<PAGE>
As filed with the Securities and Exchange Commission on June 23, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
HARRIS FINANCIAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
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<S> <C> <C>
Pennsylvania 6712 23-2889833
(State or Other Jurisdiction of (Primary Standard (I.R.S. Employer
Incorporation or Organization) Industrial Classification) Identification Number)
</TABLE>
235 North Second Street
P.O. Box 1711
Harrisburg, Pennsylvania 17101
(717) 236-4041
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Charles C. Pearson, Jr.
President and Chief Executive Officer
Harris Financial, Inc.
235 North Second Street
P.O. Box 1711
Harrisburg, Pennsylvania 17105
(717) 236-4041
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Eric Luse, Esq.
Kenneth R. Lehman, Esq.
Luse Lehman Gorman Pomerenk & Schick
A Professional Corporation
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
Phone: (202) 274-2007
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933,
check the following box: [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
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If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [_]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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Proposed Proposed
Title of each class of Amount to be maximum maximum Amount of
securities to be registered registered offering price aggregate registration
per share offering price (1) fee
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value 30,417,500 $10.00 $304,175,000 $80,302
per share shares -- -- --
Participation Interests(2) 1,000,000
interests
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</TABLE>
____________________________________
(1) Estimated solely for the purpose of calculating the registration fee.
(2) The securities to be purchased by the Harris Retirement Savings Incentive
Plan, a 401(k) Plan, are included in the amount shown for Common Stock.
However, pursuant to Rule 457(h) of the Securities Act of 1933, as amended,
no separate fee is required for the participation interests. Pursuant to
such rule, the amount being registered has been calculated on the basis of
the number of shares of Common Stock that may be purchased with the current
assets of such Plan.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the registration statement shall become effective on such
date as the Securities and Exchange Commission, acting pursuant to said Section
8(a), may determine.
<PAGE>
Prospectus Supplement
HARRIS FINANCIAL, INC.
HARRIS RETIREMENT SAVINGS INCENTIVE PLAN
Harris Financial, Inc. is providing this prospectus supplement to
participants in the Harris Retirement Savings Incentive Plan (the "401(k)
plan"). As a participant in the 401(k) plan, you will be able to direct the
trustee of the 401(k) plan to purchase common stock of Harris Financial, Inc. in
its offering with amounts allocated to your account under the 401(k) plan.
This prospectus supplement relates to your initial election to direct that
all or a portion of your account be invested in a fund made up of Harris
Financial, Inc. common stock. The trustee will reinvest your account in the
other funds available under the 401(k) plan if the offering is oversubscribed
and the trustee cannot use the total amount you allocate to purchase Harris
Financial, Inc. common stock. If you cannot acquire all the common stock you
want in the offering you may direct the investment of your account in the Harris
Financial, Inc. fund after the offering is completed.
The prospectus of Harris Financial, Inc. dated ____________, 2000 attached
to this prospectus supplement includes detailed information with respect to the
offering and the financial condition, results of operations and business of
Harris Savings Bank. You should read this prospectus supplement, which provides
information with respect to the 401(k) plan, only in conjunction with the
prospectus.
____________________
For a discussion of risks that you should consider, see "Risk Factors"
beginning on page __ of the prospectus.
The interests in the 401(k) plan and the offering of the common stock have
not been approved or disapproved by the Office of Thrift Supervision, the
Securities and Exchange Commission or any other Federal or state agency. Any
representation to the contrary is a criminal offense.
The securities offered in this prospectus supplement are not deposits or
accounts and are not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
The 401(k) plan's investment in common stock is subject to loss.
The date of this prospectus supplement is ________________, 2000.
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TABLE OF CONTENTS
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<S> <C>
THE OFFERING........................................................................................ 1
Securities Offered.................................................................................. 1
Election to Purchase Common Stock in the Offering; Priorities....................................... 1
Value of 401(k) Plan Assets......................................................................... 2
Method of Directing Transfer........................................................................ 2
Time for Directing Transfer......................................................................... 2
Irrevocability of Transfer Direction................................................................ 2
Direction to Purchase Common Stock After the Offering............................................... 3
Purchase Price of Common Stock...................................................................... 3
Nature of a Participant's Interest in the Common Stock.............................................. 3
Voting Rights of Common Stock....................................................................... 3
DESCRIPTION OF THE 401(k) PLAN........................................................................... 4
Introduction........................................................................................ 4
Eligibility and Participation....................................................................... 4
Contributions Under the 401(k) Plan................................................................. 5
Limitations on 401(k) Plan Contributions............................................................ 5
Benefits Under the 401(k) Plan...................................................................... 8
Investment of Contributions and Account Balances.................................................... 8
Withdrawals and Distributions From the 401(k) Plan.................................................. 12
Trustee............................................................................................. 13
Plan Administrator.................................................................................. 13
Reports to 401(k) Plan Participants................................................................. 14
Amendment and Termination........................................................................... 14
Merger, Consolidation or Transfer................................................................... 14
Federal Income Tax Consequences..................................................................... 14
Additional Employee Retirement Income and Security Act Considerations............................... 19
Securities and Exchange Commission Reporting and Short-Swing Profit Liability....................... 19
Financial Information Regarding 401(k) Plan Assets.................................................. 20
LEGAL OPINION............................................................................................ 20
</TABLE>
<PAGE>
THE OFFERING
Securities Offered
Harris Financial, Inc. is offering participation interests in the Harris
Retirement Savings Incentive Plan (the "401(k) plan"). The participation
interests represent indirect ownership of Harris Financial, Inc.'s common stock
through the 401(k) plan. The 401(k) plan may acquire up to 770,000 shares of
Harris Financial, Inc. common stock. Only employees of Harris Savings Bank may
become participants in the 401(k) plan. Your investment in the Harris
Financial, Inc. stock fund is subject to the priorities listed below.
Information with regard to the 401(k) plan is contained in this prospectus
supplement and information with regard to the financial condition, results of
operations and business of Harris Savings Bank is contained in the attached
prospectus. The address of the principal executive office of Harris Savings Bank
is 235 North Second Street, Harrisburg, PA 17101. Harris Savings Bank's
telephone number is (717) 236-4041.
Election to Purchase Common Stock in the Offering; Priorities
In connection with the offering, Harris Savings Bank has amended the 401(k)
plan to permit you to transfer all or part of your account balances in the
401(k) plan to the Harris Financial, Inc. stock fund, to be used to purchase
common stock issued in the offering. The trustee of the Harris Financial, Inc.
stock fund will purchase common stock in accordance with your directions. You
will also be provided the opportunity to elect alternative investments from
among the nine (9) other funds offered. In the event the offering is
oversubscribed, i.e. there are more orders for common stock than shares
available for sale in the offering, and the trustee is unable to use the full
amount allocated by you to purchase common stock in the offering, the amount
that cannot be invested in common stock will be reinvested in the other
investment funds of the 401(k) plan in accordance with your then existing
investment election (in proportion to your investment direction allocation
percentages). If you fail to direct the investment of your account balances,
your account balances will remain in the other investment funds of the 401(k)
plan as previously directed by you.
The shares of common stock are being offered for sale in the following
priorities:
(1) depositors of Harris Savings Bank with aggregate account balances of
$50 or more as of December 31, 1998;
(2) Harris Savings Bank's employee stock ownership plan;
(3) depositors of Harris Savings Bank with aggregate account balances of
$50 or more as of [____________, 2000];
(4) other depositors of Harris Savings Bank who do not qualify under (1) or
(3) above; and
<PAGE>
(5) certain members of the general public in a community offering.
Alternatively, such shares may be issued to shareholders of any
acquired corporation in exchange for shares of the acquired corporation
or in any other manner that facilitates the acquisition.
To the extent you fall into one of these categories, you may use funds in
your plan account to subscribe or pay for the common stock being acquired.
Common stock so purchased will be placed in the newly created Harris Financial,
Inc. stock fund and allocated to your 401(k) plan account.
Value of 401(k) Plan Assets
As of March 31, 2000, the market value of the assets of the 401(k) plan was
approximately $7,701,348. The plan administrator informed each participant of
the value of his or her account balance under the 401(k) plan as of March 31,
2000.
Method of Directing Transfer
You will receive a form on which you can elect to transfer all or a portion
of your account balance in the 401(k) plan to the Harris Financial, Inc. stock
fund or to the other investment options established under the 401(k) plan. If
you wish to use all or part of your account balance in the 401(k) plan to
purchase common stock issued in the offering, you should indicate that decision
on the investment allocation form.
Time for Directing Transfer
If you wish to purchase common stock with your 401(k) account balances, you
must return your election form to the Human Resources Department, Harris Savings
Bank, no later than 12:00 noon on _____________, 2000.
Irrevocability of Transfer Direction
You may not revoke your election to transfer amounts credited to your
account in the 401(k) plan to the Harris Financial, Inc. stock fund. After the
offering, however, you will be able to change the investment of your accounts
under the plan as explained below.
2
<PAGE>
Direction to Purchase Common Stock After the Offering
Whether you choose to purchase stock in the offering, or attempt to
purchase stock in the offering but are unable to do so because the offering is
oversubscribed, you will also be able to purchase stock after the offering. You
may direct that a certain percentage of your future contributions or your
account balance in the 401(k) plan be transferred to the Harris Financial, Inc.
stock fund and invested in common stock, or to the other investment funds
available under the 401(k) plan. You may change your investment allocation at
any time. Special restrictions may apply to transfers directed to and from the
Harris Financial, Inc. stock fund by the participants who are subject to the
provisions of section 16(b) of the Securities Exchange Act of 1934, as amended,
relating to the purchase and sale of securities by officers, directors and
principal shareholders of Harris Financial, Inc.
Purchase Price of Common Stock
The trustee will use the funds transferred to the Harris Financial, Inc.
stock fund to purchase common stock in the offering, except in the event of an
oversubscription, as discussed above. The trustee will pay $10.00 per share for
shares purchased in the offering, which will be the same price paid by all other
persons in the offering.
After the offering, the trustee will acquire common stock in open market
transactions at the prevailing price. The trustee will pay transaction fees
associated with the purchase, sale or transfer of the common stock after the
offering.
Nature of a Participant's Interest in the Common Stock
The trustee will hold the common stock, in trust, for the participants of
the 401(k) plan. Shares of common stock acquired by the trustee at your
direction will be allocated to your account. Therefore, investment decisions of
other participants should not affect the earnings allocated to your account.
Voting Rights of Common Stock
The trustee generally will exercise voting rights attributable to all
common stock held by the Harris Financial, Inc. stock fund as directed by
participants with accounts invested in the fund. When stockholders have a right
to vote on a matter, you will have voting instruction rights reflecting your
proportionate interest in the fund. The trustee will vote the common stock
affirmatively and negatively on each matter, in proportion to the voting
instructions the trustee receives from the participants.
3
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DESCRIPTION OF THE 401(k) PLAN
Introduction
Harris Savings Bank adopted the Harris Retirement Savings Incentive Plan
("401(k) Plan") effective October 1, 1988. The 401(k) Plan was amended and
restated effective January 1, 1989. The most recent amendment to the Plan was
adopted, effective December 31, 1999. The 401(k) plan is a tax-qualified plan
that permits participants to defer current compensation to their account
balances. The plan also permits participant direction of investment. In
connection with the offering, the 401(k) Plan has been amended to permit
investment by participants in stock of Harris Financial, Inc. As a result of
the amendment, up to 100% of the assets of the 401(k) Plan can be invested in
Harris Financial, Inc. common stock. In addition, the 401(k) Plan has been
amended so that matching contributions contributed after __________, 2000 will
be invested by the trustee in Harris Financial, Inc. stock.
Harris Savings Bank intends that the 401(k) plan, in operation, will comply
with the requirements of the Internal Revenue Code and the Employee Retirement
Income Security Act. Harris Savings Bank may amend the 401(k) plan from time to
time in the future, as it sees fit or to maintain compliance with Federal law.
Since the 401(k) plan is governed by the Employee Retirement Income Security
Act, Federal law provides you with various rights and protections as a
participant in the 401(k) plan. Your benefits under the 401(k) plan are not
governed by the Pension Benefit Guaranty Corporation.
Reference to full text of plan. The following statements are summaries of
------------------------------
certain provisions of the 401(k) plan. They are not complete and are qualified
in their entirety by the full text of the 401(k) plan. You may obtain a copy of
the 401(k) plan by filing a request with Harris Savings Bank, Attention: Barbara
E. Roth, Vice President, Human Resources Manager. We urge each employee to read
carefully the full text of the 401(k) plan.
Eligibility and Participation
Any employee of Harris Savings Bank is eligible to become a participant in
the 401(k) plan on the January 1 or July 1 following completion of six months of
service and 1,000 hours of service during the first twelve months of employment
with Harris Savings Bank. The 401(k) plan year is January 1 to December 31.
As of June 19, 2000, there were 443 employees eligible to participate in
the 401(k) plan and 335 employees participating by making elective deferral
contributions.
4
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Contributions Under the 401(k) Plan
401(k) plan contributions. As a participant in the 401(k) plan, you are
-------------------------
permitted to defer a portion of your compensation on a pre-tax basis, and to
have that amount contributed to the 401(k) plan on your behalf. The amount that
you may defer may range from 0% to 13%, subject to the limitations of the
Internal Revenue Code. For purposes of the 401(k) plan, "compensation" means
any earnings reportable on Internal Revenue Service Form W-2 as wages for
Federal income tax purposes and earned income, plus elective contributions, for
the plan year. For purposes of allocating employer contributions but not
elective deferrals, for participants who are employed as commissioned mortgage
originators and are compensated on a straight commission basis, compensation
(for the portion of a plan year an employee is employed under such status) shall
be limited to $27,098 (as indexed for cost of living), prorated if less than a
full plan year. Elective contributions are amounts excludible from your gross
income and contributed to this 401(k) plan or a section 125 cafeteria plan. In
2000, the maximum amount of your annual compensation that can be taken into
account under the 401(k) plan is limited to $170,000. Similarly, your total
deferrals may not exceed a dollar limit, which is set by law. Limits
established by the Internal Revenue Code are subject to increase pursuant to an
annual cost of living adjustment. You may elect to modify the amount
contributed to the 401(k) plan by filing a new elective deferral agreement with
the 401(k) plan administrator which will be effective the first day of the each
January 1 and July 1.
Employer contributions. If you make elective deferral contributions, and
----------------------
were hired by Harris Savings Bank prior to January 1, 1999, Harris Savings Bank
may make matching contributions to the 401(k) plan equal to 25% of your elective
deferral, on deferrals of up to 6% of your compensation. If you were hired on
or after January 1, 1999, and are precluded from participating in the Harris
Savings Bank defined benefit pension plan, Harris Savings Bank may make a
matching contribution equal to 50% of your elective deferral, on deferrals of up
to 6% of your compensation. Contributions in excess of 6% of your compensation
will not be matched. Matching contributions will be made on the last day of each
payroll period. Matching contributions vest according to the vesting schedule
set forth below.
Limitations on 401(k) Plan Contributions
Limitation on employee elective deferrals. The amount of your elective
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deferral contributions may not currently exceed $10,500 per calendar year. The
Internal Revenue Service will periodically increase this annual limitation. If
you defer salary in excess of this limitation, your gross income for Federal
income tax purposes will include the excess in the year of the deferral. In
addition, unless the excess deferral is distributed before April 15 of the
following year, it will be taxed again in the year distributed. Income on the
excess deferral distributed by April 15 of the immediately succeeding year will
be treated, for Federal income tax purposes, as earned and received by the
participant in the tax year in which the distribution is made.
5
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Limitations on annual additions and benefits. The contributions and
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forfeitures you receive under the 401(k) plan and employee stock ownership plan,
in the aggregate, cannot exceed the lesser of $30,000 or 25% of your
compensation, as defined in the 401(k) plan. To the extent contributions and
forfeitures exceed these limitations, the plan administrator will:
(1) distribute any elective deferrals (within the meaning of the Code
Section 402(g)(3)) or return any employee contributions (whether
voluntary or mandatory), and for the distribution of gains
attributable to those elective deferrals and employee contributions,
to the extent that the distribution or return would reduce the "excess
amount" in the participant's accounts; or
(2) hold any "excess amount" remaining after the return of any elective
deferrals or voluntary employee contributions in a "Section 415
suspense account"; or
(3) use the "Section 415 suspense account" in the next "limitation year"
(and succeeding "limitation years" if necessary) to reduce employer
contributions for that participant if that participant is covered by
the 401(k) plan as of the end of the "limitation year", or if the
participant is not so covered, allocate and reallocate the "Section
415 suspense account" in the next "limitation year" (and succeeding
"limitation years" if necessary) to all participant's in the 401(k)
plan before any employer or employee contributions which would
constitute "annual additions" are made to the 401(k) plan for such
"limitation year"; or
(4) reduce employer contributions to the 401(k) plan for such "limitation
year" by the amount of the "Section 415 suspense account" allocated
and reallocated during such "limitation year".
If you are also covered under Harris Savings Bank's employee stock
ownership plan and annual additions exceed the maximum permissible amount, your
annual additions under this plan will be reduced to the extent necessary, so
that the total annual additions do not exceed the maximum permissible amount.
Limitation on plan contributions for highly compensated employees. The
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Internal Revenue Code limits the amount of elective deferral contributions and
matching contributions that may be made to the 401(k) plan in any plan year on
behalf of highly compensated employees in relation to the amount of elective
deferral contributions made by or on behalf of all other employees eligible to
participate in the 401(k) plan. Specifically, the actual deferral percentage,
i.e., the average of the actual deferral ratios, expressed as a percentage, of
each eligible employee's elective deferral contribution if any, for the plan
year over the employee's salary, must meet either of the following tests:
(1) the actual deferral percentage of the eligible highly compensated
employees is not more than 125% of the actual deferral percentage of all other
eligible employees; or
6
<PAGE>
Example: If the actual deferral percentage of non-highly compensated
employees is 10%, the maximum deferral percentage of highly
compensated employees cannot exceed 12.5% (or 10% x 125% = 12.5%)
(2) the actual deferral percentage of the eligible highly compensated
employees is not more than 200% of the actual deferral percentage of all other
eligible employees, and the excess of the actual deferral percentage for the
eligible highly compensated employees over the actual deferral percentage of all
other eligible employees is not more than two percentage points.
Example: If the actual deferral percentage of non-highly compensated
employees is 4%, the actual deferral percentage of highly
compensated employees cannot exceed 6% (or 4% x 200% = 8%, but
not more than 2 percentage points, reducing the 8% to 6%).
Similarly, the actual contribution percentage, i.e., the average of the
actual contribution ratios, expressed as a percentage, of each eligible
employee's matching contributions, if any, for the plan year over the employee's
salary, must meet either of the following tests:
(1) the actual contribution percentage of the eligible highly compensated
employees is not more than 125% of the actual contribution percentage of all
other eligible employees; or
(2) the actual contribution percentage of the eligible highly compensated
employees is not more than 200% of the actual contribution percentage of all
other eligible employees, and the excess of the actual contribution percentage
for the eligible highly compensated employees over the actual contribution
percentage of all other employees is not more than two percentage points.
Effective January 1, 1997, the actual deferral percentage and actual
contribution percentage tests are performed by using the actual deferral
percentage and the actual contribution percentage of non-highly compensated
employees for the plan year preceding the 401(k) plan year that is being tested.
In general, for plan years beginning in 1998, a highly compensated employee
includes:
(1) an employee who, during the plan year or the preceding plan year, was
at any time a 5% owner of the stock of Harris Financial, Inc., or stock
possessing more than 5% of the total combined voting power of all stock of
Harris Financial, Inc.; or
(2) an employee who, for the preceding plan year, received compensation
from Harris Savings Bank in excess of $80,000, and, if Harris Savings Bank
elects for a plan year, was in the group consisting of the top 20% of employees
when ranked on the basis of compensation paid during the plan year. The dollar
amounts set forth above are adjusted annually to reflect increases in the cost
of living.
7
<PAGE>
The trustee will distribute amounts contributed by highly compensated
employees that exceed the actual deferral percentage limitation in any plan
year, together with any income allocable. These contributions must be
distributed before the close of the following plan year first to highly
compensated employees with the greatest dollar amount of deferrals, until the
plan satisfies the actual deferral percentage test. Moreover, Harris Savings
Bank will be subject to a 10% excise tax on these contributions unless, together
with any income allocable thereto, they either are re-characterized or are
distributed before the close of the first 2-1/2 months following the plan year
to which the contributions relate. In addition, the trustee will distribute any
contributions by highly compensated employees that exceed the actual
contribution percentage limitation in any plan year, together with any income
allocable thereto, before the close of the following plan year. A 10% excise
tax will also be imposed on Harris Savings Bank with respect to these
contributions, unless such contributions, plus any income allocable thereto, are
distributed within 2-1/2 months following the close of the plan year in which
they arose.
Benefits Under the 401(k) Plan
Vesting. At all times, you have a fully vested, nonforfeitable interest in
-------
your elective deferral contributions. You are vested in any employer matching
contributions, in accordance with the following schedule:
Years of Service Vesting Percentage
---------------- ------------------
Less than 2 0%
2 20%
3 40%
4 60%
5 80%
6 or more 100%
You will also be 100% vested in employer matching contributions made to
your account, regardless of your years of employment, upon attainment of early
or normal retirement age under the 401(k) plan, or upon your death or
disability. Any non-vested matching contributions which are forfeited shall be
used to reduce employer matching contributions for the plan year in which the
forfeiture occurs.
Investment of Contributions and Account Balances
All amounts credited to your accounts under the 401(k) plan are held in the
plan trust which is administered by the trustee appointed by Harris Savings
Bank's board of directors.
Prior to the effective date of the offering, you and the other participants
were provided the opportunity to direct the investment of your accounts into one
of the following funds:
A. Stable Value Fund (with CGU Life Insurance Company)
8
<PAGE>
B. Fidelity Daily U.S. Treasury Money Market
C. Loomis Sayles Bond Instl.
D. Fidelity Puritan
E. Fidelity Spartan U.S. Equity Index
F. Putnam Vista A
G. Heartland Value Plus
H. Franklin Small Cap Growth A
I. Ivy International A
The 401(k) plan now provides that in addition to the funds specified above,
you may direct the trustee to invest all or a portion of your account in the
Harris Financial, Inc. stock fund.
You may elect to have both past contributions and earnings, as well as
future contributions to your account invested either in the Harris Financial,
Inc. stock fund or among the funds listed above. Transfers of past
contributions and the earnings thereon do not affect the investment mix of
future contributions. If you make an election to direct investment of assets
into the Harris Financial, Inc. stock fund, you may change your investment at a
future date. This may be done by: (i) filing an Enrollment/Beneficiary form
with the Human Resources Department; (ii) by calling (800) 304-6498; or (iii) by
the internet at http://login.invesmart.com. The proceeds of the sale, net of
--------------------------
expenses, will be allocated to your account and reinvested in accordance with
the 401(k) plan. Until an initial investment election is made by a participant,
the participant's account will be invested in the Stable Value Fund.
A. Previous Funds
Prior to the effective date of the offering, the trustee invested
contributions under the 401(k) plan in the nine funds specified above. The
following table provides performance data with respect to the investment funds
available under the 401(k) plan, based on information provided to Harris
Financial, Inc. by Invesmart of Eastern Pennsylvania, Inc. (formerly Alliance
Benefit Group).
9
<PAGE>
<TABLE>
<CAPTION>
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1999 1998 1997
YTD % ----------------------------- Total Total
Fund Investment Total Total Total Total Total % % %
Objective Fund Return % % % Return Return Return
(5/31/00) Return Return Return 3 Yrs 5 Yrs 10 Yrs
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stable Value Stable Value Fund w/ CGU 5.25* 5.22 5.46 5.55 5.41 5.54 N/A
Life
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Money Market Fidelity Daily US Treasury 5.67* 4.46 4.93 5.00 4.80 4.93 4.76
Money Market
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Long-Term Bond Loomis Sayles Bond Instl 0.00 4.50 4.70 12.70 7.23 12.41 N/A
(Corp Bond - General)
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Balanced Fidelity Puritan 0.60 2.90 16.59 22.35 13.63 15.46 13.06
(Bonds & Stocks)
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Large Cap Stocks Fidelity Spartan US Equity -2.90 20.70 28.48 33.04 27.29 28.27 17.90
(Value & Growth) Index
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Mid-Cap Stocks Putnam Vista A 3.30 53.20 19.53 23.23 31.17 30.94 20.66
(Growth)
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Small Cap Stocks Franklin Small -3.70 97.10 -0.02 15.79 31.64 32.75 N/A
(Growth) Cap Growth A
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Small Cap Stocks Heartland Value -3.70 97.10 -0.02 15.79 31.64 32.75 N/A
(Growth) Plus
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Foreign Stock Ivy -7.40 21.00 7.34 10.38 12.77 14.10 11.75
International A
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* Current annualized return is shown in the year to date column.
** The seven-day yield is shown in the year to date column.
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- Past performance is no guarantee of future results. Actual investment performance may differ from what is reflected above based
upon your beginning account balance, transfers within your account and the timing of deposits to your account. Investment return and
principal value of the mutual funds will fluctuate so that shares, when redeemed, may be worth more or less than their original
cost.
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- The mutual fund rates of return do not reflect the quarterly custodial / asset management charge of 10/100 of one percent or
less.
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- References: Morningstar, Inc., The Wall Street Journal and CGU Life Insurance Company of America
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</TABLE>
The following is a description of each of the 401(k) plan's nine investment
funds:
Stable Value Fund This investment is with CGU Life Insurance Company of
-----------------
America and seeks to provide a reasonable rate of return without being subjected
to market value fluctuations.
Fidelity Daily U.S. Treasury Money Market This fund invests in
-----------------------------------------
instruments issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Average portfolio maturity will not exceed 120 days.
Loomis Sayles Bond Inst. This fund seeks total return through a
-----------------------
combination of current income and capital appreciation. The fund normally
invests at least 65% of assets in investment grade debt securities and
convertibles.
10
<PAGE>
Fidelity Puritan This fund seeks income consistent with preservation of
----------------
capital, investing in a diversified array of high-yielding stocks and bonds.
Approximate split: 60% Stocks and 40% Bond/Fixed Income.
Fidelity Spartan U.S. Equity Index This fund seeks to provide investment
----------------------------------
results that correspond to the total return performance of common stocks of
companies publicly traded in the United States. It attempts to duplicate the
composition and total return of the S&P 500.
Putnam Vista A This fund seeks capital appreciation. The fund invests
--------------
primarily in common stocks issued by companies with market capitalizations
between $300 million and $5 billion; it may also invest in preferred stocks,
debt securities rated at least C, convertible securities, and warrants. The
fund may invest up to 20% of assets in securities principally traded in foreign
markets.
Heartland Value Plus This fund seeks capital growth and current income.
--------------------
The fund invests primarily in income-producing equities with market
capitalizations of less than $750 million. It normally invests at least 65% of
assets in equities chosen on a value basis. It may invest up to 35% of assets
in debt securities, up to 25% of which may be rated B or BB.
Franklin Small Cap Growth A This fund seeks long-term capital
---------------------------
appreciation. The fund invests primarily in income-producing equities with
market capitalizations of less than $1 billion. It seeks to invest at least one
third of assets in companies with market capitalizations of $550 million or
less.
Ivy International A This fund seeks long-term growth; current income is
-------------------
secondary. The fund normally invests at least 65% of assets in common stocks
issued in at least three different countries. It mainly purchases stocks traded
in Europe, the Pacific Basin, and Latin America markets.
B. The Employer Stock Fund
The Harris Financial, Inc. stock fund will consist of investments in common
stock made on and after the effective date of the offering. After the offering,
the trustee will, to the extent practicable, use all amounts allocated to the
Harris Financial, Inc. stock fund, including cash dividends paid on common stock
held in the Harris Financial, Inc. stock fund, to purchase shares of common
stock of Harris Financial, Inc. Only whole shares of Harris Financial, Inc.
will be purchased, unlike in the 401(k) plan's other investment options where
fractional share interests may be purchased. Each person who elects to invest
in the Harris Financial, Inc. stock fund will have two sub-accounts in such
fund, i.e., a stock sub-account and a cash sub-account (a money market account
holding cash that will be used to buy whole shares). Periodically, when the
cash sub-account has sufficient cash, the plan adminstrator will use such cash
to purchase stock. Any earnings that result therefrom will remain in the Harris
Financial, Inc. stock fund in the event of an oversubscription and will not be
reinvested among the other five funds. It is expected that all
11
<PAGE>
purchases will be made at prevailing market prices. Under certain circumstances,
the trustee may be required to limit the daily volume of shares purchased.
As of the date of this prospectus supplement, none of the shares of common
stock have been issued or are outstanding and there is no established market for
the common stock. Accordingly, there is no record of the historical performance
of the Harris Financial, Inc. stock fund. Performance will be dependent upon a
number of factors, including the financial condition and profitability of Harris
Financial, Inc. and Harris Savings Bank and market conditions for the common
stock generally.
For a discussion of risks that you should consider, see "Risk Factors"
beginning on page ____ of the prospectus.
Withdrawals and Distributions From the 401(k) Plan
Federal law requires the 401(k) plan to impose substantial restrictions on
your right to withdraw amounts held for your benefit under the 401(k) plan prior
to your termination of employment with Harris Savings Bank. A Federal tax
penalty equal to 10% of the withdrawal, over and above the normal Federal and
state income tax, may also be imposed on withdrawals made prior to your
attainment of age 59-1/2, regardless of whether the withdrawals occur during
your employment with Harris Savings Bank or after termination of employment.
Distribution upon termination of employment or disability. Payment of your
---------------------------------------------------------
benefits upon your retirement, disability, or other termination of employment
shall be made in a lump-sum payment, in installments, over a fixed period, or in
an annuity. Payments in installments or in annuity form cannot exceed your life
expectancy or the joint life and last survivor expectancy of you and your
beneficiary. If you are married, you must receive your benefits in the form of
a qualified joint and survivor annuity with your spouse as your beneficiary,
unless you elect another optional form with proper spousal consent.
Alternatively, your benefit may be transferred to another qualified employee
benefit plan or individual retirement account. Benefit payments generally
commence as soon as administratively possible after the occurrence of the event
creating the right to a distribution. However, if you terminate employment for
reasons other than retirement, disability or death and your account balance ever
exceeded $5,000, no distribution will be made until the end of the calendar
quarter following the calendar quarter in which termination of employment
occurs.
Distribution upon death. If you die prior to the benefit commencement date
-----------------------
for retirement, disability or termination of employment, your benefit will be
paid to your surviving spouse or beneficiary, in a lump sum, in installments,
over a fixed period, or in an annuity, as elected. Alternatively, if your
spouse is your beneficiary, your benefit may be transferred to an individual
retirement account. If you die after distribution of your interest has begun,
the remaining portion of such interests will continue to be distributed as
rapidly as under the method of distribution being used prior to your death.
12
<PAGE>
Withdrawals prior to termination of employment. You may withdraw amounts
----------------------------------------------
from your accounts during employment only under limited circumstances: (i) if
you are still employed after you attain age 65; (ii) if you suffer a financial
hardship, provided that the amount you withdraw does not exceed the amount
actually needed, or (iii) if you request a loan from the plan, subject to the
limitations on loans set forth in the plan. Hardship distributions may only be
made to you from your vested matching contribution account balance and from your
rollover/transfer account, if any. Any in-service distributions to a married
participant must be consented to by the participant's spouse.
Nonalienation of benefits. Except for Federal income tax withholding or a
-------------------------
qualified domestic relations order, your benefits payable under the 401(k) plan
cannot be alienated. Examples of alienation include transferring your benefits
voluntarily and a creditor placing a lien on your benefits. Any attempt to
alienate your benefits, whether voluntary or involuntary, shall be void.
Trustee
The trustee with respect to the 401(k) plan is Fleet National Bank. The
trustee is appointed by the board of directors of Harris Savings Bank. The
trustee receives, holds and invests the contributions to the 401(k) plan in
trust and distributes them to you and your beneficiaries in accordance with the
terms of the 401(k) plan and the directions of the plan administrator. The
trustee is responsible for investment of the assets of the trust.
Plan Administrator
The 401(k) plan is administered by the plan administrator. James L.
Durrell is the 401(k) plan administrator. The address of the plan administrator
of the 401(k) Plan is 235 North Second Street, Harrisburg, PA 17101, telephone
number (717) 236-4041. The 401(k) Plan administrator is responsible for the
administration of the 401(k) plan, interpretation of the provisions of the
401(k) plan, prescribing procedures for filing applications for benefits,
preparation and distribution of information explaining the 401(k) plan,
maintenance of 401(k) plan records, books of account and all other data
necessary for the proper administration of the 401(k) plan, preparation and
filing of all returns and reports relating to the 401(k) plan which are required
to be filed and for all disclosures required to be made to participants,
beneficiaries and others.
13
<PAGE>
Reports to 401(k) Plan Participants
The plan administrator, or his designee, will furnish you with a quarterly
statement showing:
(1) the current market value of each fund as of the end of the quarter; and
(2) the amount of contributions and earnings allocated to your account for
that period.
Amendment and Termination
It is the intention of Harris Savings Bank to continue the 401(k) plan
indefinitely. Nevertheless, Harris Savings Bank may terminate the 401(k) plan at
any time. If the 401(k) plan is terminated in whole or in part, then regardless
of other provisions in the 401(k) plan, you will have a fully vested interest in
your accounts. Harris Savings Bank reserves the right to make, from time to
time, any amendment or amendments to the 401(k) plan which do not cause any part
of the trust to be used for, or diverted to, any purpose other than the
exclusive benefit of participants or their beneficiaries; provided, however,
that Harris Savings Bank may make any amendment it determines necessary or
desirable, with or without retroactive effect, to comply with the Employee
Retirement Income Security Act.
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the 401(k) plan with another
401(k) plan, or the transfer of the trust assets to another plan, the 401(k)
plan requires that you would, if either the 401(k) plan or the other plan then
terminated, receive a benefit immediately after the merger, consolidation or
transfer which is equal to or greater than the benefit you would have been
entitled to receive immediately before the merger, consolidation or transfer, if
the plan had then terminated.
Federal Income Tax Consequences
The following is a summary of the material Federal income tax aspects of
the 401(k) plan. However, statutory provisions are subject to change, as are
their interpretations, and their application may vary in individual
circumstances. The consequences under state and local income tax laws may not
be the same as under the Federal income tax laws. You are urged to consult your
tax advisors with respect to any distribution from the 401(k) plan and
transactions involving the 401(k) plan.
The 401(k) plan is tax-qualified and the related trust is exempt from tax
under the Internal Revenue Code. As a result, the 401(k) plan is afforded
special tax treatment which include the following:
14
<PAGE>
(1) Harris Savings Bank is allowed an immediate tax deduction for the
amount contributed to the 401(k) plan each year;
(2) you pay no current income tax on amounts contributed by Harris Savings
Bank on your behalf; and
(3) earnings of the 401(k) plan are tax-exempt, thereby permitting the tax-
free accumulation of income and gains on investments.
The 401(k) plan will be administered to comply in operation with the
requirements of the Internal Revenue Code as of the effective date of any change
in the law. Harris Savings Bank expects to timely adopt any amendments to the
401(k) plan that may be necessary to maintain the qualified status of the 401(k)
plan under the Internal Revenue Code.
Assuming that the 401(k) plan is administered in accordance with the
requirements of the Internal Revenue Code, participation in the 401(k) plan
under existing Federal income tax laws will have the following effects:
(1) The contributions to your account and the investment earnings on the
account are not includable in your Federal taxable income until the
contributions or earnings are actually distributed or withdrawn from the 401(k)
plan. Special tax treatment may apply to the taxable portion of any
distribution that includes common stock or qualifies as a lump-sum distribution,
as described below; and
(2) Income earned on assets held by the trust will not be taxable to the
trust.
Lump-sum distribution. A distribution from the 401(k) plan to you or your
---------------------
beneficiary will qualify as a lump-sum distribution if it:
(1) is made within one calendar year;
(2) is on account of your death, disability or separation from service, or
after you attain age 59- 1/2; and
(3) consists of your balance under this 401(k) plan and all other profit
sharing plans, if any, maintained by Harris Savings Bank. The portion of any
lump-sum distribution that is required to be included in your taxable income for
Federal income tax purposes, consists of the entire amount of the lump-sum
distribution less the amount of after-tax contributions, if any, made by you to
this or any other profit sharing plan maintained by Harris Savings Bank which is
included as part of the lump-sum distribution.
Averaging rules. The portion of the total taxable amount of a lump-sum
---------------
distribution that is attributable to participation after 1973 in the 401(k) plan
or in any other profit-sharing plan
15
<PAGE>
maintained by Harris Savings Bank, referred to as the ordinary income portion,
will be taxable generally as ordinary income for Federal income tax purposes.
Under a special rule adopted in the 1986 Tax Reform Act, if you turned 50
by 1985, you may elect to have your lump-sum distribution taxed under a ten-year
income averaging rule which would allow you to pay a separate tax on the lump-
sum distribution that would approximate the tax (under the rates in effect in
1986) that would have been due if the distribution had been received in ten
equal annual installments; you also may elect to have that portion of the lump-
sum distribution attributable to your pre-1974 participation in the 401(k) plan
treated as a long-term capital gain and taxed at a rate of 20%.
For years beginning after December 31, 1999, five-year income averaging is
repealed. The special grandfather rule is modified so that, if you qualify, you
can elect 10-year but not five- year averaging.
Common stock included in lump-sum distribution. If a lump-sum distribution
----------------------------------------------
includes common stock, the distribution generally will be taxed in the manner
described above under lump-sum distributions, except that the total taxable
amount will be reduced by the amount of any net unrealized appreciation with
respect to such common stock, i.e., the net unrealized appreciation is the
excess of the value of such common stock at the time of the distribution over
the cost or other basis to the trust.
Example: Assume the 401(k) plan purchases 100 shares of common stock
in the offering at $10 per share. Ten dollars would be the
cost basis of the stock to the 401(k) plan. If the 401(k)
plan distributes the common stock to you in a lump-sum
distribution when the stock is trading at $18 per share, you
will be taxed in the year of distribution on the $10 cost
basis of the stock to the 401(k) plan. The additional $8 per
share, or the net unrealized appreciation, will not be taxed
until you sell the stock.
The tax basis of such common stock for purposes of computing gain or loss
on its subsequent sale will be the value of the common stock at the time of
distribution less the amount of net unrealized appreciation.
Example: Assuming the same facts as above, your cost basis in the
stock is $10, which is the $18 value of the stock at the
time of distribution minus the $8 of net unrealized
-----
appreciation.
Any gain on a sale or other taxable disposition of such common stock, to
the extent of the amount of net unrealized appreciation at the time of
distribution, will be considered long-term capital gain regardless of the
holding period of such common stock. Any gain on a sale or other
16
<PAGE>
taxable disposition of the common stock in excess of the amount of net
unrealized appreciation at the time of distribution will be considered short-
term, mid-term or long-term capital gain depending upon the length of the
holding period of the common stock.
Example: Assume you sell 50 shares of the stock in January, seven
months after you receive the distribution, for $20 per
share. You will be taxed as follows: You will not be taxed
again on the $10 cost basis you recognized as income at the
time of distribution. The $8 in net unrealized appreciation
will be taxed at long-term capital gains rates. However, the
$2 appreciation in the value of the stock that occurred
since the distribution will be taxed at short-term capital
gains rates since you have only held the stock for seven
months following its distribution to you.
As a recipient of a distribution you may elect to include the amount of any
net unrealized appreciation in the total taxable amount of such distribution to
the extent allowed by the regulations to be issued by the Internal Revenue
Service.
Contribution to another qualified plan or to an individual retirement
---------------------------------------------------------------------
account. You may defer Federal income taxation of all or any portion of the
-------
total taxable amount of a lump-sum distribution, including the proceeds from the
sale of any common stock included in the lump-sum distribution, to the extent
that such amount, or a portion thereof, is contributed, within 60 days after the
date of its receipt by you, to another qualified plan or to an individual
retirement account. If less than the total taxable amount of a lump-sum
distribution is contributed to another qualified plan or to an individual
retirement account within the applicable 60-day period, the amount not so
contributed must be included in your income for Federal income tax purposes and
will not be eligible for the special averaging rules or for capital gains
treatment.
Example: You receive a distribution of 500 shares of stock and $3,000
cash from the 401(k) plan on June 30. If you intend to roll
your distribution over to another tax qualified plan or
individual retirement account, you must do so no later than
August 29, which is 60 days after you received the
distribution. If you roll over all the stock but none of the
cash, you must include the $3,000 cash in your income for
the calendar year in which the distribution is made to you.
You generally may defer the Federal income taxation of any portion of any
other distribution made on account of your disability or separation from
service, if the amount is distributed within one taxable year, and is
contributed, within 60 days after the date of its receipt by you, to an
individual retirement account.
17
<PAGE>
Effective January 1, 1993, you have the right to elect to have the trustee
transfer all or any portion of an "eligible rollover distribution" directly to
another qualified plan or to an individual retirement account. If you do not
elect to have an eligible rollover distribution transferred directly to another
qualified plan or to an individual retirement account, the distribution will be
subject to a mandatory Federal withholding tax equal to 20% of the taxable
distribution. An eligible rollover distribution means any amount distributed
from the 401(k) plan except:
(1) a distribution that is (a) one of a series of substantially equal
periodic payments made, not less frequently than annually, over your life or the
joint lives of you and your designated beneficiary, or (b) for a specified
period of ten years or more;
(2) any amount that is required to be distributed under the minimum
distribution rules; and
(3) any other distributions excepted under applicable Federal law.
If your beneficiary is your surviving spouse, he or she also may defer
Federal income taxation of all or any portion of a distribution from the 401(k)
plan to the extent that such amount, or a portion thereof, is contributed within
60 days after the date of its receipt by your surviving spouse, to an individual
retirement account. If all or any portion of the total taxable amount of a
lump-sum distribution is contributed by your surviving spouse to an individual
retirement account within the applicable 60-day period, any subsequent
distribution from the individual retirement account will not be eligible for the
special averaging rules or for capital gains treatment. Any amount received by
your surviving spouse that is not contributed to another qualified plan or to an
individual retirement account within the applicable 60-day period, and any
amount received by a nonspouse beneficiary will be included in such
beneficiary's income for Federal tax purposes in the year in which it is
received.
Additional Tax on Early Distributions. If you receive a distribution from
-------------------------------------
the 401(k) plan prior to attaining age 59- 1/2 it will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled over into an IRA or another qualified plan or the
distribution is:
(1) made to a beneficiary, or to your estate, on or after your death;
(2) attributable to your disability;
(3) part of a series of substantially equal periodic payments not less
frequently than annually made for your life or life expectancy or the joint
lives or joint life expectancies of you and your beneficiary;
(4) made to you after separation from service on account of early
retirement under the 401(k) plan after attainment of age 55;
18
<PAGE>
(5) made to pay medical expenses to the extent deductible for Federal
income tax purposes;
(6) made to an alternate payee pursuant to a qualified domestic relations
order; or
(7) made to effect the distribution of excess contributions or excess
deferrals.
Additional Employee Retirement Income and Security Act Considerations
As noted above, the 401(k) plan is subject to certain provisions of the
Employee Retirement Income Security Act, including special provisions relating
to control over the 401(k) plan's assets by participants and beneficiaries. The
401(k) plan's feature that allows you to direct the investment of your account
balances is intended to satisfy the requirements of section 404(c) of the
Employee Retirement Income Security Act of 1974 relating to control over plan
assets by a participant or beneficiary. The effect of this is two-fold. First,
you will not be deemed a "fiduciary" because of your exercise of investment
discretion. Second, no person who otherwise is a fiduciary, such as your
employer, the plan administrator, or the plan's trustee is liable under the
fiduciary responsibility provision of the Employee Retirement Income Security
Act for any loss which results from your exercise of control over the assets in
your 401(k) plan account.
Because you will be entitled to invest all or a portion of your account
balance in the 401(k) plan in Harris Financial, Inc. common stock, the
regulations under section 404(c) of the Employee Retirement Income Security Act
require that the 401(k) plan establish procedures that ensure the
confidentiality of your decision to purchase, hold, or sell employer securities,
except to the extent that disclosure of such information is necessary to comply
with Federal or state laws not preempted by the Employee Retirement Income
Security Act. These regulations also require that your exercise of voting and
similar rights with respect to the common stock be conducted in a way that
ensures the confidentiality of your exercise of these rights. Your investment
and voting instructions should be returned directly to Invesmart of Eastern
Pennsylvania, Inc. (formerly Alliance Benefit Group), the third-party
administrator. In the case of an event that involves a potential for undue
employer influence such as a tender offer, you will be instructed to return your
instructions directly to Investmart of Eastern Pennsylvania, Inc.
Securities and Exchange Commission Reporting and Short-Swing Profit Liability
Section 16 of the Securities Exchange Act of 1934 imposes reporting and
liability requirements on officers, directors, and persons beneficially owning
more than 10% of public companies such as Harris Financial, Inc. Section 16(a)
of the Securities Exchange Act of 1934 requires the filing of reports of
beneficial ownership. Within 10 days of becoming an officer, director or person
beneficially owning more than 10% of the shares of Harris Financial, Inc., a
Form 3 reporting initial beneficial ownership must be filed with the Securities
and Exchange Commission. Changes in beneficial ownership, such as purchases,
sales and gifts generally must be reported periodically, either on a Form 4
within 10 days after the end of the month in which a
19
<PAGE>
change occurs, or annually on a Form 5 within 45 days after the close of Harris
Financial, Inc.'s fiscal year. Discretionary transactions in and beneficial
ownership of the common stock through the Harris Financial, Inc. stock fund of
the 401(k) plan by officers, directors and persons beneficially owning more than
10% of the common stock of Harris Financial, Inc. generally must be reported to
the Securities and Exchange Commission by such individuals.
In addition to the reporting requirements described above, section 16(b) of
the Securities Exchange Act of 1934 provides for the recovery by Harris
Financial, Inc. of profits realized by an officer, director or any person
beneficially owning more than 10% of Harris Financial, Inc.'s common stock
resulting from non-exempt purchases and sales of Harris Financial, Inc. common
stock within any six-month period.
The Securities and Exchange Commission has adopted rules that provide
exemptions from the profit recovery provisions of section 16(b) for all
transactions in employer securities within an employee benefit plan, provided
certain requirements are met. These requirements generally involve restrictions
upon the timing of elections to acquire or dispose of employer securities for
the accounts of section 16(b) persons.
Except for distributions of common stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, persons affected by section 16(b) are required to hold shares of common
stock distributed from the 401(k) plan for six months following such
distribution and are prohibited from directing additional purchases within the
Harris Financial, Inc. stock fund for six months after receiving such a
distribution.
Financial Information Regarding 401(k) Plan Assets
Unaudited financial statements representing the net assets available for
401(k) plan benefits at [June 30, 2000],are attached to this prospectus
supplement.
LEGAL OPINION
The validity of the issuance of the common stock will be passed upon by
Luse Lehman Gorman Pomerenk & Schick, A Professional Corporation, Washington,
D.C., which firm acted as special counsel to Harris Financial, Inc. in
connection with Harris Financial, Inc.'s stock offering.
20
<PAGE>
PROSPECTUS
[Harris Financial Logo] New Harris Financial, Inc.
(Successor to Harris Financial, Inc.)
Up to 26,450,000 Shares of Common Stock
================================================================================
New Harris Financial, Inc. is a Pennsylvania corporation that is offering shares
of common stock in connection with the mutual-to-stock conversion of Harris
Financial, MHC. New Harris Financial, Inc. will be the holding company for
Harris Savings Bank. Immediately after the stock offering is completed, New
Harris Financial, Inc. will acquire by merger York Financial Corp.
================================================================================
TERMS OF THE OFFERING
Price: $10.00 per share
<TABLE>
<CAPTION>
Adjusted
Minimum Minimum Maximum
------------ ----------- -----------
<S> <C> <C> <C>
. Number of shares offered for sale................... 14,550,000 19,550,000 26,450,000
. Underwriting commissions and expenses............... $ 8,641,000 $ 8,641,000 $ 9,403,000
. Net proceeds to New Harris Financial................ $136,859,000 $186,859,000 $255,097,000
. Net proceeds per share to New Harris Financial...... $ 9.41 $ 9.55 $ 9.64
</TABLE>
New Harris Financial may sell up to 30,417,500 shares because of changes
in the market and general financial and economic conditions without notifying
prospective purchasers.
This investment involves risk, including the possible loss of principal.
Please read Risk Factors beginning on page ____.
New Harris Financial has applied to have its common stock quoted on the Nasdaq
National Market under the symbol "______."
New Harris Financial is offering the common stock on a best efforts basis,
subject to certain conditions. New Harris Financial may also offer shares in an
underwritten public offering.
These securities are not deposits or savings accounts and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
None of the Securities and Exchange Commission, the Office of Thrift Supervision
or the Federal Deposit Insurance Corporation, nor any state securities regulator
has approved or disapproved these securities or determined if this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
Funds received prior to the completion of the offering will be held in an
account at Harris Savings Bank which will bear interest at our passbook savings
rate. This offering is expected to terminate on September ___, 2000.
[Logo of Ryan, Beck & Co.]
August ___, 2000
<PAGE>
[MAP APPEARS HERE]
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Questions and Answers............................................................................ 4
Summary.......................................................................................... 7
Risk Factors..................................................................................... 15
Selected Consolidated Financial and Other Data of Harris Financial and Subsidiaries.............. 18
Selected Consolidated Financial and Other Data of York Financial Corp. and Subsidiaries.......... 20
Selected Unaudited Pro Forma Consolidated Financial Data of New Harris Financial................. 22
New Harris Financial............................................................................. 23
Harris Financial................................................................................. 23
Harris Savings Bank.............................................................................. 23
Use of Proceeds.................................................................................. 24
Dividend Policy.................................................................................. 25
Market for the New Harris Financial Common Stock................................................. 26
Historical and Pro Forma Capitalization.......................................................... 27
Historical and Pro Forma Capital Compliance...................................................... 28
Pro Forma Data................................................................................... 29
Certain Effects of the Merger of Harris Financial and York Financial............................. 37
Harris Financial and Subsidiaries Consolidated Statements of Operations.......................... 41
Management's Discussion and Analysis of Financial Condition and Results of Operations............ 42
Business of New Harris Financial................................................................. 60
Regulation....................................................................................... 83
Federal and State Taxation....................................................................... 93
Management of Harris Financial................................................................... 95
Beneficial Ownership of Common Stock............................................................. 109
Subscriptions by Executive Officers and Directors................................................ 113
The Conversion and Stock Offering................................................................ 114
Merger With York Financial....................................................................... 130
Restrictions on Acquisition of New Harris Financial.............................................. 131
Description of Capital Stock of New Harris Financial............................................. 134
Transfer Agent and Registrar..................................................................... 135
Experts.......................................................................................... 135
Legal Opinions................................................................................... 135
Additional Information........................................................................... 135
Harris Financial, Inc. and Subsidiaries
Index to Consolidated Financial Statements.................................................... F-1
York Financial Corp. and Subsidiaries
Index to Consolidated Financial Statements and Other Information.............................. G-1
</TABLE>
3
<PAGE>
QUESTIONS AND ANSWERS
The following are frequently asked questions. You should read this entire
document, including the Risk Factors beginning on page __, for more information.
Q: WHAT IS THE NATURE OF NEW HARRIS FINANCIAL'S STOCK OFFERING?
A: New Harris Financial is offering shares of its common stock on a priority
basis to eligible depositors of Harris Savings Bank in a subscription
offering. If shares are still available after eligible depositors have
subscribed for common stock in the subscription offering, New Harris
Financial is offering its shares to others in a community offering with
preference given to persons who reside in Harris Savings Bank's local
community, and then to current stockholders of Harris Financial, Inc. and
York Financial. New Harris Financial may also offer shares of common stock
not purchased in the subscription offering or the community offering in an
underwritten public offering.
Q: WHO MAY PURCHASE SHARES OF STOCK IN THE SUBSCRIPTION OFFERING?
A: Generally, rights to purchase or subscribe for stock have been granted
under the plan of conversion to the following persons in the following
descending order of priority:
(1) Harris Savings Bank depositors with $50.00 or more on deposit as of
December 31, 1998;
(2) Harris Savings Bank's employee stock ownership plan;
(3) Harris Savings Bank depositors with $50.00 or more on deposit as of
June 30, 2000; and
(4) Harris Savings Bank depositors as of August _____, 2000.
Q: HOW MANY SHARES OF STOCK ARE BEING OFFERED, AND AT WHAT PRICE?
A: New Harris Financial is offering between 19,550,000 and 26,450,000 shares
of common stock for a subscription price of $10.00 per share. New Harris
Financial may increase or decrease this amount under certain circumstances.
These circumstances are described in this document.
Q: WHAT PARTICULAR FACTORS SHOULD DEPOSITORS CONSIDER WHEN DECIDING WHETHER TO
PURCHASE STOCK?
A: There are many important factors to consider before making an investment
decision. Therefore, you should read this entire document before making
your investment decision, including the Risk Factors on page __.
Q: ARE MY SUBSCRIPTION RIGHTS AS AN ELIGIBLE DEPOSITOR TRANSFERABLE?
A: No. Any attempt to transfer subscription rights to any other person is
illegal and will cause offenders to lose their subscription rights.
Q: WILL ANY COMMISSION BE CHARGED FOR STOCK I PURCHASE IN THE STOCK OFFERING?
A: No.
Q: WILL DIVIDENDS INITIALLY BE PAID ON THE STOCK?
A: New Harris Financial intends initially to pay quarterly dividends following
the offering. The annual amount will be between $.26 and $.34 per share,
depending on how many shares are sold in the stock offering. New Harris
Financial has not yet decided on the exact amount of the dividend.
Q: WILL I BE ABLE TO SELL MY NEW HARRIS FINANCIAL STOCK AFTER I PURCHASE IT?
A: Yes. New Harris Financial has applied to have its common stock trade on
the Nasdaq National Market under the symbol "____."
4
<PAGE>
Q: WILL THE STOCK BE COVERED BY DEPOSIT INSURANCE OR GUARANTEED BY ANY
GOVERNMENT AGENCY?
A: No. Unlike insured deposit accounts at Harris Savings Bank and at York
Federal, the stock of New Harris Financial will not be insured or
guaranteed by the Federal Deposit Insurance Corporation, or FDIC, or any
other government agency.
Q: WHEN IS THE DEADLINE TO SUBSCRIBE FOR STOCK?
A: New Harris Financial must receive a properly completed and signed order
form with the required payment on or before _______, local time, on
____________, 2000.
Q: CAN THE OFFERING BE EXTENDED?
A: Yes. New Harris Financial can extend the offering beyond ____________,
2000. New Harris Financial must complete any offering to general members
of the public within 45 days after the close of the subscription offering,
unless it receives regulatory approval to further extend the offering.
Q: HOW DO I PURCHASE THE STOCK?
A: First, you should read this document. Then, complete and return the
enclosed stock order and certification form, together with your payment.
Subscription orders must be returned to the Stock Information Center
between _____ a.m. and _______ p.m., or by mail in the enclosed envelope
marked STOCK ORDER RETURN.
Q: CAN I CHANGE MY MIND AFTER I PLACE AN ORDER TO SUBSCRIBE FOR STOCK?
A: No. After your stock order and certification form and payment are received,
you may not cancel or modify your order. However, if New Harris Financial
extends the offering beyond ___________, 2000 you will be able to change or
cancel your order. If you cancel your order, you will receive a prompt
refund plus interest at Harris Savings Bank's passbook value.
Q: HOW CAN I PAY FOR THE STOCK?
A: You have several options, including sending a check or money order to
Harris Savings Bank, or authorizing a withdrawal from your deposit account
at Harris Savings Bank (without any penalty for early withdrawal). Please
do not send cash in the mail. Please note, however, that regulations do
not allow Harris Savings Bank to make loans to pay for the purchase of
stock. However, other financial institutions may be able to make such a
loan.
Q: WILL I RECEIVE INTEREST ON MY SUBSCRIPTION PAYMENT?
A: Yes. Subscription payments will be placed in an interest-bearing escrow
account at Harris Savings Bank, and will earn interest at the passbook
rate. Depositors who elect to pay by withdrawal will continue to receive
interest on their accounts until the funds are withdrawn.
Q: CAN I SUBSCRIBE FOR SHARES USING FUNDS IN MY INDIVIDUAL RETIREMENT ACCOUNT
OR IRA AT HARRIS SAVINGS BANK?
A: Yes. However, you must first establish a self-directed IRA with an outside
trustee to subscribe for stock using your IRA funds. Please call the Stock
Information Center (_______________) to get more information. Please
understand that the transfer of IRA funds takes time, so please make
arrangements as soon as possible.
Q: WHAT HAPPENS IF THERE ARE NOT ENOUGH SHARES OF STOCK TO FILL ALL
SUBSCRIPTION ORDERS?
A: If there is an oversubscription, then you may not receive any or all of the
shares you want to purchase.
5
<PAGE>
Q: WILL THE CONVERSION AND STOCK OFFERING HAVE ANY EFFECT ON MY HARRIS SAVINGS
BANK DEPOSIT OR LOAN ACCOUNTS?
A: No. The amount, interest rate and other terms of deposit accounts will not
change. Deposit accounts will continue to be insured by the FDIC. Likewise,
the loan accounts and rights of borrowers will not be affected.
Q: WHO CAN HELP ANSWER ANY OTHER QUESTIONS I MAY HAVE ABOUT THE SUBSCRIPTION
OFFERING?
A: For answers to other questions you are encouraged to read this entire
document. Questions may also be directed to the Stock Information Center at
___________ Monday through Friday, between the hours of ____ a.m. and ____
p.m., local time.
TO ENSURE THAT EACH PERSON RECEIVES A PROSPECTUS AT LEAST 48 HOURS PRIOR TO THE
EXPIRATION DATE OF ___________, 2000 IN ACCORDANCE WITH FEDERAL LAW, NO
PROSPECTUS WILL BE MAILED ANY LATER THAN FIVE DAYS PRIOR TO __________, 2000 OR
HAND DELIVERED ANY LATER THAN TWO DAYS PRIOR TO __________, 2000.
6
<PAGE>
SUMMARY
This summary highlights selected information from this document and may not
contain all the information that is important to you. To understand the stock
offering fully, you should read this entire document carefully, including the
consolidated financial statements and the notes to consolidated financial
statements of Harris Financial, Inc. and York Financial Corp.
General
New Harris Financial, Inc. is offering shares of common stock in a stock
offering. New Harris Financial's stock offering is one transaction that is part
of three primary transactions that are being conducted by six corporate
entities. The three transactions include the mutual-to-stock conversion of
Harris Financial, MHC, the stock offering by New Harris Financial, and the
merger of York Financial into New Harris Financial. The six corporate entities
that are participants in these transactions are: Harris Financial MHC, Harris
Financial, Inc., New Harris Financial, Inc., Harris Savings Bank, York Financial
Corp., and York Federal Savings and Loan Association.
Description of the Six Corporate Entities that are Participating in the
Transactions
There are six companies that are participating in the conversion, the stock
offering and the acquisition by merger. These companies are Harris Financial,
MHC, Harris Financial, Inc., New Harris Financial, Inc., Harris Savings Bank,
York Financial Corp. and York Federal Savings and Loan Association. We will
briefly describe these companies below, and we describe them in more detail in
other parts of this document.
Harris Financial, MHC. Harris Financial, MHC is a Pennsylvania mutual
holding company that is re-chartering as a federal mutual holding company prior
to the completion of the conversion and stock offering. Harris MHC was formed
by Harris Savings Bank in 1994 when Harris Savings Bank converted from the
mutual to capital stock form of organization. Harris MHC owns 25,500,000 shares
of Harris Financial, Inc. and conducts no other activities. Harris MHC will no
longer exist after the conversion and stock offering. Harris MHC's executive
offices are located at 235 North Second Street, Harrisburg, Pennsylvania 17101,
and its telephone number is (717) 236-4041.
Harris Financial, Inc. Harris Financial, Inc. is a Pennsylvania corporation
and the mid-tier stock holding company of Harris Savings Bank. Harris Financial
was formed in 1997 as the mid-tier holding company of Harris Savings Bank.
Harris Financial's shares are owned by Harris MHC and other stockholders. Harris
Financial owns all of the outstanding shares of Harris Savings Bank. Harris
Financial conducts its primary business activities through Harris Savings Bank.
Harris Financial will no longer exist after the conversion and stock offering.
Harris Financial's executive offices are located at 235 North Second Street,
Harrisburg, Pennsylvania 17101, and its telephone number is (717) 236-4041.
New Harris Financial, Inc. New Harris Financial, Inc. is a Pennsylvania
corporation that will own 100% of the common stock of Harris Savings Bank upon
completion of the conversion and stock offering. New Harris Financial will
acquire York Financial in a merger. New Harris Financial was formed in March
2000 to facilitate the conversion and stock offering. New Harris Financial is
the successor to Harris Financial and will conduct its primary business
activities through Harris Savings Bank. New Harris Financial's executive offices
are located at 235 North Second Street, Harrisburg, Pennsylvania 17101, and its
telephone number is (717) 236-4041.
Harris Savings Bank. Harris Savings Bank was formed in 1886. Harris Savings
Bank is a Pennsylvania savings bank, but is re-chartering as a federal savings
bank prior to the conversion and stock offering. It presently operates 37 full
service offices, an operations center, a business center, a support center, five
loan production offices, a mortgage lending office and a business banking
office. Harris Savings Bank's primary business is attracting deposits from the
general public and investing such deposits in loans secured by residential and
commercial real estate, commercial business loans, consumer loans and investment
securities. Harris Savings Bank primarily serves individuals and business
customers in the five central Pennsylvania counties of Dauphin, Cumberland,
York, Lancaster, and Lebanon and in the northern Maryland county of Washington.
Harris Savings Bank offers residential mortgage loans in Pennsylvania and
Maryland. Harris Savings Bank originates certain types of consumer loans
throughout most of the eastern United States. Harris Savings Bank's executive
offices are located at 235 North Second Street, Harrisburg, Pennsylvania 17101,
and its telephone number is (717) 236-4041.
York Financial Corp. York Financial Corp. is a Pennsylvania corporation and
the holding company of York Federal Savings and Loan Association. York Financial
is the sole stockholder of seven subsidiaries, including York Federal, Y-F
Service Corp., First Capital Brokerage Services, Inc., First Capital Insurance
Services Inc., New Service Corp., and Advanced Real Estate Associates. York
Financial is also a partner in a joint venture, Meridian
7
<PAGE>
Venture Partners. York Financial is a Pennsylvania corporation. York Financial's
executive offices are located at 101 South George Street, York, Pennsylvania
17401, and its telephone number is (717) 846-8777.
York Federal Savings and Loan Association. York Federal Savings and Loan
Association was formed in 1955. It conducts its business through 25 offices
located in south central Pennsylvania and northern Maryland. York Federal's
primary business is attracting deposits from the general public, commercial and
governmental entities and investing such deposits in loans secured by
residential and commercial real property, commercial business loans, consumer
loans and investment securities. York Federal maintains a commissioned mortgage
origination staff as well as mortgage correspondent relationships which
originate residential mortgage loans for York Federal primarily in Pennsylvania,
Maryland and Virginia, and to a lesser extent in 11 other states within the Mid-
Atlantic region. York Federal is the sole stockholder of three subsidiaries:
York Financial Investment Corp.; Advanced Real Estate Associates, Inc.; and
Residential Mortgage Corp. York Federal's executive offices are located at 101
South George Street, York, Pennsylvania 17401, and its telephone number is (717)
846-8777.
Diagram of Current Corporate Structure of Harris Financial. The following
diagram shows the current corporate structure of Harris MHC, Harris Financial,
and Harris Savings Bank.
-------------------------- -----------------------------
Harris MHC Minority stockholders
-------------------------- -----------------------------
75.9% of 24.1% of
common stock common stock
------------------------------------------------
Harris Financial
------------------------------------------------
100 % of common stock
------------------------------------------------
Harris Savings Bank
------------------------------------------------
Diagram of Current Corporate Structure of York Financial. The following
diagram shows the current corporate structure of York Financial and York
Federal.
------------------------------------------------
Public stockholders
------------------------------------------------
100% of common stock
------------------------------------------------
York Financial
------------------------------------------------
100% of common stock
------------------------------------------------
York Federal
------------------------------------------------
The Transactions
The three primary transactions that the six corporate entities described
above will conduct are;
. a mutual-to-stock conversion of Harris MHC;
. a stock offering by New Harris Financial; and
. a merger of York Financial into Harris Financial.
The three transactions are all inter-related. The parties will not complete any
of the transactions unless they complete all three. The transactions will be
completed simultaneously.
The Mutual-to-Stock Conversion of Harris MHC. Harris MHC currently owns the
portion of the common stock of Harris Financial that was not offered for sale to
depositors when Harris Savings Bank's mutual savings bank predecessor converted
to stock form in 1994. Federal and state law requires that Harris MHC preserve
that
8
<PAGE>
unsold mutual interest until it converts to stock form. Harris MHC is now
converting to stock form and is offering its 75.9% ownership interest for sale
in the stock offering. The conversion will be accomplished by merging both
Harris MHC and Harris Financial into Harris Savings Bank, with Harris Savings
Bank as the resulting institution. Harris MHC and Harris Financial will no
longer exist after the conversion. New Harris Financial will be the successor to
Harris Financial.
New Harris Financial's Stock Offering. New Harris Financial is offering its
common stock for sale in the stock offering. Harris Savings Bank depositors will
receive priority subscription rights to purchase stock in the stock offering
because the stock offering is part of the mutual-to-stock conversion of Harris
MHC.
The Merger of York Financial Corp. into New Harris Financial. Concurrently
with the conversion and stock offering, New Harris Financial will issue
additional shares of its common stock to York Financial stockholders in exchange
for their shares of York Financial. At the same time as York Financial shares
are exchanged for shares of New Harris Financial, York Financial will merge into
New Harris Financial, and York Federal will merge into Harris Savings Bank.
Following the mergers, the corporate existence of York Financial and York
Federal will end.
Diagram of Corporate Structure After the Transactions
The following diagram shows the proposed corporate structure after
completion of the transactions.
-----------------------------------------------
Public stockholders
-----------------------------------------------
100% of common stock
-----------------------------------------------
New Harris Financial
-----------------------------------------------
100% of common stock
-----------------------------------------------
Harris Savings Bank
-----------------------------------------------
Reasons for the Conversion, Stock Offering and Merger
The conversion of Harris MHC from the mutual holding company form of
organization and New Harris Financial's stock offering are necessary to complete
the merger with York Financial. The stock offering and merger will allow New
Harris Financial to expand the products and services that are offered by Harris
Financial and York Financial and to offer such products and services to a larger
community. Because of the stock offering and merger, Harris Financial will be
in a better position to:
. increase its lending activities, especially to support the growth of
business banking;
. expand its branch office network;
. invest in securities;
. further diversify the products and services that it offers;
. improve and increase its delivery systems, such as expanding internet
banking services; and
. market its services to customers of other banks who have been
adversely affected by recent consolidations in the local banking
market.
The stock offering is also intended to provide an additional source of
capital for New Harris Financial to:
. finance acquisitions of other financial institutions or other
businesses related to banking; and
. pay dividends to stockholders.
After the stock offering, New Harris Financial will be able to issue
additional shares of common stock to raise capital or to finance acquisitions.
At the present time, New Harris Financial is not planning any additional
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<PAGE>
capital issuances, mergers, or material acquisitions. New Harris Financial
believes that the stock offering will give customers and the local community the
opportunity to become equity owners of New Harris Financial, and to participate
in possible stock price appreciation and cash dividends. New Harris Financial
believes that through expanded local stock ownership, existing customers and
others who purchase common stock will try to support New Harris Financial by
consolidating their banking business with, and increasing their referrals to,
Harris Savings Bank.
Business of New Harris Financial
New Harris Financial was recently formed and has no operating history.
Following the transactions, the business of New Harris Financial will be the
combined businesses of Harris Financial and York Financial. New Harris
Financial will succeed to the business and operations of Harris Financial, and
will acquire the business and operations of York Financial in the merger. In
addition, New Harris Financial will raise additional capital through the stock
offering. Following the stock offering and merger, New Harris Financial will be
the largest Pennsylvania thrift holding company based on combined assets and
deposits as of March 31, 2000. In considering the business and operations that
will be conducted by New Harris Financial, please review the discussion of the
businesses of Harris Financial and York Financial, and the management's
discussion and analysis of financial condition and results of operations of
Harris Financial and York Financial, both of which are included in this
document.
Management of New Harris Financial Following the Transactions
At the completion of the merger, the Board of Directors of New Harris
Financial will consist of 17 persons, 10 of whom are currently directors of
Harris Financial and seven of whom are currently directors of York Financial.
Following the merger, the President, Chief Executive Officer and Co-Chairman of
the Board of New Harris Financial will be Charles C. Pearson, Jr., who currently
is the President, Chief Executive Officer and Chairman of the Board of Harris
Financial. Following the merger, Robert W. Pullo, who currently serves as
President, Chief Executive Officer and Chairman of York Financial, will be
appointed Co-Chairman of the Board of Directors of New Harris Financial through
2002, and thereafter will serve as Vice Chairman of the Board of Directors and
Vice Chairman of the Executive Committee of New Harris Financial. The remainder
of New Harris Financial's management team will include members of both Harris
Financial's and York Financial's current management teams.
Operating Strategies after the Merger
New Harris Financial has recently been formed and currently has no business
and operations. New Harris Financial's business after the transactions will be
the combined businesses of Harris Financial and York Financial. Harris
Financial, York Financial and New Harris Financial believe that these business
strategies can be summarized as follows:
. Expanding business banking activities
. Increasing sources of non-interest income
. Leveraging the branch network of Harris Savings Bank and York Federal
. Growth and increasing market share
. Improving competitive position
. Maintaining credit quality
. Investment leveraging
. Realizing cost savings from the merger
These strategies are described in greater detail in "Certain Effects of the
Merger on Harris Financial and York Financial." There can be no assurances that
New Harris Financial will be successful in implementing these strategies.
Description of the Conversion and Stock Offering
The Conversion. Harris MHC owns 75.9% of Harris Financial's common stock.
As part of the conversion, Harris MHC's existence will end, and Harris MHC's
75.9% ownership interest in Harris Financial will be offered for sale to Harris
Savings Bank's depositors and the public in the stock offering. New Harris
Financial will be the
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<PAGE>
successor to Harris Financial, and will own 100% of the common stock of Harris
Savings Bank.
The Stock Offering. New Harris Financial will offer shares of its common
stock on a priority basis to eligible Harris Savings Bank depositors and others
in a subscription offering. Any unsubscribed shares are expected to be offered
to the general public in an underwritten public offering. If New Harris
Financial does not receive orders for at least 19,550,000 shares in the
subscription and community offering, then, in New Harris Financial's discretion,
in order to issue the minimum number of shares necessary to complete the stock
offering, up to 5,000,000 of the unsubscribed shares may be applied to the
acquisition by merger of York Financial. When this document refers to the stock
offering, it means the issuance in the subscription offering, any community
offering and underwritten public offering, and any issuance of unsubscribed
shares to stockholders of York Financial in the merger.
The Conversion Exchange. Harris Financial's stockholders, excluding Harris
MHC, own approximately 24.1% of Harris Financial's outstanding shares. These
minority shares will be exchanged for shares of New Harris Financial. The
number of shares of New Harris Financial that Harris Financial stockholders will
receive will be based on the Harris Financial conversion exchange ratio. Former
Harris Financial stockholders will own between approximately 15.0% and 15.9% of
New Harris Financial immediately following the transactions.
Description of the Merger of York Financial into New Harris Financial
Concurrently with the conversion and stock offering, New Harris Financial
will issue additional shares of its common stock to York Financial stockholders
in exchange for their shares of York Financial. At the same time as York
Financial shares are exchanged for shares of New Harris Financial, York
Financial will merge into New Harris Financial, and York Federal will merge into
Harris Savings Bank. Following the mergers, the corporate existence of York
Financial and York Federal will end.
The York Financial Merger Exchange. At the time the merger with York
Financial is completed, each outstanding share of York Financial common stock
will become shares of New Harris Financial common stock based on the York
Financial merger exchange ratio. Under the terms of the merger agreement between
Harris Financial and York Financial, the York Financial merger exchange ratio
will be based, in part, on the final appraisal of the pro forma market value of
the shares issued in the conversion and stock offering. The independent
appraisal is described below.
The Merger Agreement. Harris Financial and York Financial entered into the
merger agreement on March 27, 2000. The merger agreement sets forth the terms
of the merger. The merger agreement was unanimously approved by the boards of
Harris MHC, Harris Financial, Harris Savings Bank, York Financial and York
Federal. The merger agreement identifies the conditions to the merger, and the
circumstances under which the merger may be terminated.
As an inducement for Harris Financial to enter into the merger agreement,
York Financial has granted Harris Financial an option to purchase up to
2,011,346 shares of York Financial common stock at an exercise price of $12.25
per share. The stock option agreement is intended to increase the likelihood
that the merger will be completed in accordance with its terms because it has
the effect of discouraging offers by third parties to acquire York Financial.
The Independent Appraisal
New Harris Financial and Harris MHC have obtained an independent appraisal
of the pro forma market value of New Harris Financial assuming the completion of
the conversion, stock offering and merger. The appraisal was prepared by RP
Financial, LC, an appraisal firm experienced in appraisals of savings
institutions. The number of shares issued in the stock offering, the number of
shares issued to Harris Financial minority stockholders in the conversion and
the number of shares issued to York Financial stockholders in the merger will be
based, in part, on the independent appraisal. The independent appraisal is
expressed as a range of values.
RP Financial has advised New Harris Financial and Harris MHC that, in its
opinion, dated June 9, 2000, the midpoint of the estimated range of the market
value of the common stock of New Harris Financial that will be issued in the
conversion and stock offering, including;
. shares sold in the stock offering, and
. shares issued to Harris Financial minority stockholders in exchange
for their shares of Harris Financial,
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<PAGE>
was $302.8 million, and ranged from a minimum of $257.4 million to a maximum of
$348.3 million. Including the shares issued to York Financial stockholders in
the merger, the midpoint of the pro forma range of the market capitalization of
New Harris Financial was $477.2 million, and ranged from $414.1 million to
$526.1 million. If New Harris Financial does not receive orders for 19,550,000
shares in the subscription and community offering, then, in New Harris
Financial's discretion, in order to issue the minimum number of shares necessary
to complete the stock offering, up to 5,000,000 of the unsubscribed shares may
be applied to the acquisition by merger of York Financial. If all 5,000,000
shares are so issued, then the pro forma market capitalization of New Harris
Financial can range as low as $364.1 million. The number of shares that will be
offered for sale in the offering, based on the valuation range, will range from
a minimum of 19,550,000 shares to a maximum of 26,450,000 shares. The maximum
of the estimated valuation range may be increased by 15% and the number of
shares of common stock to be issued in the stock offering may be increased to
30,417,500 shares due to changes in the market and general financial and
economic conditions without the resolicitation of subscribers.
Ownership of Harris Financial After the Transactions
Ownership Table. The following table shows information regarding the
shares that New Harris Financial will issue in the stock offering. The table
also shows the number of shares of New Harris Financial that will be owned by:
. purchasers in the stock offering;
. Harris Financial minority stockholders who will receive shares of New
Harris Financial in exchange for their shares of Harris Financial; and
. York Financial stockholders who will receive shares of New Harris
Financial in exchange for their shares of York Financial.
Information is presented at the minimum as adjusted for the discretionary
issuance of unsubscribed shares to York Financial stockholders, minimum,
midpoint, maximum and adjusted maximum of the offering range. The number of
shares issued is based, in part, on independent appraisal of New Harris
Financial.
<TABLE>
<CAPTION>
Shares Issued Shares Issued
at Adjusted Shares Issued Shares Issued Shares Issued at Adjusted
Minimum at Minimum at Midpoint at Maximum Maximum
of Offering of Offering of Offering of Offering of Offering
Range(1) Range Range Range Range
------------------- ------------------- ------------------- ----------------- -----------------
Percent Percent Percent Percent Percent
Number of Total Number of Total Number of Total Number of Total Number of Total
---------- -------- ---------- -------- ---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shares issued in stock offering:
Purchasers in the stock offering.. 14,550,000 74.4% 19,550,000 100% 23,000,000 100% 26,450,000 100% 30,417,500 100%
York Financial stockholders(1).... 5,000,000 25.6 -- -- -- -- -- -- -- --
---------- ------ ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total shares issued in
stock offering.............. 19,550,000 100.0% 19,550,000 100% 23,000,000 100% 26,450,000 100% 30,417,500 100%
========== ====== ========== ===== ========== ===== ========== ===== ========== =====
Shares outstanding after
conversion, stock
offering, and merger:
Purchasers in the stock offering.. 14,550,000 40.0% 19,550,000 47.2% 23,000,000 48.2% 26,450,000 50.3% 30,417,500 50.3
Harris Financial minority
stockholders in the conversion... 6,191,274 17.0 6,191,274 15.0 7,283,852 15.3 8,376,430 15.9 9,632,894 15.9
York Financial stockholders
in the merger(1)................. 15,666,264 43.0(2) 15,666,264 37.8 17,435,036 36.5 17,781,470 33.8 20,448,691 33.8
---------- ------ ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total shares outstanding
after conversion, stock
offering, and merger(3)....... 36,407,538 100.0% 41,407,538 100.0% 47,718,888 100.0% 52,607,900 100.0% 60,499,085 100.0%
========== ====== ========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
______________________
(1) If New Harris Financial does not receive orders for 19,550,000 shares in
the subscription and community offering, then, in New Harris Financial's
discretion in order to issue the minimum number of shares necessary to
complete the stock offering, up to 5,000,000 of the unsubscribed shares may
be applied to the acquisition by merger of York Financial. Assumes that
5,000,000 unsubscribed shares are so applied. All such shares are assumed
to be issued in the stock offering.
(2) The shares received by York Financial stockholders in exchange for their
shares of York Financial common stock must be less than 50% of the total
shares issued in the stock offering, conversion and merger.
(3) Does not include options that were unexercised as of March 31, 2000.
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<PAGE>
Use of Proceeds from the Sale of Common Stock
New Harris Financial will use the $221.0 million of estimated net proceeds
of the stock offering, assuming the sale of shares at the midpoint of the
offering range as follows:
. 50%, or $110.5 million, will be contributed to in Harris Savings
Bank;
. 42%, or $92.1 million, will be retained by New Harris Financial for
general corporate purposes; and
. 8%, or $18.4 million, will be loaned to the employee stock ownership
plan to fund its purchase of New Harris Financial common stock in the
stock offering.
New Harris Financial intends to use the net proceeds retained from the
offering to invest in securities, to finance the possible acquisition of other
financial institutions and other businesses that are related to banking, to pay
dividends, and for other general corporate purposes. Harris Savings Bank
intends to use the offering proceeds it receives from New Harris Financial to
increase its lending activities, especially business banking; expand its branch
office network in selected markets; expand products and services and delivery
systems; for other general corporate purposes such as the repayment of
borrowings; and market to customers of other banks who have been adversely
affected by recent consolidations in the local banking market.
Persons Who May Order Stock in the Subscription Offering and Community Offering
New Harris Financial is offering shares of common stock in a "subscription
offering" in the following order of priority:
. First, to depositors with accounts at Harris Savings Bank with
aggregate balances of at least $50 on December 31, 1998;
. Second, to Harris Savings Bank's employee stock ownership plan;
. Third, to depositors with accounts at Harris Savings Bank with
aggregate balances of at least $50 on June 30, 2000; and
. Fourth, to depositors with accounts at Harris Savings Bank on August
____, 2000.
Shares of common stock not purchased in the subscription offering may be
offered to the general public in a community offering that is expected to be
conducted during the subscription offering. New Harris Financial intends to
give a preference in the community offering to orders submitted by persons
residing in the counties where Harris Savings Bank has a branch office, and
stockholders of Harris Financial and York Financial. If New Harris Financial
does not receive orders for at least 19,550,000 shares in the subscription and
community offering, then, in New Harris Financial's discretion in order to issue
the minimum number of shares necessary to complete the stock offering, up to
5,000,000 of the unsubscribed shares may be applied to the acquisition by merger
of York Financial. New Harris Financial also may offer shares of common stock
not purchased in the subscription offering or in the community offering in an
underwritten public offering. New Harris Financial has the right to accept or
reject orders, in whole or in part, received in the community offering in its
sole discretion.
Ryan, Beck and Co., Inc. has agreed to use its best efforts to assist in
soliciting subscriptions in the subscription offering and community offering.
The Public Offering
Shares of common stock offered for sale, but not sold in the subscription
and community offering or issued to York stockholders as part of the merger
consideration, may be sold to underwriters for resale to the general public in a
standby firm commitment underwritten public offering. If a public offering is
conducted, it would be managed by Ryan, Beck and Legg Mason Wood Walker, Inc.
Harris Financial intends to reserve for sale in the public offering 7,500,000
shares not subscribed in the subscription offering. In addition, for a period
of 30 days following the public offering, Harris Financial expects to grant the
underwriters an option to purchase additional shares, not to exceed 15% of the
shares sold in the public offering, on the same terms as other shares purchased
by the underwriters, for the purpose of covering over-allotments, if any. In
the public offering, no person may purchase more than $5,000,000 of common
stock.
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<PAGE>
New Harris Financial expects that the public offering will commence during or as
soon as practicable following the expiration of the subscription offering.
How You May Pay for Your Shares
In the subscription offering and the community offering you may pay for
your shares only by:
. personal check, bank check or money order; or
. authorizing us to withdraw funds from your deposit accounts maintained
with Harris Savings Bank.
Limitations on Your Purchases of Common Stock
Your orders for common stock will be limited in the following ways:
. The minimum order is 25 shares or $250;
. The maximum amount that an individual may purchase in any category of
the stock offering is 500,000 shares, or $5,000,000, of common stock.
New Harris Financial may increase or decrease this maximum purchase
limitation at any time without notifying you;
. The maximum amount that an individual together with persons acting in
concert may purchase in all categories of the stock offering combined
is 5.0% of the shares issued in the stock offering. New Harris
Financial may increase or decrease this maximum purchase limitation at
any time without notifying you.
. Persons acting in concert may only purchase shares in the stock
offering if they will own no more than 5.0% of the shares that will be
outstanding after the conversion and stock offering. This means that
if we sell 19,550,000 shares at the minimum of the offering range and
issue 6,191,274 shares to the minority stockholders of Harris
Financial in exchange for their Harris Financial shares, persons
acting in concert will be permitted to submit orders to purchase a
number of shares that, when combined with the shares they receive in
exchange for Harris Financial shares, total 1,287,064 shares or less.
If New Harris Financial sells 26,450,000 shares at the maximum of the
offering range this limitation would be 1,741,322 shares. This
limitation does not apply to shares of New Harris Financial received
by York Financial stockholders in the York merger. New Harris
Financial may increase or decrease this maximum purchase limitation at
any time without notifying you.
. If New Harris Financial receives orders for a greater number of shares
than it is offering, then New Harris Financial will allocate the
available shares. This may result in your receiving a smaller number
of shares than you ordered, or no shares at all. See "The Conversion
and Stock Offering."
The purchase limitations described above do not apply to the employee stock
ownership plan. The employee stock ownership plan is authorized to purchase up
to 8% of the shares issued in the stock offering, including unsubscribed shares
that are applied to the acquisition by merger of York Financial. For additional
information on these purchase limitations see "The Conversion and Stock Offering
- Limitations on Common Stock Purchases."
You May Not Sell or Transfer Your Subscription Rights
If you order stock in the subscription offering, you will be required to
state that you are purchasing the stock for yourself and that you have no
agreement or understanding to sell or transfer your subscription rights. We
intend to take legal action, including reporting persons to federal or state
regulatory agencies, against anyone who we believe sold or gave away
subscription rights. We will not accept your order if we have reason to believe
that you sold or transferred your subscription rights.
Deadline for Orders of Common Stock
If you wish to purchase shares in the subscription offering or the
community offering, a properly completed stock order form, together with payment
for the shares, must be received by New Harris Financial no later than 10:00
a.m., local time, on September ____, 2000, unless we extend this deadline. You
must submit your order forms by mail, overnight courier or by dropping off your
order at our Stock Information Center. The Stock Information
14
<PAGE>
Center is located at our operations center at 449 Eisenhower Boulevard,
Harrisburg, Pennsylvania 17111. We will not accept orders that are delivered to
our branch offices.
Termination of the Offering
The subscription offering will terminate at _____ a.m., local time, on
September ___, 2000. We may extend the expiration date for the subscription
offering without notice to you, until ______________, 2000, unless regulators
approve a later date. The community offering is expected to be conducted during
the subscription offering. The underwritten public offering will begin prior to
or soon as practicable following the expiration of the subscription offering.
The community offering and the underwritten public offering may be terminated at
any time, but must be completed by 45 days after the end of the subscription
offering.
Steps We May Take If We Do Not Receive Orders for the Minimum Number of Shares
If we do not receive orders for 19,550,000 shares, we may apply up to
5,000,000 unsubscribed shares to the acquisition by merger of York Financial,
and we may increase the maximum purchase limitations. In addition, we may seek
regulatory approval to extend the offering.
Market for New Harris Financial's Common Stock
New Harris Financial has applied to have its common stock trade on the
Nasdaq National Market under the symbol "____." Ryan, Beck & Co. intends to
make a market in the common stock but it is under no obligation to do so. See
"Market for the Common Stock."
New Harris Financial's Policy Regarding Dividends
New Harris Financial intends initially to pay quarterly dividends after the
completion of the stock offering and acquisition. The exact amount of the
dividend will depend on the number of shares sold in the stock offering. New
Harris Financial intends to pay an annual dividend of $.34 if the minimum number
of shares are sold in the offering, and $.26 if the adjusted maximum number of
shares are sold in the stock offering. At the midpoint of the offering range,
the dividend is expected to be $.305. New Harris Financial intends that the
amount of the dividend will ensure that after the stock offering and merger,
former Harris Financial minority stockholders and former York Financial
stockholders will not experience a decrease in their dividends. New Harris
Financial intends to pay a prorated dividend after the end of the fiscal quarter
during which it completes the stock offering and merger.
Declarations of dividends by New Harris Financial's Board of Directors will
depend upon a number of factors. There can be no assurance that dividends will
in fact be paid on New Harris Financial's common stock or that, if paid,
dividends will not be reduced or eliminated in the future.
How You May Obtain Additional Information Regarding the Conversion and Offering
If you have any questions regarding the offering or the conversion, please
call the Stock Information Center at 800 _______________, Monday through Friday
between ____ a.m. and ____ p.m., local time.
15
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors in deciding
whether to invest in our common stock.
Changing interest rates may adversely affect our profits.
To be profitable, we must earn more in interest and fees than we pay in
interest and expenses. If interest rates continue to rise as they have recently,
the interest we pay on interest-bearing liabilities, such as deposits and
borrowings, would increase more quickly than interest earned on interest-earning
assets, such as loans and investment securities. This would reduce our net
interest income and thereby reduce our net income in the short-term. In
addition, rising interest rates are likely to reduce our income because it may
reduce the demand for loans and the value of our investment securities and make
it more difficult for our borrowers to repay their loans. If interest rates
decline, however, our loans may be refinanced at lower rates or prepaid and our
investments may be prepaid earlier than expected, which may also lower our
income. Interest rates will continue to fluctuate, and we cannot predict future
Federal Reserve Board actions or other factors that will cause market rates to
change.
Increases in market rates of interest are likely to adversely affect our
stockholders' equity.
At March 31, 2000, Harris Financial owned $1.3 billion of marketable
securities that were available for sale. Generally accepted accounting
principles require that these securities be carried at fair value on the
consolidated balance sheet. Unrealized gains or losses on these securities, that
is, the difference between the fair value and the amortized cost of these
securities, is reflected in stockholders' equity. Recently, market rates of
interest have increased. When interest rates increase, the fair value of Harris
Financial's available for sale marketable securities generally decreases, which
decreases stockholders' equity. As of March 31, 2000, Harris Financial's
available for sale marketable securities portfolio had an unrealized loss, net
of taxes, of $35.1 million, which resulted in a decrease in stockholders' equity
by the same amount. New Harris Financial stockholders' equity is likely to be
adversely affected by increases in market interest rates.
Interest rate risk may become more important after the completion of the
conversion and stock offering, and acquisition by merger of York Financial.
Harris Saving Bank will re-charter as a federal savings bank. As a federal
savings bank, Harris Savings Bank will be regulated by the Office of Thrift
Supervision. The Office of Thrift Supervision has indicated that it will focus
considerable attention, both during upcoming examinations and in financial
monitoring between examinations, on interest rate risk management. The OTS also
has indicated that institutions with troubling interest rate risk levels or
trends can expect heightened regulatory scrutiny of capital management. The
Office of Thrift Supervision has reviewed the interest rate risk profile of York
Federal, but not Harris Savings Bank. If the Office of Thrift Supervision were
to determine that the interest rate risk level or trends of the combined
operations of Harris Savings Bank and York Federal were of concern, then it
could impose operating restrictions on Harris Savings Bank's activities
following the re-chartering.
New Harris Financial's success depends on the success of the merger.
New Harris Financial's future growth and profitability depend, in part, on
its ability to successfully complete the York Financial merger and manage the
combined operations. For the merger to be successful, New Harris Financial will
have to succeed in combining the corporate cultures, personnel and operations of
New Harris Financial and York Financial, and in achieving expense savings by
eliminating selected redundant operations. New Harris Financial cannot assure
you that its plan to integrate and operate the combined operations will be
timely or efficient, or that it will successfully retain existing customer
relationships.
Recently the stock market has been volatile and many stocks have not appreciated
in value.
Publicly traded stocks have recently experienced substantial market price
volatility. This is due, in part, to investors' shifting perceptions of the
effect on various industry sectors of changes and potential changes in the
economy. Volatility, therefore, may be unrelated to the current operating
performance of particular companies whose stock shares are traded. The purchase
price of common stock sold in conversion transactions, including mutual-to-stock
conversion transactions of mutual holding companies, is based on an independent
appraisal. Independent appraisals are not intended, and should not be construed,
as a recommendation as to the advisability of purchasing shares. After New
Harris Financial's common stock begins to trade, the trading price will be
determined by the marketplace. The trading price will fluctuate, because it will
be influenced by many factors, including prevailing interest rates, other
economic conditions, New Harris Financial's operating performance and investor
perceptions of the outlook for New Harris Financial and the banking industry in
general. We cannot assure you that,
16
<PAGE>
if you chose to sell shares you purchased in the stock offering, you will be
able to sell them at or above the $10.00 per share offering price. You should
not have a short term investment horizon in evaluating whether to purchase stock
in the offering.
The issuance of shares to York Financial stockholders will be dilutive to the
voting interests of purchasers in the stock offering.
New Harris Financial will issue between 15,666,264 and 20,448,691 shares of
its common stock to the former stockholders of York Financial in exchange for
their shares of common stock of York Financial. The issuance of shares in the
merger will dilute the voting interests of subscribers in the stock offering.
Because transactions that you would like may be prevented by provisions in our
charter documents and other laws and regulations you may not be able to profit
from the sale or merger of New Harris Financial.
Provisions of our articles of organization and bylaws and applicable
provisions of Pennsylvania and Federal law and regulations may delay, inhibit or
prevent an organization or person from gaining control of New Harris Financial
through a tender offer, business combination, proxy contest or some other method
even though some of our stockholders might believe a change in control is
desirable.
A decrease in demand for loans may lower our profitability.
Making loans is our primary business and primary source of profits. If
customer demand for loans decreases, our profits may decrease because our
alternative investments, primarily investment securities, earn less revenue for
us than loans. Customer demand for loans could be reduced by a weaker economy,
an increase in unemployment, a decrease in real estate values, an increase in
interest rates or increased competition.
Because of our emphasis on commercial lending, downturns in the real estate
market or economy may adversely impact our profits.
Commercial real estate loans and commercial business loans are generally
believed to involve more credit risk than residential real estate loans. Because
the repayment of commercial real estate loans and commercial business loans
often depends on the successful operation and management of the borrower's
property or business, repayment of such loans may be affected by adverse
conditions in the economy. Moreover, unlike residential mortgage loans, which
generally are made on the basis of the borrower's ability to make repayment from
his or her employment or other income, and which are secured by real property
whose value tends to be easily ascertainable, commercial loans typically are
made on the basis of the borrower's ability to make repayment from the cash flow
of the property or the borrower's business. As a result, the availability of
funds for the repayment of commercial loans may depend substantially on the
success of the property or business itself. Further, any non-real estate
collateral securing commercial business loans may depreciate over time, may be
difficult to appraise and may fluctuate in value. In addition, much of the
commercial loan portfolio is relatively new, and there can be no assurance that
all loans will perform satisfactorily. Our focus on commercial lending therefore
could adversely affect our profits.
We have broad discretion in allocating the proceeds of the offering. Our
failure to effectively apply the proceeds of the offering could adversely effect
our profits.
The net cash proceeds from the stock offering will be between $136.9
million at the adjusted minimum of the offering range, and $255.1 million at the
maximum of the offering range. We intend to contribute half the net proceeds of
the offering to Harris Savings Bank, which will use the proceeds to support
increased lending, selective branch expansion, diversification of products, and
the expansion of product delivery systems. In addition, Harris Financial intends
to use the proceeds it retains to invest in securities, to finance the possible
acquisition of other financial institutions or other businesses related to
banking, to pay dividends and for other general corporate purposes. We have not
allocated specific amounts of proceeds for these purposes, and we will have
significant flexibility in determining the amounts of net proceeds we apply to
different uses and the timing of such applications. Our failure to apply these
funds effectively could hurt our profits.
Your subscription funds could be held for an extended time period and will not
be available to you for other investments if there is a delay in completing the
stock offering.
Although the subscription offering period ends on September ________, 2000,
New Harris Financial may extend the subscription offering for an additional 45
days, or until November ___, 2000. If New Harris Financial conducts a community
offering, the offering period may likewise be extended until as late as November
____, 2000. If the offering period is extended, subscribers will not have an
opportunity to decrease their orders, or have their
17
<PAGE>
subscriptions refunded. New Harris Financial cannot extend the offering period
beyond November ___, 2000 unless it obtains regulatory approval and gives
subscribers the opportunity to cancel their orders and obtain a refund of their
subscriptions.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
OF HARRIS FINANCIAL AND SUBSIDIARIES
Since New Harris Financial was formed only recently to effect the
conversion and merger, it has no historical business or results of operations.
However, since New Harris Financial will be the successor to Harris Financial,
we are presenting the financial and other data of Harris Financial and its
subsidiaries.
The following tables set forth selected consolidated historical financial
and other data of Harris Financial and its subsidiaries for the periods and at
the dates indicated. The information is derived in part from, and should be read
together with, the Consolidated Financial Statements and Notes thereto of Harris
Financial contained elsewhere in this document. The selected consolidated
financial condition and operating data at, and for the three months ended, March
31, 2000 and 1999 are derived from unaudited consolidated financial statements
and, in the opinion of management of Harris Financial, all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
the results for the unaudited periods have been made. The results of operations
data presented below for the three months ended March 31, 2000, are not
necessarily indicative of the results of Harris Financial that may be expected
for the entire year.
<TABLE>
<CAPTION>
At
March 31, At December 31,
-------------------------------------------------------------
2000 1999 1998 1997 1996 1995
---------- ---------- ----------- ---------- ---------- ----------
(unaudited) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets.................... $2,767,050 $2,691,400 $ 2,497,469 $2,207,481 $1,768,122 $1,255,864
Loans receivable, net........... 1,313,645 1,267,983 1,051,642 890,906 823,916 651,605
Loans held for sale, net........ 1,761 1,646 14,418 14,886 9,053 --
Marketable securities........... 1,303,825 1,257,603 1,274,837 1,199,194 828,910 524,932
Deposits........................ 1,439,688 1,373,870 1,205,379 1,146,238 1,173,423 1,073,710
Borrowings...................... 1,123,375 1,118,000 1,069,254 853,978 420,631 19,180
Stockholders' equity............ 167,198 169,324 189,970 179,034 152,752 151,459
Three Months Ended
March 31, Years Ended December 31,
----------------------- ---------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
--------- ---------- -------- -------- ---------- ---------- ----------
(unaudited) (In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income................. $ 47,236 $ 41,708 $174,829 $164,012 $ 141,067 $ 107,988 $ 80,625
Interest expense................ 31,718 26,587 113,391 107,150 93,085 67,326 47,696
---------- ---------- -------- -------- ---------- ---------- ----------
Net interest income............ 15,518 15,121 61,438 56,862 47,982 40,662 32,929
Provision for loan losses....... 835 795 3,180 2,540 610 1,957 --
---------- ---------- -------- -------- ---------- ---------- ----------
Net interest income after
provision for loan losses..... 14,683 14,326 58,258 54,322 47,372 38,705 32,929
Noninterest income.............. 2,734 4,021 10,757 15,545 14,559 3,996 2,564
Noninterest expense(1)(2)....... 11,832 11,592 42,707 43,329 35,848 42,187 20,776
---------- ---------- -------- -------- ---------- ---------- ----------
Income before taxes............. 5,585 6,755 26,308 26,538 26,083 514 14,717
Provision for income taxes...... 1,565 1,822 7,625 7,309 8,312 (517) 5,503
---------- ---------- -------- -------- ---------- ---------- ----------
Net income..................... $ 4,020 $ 4,933 $ 18,683 $ 19,229 $ 17,771 $ 1,031 $ 9,214
========== ========== ======== ======== ========== ========== ==========
</TABLE>
_______________
(1) Noninterest expense for 1996 includes a one-time special assessment of $7.0
million pre-tax ($4.4 million net of taxes) to recapitalize the Savings
Association Insurance Fund of the Federal Deposit Insurance Corporation. In
1996, a one-time special assessment was made on all depository institutions
with deposits insured by the Savings Association Insurance Fund of the
Federal Deposit Insurance Corporation.
(2) Noninterest expense for 1996 includes a $4.3 million pre-tax charge ($2.7
million net of taxes) for a fraud loss incurred with the acquisition of
First Harrisburg Bancor.
18
<PAGE>
<TABLE>
<CAPTION>
At or for the
Three Months Ended
March 31, (1) At or for the Year Ended December 31,
------------------ ----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Operating Ratios and Other Data
Performance Ratios:
Return on average assets (net income divided
by average total assets)........................... 0.60% 0.79% 0.72% 0.82% 0.89% 0.07% 0.81%
Return on average equity (net income divided
by average equity)................................. 9.65 10.37 10.10 10.33 10.89 0.68 6.34
Average net interest rate spread(5).................. 2.27 2.45 2.35 2.38 2.38 2.45 2.39
Net interest margin(4)............................... 2.46 2.67 2.57 2.66 2.66 2.87 3.00
Net interest income after provision for loan
losses to total noninterest expenses................ 124.10 123.59 136.41 125.37 132.15 91.75 158.50
Efficiency ratio(3).................................. 67.90 63.20 61.90 62.00 57.90 98.80 58.50
Noninterest expense to average assets................ 1.76 1.86 1.65 1.84 1.80 2.46 1.85
Noninterest income to average assets................. 0.41 0.65 0.41 0.66 0.73 0.26 0.23
Average interest-earning assets to average
interest-bearing liabilities....................... 103.85 105.00 104.82 105.84 105.92 109.40 113.75
Asset Quality Ratios:
Nonperforming loans to total loans................... 1.21 0.62 1.27 0.73 0.78 0.68 0.31
Nonperforming loans to total assets.................. 0.57 0.28 0.60 0.31 0.31 0.32 0.16
Nonperforming assets as a percentage
of total assets.................................... 0.63 0.57 0.66 0.59 0.62 0.72 0.68
Nonperforming loans and real estate owned
to total net loans and real estate owned........... 1.24 1.20 1.30 1.40 1.52 1.52 1.30
Allowance for loan losses to total loans............. .92 .85 .94 .86 .92 1.01 .94
Allowance for loan losses to non-performing loans.... .77 1.09 .74 1.19 1.18 1.48 3.04
Equity and Dividend Ratios:
Tangible capital..................................... 6.70 6.70 6.80 6.80 6.80 7.30 11.00
Core capital......................................... 6.70 6.70 6.80 6.80 6.80 7.30 11.00
Risk-based capital................................... 11.00 11.00 11.10 11.10 13.00 13.80 20.50
Average equity to average assets..................... 6.19 7.64 7.15 7.91 8.25 9.88 12.83
Period end equity to assets.......................... 6.04 7.62 6.29 7.61 8.11 8.64 12.06
Dividend payout ratio(6)............................. 11.94 9.69 10.13 9.81 8.67 141.90 13.70
Per Share Data (2):
Basic earnings per share............................. $ 0.12 $ 0.15 $ 0.56 $ 0.57 $ 0.53 $ 0.03 $ 0.28
Diluted earnings per share........................... 0.12 0.15 0.55 0.57 0.52 0.03 0.28
Dividends per share.................................. 0.06 0.06 0.24 0.22 0.20 0.19 0.17
Book value per share................................. 4.98 5.76 5.04 5.66 5.30 4.54 4.50
Other Data:
Number of:
Real estate loans outstanding........................ 7,325 9,423 6,888 9,623 9,625 10,244 10,112
Loans serviced for others............................ 2,758 14,810 10,675 26,054 14,348 10,284 10,156
Deposit accounts..................................... 153,247 146,767 154,432 146,425 141,672 133,893 120,755
Full-service offices................................. 37 35 37 35 33 32 25
</TABLE>
________________________________________
(1) Annualized where appropriate.
(2) All per share values have been adjusted to reflect the 1997 three for one
stock split.
(3) Efficiency ratio is noninterest expense divided by the sum of net interest
income after provision for loan losses and noninterest income.
(4) Represents annualized tax-effected net interest income before the provision
for loan losses divided by average interest-earned assets.
(5) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
(6) Represents cash dividends paid divided by net income.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
OF YORK FINANCIAL CORP. AND SUBSIDIARIES
The following tables set forth selected consolidated historical financial
and other data of York Financial Corp. and its subsidiaries for the periods and
at the dates indicated. The selected consolidated financial condition and
operating data at, and for the nine months ended, March 31, 2000 and 1999 are
derived from unaudited consolidated financial statements and, in the opinion of
management of York Financial, all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of the financial position and the
results of operations for the unaudited periods have been made. The results of
operations data presented below for the nine months ended March 31, 2000, are
not necessarily indicative of the results of York Financial that may be expected
for the entire year. The information is derived in part from, and should be read
together with, the Consolidated Financial Statements and Notes thereto of York
Financial contained elsewhere in this document.
<TABLE>
<CAPTION>
At At June 30,
March 31, --------------------------------------------------------------
2000 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------- ----------
(unaudited) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets........................ $1,630,290 $1,364,636 $1,229,268 $1,162,393 $1,109,804 $1,009,918
Loans receivable, net............... 1,127,976 909,193 951,641 997,841 938,570 845,205
Loans held for sale, net............ 1,461 30,631 17,534 4,882 5,686 6,450
Marketable securities............... 395,464 326,285 61,700 83,708 90,859 70,490
Deposits............................ 1,153,293 1,115,253 1,065,777 993,106 908,123 832,056
Borrowings.......................... 348,005 113,962 27,861 46,236 74,380 65,759
Stockholders' equity................ 109,938 110,410 109,225 100,083 93,540 85,330
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
March 31, Year Ended June 30,
----------------- -------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
------- ------- ------- ------- --------- ------- -------
(unaudited) (In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income....................... $79,999 $64,350 $86,365 $88,566 $ 87,641 $80,880 $68,155
Interest expense...................... 51,577 38,876 51,826 51,844 51,788 45,905 36,402
------- ------- ------- ------- --------- ------- -------
Net interest income.................. 28,422 25,474 34,539 36,722 35,853 34,975 31,753
Provision for loan losses............. 1,550 2,772 3,632 3,737 2,424 2,300 2,340
------- ------- ------- ------- --------- ------- -------
Net interest income after provision
for loan losses..................... 26,872 22,702 30,907 32,985 33,429 32,675 29,413
Noninterest income.................... 5,105 7,192 12,038 10,152 8,696 8,630 5,706
Noninterest expense................... 23,275 20,595 28,234 27,323 31,163(1) 24,450 22,616
------- ------- ------- ------- --------- ------- -------
Income before income taxes............ 8,702 9,299 14,711 15,814 10,962 16,855 12,503
Provision for income taxes............ 1,754 3,201 5,041 5,799 3,875 6,512 4,837
------- ------- ------- ------- --------- ------- -------
Net income............................ $ 6,948 $ 6,098 $ 9,670 $10,015 $ 7,087 $10,343 $ 7,666
======= ======= ======= ======= ========= ======= =======
</TABLE>
--------------------------
(1) Includes one-time special assessment of $5.3 million pre-tax ($3.2 million
net of taxes) to recapitalize the Savings Association Insurance Fund of the
Federal Deposit Insurance Corporation. In 1996, a one-time special
assessment was made on all depository institutions with deposits insured by
the Savings Association Insurance Fund of the Federal Deposit Insurance
Corporation.
20
<PAGE>
<TABLE>
<CAPTION>
At or for the
Nine Months Ended
March 31, (1) At or for the Year Ended June 30,
---------------------- ----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Operating Ratios and Other Data
Performance Ratios:
Return on average assets (net income
divided by average total assets)........... 0.59% 0.65% 0.76% 0.84% 0.61% 0.99% 0.83
Return on average equity (net
income divided by average equity).......... 8.50 7.24 8.64 9.61 7.46 11.57 9.39
Average net interest rate spread(5)......... 2.30 2.53 2.56 2.92 3.01 3.24 3.49
Net interest margin(4)...................... 2.55 2.88 2.90 3.28 3.27 3.54 3.70
Net interest income after
provision for loan losses to
total noninterest expenses................. 115.45 110.23 109.47 120.72 107.27 133.64 130.05
Efficiency ratio(3)......................... 69.42 63.05 60.62 58.29 69.95 56.07 60.38
Noninterest expense to average assets....... 1.48 1.65 2.23 2.30 2.68 2.33 2.45
Noninterest income to average assets........ 0.32 0.57 0.95 0.86 0.75 0.82 0.62
Average interest-earning assets to average
interest-bearing liabilities............... 105.41 107.88 107.71 107.64 105.53 106.34 104.92
Asset Quality Ratios:
Nonperforming loans to total loans.......... 0.70 1.23 1.07 1.63 1.43 1.28 1.53
Nonperforming loans to total assets......... 0.49 0.86 0.74 1.28 1.24 1.09 1.29
Nonperforming assets as a percentage
of total assets............................ 0.74 1.39 1.24 2.01 2.12 1.96 2.57
Nonperforming loans and real
estate owned to total net
loans and real estate owned................ 1.06 2.00 1.83 2.56 2.46 2.38 3.06
Allowance for loan losses to
total loans................................ 0.99 1.19 1.17 0.92 0.64 0.70 0.69
Allowance for loan losses to
non-performing loans....................... 141.50 95.50 107.46 56.18 44.57 54.65 44.70
Equity and Dividend Ratios:
Tangible capital............................ 7.4 7.7 7.1 7.7 7.5 7.5 7.5
Core capital................................ 7.4 7.7 7.1 7.7 7.5 7.5 7.5
Risk-based capital.......................... 13.6 13.6 12.8 13.1 12.0 12.3 11.9
Average equity to average assets............ 6.91 8.97 8.84 8.78 8.19 8.51 8.85
Period end equity to assets................. 6.74 8.82 8.09 8.89 8.61 8.43 8.45
Dividend payout ratio(6).................... 54.52 59.74 50.62 44.13 55.30 32.69 39.94
Per Share Data (2):
Basic earnings per share.................... $ 0.70 $ 0.61 $ 0.96 $ 10.3 $ 0.75 $ 1.14 $ 0.88
Diluted earnings per share.................. 0.68 0.58 0.92 0.96 0.71 1.08 0.83
Cash dividends paid......................... 0.38 0.36 0.49 0.46 0.42 0.37 0.34
Book value per share........................ 10.88 11.11 10.99 11.05 10.36 10.14 9.44
Other Data:
Number of:
Real estate loans outstanding............... 7,695 7,209 7,401 8,795 9,471 9,724 9,786
Loans serviced for others................... 7,162 8,095 7,823 7,724 8,484 9,649 9,648
Deposit accounts............................ 136,604 133,095 133,107 130,968 128,211 118,758 114,541
Full-service offices........................ 25 25 25 23 22 22 22
</TABLE>
__________________
(1) Annualized where appropriate.
(2) All per share values have been adjusted for stock dividends affected
through March 31, 2000.
(3) Efficiency ratio is noninterest expense divided by the sum of net interest
income after provision for loan losses and noninterest income.
(4) Represents annualized tax-effected net interest income before the provision
for loan losses divided by average interest-earned assets.
(5) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
(6) Represents cash dividends paid divided by net income.
21
<PAGE>
SELECTED UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL DATA OF NEW HARRIS FINANCIAL
The following tables present selected unaudited pro forma consolidated
financial data with respect to New Harris Financial and its subsidiaries. For
each period presented below, the "Pro Forma for Acquisition" information
reflects the acquisition by merger of York Financial, but not the conversion.
The "Pro Forma for Acquisition and Conversion" information reflects the
consummation of both the conversion and merger, including the sale of shares in
the offering and includes other assumptions as described in "Pro Forma Data--Pro
Forma Conversion Data." This financial data assumes that these transactions
occurred on each of the dates and at the beginning of each of the periods
presented, that subscription shares are sold in the offering at the $10.00
subscription price per share at the midpoint of the offering range. For
information on net income, net income per share, stockholders' equity and
stockholders' equity per share at the adjusted minimum, minimum, midpoint,
maximum and 15% above the maximum of the valuation range, see "Pro Forma Data--
Pro Forma Conversion Data." For additional assumptions used in calculating the
pro forma data, see "Pro Forma Data--Unaudited Pro Forma Condensed Consolidated
Financial Information." New Harris Financial intends to account for the
acquisition by merger of York Financial as a pooling of interests in accordance
with generally accepted accounting principles.
The following selected unaudited pro forma financial data should be read in
conjunction with the audited consolidated financial statements and related notes
presented elsewhere in this document.
<TABLE>
<CAPTION>
At March 31, 2000 At December 31, 1999
---------------------------------- --------------------------------------
Pro Forma Pro Forma
Pro Forma For Acquisition Pro Forma For Acquisition
For Acquisition and Conversion For Acquisition and Conversion
---------------- ---------------- ---------------- ---------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Financial Condition
-------------------
Total assets....................................... $4,390,031 $4,592,609 $4,334,746 $4,537,324
Loans receivable, net.............................. 2,444,843 2,444,843 2,433,303 2,433,303
Securities available for sale...................... 1,609,584 1,812,162 1,558,251 1,760,829
Securities held to maturity........................ 22,665 22,665 22,650 22,650
Excess of cost over fair value of assets acquired.. 16,898 16,898 17,617 17,617
Deposits........................................... 2,592,981 2,592,981 2,477,214 2,477,214
Borrowings......................................... 1,471,380 1,471,380 1,536,551 1,536,551
Total stockholders' equity......................... 269,827 472,405 271,135 473,713
Nonperforming loans................................ 23,850 23,850 24,871 24,871
Nonperforming assets............................... 28,618 28,618 30,810 30,810
Asset quality ratios (period end)
---------------------------------------------------
Nonperforming assets as a percent of total assets.. 0.65% 0.62% 0.71% 0.68%
Allowance for loan losses to total loans........... 0.95% 0.95% 0.95% 0.95%
Allowance for loan losses to nonperforming loans... 97.62% 97.62% 92.69% 92.69%
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended For the Year Ended
At March 31, 2000 At December 31, 1999(1)
---------------------------------- ---------------------------------
Pro Forma Pro Forma
Pro Forma For Acquisition Pro Forma For Acquisition
For Acquisition and Conversion For Acquisition and Conversion
--------------- ---------------- --------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Results of Operations(2)
------------------------
Net interest income.................. $ 25,030 $ 28,210 $ 97,969 $ 110,083
Provision for loan losses............ 1,235 1,235 6,105 6,105
--------------- ---------------- --------------- ---------------
Net interest income after provision
for loan losses................. 23,795 26,975 91,864 103,978
Noninterest income................... 4,565 4,565 20,826 20,826
Noninterest expense.................. 20,156 20,463 72,182 73,409
--------------- ---------------- --------------- ---------------
Income before taxes.................. 8,204 11,078 40,508 51,395
Provision for income taxes........... 1,858 2,864 11,708 15,519
--------------- ---------------- --------------- ---------------
Net income........................... $ 6,346 $ 8,214 $ 28,800 $ 35,877
=============== ================ =============== ===============
Diluted EPS.......................... $ 0.14 $ 0.18 $ 0.63 $ 0.78
Selected Ratios:
----------------
Performance ratios:
Return on end of period assets(3).. 0.58% 0.72% 0.66% 0.79%
Return on end of period equity(3).. 9.41% 6.96% 10.62% 7.57%
</TABLE>
_____________________
(1) Reflects statements of operation of York Financial for the 12 months ended
December 31, 1999, and Harris Financial for the fiscal year ended December
31, 1999.
(2) Does not reflect any cost savings or other benefits of the acquisition by
merger of York Financial.
(3) Information for three months ended March 31, 2000 is annualized.
Calculations are based on end of period equity or assets, as applicable.
22
<PAGE>
NEW HARRIS FINANCIAL
New Harris Financial, Inc. was organized in March 2000 to effect the
conversion of Harris MHC and the merger with York Financial. New Harris
Financial will succeed to the operations of Harris Financial after the
conversion and will also succeed to the operations of York Financial after the
merger. Neither Harris MHC, Harris Financial, nor York Financial will exist
after the conversion and merger. As a result, you should review the business
and operations of Harris Financial and York Financial contained in this document
for an understanding of the business and operations of New Harris Financial
after the conversion and merger.
New Harris Financial's assets will consist primarily of 100% of the
outstanding shares of Harris Savings Bank and investment securities. Following
the stock offering and conversion, New Harris Financial's assets will also
include the portion of the net proceeds of the offering not infused into Harris
Savings Bank and the loan to the employee stock ownership plan. Following the
merger with York Financial, New Harris Financial's assets also will include the
assets held by York Financial at the time of the merger. As of March 31, 2000,
York Financial's assets included primarily its ownership of 100% of the common
stock of York Federal and six other subsidiaries, including Y-F Service Corp.,
First Capital Brokerage Services, Inc., First Capital Insurance Services Inc.,
New Service Corp., and Advanced Real Estate Associates, and its partnership
interest in a joint venture, Meridian Venture Partners.
New Harris Financial does not, and does not intend to own or lease any
property, but instead will use the premises, equipment and furniture of Harris
Savings Bank. New Harris Financial does not, and at the present time does not
intend to, employ any persons other than officers, but will use the support
staff of Harris Savings Bank from time to time. Additional employees will be
hired as appropriate to the extent New Harris Financial expands its business.
The offering will provide New Harris Financial with additional capital to
support future growth. Management believes that the offering will provide New
Harris Financial with additional flexibility to diversify its business
activities through existing or newly formed subsidiaries, or through
acquisitions of or mergers with other financial institutions and financial
services related companies or for other business or investment purposes.
Although there are no current material arrangements, understandings or
agreements, written or oral, regarding any such opportunities or transactions,
except for the acquisition by merger of York Financial, New Harris Financial
will be in a position after the offering to take advantage of any such
acquisition and expansion opportunities that may arise. Future activities of
New Harris Financial are anticipated to be funded primarily by the offering
proceeds retained by New Harris Financial or, alternatively, through dividends
received from Harris Savings Bank.
New Harris Financial's executive offices are located at 235 North Second
Street, Harrisburg, Pennsylvania 17101, and its telephone number is (717) 236-
4041.
HARRIS FINANCIAL
Harris Financial, Inc. was organized in September 1997 as a Pennsylvania
corporation and the mid-tier stock holding company of Harris Savings Bank.
Prior to September 1997, Harris Savings Bank's shares of common stock were owned
by Harris MHC and other stockholders. When Harris Financial, Inc. was formed,
it exchanged its shares for all of the outstanding shares of Harris Savings
Bank. As a result, Harris Financial's shares are owned by Harris MHC and other
stockholders, and all of Harris Savings Bank's outstanding shares are owned by
Harris Financial, Inc. Harris Financial conducts its primary business
activities through Harris Savings Bank. Harris Financial is a bank holding
company regulated by the Board of Governors of the Federal Reserve system.
Prior to the completion of the conversion and merger, Harris Financial will re-
charter as a savings and loan holding company regulated by the Office of Thrift
Supervision. New Harris Financial will be the successor to Harris Financial
upon completion of the conversion, and Harris Financial will no longer exist.
Harris Financial's executive offices are located at 235 North Second
Street, Harrisburg, Pennsylvania 17101, and its principal telephone number is
(717) 236-4041.
HARRIS SAVINGS BANK
Harris Savings Bank was formed in 1886. Prior to the completion of the
conversion and merger, Harris Savings Bank will convert from a Pennsylvania
savings bank regulated by the Pennsylvania Department of Banking, to a federal
savings bank regulated by the Office of Thrift Supervision. Harris Savings Bank
presently operates 37 full service offices, an operations center, a business
center, a support center, five loan production offices, a mortgage lending
office and a business banking office. Harris Savings Bank's primary business is
attracting deposits from the general public and investing these deposits in
loans secured by residential and commercial real property, commercial business
loans, consumer loans and investment securities. Harris Savings Bank primarily
serves individual and
23
<PAGE>
business customers in the five central Pennsylvania counties of Dauphin,
Cumberland, York, Lancaster, and Lebanon and in the northern Maryland county of
Washington. Harris Savings Bank offers residential mortgage loans in
Pennsylvania and Maryland. It offers certain types of consumer loans throughout
most of the eastern United States.
In addition to its internal loan and deposit growth during recent years,
Harris Savings Bank has grown through acquisitions. In 1995, Harris Savings
Bank acquired two branches in Hagerstown, Maryland, with $126 million in
deposits and no loans. Harris Savings Bank recorded $10.4 million of goodwill
in connection with that acquisition, which is being amortized over seven years.
During 1996, Harris Savings Bank acquired First Harrisburg Bancorp,
headquartered in Harrisburg, Pennsylvania, in a transaction that was accounted
for as a purchase transaction. In the acquisition of First Harrisburg Bancorp,
Harris Savings Bank acquired $276.6 million in assets and $252.2 million in
deposits, and recorded goodwill totaling $13.8 million. The goodwill acquired
in the First Harrisburg Bancorp acquisition is being amortized over 15 years.
During 1999, Harris Savings Bank acquired two branches in Lebanon, Pennsylvania,
one of which was subsequently closed, in a transaction accounted for as a
purchase transaction. In the acquisition of the Lebanon County branches, Harris
Savings Bank acquired $11.8 million of loans and $37.3 million of deposits, and
recorded $3.3 million of goodwill which is being amortized over seven years.
As part of the merger, York Federal will merge into Harris Savings Bank,
and Harris Savings Bank's business and operations will include the business and
operations formerly conducted by York Federal. York Federal conducts its
business through 25 offices located in south central Pennsylvania and Maryland.
York Federal's primary business is attracting deposits from the general public
and from commercial and governmental entities, and investing these deposits in
loans secured by residential and commercial real property, commercial business
loans, consumer loans and investment securities. York Federal maintains a
commissioned mortgage origination staff as well as mortgage correspondent
relationships which originate residential mortgage loans for York Federal
primarily in Pennsylvania, Maryland and Virginia, and to a lesser extent in
eleven other states within the Mid-Atlantic region.
Harris Savings Bank's executive offices are located at 235 North Second
Street, Harrisburg, Pennsylvania 17101, and its telephone number is (717) 236-
4041.
USE OF PROCEEDS
The net proceeds from the offering will depend on the total number of
shares of common stock sold in the offering. The total number of shares sold in
the offering will depend on the final appraisal, regulatory and market
considerations, and whether unsubscribed shares are applied to the acquisition
by merger of York Financial. Net proceeds will also depend on the expenses
incurred in connection with the stock offering. Although we will not be able to
determine the actual net proceeds from the sale of the common stock until we
complete the offering, we estimate the net proceeds to be between $136.9 million
and $255.1 million, or $294.3 million if the offering is increased by15%.
New Harris Financial intends to distribute the net proceeds from the
offering as follows:
<TABLE>
<CAPTION>
Adjusted
Minimum Minimum Maximum
19,550,000 Shares 19,550,000 Shares 26,450,000 Shares
----------------- ----------------- -----------------
(In Thousands)
<S> <C> <C> <C>
Gross proceeds...................................... $ 195,500 $ 195,500 $ 264,500
Less: offering shares issued to York Financial
stockholders..................................... 50,000 -- --
Less: offering expenses............................. 8,641 8,641 9,403
----------------- ----------------- -----------------
Net proceeds........................................ 136,859 186,859 255,097
Less:
Proceeds contributed to Harris Savings Bank.... 68,430 93,430 127,549
Funds loaned to employee stock ownership plan.. 15,640 15,640 21,160
----------------- ----------------- -----------------
Funds retained for general corporate purposes....... $ 52,789 $ 52,789 $ 106,388
================= ================= =================
</TABLE>
The net proceeds may vary because total expenses relating to the offering
may be more or less than our estimates. For example, our expenses will change
depending on the number of shares that are sold in the underwritten public
offering. The net proceeds also will vary if the number of shares to be sold in
the offering is increased to up to 30,417,500 shares to reflect an increase of
up to 15% in the maximum of the estimated pro forma market value of New Harris
Financial. Payments for shares made through withdrawals from existing deposit
accounts will not result in the receipt of new funds for investment by Harris
Savings Bank but will result in a reduction of Harris Savings Bank's deposits
and interest expense as funds are transferred from interest bearing certificates
of deposit or other deposit accounts.
24
<PAGE>
New Harris Financial may use the proceeds it retains from the offering:
. to finance possible acquisitions of financial institutions or other
businesses related to banking;
. to pay dividends to stockholders;
. to invest in securities; and
. for general corporate purposes.
Harris Savings Bank may use the proceeds it receives from the offering:
. to fund new loans;
. to establish or acquire new branches;
. to diversify products and services that we offer;
. to expand and increase delivery systems;
. to invest in securities;
. to pay dividends to New Harris Financial; and
. for general corporate purposes.
Our ability to repurchase our common stock may be subject to regulatory
restrictions.
DIVIDEND POLICY
New Harris Financial intends initially to pay quarterly dividends after the
completion of the stock offering and merger. The exact amount of the dividend
will depend on the number of shares sold in the stock offering. New Harris
Financial intends to pay an annual dividend of $.34 per share at the adjusted
minimum or minimum number of shares are sold in the offering, and $.26 per share
if the adjusted maximum number of shares are sold in the stock offering. At the
midpoint of the offering range, the dividend is expected to be $.305 per share.
New Harris Financial intends that the amount of the dividend will ensure that
after the stock offering and merger, former Harris Financial minority
stockholders and former York Financial stockholders will not experience a
decrease in their dividends. New Harris Financial intends to pay a prorated
dividend after the end of the fiscal quarter during which it completes the stock
offering and merger.
Declarations of dividends by New Harris Financial's Board of Directors will
depend upon a number of factors, including the amount of the net proceeds from
the offering retained by New Harris Financial, investment opportunities
available to New Harris Financial and Harris Savings Bank, capital requirements,
regulatory limitations, New Harris Financial's and Harris Savings Bank's
financial condition and results of operations, tax considerations and general
economic conditions. There can be no assurance that dividends will in fact be
paid on New Harris Financial common stock or that, if paid, dividends will not
be reduced or eliminated in the future. For information concerning federal and
state law and regulations which apply to New Harris Financial in determining
the amount of proceeds which may be retained by New Harris Financial and
regarding a savings institution's ability to make capital distributions,
including payment of dividends to its holding company, see "Federal and State
Taxation--Federal Taxation" and "Regulation--Limitation on Capital
Distributions."
The funds that New Harris Financial is able to receive from Harris Savings
Bank will be regulated by the Office of Thrift Supervision, although New Harris
Financial is not itself restricted by Office of Thrift Supervision regulations
on the payment of dividends to its stockholders. New Harris Financial, however,
is subject to the requirements of Pennsylvania law.
Additionally, in connection with the conversion, New Harris Financial and
Harris Savings Bank have committed to the Office of Thrift Supervision that
during the one-year period following the consummation of the offering, New
Harris Financial will not take any action to declare an extraordinary dividend
to stockholders that would be treated by recipient stockholders as a tax-free
return of capital for federal income tax purposes without prior approval of the
Office of Thrift Supervision.
25
<PAGE>
MARKET FOR THE NEW HARRIS FINANCIAL COMMON STOCK
New Harris Financial Common Stock. New Harris Financial has not previously
issued common stock, so there is currently no established market for the common
stock. New Harris Financial has applied to have its common stock quoted on the
Nasdaq National Market under the symbol "____" after completion of the
transaction. Ryan, Beck has advised New Harris Financial that it intends to make
a market in the common stock following the transactions, but is under no
obligation to do so. New Harris Financial will encourage and assist additional
market makers to make a market in its common stock.
The development of an active trading market depends on the existence of
willing buyers and sellers, the presence of which is not within New Harris
Financial's control, or any market maker. The number of active buyers and
sellers of the common stock at any particular time may be limited. Under such
circumstances, you could have difficulty selling your shares on short notice,
and, therefore, you should not view the common stock as a short-term investment.
New Harris Financial cannot assure you that an active trading market for the
common stock will develop or that, if it develops, it will continue, nor can we
assure that you if you purchase shares you will be able to sell them at or above
$10.00 per share.
Harris Financial Common Stock. Harris Financial common stock currently
trades on the Nasdaq National Market under the symbol "HARS." The shares of
Harris Financial common stock owned by the public prior to the completion of the
conversion and stock offering will automatically be converted into and become a
right to receive a number of shares of New Harris Financial common stock that is
determined pursuant to the Harris conversion exchange ratio.
The following table sets forth the high and low bid quotes for Harris
Financial common stock and the adjusted cash dividends per share declared for
the periods indicated. The information is presented on a per share, historical
basis. Prospective investors should consider that the table reflects quotations
and dividends relating to currently outstanding shares of Harris Financial
common stock, which will be exchanged for a greater or lesser number of shares
of New Harris Financial based on the Harris conversion exchange ratio. The
Harris conversion exchange ratio cannot be determined until the transactions are
completed. The quotations shown in the table represent prices between dealers
and do not include retail markups, markdowns, or commissions, and do not reflect
actual transactions. This information has been obtained from monthly
statistical summaries provided by the Nasdaq Stock Market.
<TABLE>
<CAPTION>
High Low Cash Dividend
Year ending December 31, 2000 Bid Bid Declared
--- --- --------
<S> <C> <C> <C>
Quarter ending September 30, 2000
(through August __, 2000)
Quarter ended June 30, 2000
Quarter ended March 31, 2000 7 15/16 6 .0600
Year ended December 31, 1999
Quarter ended December 31, 1999 11 1/8 6 15/16 $.0600
Quarter ended September 30, 1999 12 5/8 9 .0600
Quarter ended June 30, 1999 12 3/4 10 .0600
Quarter ended March 31, 1999 15 12 .0600
Year ended December 31, 1998
Quarter ended December 31, 1998 16 15/16 11 $.0550
Quarter ended September 30, 1998 22 1/8 12 .0550
Quarter ended June 30, 1998 27 3/4 21 1/2 .0550
Quarter ended March 31, 1998 27 7/8 17 5/8 .0550
</TABLE>
At March 24, 2000, the business day immediately preceding the public
announcement of the conversion and merger, and at August __, 2000, the last sale
of Harris Financial common stock as reported on the Nasdaq National Market was
at a price of $7.25 per share and $__________ per share, respectively. At March
31, 2000, Harris Financial had 3,522 stockholders of record. All currently
outstanding shares of Harris Financial common stock held by stockholders other
than Harris MHC, including shares held by Harris Financial's officers and
directors, will at the time the conversion and stock offering are completed be
automatically converted into and become the right to receive a number of shares
of Harris Financial common stock determined pursuant to the Harris conversion
exchange ratio, and options to purchase shares of Harris Financial common stock
will be converted into options to purchase a number of shares of New Harris
Financial common stock determined pursuant to the exchange ratio. See
"Beneficial Ownership of Common Stock."
26
<PAGE>
HISTORICAL AND PRO FORMA CAPITALIZATION
The following table presents the historical consolidated capitalization of
Harris Financial and York Financial at March 31, 2000, and the pro forma
consolidated capitalization of New Harris Financial after giving effect to the
offering and the acquisition by merger of York Financial, based upon the
assumptions set forth in the "Pro Forma Data" section.
<TABLE>
<CAPTION>
Harris Financial York Financial Pro Forma
Historical at Historical at Acquisition Consolidated
March 31, 2000 March 31, 2000 Adjustments(1)(5) Historical
-------------- -------------- ----------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Deposits(4)................ $1,439,688 $1,153,293 $ -- $ 2,592,981
Borrowings................. 1,123,375 348,005 -- 1,471,380
---------- ---------- ------------ -----------
Total deposits and
borrowings................ $2,563,063 $1,501,298 $ -- $ 4,064,361
========== ========== ============ ===========
Stockholders' equity:
Common Stock, $0.01 par
value.................... $ 340 $ -- $ -- $ 441
Common Stock, $1.00 par
value (5)................ -- 10,107 -- --
Paid-in capital........... 30,348 97,105 -- 137,459
Retained earnings(6)...... 172,300 11,389 (7,309) 176,380
Accumulated other
comprehensive income..... (35,065) (8,133) -- (43,198)
Employee stock ownership
plan(7).................. (271) (530) -- (801)
Existing restricted stock
plans.................... (454) -- -- (454)
---------- ---------- ------------ -----------
Total stockholders'
equity.................. $ 167,198 $ 109,938 $(7,309) $ 269,827
========== ========== ============ ===========
Assets..................... $2,767,050 $1,630,290 $(7,309) $ 4,390,031
========== ========== ============ ===========
Total stockholders'
equity to total assets... 6.04% 6.74% -- 6.15%
========== ========== ============ ===========
<CAPTION>
Pro Forma New Harris Financial at March 31, 2000 Based upon the sale
for $10.00 per share, or Other Issuance
--------------------------------------------------------------------------------
Minimum Maximum
as Adjusted Minimum Midpoint Maximum as Adjusted
19,550,000 19,550,000 23,000,000 26,450,000 30,417,500
Shares(2) Shares Shares Shares Shares(3)
------------ ------------ ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Deposits(4)................ $ 2,592,981 $ 2,592,981 $ 2,592,981 $ 2,592,981 $2,592,981
Borrowings................. 1,471,380 1,471,380 1,471,380 1,471,380 1,471,380
----------- ----------- ----------- ----------- ----------
Total deposits and
borrowings................ $ 4,064,361 $ 4,064,361 $ 4,064,361 $ 4,064,361 $4,064,361
=========== =========== =========== =========== ==========
Stockholders' equity:
Common Stock, $0.01 par
value.................... $ 364 $ 414 $ 477 $ 526 $ 605
Common Stock, $1.00 par
value (5)................ -- -- -- -- --
Paid-in capital........... 274,395 324,345 358,403 392,475 431,629
Retained earnings(6)...... 176,380 176,380 176,380 176,380 176,380
Accumulated other
comprehensive income..... (43,198) (43,198) (43,198) (43,198) (43,198)
Employee stock ownership
plan(7).................. (16,441) (16,441) (19,201) (21,961) (25,135)
Existing restricted stock
plans.................... (454) (454) (454) (454) (454)
----------- ----------- ----------- ----------- ----------
Total stockholders'
equity.................. $ 391,046 $ 441,046 $ 472,405 $ 503,764 $ 539,827
=========== =========== =========== =========== ==========
Assets..................... $ 4,561,250 $ 4,561,250 $ 4,592,609 $ 4,623,968 $4,660,031
=========== =========== =========== =========== ==========
Total stockholders'
equity to total assets... 9.67% 9.67% 10.29% 10.98% 11.58%
=========== =========== =========== =========== ==========
---------------------------------------
</TABLE>
(1) Acquisition adjustments include $7.430 million of after-tax merger expenses,
net of $121,000 of Harris MHC net assets consolidated with Harris Financial.
(2) If New Harris Financial does not receive orders for at least 19,550,000
Shares in the subscription and community offering, then, in New Harris
Financial's discretion, in order to issue the minimum number of shares
necessary to complete the stock offering, up to 5,000,000 of the
unsubscribed shares may be applied to the acquisition by merger of York
Financial. Assumes that 5,000,000 unsubscribed shares are so applied. All
such shares are assumed to be issued in the stock offering and conversion.
(3) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the offering range to reflect changes
in market or general financial conditions following the commencement of the
subscription and community offerings.
(4) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the conversion. These withdrawals would reduce pro forma
deposits by the amount of the withdrawals.
(5) York Financial has 20,000,000 authorized shares of York Financial common
stock, par value $1.00 per share. York Financial common stock and additional
paid-in capital have been reclassified to conform to the $0.01 par value of
New Harris Financial common stock.
(6) The retained earnings of New Harris Financial will be substantially
restricted after the conversion. See "The Conversion and Stock Offering--
Liquidation Rights" and "Regulation--Limitation on Capital Distributions."
(7) Assumes that 8% of the shares issued in the offering will be acquired by the
employee stock ownership plan financed by a loan from New Harris Financial.
The loan will be repaid principally from New Harris Financial's
contributions to the employee stock ownership plan. Since New Harris
Financial will finance the employee stock ownership plan debt, this debt
will be eliminated through consolidation and no liability will be reflected
on New Harris Financial's consolidated financial statements. Accordingly,
the amount of stock acquired by the employee stock ownership plan is shown
in this table as a reduction of total stockholders' equity.
27
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
At March 31, 2000, Harris Financial, Harris Savings Bank, and York Federal
each exceeded all applicable regulatory capital requirements. The table below
assumes that Harris Savings Bank and Harris Financial were regulated by the
Office of Thrift Supervision as of March 31, 2000, and sets forth the historical
regulatory capital of Harris Savings Bank and York Federal at March 31, 2000 and
the pro forma regulatory capital of Harris Savings Bank after giving effect to
the sale at $10.00 per share, or other issuance, of the number of shares shown
in the table, and the merger of York Federal with and into Harris Savings Bank.
The pro forma regulatory capital amounts reflect the receipt by Harris Savings
Bank of 50% of the net offering proceeds. See "Pro Forma Data" for the
assumptions used to determine the net proceeds of the offering. For purposes of
the table below, the amount expected to be borrowed by the employee stock
ownership plan has been deducted from pro forma regulatory capital.
<TABLE>
<CAPTION>
Harris Savings Bank York Federal Pro Forma Consolidated
Historical at Historical at Historical at
March 31, 2000 March 31, 2000 March 31, 2000 (1)
------------------- ------------------ -----------------------
Percent Percent Percent
of of of
Amount Assets(4) Amount Assets(4) Amount Assets(4)
------- --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Generally accepted
accounting principles
capital....................... $167,198 6.04% $109,938 6.74% 269,948 6.15%
Tier 1 Leverage Capital:
Capital level................. 180,727 6.50 120,460 7.39 308,738 7.00
Requirement................... 111,272 4.00 65,219 4.00 176,496 4.00
-------- ---- -------- ---- ------- ----
Excess...................... $ 69,455 2.50 $ 55,241 3.39 132,242 3.00
Tier 1 Risk-Based Capital:
Capital level................. $180,727 10.62% $120,460 12.49% 308,738 11.58%
Requirement(5)............. 68,065 4.00 38,570 4.00 106,640 4.00
-------- ---- -------- ---- ------- ----
Excess.................... $112,662 6.62 $ 81,890 8.49 202,098 7.58
Total Risk-Based Capital:
Capital level(6).............. $194,379 11.42% $130,861 13.57% 326,847 2.26%
Requirement(6)............... 136,131 8.00 77,140 8.00 213,280 8.00
-------- ---- -------- ---- ------- ----
Excess....................... $ 58,248 3.42 $ 53,721 5.57 113,567 4.26
<CAPTION>
Pro Forma at March 31, 2000, Based upon the Sale or Issuance of
------------------------------------------------------------------------------------------------
19,550,000 Shares 19,550,000 Shares 23,000,000 Shares 26,450,000 Shares
at the Adjusted at the Minimum at the Midpoint at the Maximum
Minimum of the of the of the of the
Offering Range (2) Offering Range Offering Range Offering Range
--------------------- -------------------- ----------------------- ---------------------
Percent Percent Percent Percent
of of of of
Amount Assets(4) Amount Assets(4) Amount Assets(4) Amount Assets(4)
------- --------- --------- ----------- ----------- ---------- --------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Generally accepted
accounting principles
capital..................... $322,738 7.26% $347,738 7.78% $362,037 8.08% $376,337 8.37%
Tier 1 Leverage Capital:
Capital level............... 361,528 8.10 386,528 8.61 400,827 8.90 415,127 9.19
Requirement................. 178,607 4.00 179,607 4.00 180,179 4.00 180,751 4.00
-------- ---- -------- ----- -------- ----- -------- -----
Excess.................... $182,920 4.10 $206,920 4.61 $220,648 4.90 $234,375 5.19
Tier 1 Risk-Based Capital:
Capital level............... $361,528 3.51% $386,528 14.41% $400,827 14.93% $415,127 15.45%
Requirement(5).......... 107,062 4.00 107,262 4.00 107,377 4.00 107,491 4.00
-------- ---- -------- ----- -------- ----- -------- -----
Excess.................. $254,465 9.51 $279,265 10.41 $293,450 10.93 $307,635 11.45
Total Risk-Based Capital:
Capital level(6)............ $379,637 4.18% $404,637 15.09% $418,936 15.61% $433,236 16.12%
Requirement(6)............. 214,125 8.00 214,525 8.00 214,754 8.00 214,982 8.00
-------- ---- -------- ----- -------- ----- -------- -----
Excess..................... $165,512 6.18 $190,112 7.09 $204,182 7.61 $218,253 8.12%
<CAPTION>
-----------------------------
30,417,500 Shares
at the Adjusted
Maximum of the
Offering Range(3)
-----------------------------
Percent
of
Amount Assets(4)
------------ ------------
<S> <C> <C>
Generally accepted
accounting principles
capital..................... $ 392,781 8.70%
Tier 1 Leverage Capital:
Capital level............... 431,571 9.52
Requirement................. 181,409 4.00
--------- -----
Excess.................... $ 250,162 5.52
Tier 1 Risk-Based Capital:
Capital level............... $ 431,571 16.04
Requirement(5).......... 107,623 4.00
--------- -----
Excess.................. $ 323,948 12.04
Total Risk-Based Capital:
Capital level(6)............ $ 449,680 16.71%
Requirement(6)............. 215,246 8.00
--------- -----
Excess..................... $ 234,434 8.71%
</TABLE>
___________________
(1) Includes the capital of Harris Financial, MHC.
(2) If New Harris Financial does not receive orders for at least 19,550,000
shares in the subscription and community offering, then, in New Harris
Financial's discretion in order to issue the minimum number of shares
necessary to complete the stock offering, up to 5,000,000 of the
unsubscribed shares may be applied to the acquisition by merger of York
Financial. Assumes that 5,000,000 unsubscribed shares are so applied. All
such shares are assumed to be issued in the stock offering and conversion.
(3) As adjusted to give effect to an increase in the number of shares sold
which could occur due to a 15% increase in the maximum of the valuation
range to reflect changes in market or general financial conditions
following the commencement of the offering.
(4) Tier 1 (core) capital levels are shown as a percentage of total adjusted
assets. Risk-based capital levels are shown as a percentage of risk-
weighted assets. Pro forma total adjusted and risk-weighted assets used
for the capital calculations include the proceeds of the employee stock
ownership plan's purchase of 8% of the common stock sold in the offering.
(5) The current Office of Thrift Supervision core capital requirement for
savings banks is 3% of total adjusted assets. The Office of Thrift
Supervision has proposed core capital requirements which would require a
core capital ratio of 3% of total adjusted assets for savings banks that
receive the highest supervisory rating for safety and soundness, and a 4%
to 5% core capital ratio requirement for all other savings banks. See
"Regulation."
(6) Pro forma amounts and percentages assume net proceeds are invested in
assets that carry a 20% risk-weighting.
28
<PAGE>
PRO FORMA DATA
Unaudited Pro Forma Condensed Consolidated Financial Information
The following Unaudited Pro Forma Condensed Consolidated Balance Sheets at
March 31, 2000 and December 31, 1999 and Unaudited Pro Forma Condensed
Consolidated Statements of Operations for the three months ended March 31, 2000
and for the year ended December 31, 1999, give effect to the acquisition by
merger of York Financial and the offering based on the assumptions set forth
below. The unaudited pro forma consolidated financial statements are based on
the unaudited consolidated financial statements of Harris Financial and York
Financial for the three months ended March 31, 2000, the audited consolidated
financial statements of Harris Financial for the year ended December 31, 1999,
and the unaudited financial information of York Financial for the 12 months
ended December 31, 1999. The unaudited pro forma consolidated financial
statements give effect to the York Financial merger using the pooling method of
accounting under generally accepted accounting principles.
The Unaudited Pro Forma Condensed Consolidated Balance Sheets and the
Unaudited Pro Forma Condensed Consolidated Statements of Operations reflect the
impact of the offering at the midpoint of the valuation range, including the
increase in stockholders equity resulting from the stock offering proceeds, the
investment income from investment of conversion proceeds, and the anticipated
employee stock ownership plan expense. For the assumptions underlying such
effects, see "--Pro Forma Conversion Data."
The unaudited pro forma information is provided for informational purposes
only. The pro forma financial information presented is not necessarily
indicative of the actual results that would have been achieved had the
conversion and the merger been consummated on the dates or at the beginning of
the periods presented, and is not necessarily indicative of future results. The
unaudited pro forma financial information should be read in conjunction with the
audited Consolidated Financial Statements and the Notes thereto of Harris
Financial and York Financial contained elsewhere in this document.
The pro forma stockholders' equity is based upon the value of the common
stockholders' ownership of New Harris Financial computed in accordance with
generally accepted accounting principles. This amount is not intended to
represent fair market value and does not represent amounts, if any, that would
be available for distribution to stockholders in the event of liquidation.
The unaudited pro forma common stockholders' equity and net income derived
from the above assumptions are qualified by the statements set forth under this
caption and should not be considered indicative of the market value of New
Harris Financial common stock or the actual or future results of operations of
New Harris Financial, Harris Financial and York Financial for any period. The
pro forma data may be materially affected by the actual gross and net proceeds
from the sale of shares in the offering and other factors. See "Use of
Proceeds."
29
<PAGE>
Unaudited Pro Forma Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
At March 31, 2000(1)
-----------------------------------------------------------------------------------------
Pro Forma Pro Forma
Offering Consolidated
Pro Forma Adjustments At Midpoint
Harris York Acquisition Pro forma at Midpoint of Offering
Financial Financial Adjustments(3) Consolidated Offering Range Range
----------- ------------- -------------- ------------- --------------- -------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents............. $ 54,532 $ 35,262 $ (7,309) $ 82,485 $ $ 82,485
Securities available for sale......... 1,258,075 351,509 1,609,584 202,578 1,812,162
Securities held to maturity........... -- 22,665 22,665 22,665
Loans held for sale................... 1,761 1,461 3,222 3,222
Loans, net............................ 1,313,645 1,127,976 2,441,621 2,441,621
Real estate owned..................... 399 4,099 4,498 4,498
Office property and equipment......... 27,565 21,464 49,029 49,029
Federal Home Loan Bank stock.......... 45,750 21,290 67,040 67,040
Accrued interest receivable........... 16,735 11,218 27,953 27,953
Excess of cost over fair value
of assets acquired.................. 16,898 -- 16,898 16,898
Other assets........................ 31,690 33,346 65,036 65,036
---------- ---------- ---------- ---------- ----------
Total assets........................ $2,767,050 $1,630,290 $ (7,309) $4,390,031 $ 202,578 $4,592,609
========== ========== ========== ========== ========== ==========
Liabilities and Stockholders' Equity:
Deposits.............................. $1,439,688 $1,153,293 $2,592,981 $ $2,592,981
Borrowed funds........................ 1,123,375 348,005 1,471,380 1,471,380
Deferred income taxes................. -- 2,036 2,036 2,036
Other liabilities..................... 36,789 17,018 53,807 53,807
---------- ---------- ---------- ----------
Total liabilities................... 2,599,852 1,520,352 4,120,204 $4,120,204
Stockholders' equity:
Common stock.......................... 340 10,107 441 36 477
Additional paid in capital............ 30,348 97,105 137,459 220,942 358,401
Retained earnings..................... 171,846 11,389 $ (7,309) 175,926 175,926
Unearned compensation - Employee
Stock Ownership Plan................ (271) (530) (801) (18,400) (19,201)
Accumulated other
comprehensive income................ (35,065) (8,133) (43,198) (43,198)
---------- ---------- ---------- ---------- ---------- ----------
Total stockholders' equity.......... 167,198 109,938 (7,309) 269,827 202,578 472,405
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and
stockholders' equity.............. $2,767,050 $1,630,290 $ (7,309) $4,390,031 $ 202,578 $4,592,609
========== ========== ========== ========== ========== ==========
</TABLE>
(footnotes on following page)
30
<PAGE>
Unaudited Pro Forma Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
At December 31, 1999(2)
------------------------------------------------------------------------------------------
Pro Forma Pro Forma
Offering Consolidated
Pro forma Adjustments At At Midpoint
Harris York Acquisition Pro forma Midpoint of of Offering
Financial Financial Adjustments(3) Consolidated Offering Range Range
----------- --------------- -------------- ------------- --------------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents............. $ 73,613 $ 32,552 (7,309) $ 98,856 $ $ 98,856
Securities available for sale......... 1,212,203 346,048 1,558,251 202,578 1,760,829
Securities held to maturity........... -- 22,650 22,650 22,650
Loans held for sale................... 1,646 3,672 5,318 5,318
Loans, net............................ 1,267,983 1,160,002 2,427,985 2,427,985
Real estate owned..................... 396 5,199 5,595 5,595
Office property and equipment......... 23,228 21,249 44,477 44,477
Federal Home Loan Bank stock.......... 45,400 20,850 66,250 66,250
Accrued interest receivable........... 18,302 10,137 28,439 28,439
Excess of cost over fair value
of assets acquired.................. 17,617 -- 17,617 17,617
Other assets........................ 31,012 28,296 59,308 59,308
---------- ---------- ---------- ---------- ---------- ----------
Total assets........................ $2,691,400 $1,650,655 $ (7,309) $4,334,746 $ 202,578 $4,537,324
========== ========== ========== ========== ========== ==========
Liabilities and Stockholders' Equity:
Deposits.............................. $1,373,870 $1,103,344 $2,477,214 2,477,214
Borrowed funds........................ 1,118,000 418,551 1,536,551 1,536,551
Deferred income taxes................. -- 1,827 1,827 1,827
Other liabilities..................... 30,206 17,813 48,109 48,019
---------- ---------- ---------- ----------
Total liabilities................... 2,522,076 1,541,535 4,063,611 4,063,611
Stockholders' equity:
Common stock.......................... 340 10,048 440 36 476
Additional paid in capital............ 30,323 96,518 136,789 220,942 357,731
Retained earnings..................... 168,304 10,368 $ (7,309) 171,363 171,363
Unearned compensation - Employee
Stock Ownership Plan................ (296) (662) (958) (18,400) (19,358)
Accumulated other
comprehensive income................ (29,347) (7,152) (36,499) (36,499)
---------- ---------- ---------- ---------- ---------- ----------
Total stockholders' equity.......... 169,324 109,120 (7,309) 271,135 202,578 473,713
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and
stockholders' equity.............. $2,691,400 $1,650,655 $ (7,309) $4,334,746 $ 202,578 $4,537,324
========== ========== ========== ========== ========== ==========
</TABLE>
-----------------
(1) Reflects the balance sheets of Harris Financial and York Financial as of
March 31, 2000. York Financial common stock and additional paid in capital
have been reclassified to conform to the $0.01 par value of Harris
Financial common stock.
(2) Reflects the balance sheets of Harris Financial and York Financial as of
December 31, 1999. York Financial common stock and additional paid in
capital have been reclassified to conform to the $0.01 par value of Harris
Financial common stock.
(3) Reflects estimated after-tax merger-related costs of $7.430 million and the
addition of $121,000 of Harris MHC's assets to pro forma balance sheet.
31
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000(1)
--------------------------------------------------------------------------------------
Pro Forma Pro Forma
Offering Consolidated
Harris York Acquisition Pro forma Adjustments With Offering
Financial Financial Adjustments(3) Consolidated(4) At Midpoint At Midpoint
------------ --------------- --------------- --------------- ------------- -------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C>
Interest income......................... $ 47,236 $ 28,656 $ -- $ 75,892 $ 3,180 $ 79,072
Interest expense........................ 31,718 19,144 -- 50,862 -- 50,862
----------- ----------- ---------- ----------- ------- -----------
Net interest income.................... 15,518 9,512 -- 25,030 3,180 28,210
Provision for losses on loans........... 835 400 -- 1,235 -- 1,235
----------- ----------- ---------- ----------- ------- -----------
Net interest income after provision
for losses on loans.................. 14,683 9,112 -- 23,795 3,180 26,975
Noninterest income...................... 2,734 1,831 -- 4,565 -- 4,565
Noninterest expense..................... 11,832 8,324 -- 20,156 306 20,462
----------- ----------- ---------- ----------- ------- -----------
Earnings before income taxes........... 5,585 2,619 -- 8,204 2,874 11,078
Income taxes............................ 1,565 293 -- 1,858 1,006 2,864
----------- ----------- ---------- ----------- ------- -----------
Net earnings........................... $ 4,020 $ 2,326 $ -- $ 6,346 $ 1,868 $ 8,214
=========== =========== ========== =========== ======= ===========
Earnings per share(4)
Basic.................................. $ 0.12 $ 0.23 nm $ 0.14 $ nm $ 0.18
Diluted................................ 0.12 0.23 nm 0.14 nm 0.18
Shares used for calculating EPS:
Basic.................................. 33,578,078 10,007,061 nm 45,909,554 nm 45,909,554
Diluted................................ 33,620,210 10,161,308 nm 45,947,556 nm 45,947,556
<CAPTION>
Year ended December 31, 1999(2)
--------------------------------------------------------------------------------------
Pro Forma Pro Forma
Offering Consolidated
Harris York Acquisition Pro forma Adjustments With Offering
Financial Financial Adjustments(3) Consolidated(4) At Midpoint At Midpoint
------------- ----------- --------------- ----------------- ------------- --------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Interest income.......................... $ 174,829 $ 94,507 $ -- $ 269,336 $12,114 $ 281,450
Interest expense......................... 113,391 57,976 -- 171,367 -- 171,367
----------- ----------- ------------ ----------- ------- -----------
Net interest income.................... 61,438 36,531 -- 97,969 12,114 110,083
Provision for losses on loans............ 3,180 2,925 -- 6,105 -- 6,105
----------- ----------- ------------ ----------- ------- -----------
Net interest income after
provision for losses on loans......... 58,258 33,606 -- 91,864 12,114 103,978
Noninterest income....................... 10,757 10,069 -- 20,826 -- 20,826
Noninterest expense...................... 42,707 29,475 -- 72,182 1,226 73,408
----------- ----------- ------------ ----------- ------- -----------
Earnings before income taxes........... 26,308 14,200 -- 40,508 10,888 51,396
Income taxes............................. 7,625 4,083 -- 11,708 3,811 15,519
----------- ----------- ------------ ----------- ------- -----------
Net earnings........................... $ 18,683 $ 10,117 $ -- $ 28,800 $ 7,077 $ 35,877
=========== =========== ============ =========== ======= ===========
Earnings per share(5):
Basic.................................. $ 0.56 $ 0.98 nm $ 0.63 $ nm $ 0.78
Diluted................................ 0.55 0.96 nm 0.63 nm 0.78
Shares used for calculating EPS:
Basic.................................. 33,595,772 10,319,359 nm 46,001,554 nm 46,001,554
Diluted................................ 33,666,557 10,591,143 nm 46,065,399 nm 46,065,399
</TABLE>
------------------
(1) Reflects the statements of operations of Harris Financial and York Financial
for the three months ended March 31, 2000.
(2) Reflects the statements of operations of Harris Financial for the fiscal
year ended December 31, 1999 and York Financial for the 12 months ended
December 31, 1999.
(3) Reflects lost yield on after-tax merger-related costs net of Harris MHC
assets consolidated with Harris Financial of $7.309 million.
(4) Reflects the pro forma consolidated statements of operations of New Harris
Financial, after giving effect to the conversion and merger.
(5) Earnings per share have been calculated using Harris Financial's historical
shares--see Note 1 of Notes to Consolidated Financial Statements.
32
<PAGE>
Pro Forma Conversion Data
The tables on the following pages provide unaudited pro forma data with
respect to New Harris Financial's stockholders' equity, net income and related
per share amounts based upon the adjusted minimum, minimum, midpoint, maximum
and 15% above the maximum of the estimated valuation range at March 31, 2000,
and for the three months then ended and at December 31, 1999 and for the year
then ended. The actual net proceeds from the sale of the subscription shares
cannot be determined until the conversion is completed. The pro forma
information is prepared based on the following assumptions:
(1) all subscription shares will be sold in the subscription, community
and public offerings;
(2) no fees will be paid to Ryan Beck on shares purchased by the employee
stock ownership plan or the shares assumed purchased by officers,
directors, employees and members of their immediate families;
(3) a total of 7,500,000 shares will be sold in the public offering with
an aggregate fee equal to 7.0% of the aggregate purchase price for
shares sold in the public offering;
(4) Ryan Beck will receive an aggregate fee equal to 1.2% of the aggregate
purchase price for sales in the subscription offering, excluding the
sale of shares to the employee stock ownership plan, and to officers,
directors, employees and members of their immediate families; and
(5) total fixed expenses of the conversion will be $2.1 million, including
an advisory and management fee to be paid to Ryan Beck that is not
included in the fees described above.
Pro forma net income has been calculated for the three months ended March
31, 2000 and the year ended December 31, 1999 as if the subscription shares had
been sold on the dates indicated and the net investable proceeds had been
invested at the yield on the one year U.S. Treasury Bill in effect at the end of
the period for each of the periods presented, or at 6.28% and 5.98%,
respectively. This yield is assumed to reflect the interest rate at which the
conversion proceeds will be initially invested. The effect of withdrawals from
deposit accounts at Harris Savings Bank for the purchase of subscription shares
in the offering has not been reflected. A combined effective federal and state
income tax rate of 35.0% has been assumed for pro forma adjustments in all
periods. Pro forma earnings per share amounts have been calculated by dividing
pro forma amounts by the number of outstanding shares of New Harris Financial
common stock less employee stock ownership plan shares which have not been
committed to be released.
Pro forma unaudited stockholders' equity of New Harris Financial has been
calculated in the same manner and based upon the same assumptions as set forth
with respect to the preceding pro forma unaudited presentations. Pro forma
stockholders' equity per share has been calculated by dividing pro forma amounts
by the number of outstanding shares of New Harris Financial common stock
assuming employee stock ownership plan shares are issued and outstanding.
The following pro forma unaudited information is based, in part, on
historical information related to Harris Financial and York Financial and on
assumptions as to future events. For these and other reasons, the pro forma
unaudited financial data may not be representative of the financial effects of
the conversion and the acquisition by merger of York Financial at the date on
which these transactions actually occur and should not be taken as indicative of
future results of operations. Pro forma stockholders' equity represents the
difference between the stated amount of assets and liabilities of New Harris
Financial computed in accordance with generally accepted accounting principles.
The pro forma stockholders' equity is not intended to represent the fair
market value of New Harris Financial common stock and may be different than
amounts that would be available for distribution to stockholders in the event of
liquidation of New Harris Financial.
33
<PAGE>
The following table summarizes historical and pro forma data of New Harris
Financial at or for the three months ended March 31, 2000 and for the fiscal
year ended December 31, 1999, based on assumptions set forth above and in the
table, and should not be used as a basis for projections of market value of the
common stock following the conversion. No effect has been given in the tables
to the possible issuance of additional shares reserved for future issuance
pursuant to currently outstanding stock options, nor does book value give effect
to the liquidation account to be established in the conversion, the bad debt
reserve on liquidation or to intangibles in the event of liquidation. See "The
Conversion and Stock Offering--Liquidation Rights" and "Management of New Harris
Financial--Harris Financial and York Financial Executive Compensation" and "--
Compensation of Directors."
<TABLE>
<CAPTION>
At or for the Three Months Ended March 31, 2000
Based upon the Sale for $10.00 per share, or Other Issuance of
----------------------------------------------------------------------
Minimum Maximum
As Adjusted Minimum Midpoint Maximum As Adjusted
19,550,000 19,550,000 23,000,000 26,450,000 30,417,500
Shares(1) Shares Shares Shares Shares(2)
----------- ----------- ------------- ----------- -----------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Gross proceeds...................................... $ 195,500 $ 195,500 $ 230,000 $ 264,500 $ 304,175
Less: Offering shares issued to York Financial
stockholders..................................... (50,000) -- -- -- --
Estimated expenses.................................. (8,641) (8,641) (9,022) (9,403) (9,841)
----------- ----------- ----------- ----------- -----------
Estimated net proceeds............................. 136,859 186,859 220,978 255,097 294,334
Less: Common stock purchased by employee
stock ownership plan(3).......................... (15,640) (15,640) (18,400) (21,160) (24,334)
----------- ----------- ----------- ----------- -----------
Estimated net proceeds, as adjusted............ $ 121,219 $ 171,219 $ 202,578 $ 233,937 $ 270,000
=========== =========== =========== =========== ===========
For the three months ended March 31, 2000:
Consolidated net income:
Historical combined with acquisition................ $ 6,346 $ 6,346 $ 6,346 $ 6,346 $ 6,346
Pro forma income on adjusted net proceeds........... 1,237 1,747 2,067 2,387 2,755
Pro forma employee stock ownership plan
adjustment(3).................................... (169) (169) (199) (229) (264)
----------- ----------- ----------- ----------- -----------
Pro forma net income............................. $ 7,414 $ 7,924 $ 8,214 $ 8,504 $ 8,837
=========== =========== =========== =========== ===========
Net income per share(4):
Historical combined with acquisition................ $ 0.18 $ 0.16 $ 0.14 $ 0.13 $ 0.11
Pro forma income on net proceeds.................... 0.03 0.04 0.04 0.04 0.04
Pro forma employee stock ownership plan
adjustment(3)................................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Pro forma net income per share(4)................ $ 0.21 $ 0.20 $ 0.18 $ 0.17 $ 0.15
=========== =========== =========== =========== ===========
Pro forma price to earnings......................... 11.90x 12.50x 13.89x 14.71x 16.67x
=========== =========== =========== =========== ===========
Number of shares used in earnings per share
calculations....................................... 34,869,605 39,869,605 45,909,554 50,527,167 58,106,242
At March 31, 2000:
Stockholders' equity:
Historical combined with acquisition............... $ 269,827 $ 269,827 $ 269,827 $ 269,827 $ 269,827
Estimated net proceeds............................. 136,859 186,859 220,978 255,097 294,334
Less: Common stock acquired by employee
stock ownership plan(3)......................... (15,640) (15,640) (18,400) (21,160) (24,334)
----------- ----------- ----------- ----------- -----------
Pro forma stockholders' equity(5)................ 391,046 424,046 472,405 503,764 539,827
Less: intangible assets............................. (16,898) (16,898) (16,898) (16,898) (16,898)
----------- ----------- ----------- ----------- -----------
Pro forma tangible stockholders' equity.......... $ 374,148 $ 424,148 $ 455,507 $ 486,866 $ 522,929
=========== =========== =========== =========== ===========
Stockholders' equity per share(4):
Historical combined with acquisition............... $ 7.41 $ 6.52 $ 5.65 $ 5.13 $ 4.46
Estimated net proceeds............................. 3.76 4.51 4.64 4.85 4.86
Less: Common stock acquired by employee
stock ownership plan(3)......................... (0.43) (0.38) (0.39) (0.40) (0.40)
----------- ----------- ----------- ----------- -----------
Pro forma stockholders' equity per share(4)(6)... 10.74 10.65 9.90 9.58 8.92
Less: intangible assets............................ (0.46) (0.41) (0.35) (0.32) (0.28)
----------- ----------- ----------- ----------- -----------
Pro forma tangible stockholders' equity per share $ 10.28 $ 10.24 $ 9.55 $ 9.25 $ 8.64
=========== =========== ========== =========== ===========
Offering price as a percentage of pro forma
stockholders' equity per share................... 93.11% 93.90% 101.01% 104.38% 112.11%
=========== =========== ========== =========== ===========
Offering price as a percentage of pro forma
tangible stockholders' equity per share............ 97.28% 97.66% 104.71% 108.11% 115.74%
=========== =========== =========== =========== ============
Number of shares used in stockholders' equity
per share calculations............................ 36,407,538 41,407,538 47,718,888 52,607,900 60,499,085
</TABLE>
(footnotes begin on next page)
34
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended December 31, 1999
Based upon the Sale for $10.00 or Other Issuance of
----------------------------------------------------------------------------
Minimum Maximum
As Adjusted Minimum Midpoint Maximum As Adjusted
19,550,000 19,550,000 23,000,000 26,450,000 30,417,500
Shares(1) Shares Shares Shares Shares(2)
-------------- ----------- ---------- ------------- ---------------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Gross proceeds................................. $ 195,500 $ 195,500 $ 230,000 $ 264,500 $ 304,175
Less: Offering shares issued to York
Financial stockholders..................... (50,000) -- -- -- --
Estimated expenses............................. (8,641) (8,641) (9,022) (9,403) (9,841)
----------- ----------- ----------- ----------- -----------
Estimated net proceeds........................ 136,859 186,859 220,978 255,097 294,334
Less: Common stock purchased by employee
stock ownership plan(3).................... (15,640) (15,640) (18,400) (21,160) (24,334)
----------- ----------- ----------- ----------- -----------
Estimated net proceeds, as adjusted....... $ 72,669 $ 171,219 $ 202,578 $ 233,937 $ 270,000
=========== =========== =========== =========== ===========
For the year ended December 31, 1999:
Consolidated net income:
Historical combined with acquisition........... $ 28,800 $ 28,800 $ 28,800 $ 28,800 $ 28,800
Pro forma income on adjusted net proceeds...... 4,712 6,655 7,874 9,093 10,495
Pro forma employee stock ownership
plan adjustment(3)......................... (678) (678) (797) (917) (1,054)
----------- ----------- ----------- ----------- -----------
Pro forma net income...................... $ 32,834 $ 34,477 $ 35,877 $ 36,976 $ 38,241
=========== =========== =========== =========== ===========
Net income per share(4):
Historical combined with acquisition........... $ 0.82 $ 0.72 $ 0.63 $ 0.57 $ 0.49
Pro forma income on net proceeds............... 0.14 0.17 0.17 0.18 0.19
Pro forma employee stock ownership
plan adjustment(3)......................... (0.02) (0.02) (0.02) (0.02) (0.02)
----------- ----------- ----------- ----------- -----------
Pro forma net income per share(4)......... $ 0.94 $ 0.87 $ 0.78 $ 0.73 $ 0.66
=========== =========== =========== =========== ===========
Pro forma price to earnings.................... 10.64x 11.49x 12.82x 13.70x 15.15x
=========== =========== =========== =========== ===========
Number of shares used in earnings per share
calculations.................................. 34,947,805 39,947,805 46,001,554 50,632,967 58,227,912
At December 31, 1999:
Stockholders' equity:
Historical combined with acquisition.......... $ 271,135 $ 271,135 $ 271,135 $ 271,135 $ 271,135
Estimated net proceeds........................ 136,859 186,859 220,978 255,097 294,334
Less: Common stock acquired by employee
stock ownership plan...................... (15,640) (15,640) (18,400) (21,160) (24,334)
----------- ----------- ----------- ----------- -----------
Pro forma stockholders' equity(5)......... 392,354 442,354 473,713 505,072 541,135
Less: intangible assets....................... 17,617 17,617 17,617 17,617 17,617
----------- ----------- ----------- ----------- -----------
Pro forma tangible stockholders' equity....... $ 374,737 $ 424,737 $ 456,096 $ 487,455 $ 523,518
=========== =========== =========== =========== ===========
Stockholders' equity per share(4):
Historical combined with acquisition.......... $ 7.45 $ 6.55 $ 5.68 $ 5.15 $ 4.48
Estimated net proceeds........................ 3.76 4.51 4.64 4.85 4.86
Less: Common stock acquired by employee
stock ownership plan(3)................... (0.43) (0.38) (0.39) (0.40) (0.40)
----------- ----------- ----------- ----------- -----------
Pro forma stockholders' equity per share(4)(6) 10.78 10.68 9.93 9.60 8.94
Less: Intangible assets....................... (0.48) (0.43) (0.37) (0.33) (0.29)
----------- ----------- ----------- ----------- -----------
Pro forma tangible stockholders equity
per share................................. $ 10.29 $ 10.26 $ 9.56 $ 9.27 $ 8.65
=========== =========== =========== =========== ===========
Offering price as a percentage of pro
forma stockholders' equity per share.......... 92.76% 93.63% 100.70% 104.17% 111.86%
=========== =========== =========== =========== ===========
Offering price as a percentage of pro forma
tangible stockholders' equity per share....... 97.18% 97.47% 104.60% 107.87% 115.61%
=========== =========== =========== =========== ===========
Number of shares used in stockholders' equity
per share calculations........................ 36,407,538 41,407,538 47,718,888 52,607,900 60,499,085
</TABLE>
__________________________
(1) If New Harris Financial does not receive orders for at least 19,550,000
shares in the subscription and community offering, then, in New Harris
Financial's discretion in order to issue the minimum number of shares
necessary to complete the stock offering, up to 5,000,000 of the
unsubscribed shares may be applied to the acquisition by merger of York
Financial. Assumes that 5,000,000 unsubscribed shares are so applied. All
such shares are assumed to be issued in the stock offering and conversion.
(2) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the offering range to reflect changes
in market and financial conditions following the commencement of the
offering.
(3) Assumes that 8% of shares of common stock sold in the offering will be
purchased by the employee stock ownership plan. For purposes of this
table, the funds used to acquire these shares are assumed to have been
borrowed by the employee stock ownership plan from the net proceeds of the
offering retained by New Harris
35
<PAGE>
Financial. New Harris Financial intends to make annual contributions to the
employee stock ownership plan in an amount at least equal to the principal
of the debt. New Harris Financial's total annual payments on the employee
stock ownership plan debt are based upon 15 equal annual installments of
principal. Statement of Position 93-6 requires that an employer record
compensation expense in an amount equal to the fair value of the shares
committed to be released to employees. The pro forma adjustments assume
that the employee stock ownership plan shares are allocated in equal annual
installments based on the number of loan repayment installments assumed to
be paid by New Harris Financial, the fair value of the common stock remains
at the subscription price and the employee stock ownership plan expense
reflects an effective combined federal and state tax rate as set forth
above. The unallocated employee stock ownership plan shares are reflected
as a reduction of stockholders' equity. No reinvestment is assumed on
proceeds contributed to fund the employee stock ownership plan. The pro
forma net income further assumes (i) that 26,067, 26,067, 30,667, 35,267,
and 40,557 shares were committed to be released for the three months ended
March 31, 2000, and that 104,267, 104,267, 122,667, 141,067 and 162,227
shares were committed to be released for the fiscal year ended December 31,
1999, in each case at the adjusted minimum, minimum, midpoint, maximum, and
adjusted maximum of the offering range, respectively, and (ii) in
accordance with Statement of Position 93-6, only the employee stock
ownership plan shares committed to be released during the respective period
were considered outstanding for purposes of net income per share
calculations. See "Management of Harris Financial."
(4) Per share computations are determined by adding: (i) the aggregate number
of shares assumed to be issued in the offering, (ii) the number of shares
assumed to be issued in exchange for shares of Harris Financial held by
stockholders other than Harris MHC, and (iii) the number of shares assumed
to be issued to York Financial stockholders in the acquisition by merger of
York Financial. In accordance with Statement of Position 93-6, to
determine net income per share, the employee stock ownership plan shares
which have not been committed for release during the respective period have
been subtracted from these amounts.
(5) The retained earnings of New Harris Financial will be substantially
restricted after the conversion. See "Dividend Policy," "The Conversion
and Stock Offering--Liquidation Rights" and "Regulation--Limitation on
Capital Distributions."
(6) Includes Harris MHC's assets of $121,000, excluding Harris Financial Common
Stock.
36
<PAGE>
CERTAIN EFFECTS OF THE MERGER OF HARRIS FINANCIAL AND YORK FINANCIAL
Business and Operating Strategy
Harris Financial is a community-oriented financial services company that
offers a wide range of deposit, loan, investment and insurance products to its
customers. Historically, Harris Financial has operated as a traditional savings
bank with an emphasis on residential mortgage lending. In recent years, Harris
Savings Bank, like many mortgage lenders, has experienced a decrease in the
difference, or "spread," between the interest income it earns on mortgage loans
and the interest it pays on deposits and borrowings. This decrease in spread
has resulted in lower levels of profitability in Harris Savings Bank's
traditional mortgage lending and deposit-taking business. To enhance
profitability and reduce exposure to interest rate risk, Harris Financial's
strategy has been to expand its commercial lending and fee-generating services.
Commercial loans offer higher yields, and greater fee income reduces Harris
Financial's dependance on interest income. Harris Financial has done this by
hiring experienced commercial bankers, including its current Chief Executive
Officer, and by investing in systems and technology to support these activities.
Today Harris Financial is a full-service community banking organization that
offers a wide range of financial services and products, including commercial and
consumer loans, a variety of deposit products, trust services, investment and
brokerage services and insurance.
New Harris Financial, the successor to Harris Financial, is merging with
York Financial because it believes the merger will have both strategic and
financial benefits to both entities, and will accelerate its efforts to become a
full-service community financial services company. As a result of the merger,
New Harris Financial will significantly expand its market presence in south-
central Pennsylvania, including the growing York County market. New Harris
Financial will have the second largest market share based on deposits in the
five county market area that includes Dauphin, York, Cumberland, Lancaster, and
Lebanon counties. Moreover, following the conversion and merger, New Harris
Financial, which will represent the combined interest of Harris Financial and
York Financial, will be a strongly capitalized financial services holding
company with over $4.5 billion of assets. It will have the size and financial
capacity to participate in further industry consolidation. The combination with
York Financial will complement and strengthen Harris Financial's existing
management team and add 25 branches (prior to any consolidations) to our branch
network. In addition, potential pre-tax annual cost savings to New Harris
Financial resulting from the merger may approximate $10.4 million, or $.22 per
share assuming the number of shares at the midpoint of the offering range.
New Harris Financial's business strategy can be summarized as follows:
. Expanded Business Banking - In recent years, Harris Financial has
significantly expanded its Business Banking Group, which is
responsible for originating and overseeing commercial business lending
and commercial real estate lending. Largely as a result of this
effort, commercial business and commercial real estate loan
originations increased from $19.0 million in 1996 to $168.1 million in
1999. In addition, in 1999 Harris Financial began offering mergers and
acquisitions and investment advisory services to expand the financial
products and services available to commercial customers. Harris
Financial also assigns experienced relationship managers to corporate
clients to ensure a high level of service. New Harris Financial
intends to use the additional capital from the stock offering and the
financial and managerial resources from the merger with York
Financial, to further expand its Business Banking Group.
. Increasing Sources of Non-interest Income - In 1999 Harris Financial
established an insurance subsidiary, Harris Insurance Services, to
offer a range of insurance products designed to meet the needs of its
banking customers. Harris Financial also offers a variety of
personalized securities brokerage services for individual and business
banking clients. In addition, Harris Financial began offering trust
and investment services in 1998 that are targeted to high net worth
individuals and medium-sized businesses. Each of these new lines of
business or services is intended to increase New Harris Financial's
fee income. The merger is expected to further increase sources of
noninterest income, as York Financial operates a securities brokerage,
an insurance agency, and venture capital investments.
. Leveraging the Branch Network of Harris Savings Bank and York Federal
- Harris Financial trains and encourages all branch office personnel
to actively promote all products and services offered by the bank in
order to take full advantage of Harris Financial's extensive branch
network and large customer base. The purpose of this effort is to
cross-sell products to retail customers and to increase lower-cost
deposits. The merger with York Financial will significantly expand
our market presence in south-central Pennsylvania, and New Harris
Financial expects to use its increased size and market presence to
further increase its customer base and expand its products and
services
37
<PAGE>
available to all customers. In addition, the merger will increase and
enhance the market presence in northern Maryland, where Harris
Financial and York Financial currently serve non-overlapping markets.
. Growth and Increasing Market Share - New Harris Financial intends to
grow as market conditions permit as a means of increasing net income
and operating efficiencies. The York Financial merger is illustrative
of New Harris Financial's intention to increase its market share in a
growing and desirable geographic area through whole bank acquisitions
and de novo branching.
. Improving Competitive Position - Harris Financial seeks to continually
improve its competitive position in the markets it serves. In the
merger with York Financial, Harris Financial anticipates that the
complementary nature of the respective geographic markets, business
products and skills of the employees and managements of the two
companies will result in greater efficiencies as products are cross-
marketed and distributed over broader geographic and customer bases.
. Maintaining Credit Quality - Harris Financial continues to emphasize
sound underwriting and high credit quality for its loan portfolio. To
accomplish this objective, Harris Financial maintains separate credit
and lending functions so that the increased volume of loan
originations does not come at the expense of credit quality. New
Harris Financial will continue to focus on credit quality after the
merger with York Financial.
. Investment Leveraging - New Harris Financial continues to use
wholesale funding sources, such as Federal Home Loan Bank borrowings,
to support an investment leveraging strategy and to supplement funding
from deposits. The objective of this investment leveraging strategy is
to use excess capital, including the capital expected to be raised in
the offering, to increase net interest income and improve return on
equity. However, this strategy tends to reduce overall net interest
margins because of the higher cost of wholesale funds compared to
retail deposits and the lower yield on investment securities compared
to loans.
Business of Harris Financial and York Financial
Harris Financial, through Harris Savings Bank, operates 37 full-service
offices in five counties of south-central Pennsylvania and Washington County,
Maryland. Harris Financial is the third largest Pennsylvania thrift holding
company, based on assets as of March 31, 2000, and the fourth largest
Pennsylvania thrift holding company based on deposits as of March 31, 2000.
Harris Financial is also fourth in deposit market share in the five county south
central region of Pennsylvania including Dauphin, York, Cumberland, Lancaster
and Lebanon.
York Financial, through York Federal, operates 25 full-service offices in
four counties in south central Pennsylvania and Harford County, Maryland. York
Financial is the sixth largest Pennsylvania thrift holding company, based on
assets as of March 31, 2000, and the sixth largest Pennsylvania thrift holding
company based on deposits as of March 31, 2000. York Financial is sixth in
deposit market share in the five county south-central region of Pennsylvania
including Dauphin, York, Cumberland, Lancaster and Lebanon.
Following the merger, New Harris Financial will be the second largest
Pennsylvania thrift holding company, based on pro forma combined assets and
depositors of March 31, 2000. On a pro forma basis, New Harris Financial will
be second in market share, based on deposits, and will have approximately 13.3%
of the FDIC-insured deposits maintained by branches located in the five county
south-central region of Pennsylvania including Dauphin, York, Cumberland,
Lancaster and Lebanon.
38
<PAGE>
Deposits of Harris Financial and York Financial
The following table describes the deposits maintained by Harris Financial
and York Financial as of March 31, 2000.
<TABLE>
<CAPTION>
Harris Financial Historical York Financial Historical
Three Months Ended March 31, 2000 Three Months Ended March 31, 2000
--------------------------------------- --------------------------------------
Percent Percent
of total Weighted of total Weighted
Average average average Average average average
balance deposits rate balance deposits rate
------------- ---------- ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
NOW and money market accounts.................. $ 288,496 20.62% 3.07% $ 431,435 38.18% 3.91%
Savings deposits............................... 124,200 8.88 2.18 44,843 3.97 2.49
Non-interest-bearing demand checking
accounts...................................... 45,533 3.25 -- 21,990 1.95 --
------------- ------- ------ ------------ ------- -------
Total transaction deposit accounts.......... 458,229 32.75% 2.53% 498,268 44.10% 3.61%
Certificate of deposit accounts:
6 months or less........................... 222,393 15.89 5.08 102,897 9.11 4.14
Over 6 months through 12 months............ 254,305 18.17 5.17 101,121 8.95 4.92
Over 12 months through 24 months........... 282,587 20.20 5.49 185,563 16.42 6.15
Over 24 months............................. 181,686 12.98 5.94 242,014 21.42 6.10
------------- ------- ------ ------------ ------- -------
Total certificates of deposit accounts... 940,971 67.25 5.39 631,595 55.90 5.61
------------- ------- ------ ------------ ------- -------
Total average deposits................... $ 1,399,200 100.00% 4.45% $ 1,129,863 100.00% 4.72%
============= ======= ====== ============ ======= =======
</TABLE>
Loan Portfolio of Harris Financial and York Financial
The following table describes the loan portfolios of Harris Financial and
York Financial.
<TABLE>
<CAPTION>
Harris Financial Historical York Financial Historical
At March 31, 2000 At March 31, 2000
----------------------------------- ---------------------------------
Percent Average Percent Average
Amount of total yield Amount of total yield
---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family.................... $ 537,225 40.88% 7.07% $ 736,619 64.77% 7.25%
Construction........................... 19,383 1.47 7.37 85,470 7.52 5.97
---------- ------- ------ ---------- -------- ------
Total mortgage loans.................. $ 556,608 42.36% 7.08% $ 822,089 72.29% 7.12%
---------- ------- ------ ---------- -------- ------
Business Banking:
Commercial real estate loans(1)........ 228,995 17.43 8.12 123,029 10.07 8.15
Commercial business loans.............. 139,890 10.64 8.01 22,161 1.95 7.13
Commercial and site development loans.. 8,740 0.67 9.15 11,295 1.00 8.85
---------- ------- ------ ---------- -------- ------
Total business banking loans.......... 377,625 28.74 8.10 156,585 13.77 8.05
---------- ------- ------ ---------- -------- ------
Consumer and other loans:
Manufactured housing................... 80,333 6.11 8.38 1,446 0.13 8.64
Home equity and second mortgage........ 184,104 14.01 9.02 62,435 5.49 9.05
Indirect automobile and other.......... 115,443 8.78 8.11 94,732 8.33 8.64
----------
Total consumer loans.................. 379,880 28.9 8.61 158,613 13.95 8.75
---------- ------- ------ ---------- -------- ------
Loans receivable, gross............... 1,314,113 100.0% 7.73% 1,137,287 100.00% 7.48%
---------- ------- ------ ---------- -------- ------
Plus:
Dealer reserves........................ 21,165 --
Less:
Unearned discounts..................... 274 --
Net deferred loans origination fees.... 9,327 (2,729)
Allowance for loan losses.............. 12,032 11,251
---------- ----------
Loans receivable, net................. $1,313,645 $1,128,765
========== ==========
Nonperforming loans as a percent of
total loans........................... 1.21% 0.70%
Nonperforming assets as a percent of
total assets......................... 0.63% 0.74%
</TABLE>
______________________________
(1) Includes income-producing real estate loans.
39
<PAGE>
Forward Looking Statements
This prospectus contains forward looking statements that are based on
assumptions and describe future plans, strategies, and expectations of Harris
Savings Bank and New Harris Financial. These forward looking statements are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. New Harris
Financial's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors that could have a material adverse
effect on the operations of New Harris Financial and its subsidiaries include,
but are not limited to, changes in interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality and composition of the loan and investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
New Harris Financial's market area, and changes in relevant accounting
principles. These risks and uncertainties should be considered in evaluating
forward looking statements and undue reliance should not be placed on such
statements. New Harris Financial does not undertake--and specifically disclaims-
-any obligation to publicly release the results of any revisions that may be
made to any forward looking statements to reflect events or circumstances after
the date of the statements or to reflect the occurrence of anticipated or
unanticipated events.
40
<PAGE>
HARRIS FINANCIAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
The following Consolidated Statements of Operations of Harris Financial for
the fiscal years ended December 31, 1999, 1998 and 1997 have been audited by
Arthur Andersen LLP, independent certified public accountants, whose report
thereon appears elsewhere herein. The Consolidated Statements of Operations for
the three months ended March 31, 2000 and 1999 are unaudited and have been
prepared in accordance with the requirements for a presentation of interim
financial statements and are in accordance with generally accepted accounting
principles. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, that are necessary for a fair presentation of the interim
periods, have been reflected. The results of operations for the three months
ended March 31, 2000 are not necessarily indicative of the results of operations
that may be expected for the fiscal year ending December 31, 2000. These
statements should be read in conjunction with the Consolidated Financial
Statements of Harris Financial and Notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
-----------------------------------------------------------------------------------
2000 1999 1999 1998 1997
------------ ------------ ---------------- ------------ ----------
(Unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans receivable:
First mortgage loans.............. $ 9,744 $11,251 $ 44,444 $ 44,874 43,929
Commercial loans.................. 7,136 4,255 22,197 11,694 6,767
Consumer and other loans.......... 7,791 5,681 26,945 20,286 19,442
Held for sale..................... -- 719 866 3,719 1,879
Taxable investments................... 7,298 7,998 29,520 31,505 21,239
Tax-free investments.................. 861 1,583 5,395 6,232 5,746
Dividends............................. 1,752 2,226 7,896 9,138 7,821
Mortgage-backed securities............ 12,621 7,979 37,460 36,480 34,075
Money market investments.............. 33 16 106 84 169
------- ------- -------- -------- -------
Total interest income............. 47,236 41,708 174,829 164,012 141,067
------- ------- -------- -------- -------
Interest expense:
Deposits.............................. 15,582 12,470 52,807 50,532 54,383
Borrowed funds........................ 16,120 14,092 60,494 56,528 38,586
Escrow................................ 16 25 90 90 116
------- ------- -------- -------- -------
Total interest expense............ 31,718 26,587 113,391 107,150 93,085
------- ------- -------- -------- -------
Net Interest income................. 15,518 15,121 61,438 56,862 47,982
Provision for loan losses.............. 835 795 3,180 2,540 610
------- ------- -------- -------- -------
Net interest income after
provision for loan losses............ 14,683 14,326 58,258 54,322 47,372
------- ------- -------- -------- -------
Non-interest income:
Service charges on deposits........... 1,601 1,233 5,907 4,186 2,156
Other service
charges/commissions/fees............. 293 324 1,280 883 1,355
Net servicing income.................. 242 -- 737 137 2,183
Gain (loss) on sale of
mortgage-backed
securities, net...................... (287) 1,313 1,363 2,199 3,576
Gain on sale of other
securities, net...................... 271 40 337 2,385 481
Gain on sale of loans, net............ 508 1,172 238 5,020 2,472
Other................................. 106 (61) 895 735 2,336
------- ------- -------- -------- -------
Total noninterest income............. 2,734 4,021 10,757 15,545 14,559
------- ------- -------- -------- -------
Non-interest expense:
Salaries and benefits................. 5,730 5,772 22,176 22,336 19,006
Equipment expense..................... 1,016 962 3,976 3,300 2,183
Occupancy expense..................... 1,001 802 3,152 3,012 2,886
Advertising and public
relations............................ 430 483 1,849 2,047 2,091
FDIC insurance........................ 68 169 713 696 751
Director fees......................... 94 83 293 322 333
Expense (income) from
real estate operations............... 5 (216) (3,191) (554) (770)
Amortization and
write-off of intangibles............. 720 600 2,640 2,487 2,393
Consulting and other fees............. 740 465 2,893 2,000 1,400
Supplies, telephone and postage....... 886 888 3,509 2,965 2,226
Other................................. 1,142 1,584 4,697 4,718 3,349
------- ------- -------- -------- -------
Total noninterest expense............ 11,832 11,592 42,707 43,329 35,848
------- ------- -------- -------- -------
Income before income taxes............. 5,585 6,755 26,308 26,538 26,083
Income tax expense..................... 1,565 1,822 7,625 7,309 8,312
------- ------- -------- -------- -------
Net income............................ $ 4,020 $ 4,933 $ 18,683 $ 19,229 $17,771
======= ======= ======== ======== =======
Basic earnings per share............... $ 0.12 $ 0.15 $ 0.56 $ 0.57 $ 0.53
======= ======= ======== ======== =======
Diluted earnings per share............. $ 0.12 $ 0.15 $ 0.55 $ 0.57 $ 0.52
======= ======= ======== ======== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
41
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Consolidated Financial and Other Data and the Consolidated Financial Statements
and related Notes appearing elsewhere in this prospectus. In addition to
historical information, the following discussion contains forward-looking
statements as a result of certain factors, including those discussed in "Risk
Factors" contained elsewhere in this prospectus.
General
Harris Financial is the holding company for Harris Savings Bank. New
Harris Financial will be the successor to Harris Financial and will operate as
the holding company of Harris Savings Bank following the conversion and merger.
Harris Financial's business operations are conducted primarily through Harris
Savings Bank and New Harris Financial's business operations will also be
conducted primarily through Harris Savings. New Harris Financial has had no
business activities or results of operations. As a result, the following is a
discussion and analysis of the financial condition and results of operations of
Harris Financial. Any references to Harris Financial in the following
discussion generally refer to the consolidated operations of Harris Financial
and Harris Savings Bank.
The net income of Harris Financial depends primarily on its net interest
income, which is the difference between interest income on loans and investments
and interest expense on deposits and borrowings. Net interest income is a
function of Harris Financial's interest rate spread, which is the difference
between the average yield earned on interest-earning assets and the average rate
paid on interest-bearing liabilities, as well as a function of the average
balance of interest-earning assets as compared to interest-earning liabilities.
Because of this reliance on net interest income, Harris Financial's net income
is affected by changes in market interest rates and prevailing economic
conditions. For example, as interest rates rise, Harris Financial's net
interest income will tend to fall. Conversely, when interest rates fall, Harris
Financial's net interest income will tend to rise. This condition is often
referred to as "interest rate risk". Financial institutions that accept and
manage substantial degrees of interest rate risk are generally susceptible to
larger net interest income fluctuations when compared to peer institutions that
accept less interest rate risk. Accordingly, managing interest rate risk
successfully has a significant impact on Harris Financial's return on equity.
Harris Financial also generates non-interest income primarily from fees and
commissions charged on customers' accounts. Gains on the sales of securities
and loans is another source of non-interest income. Harris Financial's non-
interest expenses primarily consist of employee compensation and benefits,
occupancy and equipment expense, advertising and other operating expenses.
Harris Financial's results of operations also are affected by general economic
and competitive conditions, notably changes in market interest rates, government
policies and regulations.
Forward Looking Statements
This prospectus contains forward looking statements that are based on
assumptions and describe future plans, strategies, and expectations of Harris
Savings Bank and Harris Financial. These forward looking statements are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. Harris Financial's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors that could have a material adverse effect on the
operations of Harris Financial and its subsidiaries include, but are not limited
to, changes in interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality and composition of the loan and investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
Harris Financial's market area, and changes in relevant accounting principles.
These risks and uncertainties should be considered in evaluating forward looking
statements and undue reliance should not be placed on such statements. Harris
Financial does not undertake--and specifically disclaims--any obligation to
publicly release the results of any revisions that may be
42
<PAGE>
made to any forward looking statements to reflect events or circumstances after
the date of the statements or to reflect the occurrence of anticipated or
unanticipated events.
Comparison of Financial Condition at March 31, 2000 and December 31, 1999
Total assets increased $75.7 million, or 2.8%, to $2.767 billion at March
31, 2000 from $2.691 billion at December 31, 1999. This growth reflected an
increase of $45.7 million, or 3.6%, in net loans receivable to $1.314 billion at
March 31, 2000 from $1.268 billion at December 31, 1999. The growth in the net
loans receivable resulted primarily from a $27.8 million, or 26.3%, increase in
commercial real estate loans to $133.6 million at March 31, 2000 from $105.8
million at December 31, 1999. The growth in this loan portfolio reflected the
continued growth in Harris Financial's business lending portfolio generally,
which increased by $30.3 million, or 8.7%, to $377.6 million at March 31, 2000
from $347.3 million at December 31, 1999. At the same time, total one-to four-
family residential mortgage loans increased slightly by $3.6 million, although
such loans decreased to 40.89% of Harris Financial's total loan portfolio at
March 31, 2000 compared to 42.06% at December 31, 1999.
Marketable securities available for sale increased by $46.2 million, or
3.7%, to $1.304 billion at March 31, 2000 from $1.258 billion at December 31,
1999. These investments were made in U.S. Government and agency obligations,
corporate and municipal obligations, Federal Home Loan Bank stock and marketable
equities, as well as mortgage-backed securities. The increase in the marketable
securities portfolio was due primarily to an increase in mortgage-backed
securities of $49.6 million, or 7.2%, to $737.2 million at March 31, 2000 from
$687.6 million at December 31, 1999. At March 31, 2000, 49.8% of the marketable
securities portfolio had an anticipated weighted average life of three years or
less. While the rates earned on these securities are lower than rates earned on
longer-term securities and loans, the investment in these securities may reduce
Harris Financial's interest-rate risk exposure.
Deposits increased by $65.8 million, or 4.8%, to $1.440 billion at March
31, 2000 from $1.374 billion at December 31, 1999. The increase in deposits
resulted from the continued expansion of Harris Savings Bank's branch network.
Other borrowing from non-deposit funding sources increased $5.4 million, or
0.5%, to $1.123 billion at March 31, 2000 from $1.118 billion at December 31,
1999. These borrowings consisted of Federal Home Loan Bank advances, which
increased by $110.0 million, or 13.7%, and repurchase agreements, which
decreased by $104.6 million, or 33.4%. At March 31, 2000, Harris Financial had
maximum available Federal Home Loan Bank lines of credit of $1.009 billion,
compared to $1.060 billion at December 31, 1999. The decrease in available
credit of $51.0 million, or 4.8%, was due to a decrease in the amount of
securities qualifying as security for Federal Home Loan Bank advances. Harris
Financial had total borrowings outstanding to the Federal Home Loan Bank of
$915.0 million at March 31, 2000, compared to $805.0 million at December 31,
1999.
Non-accrual loans totaled $10.8 million at March 31, 2000, compared to
$10.0 million at December 31, 1999. Loans 90 days past due but still accruing
interest totaled $5.1 million at March 31, 2000 compared to $6.1 million at
December 31, 1999. The combined total of non-accrual loans and loans 90 days
past due but still accruing interest as a percentage of total loans receivable
(excluding loans held-for-sale) before deducting the allowance for loan loss,
was 1.21% at March 31, 2000 compared to 1.27% at December 31, 1999.
Stockholders' equity totaled $167.2 million at March 31, 2000 compared to
$169.3 million at December 31, 1999. The decrease in stockholders' equity of
$2.1 million, or 1.3%, resulted primarily from a $5.7 million decline in the
market value, net of tax effect, of Harris Financial's available-for-sale
securities, reflecting the impact of recent market interest rate increases on
the market value of these securities. The decrease in stockholders' equity also
reflected $0.5 million in dividends paid during the period. Partially
offsetting the impact of these items on stockholders' equity was net income of
$4.0 million for the three months ended March 31, 2000.
Comparison of Financial Condition at December 31, 1999 and December 31, 1998
Total assets increased $193.9 million, or 7.8%, to $2.691 billion at
December 31, 1999 from $2.497 billion at December 31, 1998. This growth
reflected an increase of $216.3 million, or 20.6%, in net loans receivable to
$1.268 billion at December 31, 1999 from $1.052 billion at December 31, 1998.
The increase in the loan portfolio
43
<PAGE>
was due primarily to a substantial increase in Harris Financial's business loan
portfolio, which increased by $143.8 million, or 70.6%, to $347.3 million at
December 31, 1999 from $203.6 million at December 31, 1998. Harris Financial
increased all components of its business loan portfolio in 1999. Commercial real
estate loans increased by $38.7 million, or 57.6%, commercial business loans
increased by $56.9 million, or 68.9%, construction and site development loans
increased by $3.6 million, or 183.9%, and income-producing real estate loans
increased by $44.7 million, or 85.9%. At December 31, 1999, business banking
loans comprised 27.38% of Harris Financial's loans receivable compared to 19.28%
at December 31, 1998. In contrast, one to-four-family residential mortgage loans
comprised 42.06% of Harris Financial's loan portfolio at December 31, 1999,
compared to 53.65% of its loan portfolio at December 31, 1998.
Total consumer loans increased $114.8 million, or 46.0%, to $364.5 million
at December 31, 1999 from $249.7 million at December 31, 1998. The increase
resulted primarily from the expansion of Harris Financial's indirect automobile
lending program, as the balance of these loans increased to $106.5 million at
December 31, 1999 from $30.6 million at December 31, 1998. The increase also
reflected general increased consumer loan originations through the expanding
branch network and loan production offices of Harris Financial.
Marketable securities available for sale decreased slightly by $17.2
million, or 1.4%, to $1.258 billion at December 31, 1999 from $1.275 billion at
December 31, 1998. Within this portfolio, mortgage-backed securities increased
by $150.4 million, or 28.0%, to $687.6 million at December 31, 1999 from $537.2
million at December 31, 1998. Harris Financial's portfolio of U.S. Government
and agency securities increased by $25.4 million, or 8.5%. These increases were
offset by an $82.4 million, or 57.9%, decrease in corporate bonds, a $55.7
million, or 46.7%, decrease in municipal securities and a $39.2 million, or
24.3%, decrease in equity securities in 1999.
Deposits increased by $168.5 million, or 14.0%, to $1.374 billion at
December 31, 1999 compared to $1.205 billion at December 31, 1998. At December
31, 1999, Harris Financial's time deposits totaled $909.4 million, representing
66.2% of total deposits, while checking, money market and savings deposits
totaled $464.5 million, or 33.8% of total deposits. At December 31, 1998, time
deposits totaled $765.2 million, or 63.5% of total deposits, while checking,
money market and savings deposits totaled $440.2 million, or 36.5% of total
deposits. Included in Harris Financial's time deposits at December 31, 1999 were
$77.1 million of brokered certificates of deposit, compared to $50.0 million of
brokered certificates of deposit at December 31, 1998. Harris Financial has
been able to maintain its mix of relatively low-cost checking, money market and
savings deposits through its extensive branch network and through improved
marketing and increased pricing discipline. Borrowings from non-deposit funding
sources totaled $1.118 billion at December 31, 1999 compared to $1.069 billion
at December 31, 1998. Federal Home Loan Bank advances increased to $805.0
million at December 31, 1999 from $746.6 million at December 31, 1998, while
repurchase agreements decreased to $313.0 million at December 31, 1999 from
$322.7 million at December 31, 1998. At December 31, 1999, Harris Financial had
maximum available Federal Home Loan Bank lines of credit totaling $1.060 billion
compared to $943.5 million in available Federal Home Loan Bank credits at
December 31, 1998.
Non-accrual loans totaled $10.0 million at December 31, 1999, compared to
$7.7 million at December 31, 1998. The increase of $2.3 million in non-accrual
loans in 1999 was primarily due to a $5.4 million loan, secured by a local golf
course facility, that became non-performing in 1999. This loan was subsequently
repaid in full after March 31, 2000. Loans 90 days past due but still accruing
interest totaled $6.1 million at December 31, 1999. There were no such loans at
December 31, 1998. The combined total of non-accrual loans and loans 90 days
past due but still accruing interest as a percentage of total loans receivable
(excluding loans held-for-sale) before deducting the allowance for loan losses
was 1.27% at December 31, 1999 compared to 0.73% at December 31, 1998.
Stockholders' equity totaled $169.3 million at December 31, 1999 compared
to $190.0 million at December 31, 1998. The decrease in stockholders' equity of
$20.6 million, or 10.9%, resulted primarily from a decrease of $37.5 million in
the market value, net of tax effect, of Harris Financial's available-for-sale
securities portfolio, reflecting the impact of market interest rate increases on
the market value of these securities, from $1.9 million in dividends paid to
stockholders, and from the repurchase of $0.4 million of Harris Financial's
common stock. This
44
<PAGE>
decrease in stockholders' equity was partly offset by $18.7 million of net
income during the year, $0.3 million from earned ESOP and management and
recognition plan shares, and $0.1 million from the exercise of stock options.
Comparison of Operating Results for the Three Months Ended March 31, 2000 and
1999
Net Income. Net income decreased by $913,000, or 18.5%, to $4.0 million
for the three months ended March 31, 2000 from $4.9 million for the three months
ended March 31, 1999. The decrease in net income was due primarily to a $1.3
million, or 32.0%, decrease in non-interest income to $2.7 million for the three
months ended March 31, 2000 compared to $4.0 million for the three months ended
March 31, 1999. This decrease in non-interest income was due primarily to a
reduction in net gain on the sale of securities. For the three months ended
March 31, 1999, Harris Financial realized a net gain from the sale of securities
of $1.4 million; for the three months ended March 31, 2000, Harris Financial
realized a net loss on the sale of securities of $16,000. To a lesser extent
the decrease in net income also was attributable to an increase of $240,000, or
2.1%, in non-interest expense to $11.8 million for the three months ended March
31, 2000 from $11.6 million for the three months ended March 31, 1999. These
items were partially offset by a $397,000, or 2.6%, increase in net interest
income for the three months ended March 31, 2000 as compared to the three months
ended March 31, 1999.
Net Interest Income. Changes in net interest income are generally
determined by changes in average account balances, changes in interest rates and
the mix of interest-earning assets and interest-bearing liabilities. A delay
exists between the time changes occur in market interest rates and when such
changes are reflected in the rates earned on Harris Financial's interest-earning
assets and rates paid on its interest-bearing liabilities. The average yield on
interest-earning assets is influenced by the rate of repayments and prepayments,
purchases and sales, and the mix of asset maturities, as well as current market
interest rates. Similarly, the average cost of interest-bearing liabilities is
influenced by redemptions, early withdrawals, deposit purchases, deposit-raising
activities, borrowed funds activities, and the mix of liability maturities as
well as current market interest rates. The following discussion of interest
income and yields is presented on a tax equivalent basis to reflect Harris
Financial's portfolio of tax-exempt securities.
Net interest income, on a tax equivalent basis, increased by $9,000, or
0.06%, to $15.98 million for the three months ended March 31, 2000 from $15.97
million for the three months ended March 31, 1999. The increase was due
primarily to increased interest income attributable to larger average balances
of interest-earning assets, which increased by $206.4 million, or 8.6%, as well
as a higher-average yield on such assets, which increased by 23 basis points to
7.35% for the three months ended March 31, 2000. In particular, interest income
earned from Harris Financial's taxable marketable securities increased by $3.6
million, or 20.0%, to $21.4 million for the three months ended March 31, 2000
from $17.9 million for the three months ended March 31, 1999. The increase was
due to an $85.1 million, or 7.5%, increase in the average balance of such
securities to $1.217 billion for the three months ended March 31, 2000, as well
as an improvement of 73 basis points in the average yield earned on such
securities to 7.04% for the three months ended March 31, 2000.
Harris Financial's commercial loan portfolio also contributed to increased
interest income. Interest earned on this portfolio increased by $2.9 million,
or 67.7%, to $7.1 million for the three months ended March 31, 2000 from $4.3
million for the three months ended March 31, 1999. The increase in interest
income from this portfolio was attributable to an increase of $131.3 million, or
58.5%, in the average balance of such loans as well as an improvement of 44
basis points in the average yield on such loans for the three months ended March
31, 2000. Similarly, interest income earned on Harris Financial's indirect
consumer loans increased by $1.4 million, or 50.0%, to $4.1 million for the
three months ended March 31, 2000 from $2.7 million for the three months ended
March 31, 1999. The increased interest income from this portfolio was
attributable to an $87.7 million, or 65.5%, increase in the average balance of
such loans for the three months ended March 31, 2000 as compared to the three
months ended March 31, 1999. Finally, interest income from Harris Financial's
direct consumer loan portfolio increased $741,000, or 25.2%, to $3.7 million for
the three months ended March 31, 2000. The increased interest income derived
from this portfolio was due to a $26.0 million, or 18.1% increase in the average
balances of such loans as well as a 49 basis point improvement in the average
yield on such balances to 8.67% for the three months ended March 31, 2000. The
higher contribution to interest income from the commercial, direct consumer and
indirect consumer loan
45
<PAGE>
portfolios reflected Harris Financial's increased emphasis on higher-margin
commercial bank-like products, as well as healthy demand for such products in
Harris Financial's primary market area.
By contrast, interest income attributable to Harris Financial's mortgage
loan portfolio decreased by $2.2 million, or 18.6%, to $9.7 million for the
three months ended March 31, 2000 compared to $12.0 million for the three months
ended March 31, 1999. The decrease reflected a decrease of $60.4 million, or
9.9%, in the average balance of net mortgage loans, as Harris Financial sold
substantially all of the mortgage loans that it originated during the twelve
month period ended March 31, 2000. To a lesser extent, the decreased interest
income from this portfolio was also attributable to a decline of 76 basis points
in the average yield on the portfolio to 7.10% for the three months ended March
31, 2000.
Interest expense increased $5.1 million, or 19.3%, to $31.7 million for the
three months ended March 31, 2000 from $26.6 million for the three months ended
March 31, 1999. The increase in interest expense was attributable to higher
average balances of interest-bearing liabilities, which increased by $223.9
million, or 9.8%, to $2.500 billion for the three months ended March 31, 2000
compared to $2.276 billion for the three months ended March 31, 1999. To a
lesser extent, the increase in interest expense also was due to higher average
costs on such liabilities, which increased to 5.08% for the three months ended
March 31, 2000 from 4.67% for the three months ended March 31, 1999. The
primary components of the increased interest expense were higher interest
expense on borrowed funds which increased $2.0 million, or 14.4%, and higher-
interest expense on time deposits, which increased $2.6 million, or 25.7%. The
higher interest expense on borrowed funds was due to higher average balances of
such borrowings, which increased by $36.6 million, or 3.5%, to $1.097 billion
for the three months ended March 31, 2000, reflecting Harris Financial's
reliance on wholesale funding sources to support its investment leveraging
strategy and to supplement funding provided by savings and time deposits. The
average cost of such borrowed funds increased 56 basis points to 5.88% for the
three months ended March 31, 2000, reflecting generally higher market interest
rates for the period.
Harris Financial's interest rate spread (the difference between the yield
on assets minus the cost of funds) decreased by 18 basis points to 2.27% for the
three months ended March 31, 2000 from 2.45% for the three months ended March
31, 1999. Net interest margin decreased 21 basis points to 2.46% for the three
months ended March 31, 2000 compared to 2.67% for the three months ended March
31, 1999. During the three months ended March 31, 2000 and December 31, 1999,
Harris Financial experienced margin compression in its loan and deposit
portfolios as average deposit interest costs rose faster than average loan
yields. Within the leveraged investment portfolio during these periods, average
investment yields increased slightly more than average borrowing costs. Despite
this recent performance, management anticipates that Harris Financial's
continued reliance on wholesale funding sources to support its investment
leverage strategy will tend to compress its net interest margin due to the
higher interest costs on non-deposit funds as opposed to core deposits.
The following table summarizes the impact of the leveraging strategy on
Harris Financial's return on average assets and net interest margin for the
three month periods ended March 31, 2000, December 31, 1999, and March 31, 1999.
<TABLE>
<CAPTION>
With Without Difference in
Leveraging Leveraging Basis Points
----------- ----------- --------------
<S> <C> <C> <C>
Three month period ended March 31, 2000
Return on average assets................... 0.60% 0.37% 23
Net interest margin........................ 2.46 3.03 (57)
Three month period ended December 31, 1999
Return on average assets................... 0.73 0.56 17
Net interest margin........................ 2.51 3.07 (56)
Three month period ended March 31, 1999
Return on average assets................... 0.79 0.58 21
Net interest margin........................ 2.67 3.50 (83)
</TABLE>
Provision for Loan Losses. Harris Financial establishes provisions
loan losses, which are charged to operations, in order to maintain the al
for loan losses at a level that is deemed appropriate to absorb
46
<PAGE>
charge-offs of loans deemed uncollectible. In determining the appropriate level
allowance of loan losses, management considers past loss experience, evaluations
of real estate collateral, current and anticipated economic conditions, volume
and type of lending and the levels of nonperforming and other classified The
amount of the allowance is based on estimates and the ultimate losses vary from
such estimates. In addition, various regulatory agencies, as a integral part of
their examination process, periodically review Harris Financial's allowance for
loan losses. Such agencies may require Harris Financial to recognize additional
provisions for loan losses based on the judgment about information available to
them at the time of their examina Management of Harris Financial assesses the
allowance for loan losses on a quarterly basis and makes provisions for loan
losses in order to maintain the adequacy of the allowance.
Harris Financial added $835,000 and $795,000 in loan loss provisions for
the three months ended March 31, 2000 and 1999, respectively. The increased
provision for loan losses for the three months ended March 31, 2000 reflected
Harris Financial's increased emphasis on business and consumer lending and its
decreased investment in residential mortgage loans. For the three months ended
March 31, 2000, charge-offs from Harris Financial's consumer and other loans
portfolio increased to $709,000, as compared to $170,000 for the three months
ended March 31, 1999. The additional provision for loan losses for the three
months ended March 31, 2000 resulted in an increase to the allowance for loan
losses to $12.0 million (amounting to 0.91% of total loans receivable) from
$11.9 million at December 31, 1999 (amounting to 0.93% of total loans
receivable).
Non-interest Income. Non-interest income consists primarily of fee income
for bank services and profits from the sale of loans and securities. Non-
interest income decreased by $1.3 million, or 32.0%, to $2.7 million for the
three months ended March 31, 2000 compared to $4.0 million for the three months
ended March 31, 1999. This decrease in non-interest income was due primarily to
a reduction in the net gain on the sale of securities from a net gain of $1.4
million for the three months ended March 31, 1999 to a net loss on the sale of
such securities of $16,000 for the three months ended March 31, 2000. The lower
non-interest income from sales of securities was due primarily to the impact of
rising market interest rates on the fair values of these securities as well as
Harris Financial's decreased reliance on this revenue source. Also contributing
to the decline in non-interest income was a reduction of $664,000, or 56.7%, in
net gain on the sale of loans, due to the termination of mortgage operations at
Harris Financial's mortgage banking subsidiary in 1999.
These decreases were partially offset by an increase of $368,000, or 29.8%,
in service charges on deposits due to the growth in deposit accounts at Harris
Financial resulting, in part, from the addition of two new branch offices during
the twelve months ended March 31, 2000. In addition, net servicing income
generated on Harris Financial's servicing portfolio increased to $242,000 for
the three months ended March 31, 2000; Harris Financial recorded no non-interest
income from net servicing income for the three months ended March 31, 1999.
Non-interest Expense. Non-interest expense increased by $240,000, or 2.1%
for the three months ended March 31, 2000 compared to the three months ended
March 31, 1999. The increase reflected a $54,000, or 5.6%, increase in
equipment expense, and a $199,000, or 24.8%, increase in occupancy expense,
reflecting the expansion of Harris Financial's branch network. However, this
expansion of the branch network did not result in higher salaries and benefit
expenses, as cost controls resulted in a reduction in salaries and benefits
expense of $42,000, or 0.7%, to $5.73 million for the three months ended March
31, 2000 compared to $5.77 million for the three months ended March 31, 1999.
Income Tax Expense. Income tax expense decreased by $257,000, or 14.1% to
$1.6 million for the three months ended March 31, 2000 from $1.8 million for the
three months ended March 31, 1999. Harris Financial's effective tax rate was
28.0% for the three months ended March 31, 2000 compared to an effective tax
rate of 27.0% for the three months ended March 31, 1999. The effective tax
rates were less than the statutory rates due to Harris Financial's tax-exempt
sources of income.
47
<PAGE>
Comparison of Operating Results for the Years Ended December 31, 1999 and 1998
Net Income. Net income decreased by $546,000, or 2.8%, to $18.7 million
for the year ended December 31, 1999 from $19.2 million for the year ended
December 31, 1998. The decrease in net income was due primarily to a $4.8
million, or 30.8%, decrease in non-interest income to $10.8 million for the year
ended December 31, 1999 from $15.5 million for the year ended December 31, 1998.
The decrease in non-interest income was due primarily to reduced net gains on
the sale of loans, mortgage-backed securities and other securities. For the year
ended December 31, 1999, gains on the sales of these assets amounted to $1.9
million compared to gains of $9.6 million for the year ended December 31, 1998,
a decrease of $7.7 million, or 79.8%. The decrease in non-interest income more
than offset improved net interest income, on a tax equivalent basis, which
increased by $4.1 million, or 6.9%, to $64.3 million for the year ended December
31, 1999 from $60.2 million for the year ended December 31, 1998, as well as
lower non-interest expense, which decreased by $622,000, or 1.4%, to $42.7
million for the year ended December 31, 1999 from $43.3 million for the year
ended December 31, 1998.
Net Interest Income. Net interest income, on a tax equivalent basis,
increased by $4.1 million, or 6.9%, to $64.3 million for the year ended December
31, 1999 from $60.2 million for the year ended December 31, 1998. The increase
was due primarily to increased interest income of $177.7 million for the year
ended December 31, 1999 compared to $167.4 million for the year ended December
31, 1998, reflecting primarily larger average balances of interest-earning
assets, which increased by $235.1 million, or 10.4%. In particular, interest
income earned on Harris Financial's commercial loan, direct consumer loan and
indirect consumer loan portfolios increased by $10.5 million, or 89.8%, $1.3
million, or 10.6%, and $5.4 million, or 65.0%, respectively, reflecting the
growing importance of these commercial bank-like portfolios to Harris
Financial's operating results. The increased interest income generated by these
portfolios was largely due to higher average balances, which more than offset
generally declining average yields for the year ended December 31, 1999 compared
to the year ended December 31, 1998. The average balance of Harris Financial's
commercial loan, direct consumer loan and indirect consumer loan portfolios
increased by $151.8 million, or 109.8%, $7.4 million, or 5.1%, and $78.4
million, or 76.7%, respectively. By contrast, interest income earned on Harris
Financial's mortgage loan portfolio decreased by $3.3 million, or 6.8%, to $45.3
million for the year ended December 31, 1999 compared to $48.6 million for the
year ended December 31, 1998.
Interest income generated by Harris Financial's taxable and tax-free
marketable securities decreased by $1.4 million, or 1.9%, and $1.3 million, or
13.4%, respectively, for the year ended December 31, 1999 compared to the year
ended December 31, 1998. The decreases were due to lower average balances,
which decreased by $14.1 million, or 1.2%, and $14.0 million, or 12.4%,
respectively, as well as slightly lower average yields.
Interest expense increased $6.2 million, or 5.8%, to $113.4 million for the
year ended December 31, 1999 from $107.2 million for the year ended December 31,
1998. The increase in interest expense was attributable to higher average
balances of interest-bearing liabilities, which increased by $245.2 million, or
11.5%, to $2.384 billion for the year ended December 31, 1999 from $2.139
billion for the year ended December 31, 1998. The increase in average balances
more than offset a decrease of 25 basis points in the average cost of such
interest-bearing liabilities to 4.76% for the year ended December 31, 1999. The
primary components of the increased interest expense were higher interest
expense on borrowed funds, which increased $4.0 million, or 7.0%, and time
deposits, which increased $2.5 million, or 6.2%. In each case, the higher
interest expense was attributable to higher average balances of such
liabilities, which increased by 11.7% in the case of borrowed funds and 11.6% in
the case of time deposits, in each case more than offsetting slight declines in
the average cost on such interest-bearing liabilities for the period. The higher
average balances of borrowings reflected Harris Financial's continued reliance
on wholesale funding sources to support its investment leveraging strategy and
to supplement funding provided by savings and time deposits.
Harris Financial's interest rate spread decreased by three basis points to
2.35% for the year ended December 31, 1999 from 2.38% for the year ended
December 31, 1998. Its net interest margin decreased by nine basis points to
2.57% for the year ended December 31, 1999 from 2.66% for the year ended
December 31, 1998, due primarily to Harris Financial's reliance on higher-cost
non-deposit borrowed funds to support its investment leveraging strategy.
48
<PAGE>
The following table summarizes the impact of the leveraging strategy on
Harris Financial's return on average assets and net interest margin for the
years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
For the year 1999 With Leveraging Without Leveraging Difference in Basis Points
----------------- --------------- ------------------ --------------------------
<S> <C> <C> <C>
Return on average assets 0.72% 0.54% 18
Net interest margin 2.57 3.29 (72)
For the year 1998
-----------------
Return on average assets 0.82 0.68 14
Net interest margin 2.66 3.35 (69)
</TABLE>
Provision for Loan Losses. Harris Financial increased its provision for
loan losses by $640,000, or 25.2%, to $3.2 million for the year ended December
31, 1999 compared to $2.5 million for the year ended December 31, 1998. The
increase reflected Harris Financial's larger loan portfolio, particularly larger
balances of commercial and consumer loans, which had the effect of increasing
Harris Financial's credit risk exposure.
The increased provision for loan losses resulted in an increase in the
allowance for loan losses to $11.9 million at December 31, 1999 from $9.1
million at December 31, 1998. At December 31, 1999, the ratio of total non-
performing loans to total loans (excluding loans held-for-sale) was 1.27%,
compared to 0.73% at December 31, 1998.
Non-interest Income. Non-interest income decreased $4.8 million, or 30.8%,
to $10.8 million for the year ended December 31, 1999 from $15.5 million for the
year ended December 31, 1998. The decrease was due primarily to a decrease of
$836,000, or 38.0%, in net gains on the sale of mortgage-backed securities and a
decrease of $2.0 million, or 85.9%, in net gains on the sale of other
securities, reflecting rising market interest rates in 1999 which decreased the
market values of Harris Financial's securities portfolios. The decrease in non-
interest income also reflected lower net gains on the sale of loans, which
decreased by $4.8 million, or 95.3%, to $238,000 for the year ended December 31,
1999 from $5.0 million for the year ended December 31, 1998. This decrease was
attributable to the winding up of Harris Financial's mortgage-banking subsidiary
as well as the rising market interest rate environment during the latter half of
1999 which decreased mortgage loan production and limited the opportunities for
generating gains on the sales of mortgage loans.
The decrease in non-interest income occurred despite improvements in
service charges on deposits, which increased $1.7 million, or 41.1%, other
service charges, commissions and fees, which increased $397,000, or 45.0%, and
net servicing income, which increased $600,000, or 438.0% for the year ended
December 31, 1999 compared to the year ended December 31, 1998. These increases
reflected Harris Financial's strategic initiative to increase non-interest
revenue streams and the relative contribution of non-interest income to Harris
Financial's earnings. The improvements in these categories were due to the on-
going expansion of Harris Financial's ATM network and its branching network, as
well as growth in Harris Financial's commercial services, including advisory
services and commercial deposit services.
Non-interest Expense. Non-interest expense decreased $622,000, or 1.4%, to
$42.7 million for the year ended December 31, 1999 compared to $43.3 million for
the year ended December 31, 1998. The primary reason for this improvement was a
$2.6 million gain on the sale of an apartment complex in 1999 that was
previously recorded as foreclosed real estate. The sale enhanced gains from real
estate operations, which improved to a gain of $3.2 million for the year ended
December 31, 1999 compared to a gain of $554,000 for the year ended December 31,
1998. Offsetting this improvement were consulting and other fees, which
increased $893,000, or 44.7%, equipment expense which increased $676,000, or
20.5%, and supplies, telephone and postage expense, which increased $544,000, or
18.3%. All of these increased expenses were attributable to winding up
unprofitable operations, including Harris Financial's mortgage-banking
operations, and refocusing on and expanding core businesses. During the year
ended December 31, 1999, Harris Financial restructured its mortgage operations,
resulting in additional expense of $1.2 million, reflecting the net costs of
winding up in its mortgage-banking subsidiary, as well as net losses on the sale
of certain mortgage assets.
49
<PAGE>
Income Tax Expense. Income tax expense was $7.6 million for the year ended
December 31, 1999 compared to $7.3 million for the year ended December 31, 1998.
The income tax expense for 1999 resulted in an effective tax rate of 29.0%,
which was lower than the statutory rate due to significant investments in tax-
advantaged loans and marketable securities, including municipal bonds and
certain preferred equities.
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997
Net Income. Net income increased $1.4 million, or 8.2%, to $19.2 million
for the year ended December 31, 1998 compared to $17.8 million for the year
ended December 31, 1997. The increase was due primarily to a $9.1 million, or
7.9%, increase in net interest income, on a tax equivalent basis, for the year
ended December 31, 1998 compared to the earlier year, as well as an increase of
$986,000, or 6.8%, in non-interest income. These increases more than offset the
increase of $7.5 million, or 20.9%, in non-interest expense for the year ended
December 31, 1998 compared to the earlier year.
Net Interest Income. Net interest income, on a tax equivalent basis,
increased $9.1 million, or 17.9%, for the year ended December 31, 1998 compared
to the year ended December 31, 1997. The increase was due primarily to an
increase of $23.2 million, or 16.1%, in interest income, reflecting larger
average balances of interest-earning assets, which increased by $343.9 million,
or 17.9%. In particular, interest income earned on Harris Financial's commercial
loan, direct consumer and indirect consumer loan portfolios increased by $4.9
million, or 72.8%, $524,000, or 4.6%, and $320,000, or 4.0%, respectively,
reflecting the increasing importance of these commercial bank-like portfolios to
Harris Financial's operating results. The increased interest income generated by
these portfolios reflected moderate increases in the average balances of the
direct consumer loan portfolio (1.7%) and the indirect consumer loan portfolio
(0.01%), and a substantial increase in the average balances of the commercial
loan portfolio, which increased $59.7 million, or 75.9%. The contribution of
Harris Financial's direct and indirect consumer loan portfolio was largely due
to improved yields, which increased by 23 basis points to 8.32% and 31 basis
points to 8.11%, respectively, notwithstanding the generally lower market
interest rate environment for the year ended December 31, 1998.
Interest income, on a tax equivalent basis, generated by Harris Financial's
taxable and tax-free marketable securities increased by $13.7 million, or 22.8%,
and $749,000, or 8.5%, respectively. The increases were due to higher average
balances as the taxable securities portfolio, in particular, increased to $1.157
billion for the year ended December 31, 1998 compared to $916.3 million for the
year ended December 31, 1997.
Interest expense increased $14.1 million, or 15.1%, to $107.2 million for
the year ended December 31, 1998 from $93.1 million for the year ended December
31, 1997. The increase in interest expense was primarily attributable to higher
average balances of borrowed funds, which increased $342.8 million, or 52.4%, to
$997.3 million for the year ended December 31, 1998 from $654.4 million for the
year ended December 31, 1997. The higher average balances of borrowings
reflected Harris Financial's use of wholesale funding sources to support its
investment leveraging strategy and to supplement funding provided by savings and
time deposits. The cost associated with this increased borrowing was reduced
somewhat by the lower average cost of such borrowings to 5.67% for the year
ended December 31, 1998 from 5.90% for the year ended December 31, 1997. The
increase in interest expense was somewhat mitigated by lower interest expense on
time deposits, which decreased $3.6 million, or 8.2%, due primarily to lower
average balances of such liabilities as the use of borrowed funds to support
investments and loans grew.
Harris Financial's interest rate spread and net interest margin remained
unchanged at 2.38% and 2.66%, respectively, for the year ended December 31, 1998
as compared to the year ended December 31, 1997.
50
<PAGE>
The following table summarizes the impact of Harris Financial's leveraging
strategy on the return on average assets and net interest margin for the years
ended December 31, 1998 and 1997.
With Without Difference in
Leveraging Leveraging Basis Points
---------- ---------- -------------
For the year 1998
-----------------
Return on average assets....... 0.82% 0.68% 14
Net interest margin............ 2.66 3.35 (69)
For the year 1997
-----------------
Return on average assets....... 0.89 0.80 9
Net interest margin............ 2.66 3.17 (51)
Provision for Loan Losses. The provision for loan losses increased $1.9
million, or 316.4%, to $2.5 million for the year ended December 31, 1998 from
$610,000 for the year ended December 31, 1997. The increase reflected the larger
average loan portfolio, particularly the larger average balance of the
commercial loan portfolio, which increased by $59.7 million, or 75.9%, to $138.2
million for the year ended December 31, 1998. At December 31, 1998, $4.9 million
of the allowance for loan losses, or 19.3%, was allocated to commercial loans,
compared to $2.2 million, or 9.1%, allocated to commercial loans at December 31,
1997. For the year ended December 31, 1998, total charge-offs amounted to $1.2
million, compared to total charge-offs of $368,000 for the year ended December
31, 1997. Of the total charge-offs in 1998, $591,000, or 49.6% of total charge-
offs, were attributable to the commercial loan portfolio.
Non-interest Income. Non-interest income increased $986,000, or 6.8%, to
$15.5 million for the year ended December 31, 1998 compared to $14.6 million for
the year ended December 31, 1997. The improvement in non-interest income was due
primarily to a $2.0 million, or 94.2%, increase in service charges on deposits,
which was attributable to increased ATM network fees and the continuation of
Harris Financial's "High Performance Checking" program. Offsetting this
improvement was a reduction in net servicing income, which decreased to $137,000
for the year ended December 31, 1998 compared to $2.2 million for the year ended
December 31, 1997. The decrease reflected relatively low market interest rates
and mortgage rates which resulted in high levels of mortgage refinancing in
1998. However, the relatively low market interest rate environment permitted
Harris Financial to generate $5.0 million in net gains on the sale of loans for
the year ended December 31, 1998 compared to $2.5 million for the year ended
December 31, 1997, as well as net gains on the sale of other securities of $2.4
million for the year ended December 31, 1998 compared to $481,000 for the year
ended December 31, 1997. Finally, other non-interest income decreased to
$735,000 for the year ended December 31, 1998 from $2.3 million for the year
ended December 31, 1997, reflecting the recognition in 1997 of $1.6 million as
partial fraud recovery on a claim associated with Harris Financial's 1996
acquisition of another financial institution.
Non-interest Expense. Non-interest expense increased $7.5 million, or
20.9%, to $43.3 million for the year ended December 31, 1998 from $35.8 million
for the year ended December 31, 1997. The increase was due to increased salaries
and benefits, which increased $3.3 million, or 17.5%, due to increased staffing
to support Harris Financial's transition to a full-service community bank.
Similarly, equipment expense increased by $1.1 million, or 51.2%, primarily
because of higher depreciation expense associated with the new main frame
computer system installed in 1997. The increase in occupancy expense (4.4%),
consulting expenses (42.9%), and supplies, telephone and postage (33.2%), was
attributed primarily to the continued expansion of Harris Financial's core
businesses during the period.
Income Tax Expense. Income tax expense decreased $1.0 million, or 12.1%, to
$7.3 million for the year ended December 31, 1998 from $8.3 million for the year
ended December 31, 1997. Harris Financial's effective tax rate was 27.5% for the
year ended December 31, 1998, reflecting the impact of Harris Financial's
investment in tax-free marketable securities.
51
<PAGE>
Average Balance Sheet
The following table sets forth information relating to Harris Financial's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. These yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are daily averages.
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------------------------------------------------
Rate at 2000 1999
---------------------------------------------------------------------------------------
March 31, Average Average Average Average
2000(1) Balance Interest/(1)(2)/ Yield/Cost Balance Interest/(1)(2)/ Yield/Cost
---------- ------------ ---------------- ---------- ---------- ---------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Mortgage loans, net........ 7.08% $ 548,851 $ 9,744 7.10% $ 609,208 $ 11,970 7.86%
Commercial loans........... 8.10 355,772 7,136 8.02 224,465 4,255 7.58
Direct consumer loans...... 8.93 169,797 3,682 8.67 143,750 2,941 8.18
Indirect consumer loans.... 8.34 221,414 4,109 7.42 133,762 2,740 8.19
Marketable securities -
taxable, net............... 6.94 1,216,824 21,425 7.04 1,131,738 17,853 6.31
Marketable securities -
tax free, net.............. 8.83 59,401 1,325 8.92 117,697 2,435 8.28
Other interest-earning
assets..................... 4.93 24,044 279 4.64 29,077 366 5.03
---------- ---------- ---------------- ---------- ---------- ---------------- ----------
Total interest earning
assets...................... 7.33 2,596,103 47,700 7.35 2,389,697 42,560 7.12
---------- ---------------- ---------- ---------------- ----------
Noninterest earning assets.. 97,692 101,290
---------- ----------
Total assets................ $ 2,693,795 $ 2,490,987
========== ==========
Liabilities and
Stockholders' Equity:
Interest-bearing
liabilities:
Savings deposits........... 2.54% $ 124,200 $ 676 2.18% $ 143,872 $ 686 1.91%
Time deposits.............. 5.45 940,971 12,689 5.39 768,883 10,094 5.25
NOW and money market
accounts................... 2.80 334,029 2,217 2.65 292,092 1,690 2.31
Escrow..................... 1.53 3,664 16 1.75 10,729 25 0.93
Borrowed funds............. 5.97 1,096,956 16,120 5.88 1,060,310 14,092 5.32
---------- ---------- ---------------- ---------- ---------- ---------------- ----------
Total interest-bearing
liabilities................. 5.20 2,499,820 31,718 5.08 2,275,886 26,587 4.67
---------- ---------- ---------------- ---------- ---------- ---------------- ----------
Noninterest-bearing
liabilities................. 27,347 24,765
---------- ----------
Total liabilities........... 2,527,167 2,300,651
Stockholders' equity........ 166,628 190,336
---------- ----------
Total liabilities and
stockholders' equity........ $ 2,693,795 $ 2,490,987
========== ==========
Net interest income......... $ 15,982 $ 15,973
================ ================
Interest rate spread(3)..... 2.27% 2.45%
========== ==========
Net interest-earning assets. $ 96,283 $ 113,811
========== ==========
Net interest margin(4)...... 2.46% 2.67%
========== ==========
Ratio of interest-earning
assets to
interest-bearing
liabilities................ 1.04 1.05
========== ==========
</TABLE>
_______________________________________
(1) Includes income recognized on deferred loan fees of $211,000 and $444,000
for the three months ended March 31, 2000 and 1999, respectively, and the
effect of estimated deferred loan fees of $1.1 million (annualized) at March
31, 2000.
(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 of interest-bearing liabilities.
(4) Represents the annualized net interest income before the provision for loan
losses divided by average interest-earning assets.
52
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------------------------
1999 1998
----------------------------------------- ----------------------------------------------------
Average Average Average Average Average
Balance Interest(1)(2) Yield/Cost Balance Interest(1)(2) Yield/Cost Balance
----------- -------------- ---------- ---------- -------------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Mortgage loans, net...... $ 608,137 $ 45,310 7.45% $ 580,303 $ 48,593 8.37% $ 556,995
Commercial loans......... 290,014 22,197 7.65 138,229 11,694 8.46 78,567
Direct consumer loans.... 151,519 13,267 8.76 144,158 11,995 8.32 141,785
Indirect consumer
loans.................. 180,588 13,678 7.57 102,203 8,291 8.11 102,190
Marketable securities -
taxable, net........... 1,142,922 73,815 6.46 1,157,064 76,225 6.50 916,265
Marketable securities -
tax free, net.......... 99,096 8,300 8.38 113,106 9,588 8.48 103,708
Other interest-earning
assets................. 26,767 1,167 4.36 28,871 1,982 6.87 20,524
----------- -------------- ---------- ----------- -------------- ---------- -----------
Total interest earning
assets................... 2,499,043 177,734 7.11 2,263,934 167,368 7.39 1,920,034
-------------- ---------- -------------- ----------
Noninterest earning
assets................... 95,163 88,977 75,123
----------- ----------- -----------
Total assets.............. $ 2,594,206 $ 2,352,911 $ 1,995,157
=========== ========== ===========
Liabilities and
Stockholders' Equity:
Interest-bearing
liabilities:
Savings deposits......... $ 139,098 $ 2,931 2.11% $ 147,954 $ 3,285 2.22% $ 147,738
Time deposits............ 810,444 42,648 5.26 726,316 40,153 5.53 782,578
NOW and money market
accounts............... 315,812 7,228 2.23 258,504 7,094 2.74 220,557
Escrow................... 5,034 90 1.79 8,997 90 1.00 7,444
Borrowed funds........... 1,113,848 60,494 5.43 997,260 56,528 5.67 654,447
----------- -------------- ---------- ----------- -------------- ---------- -----------
Total interest-bearing
liabilities............. 2,384,236 113,391 4.76 2,139,031 107,150 5.01 1,812,764
-------------- ---------- -------------- ----------
Noninterest-bearing
liabilities............. 24,552 27,667 17,853
----------- ----------- -----------
Total liabilities......... 2,408,788 2,166,698 1,830,617
Stockholders' equity...... 185,418 186,213 164,540
----------- ----------- -----------
Total liabilities and
stockholders' equity..... $ 2,594,206 $ 2,352,911 $ 1,995,157
=========== =========== ===========
Net interest income....... $ 64,343 $ 60,218
============== ==============
Interest rate spread(3)... 2.35% 2.38%
========== ==========
Net interest-earning
assets................... $ 114,807 $ 124,903 $ 107,270
=========== =========== ===========
Net interest margin(4).... 2.57% 2.66%
========== ==========
Ratio of interest-earning
assets to interest-bearing
liabilities.............. 1.05 1.06 1.06
=========== =========== ===========
<CAPTION>
--------------------------
1997
--------------------------
Average
Interest(1)(2) Yield/Cost
-------------- ----------
<S> <C> <C>
Assets:
Interest earning assets:
Mortgage loans, net...... $ 45,808 8.22%
Commercial loans......... 6,767 8.61
Direct consumer loans.... 11,471 8.09
Indirect consumer
loans.................. 7,971 7.80
Marketable securities -
taxable, net........... 61,561 6.72
Marketable securities -
tax free, net.......... 8,839 8.52
Other interest-earning
assets................. 1,744 8.49
------------ ----------
Total interest earning
assets................... 144,161 7.51
------------ ----------
Noninterest earning
assets...................
Total assets..............
Liabilities and
Stockholders' Equity:
Interest-bearing
liabilities:
Savings deposits......... $ 4,072 2.76%
Time deposits............ 43,760 5.59
NOW and money market
accounts............... 6,551 2.97
Escrow................... 116 1.55
Borrowed funds........... 38,586 5.90
------------ ----------
Total interest-bearing
liabilities............. 93,085 5.13
------------ ==========
Noninterest-bearing
liabilities.............
Total liabilities.........
Stockholders' equity......
Total liabilities and
stockholders' equity.....
Net interest income....... $ 51,076
============
Interest rate spread(3)... 2.38%
==========
Net interest-earning
assets....................
Net interest margin(4).... 2.66%
==========
Ratio of interest-earning
assets to interest-
bearing liabilities......
</TABLE>
____________________
(1) Includes income recognized on deferred loan fees of $1.6 million in 1999,
$2.6 million in 1998, and $1.3 million in 1997.
(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 of interest-bearing liabilities.
(4) Represents the annualized net interest income before the provision for loan
losses divided by average interest-earning assets.
53
<PAGE>
Rate/Volume Analysis
The table below sets forth information regarding changes in interest income
and interest expense of Harris Financial for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to changes in average volume
(changes in average volume multiplied by old rate) and changes in rate (change
in rate multiplied by old average volume). Changes in interest income and
interest expense arising from the combination of rate and volume variances are
pro-rated across rate and volume variances.
<TABLE>
<CAPTION>
Three Months Ended March 31, Years Ended December 31, Years Ended December 31,
2000 vs. 1999 1999 vs. 1998 vs. 1998 vs. 1997
------------------------------- ------------------------------- ---------------------------------
Increase (decrease) Increase (decrease) Increase (decrease)
------------------------------- ------------------------------- ---------------------------------
Volume Rate Net Volume Rate Net Volume Rate Net
--------- -------- -------- ---------- -------- -------- ---------- ------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Mortgage loans, net....... $ (1,129) $ (1,097) $ (2,226) $ 2,246 $ (5,529) $ (3,283) 1,925 $ 860 $ 2,785
Commercial loans.......... 2,621 260 2,881 11,720 (1,217) 10,503 5,047 (120) 4,927
Direct consumer loans..... 557 184 741 625 647 1,272 189 335 524
Indirect consumer loans... 1,648 (279) 1,369 5,972 (585) 5,387 1 319 320
Marketable
securities-taxable....... 1,407 2,165 3,572 (938) (472) (1,410) 15,724 (2,060) 13,664
Marketable securities-tax
free..................... (1,286) 176 (1,110) (1,176) (112) (1,288) 795 (46) 749
Other interest earning
assets................... (60) (27) (87) (136) (679) (815) 617 (379) 238
------- -------- --------- ---------- -------- --------- ---------- ------- -----------
Total interest earning
assets.................... 3,758 1,382 5,140 18,313 (7,947) 10,366 24,298 (1,091) 23,207
------ -------- --------- ---------- -------- --------- ---------- ------- -----------
Interest bearing
liabilities:
Savings deposits.......... (100) 90 (10) (194) (160) (354) 6 (793) (787)
Time deposits............. 2,319 276 2,595 4,514 (2,019) 2,495 (3,127) (480) (3,607)
NOW and money market
deposits................. 260 267 527 1,413 (1,279) 134 1,067 (524) 543
Escrow.................... (23) 14 (9) (51) 51 -- 21 (47) (26)
Borrowed funds............ 501 1,527 2,028 6,426 (2,460) 3,966 19,512 (1,570) 17,942
------ -------- --------- ---------- -------- --------- ---------- ------- -----------
Total interest bearing
liabilities.............. 2,957 2,174 5,131 12,108 (5,867) 6,241 17,479 (3,414) 14,065
------ -------- --------- ---------- -------- --------- ---------- ------- -----------
Net change in interest
income.................... $ 801 $ (792) $ 9 $ 6,205 $ (2,080) $ 4,125 $ 6,819 $ 2,323 $ 9,142
====== ======== ========= ========== ======== ========= ========== ======= ===========
</TABLE>
54
<PAGE>
Asset and Liability Management - Interest Rate Risk Analysis
Nearly all of Harris Financial's interest rate risk exposure is associated
with Harris Savings Bank because it holds all of Harris Financial's interest-
bearing liabilities and almost all of its interest-earning assets. Fluctuations
in market interest rates will impact both the level of net interest income and
the market value of Harris Financial's assets and liabilities. In addition to
interest rate risk associated with loans and deposits, Harris Financial manages
interest rate risk associated with its leverage portfolios. The leverage
portfolios include investments in marketable securities which are funded through
wholesale borrowings, most of which are match funded. Harris Financial also
sells a significant portion of its conforming 30-year mortgage loan originations
to reduce its interest rate risk exposure. In addition, Harris Financial's
investment and borrowing activities are managed to mitigate its interest rate
risk profile.
Harris Financial has an Asset/Liability Committee that meets at least
monthly to monitor and manage interest rate risk exposure. Harris Financial
primarily employs a dynamic interest rate sensitivity or "GAP" analysis and net
interest income volatility analysis to assist in the management of interest rate
risk. The Asset/Liability Committee communicates monthly to the Board of
Directors on all matters relevant to interest rate risk exposures. In the
context of this discussion, dynamic GAP refers to Harris Financial's refinement
of standard repricing analysis procedures to include anticipated prepayments,
option calls, and other factors not normally employed in static GAP analysis.
Harris Financial's standard Asset/Liability Committee procedures include a
review of monthly GAP results. The table below sets forth the amounts of Harris
Financial's interest-earning assets and interest-bearing liabilities at March
31, 2000 that are anticipated to mature or reprice in each of the future time
periods shown. As of that date, Harris Financial's cumulative one-year GAP ratio
was -12.83% and three-year GAP ratio was -10.06%. These assumptions reflect the
rising interest rates existing in the market at March 31, 2000.
<TABLE>
<CAPTION>
At March 31, 2000
-----------------------------------------------------------------------------------------------------
One Year More than One Year More than Three
or Less to three Years Years to Five Years More than Five Years
-----------------------------------------------------------------------------------------------------
Balance Rate Balance Rate Balance Rate Balance Rate
-----------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Cash and cash equivalents.... $ 26,737 4.93% $ -- 0.00% $ -- 0.00% $ 27,795 0.00%
Marketable securities/(1)
(3)/........................ 607,587 6.93 71,161 6.77 65,302 6.91 617,662 6.89
Commercial loans............ 188,054 8.31 92,054 8.05 74,640 7.81 22,877 7.45
Mortgage loans/(2)/......... 126,706 7.17 127,169 6.84 99,982 6.76 202,751 6.79
Consumer loans.............. 143,733 8.75 154,447 8.42 66,478 8.59 15,222 9.16
----------- ------- ---------- -------- ---------- -------- ---------- -------
Total interest-earning
assets.................... $ 1,092,817 7.39% $ 444,831 7.63% $ 306,402 7.45% $ 888,068 6.71%
----------- ------- ---------- -------- ---------- -------- ---------- -------
INTEREST-BEARING
LIABILITIES:
Savings accounts............ $ 16,733 5.31% $ -- 0.00% $ -- 0.00% $ 128,960 2.18%
Interest-bearing
Demand deposit accounts.... -- 0.00 -- 0.00 -- 0.00 102,463 1.10
Non-interest bearing
Demand deposit accounts.... -- 0.00 -- 0.00 -- 0.00 48,780 0.00
Money market accounts
(variable)................. 178,670 4.54 -- 0.00 -- 0.00 -- 0.00
Time deposits............... 480,803 5.20 304,831 5.79 88,392 6.46 3,406 5.87
Escrow...................... -- 0.00 -- 0.00 -- 0.00 3,354 1.53
Other borrowings............ 771,711 5.87 63,375 5.05 175,000 6.71 199,939 5.80
----------- ------- ---------- -------- ---------- -------- ---------- -------
Total interest-bearing
liabilities............... $ 1,447,917 5.48% $ 368,206 5.67% $ 263,392 6.63% $ 486,902 3.24%
----------- ------- ---------- -------- ---------- -------- ---------- -------
Interest sensitivity gap
per period.................. $ (355,100) $ 76,625 $ 43,010 $ 399,405
=========== ========== ========== ==========
Cumulative interest
Sensitivity gap............ $ (355,100) $ (278,475) $ (235,465) $ 163,940
=========== ========== ========== ==========
Cumulative interest
sensitivity gap as a
percent of total assets.... (12.83%) (10.06%) (8.51%) 5.92%
=========== ========== ========== ==========
Cumulative net interest-
earning assets as a
percentage of net
interest-bearing
liabilities............... 75.48% 84.67% 88.68% 106.39%
=========== ========== ========== ==========
<CAPTION>
---------------------------
Total
---------------------------
Balance Rate
---------------------------
<S> <C> <C>
INTEREST-EARNING ASSETS:
Cash and cash equivalents... $ 54,532 2.42%
Marketable securities/(1)
(3)/........................ 1,361,712 6.90
Commercial loans............ 377,625 8.10
Mortgage loans/(2)/......... 556,608 6.88
Consumer loans.............. 379,880 8.61
---------- --------
Total interest-earning
assets.................... $2,730,357 7.21%
---------- --------
INTEREST-BEARING
LIABILITIES:
Savings accounts............ $ 145,693 2.54%
Interest-bearing
Demand deposit accounts.... 102,463 1.10
Non-interest bearing
Demand deposit accounts.... 48,780 0.00
Money market accounts
(variable)................. 178,670 4.54
Time deposits............... 964,282 5.45
Escrow...................... 3,354 1.53
Other borrowings............ 1,123,175 6.40
---------- --------
Total interest-bearing
liabilities............... $2,566,417 5.20%
---------- --------
Interest sensitivity gap
per period.................. 163,940
==========
Cumulative interest
Sensitivity gap............
Cumulative interest
sensitivity gap as a
percent of total assets....
Cumulative net interest-
earning assets as a
percentage of net
interest-bearing
liabilities................
</TABLE>
_____________
(1) Book value (net of allowance for sale adjustment) of investment portfolio.
(2) Excludes deferred loan costs and fees.
(3) Includes amounts presented on a tax equivalent basis.
55
<PAGE>
Generally, the amount of assets and liabilities shown in the table were
determined based upon the contractual terms of the underlying financial
instruments. However, certain instruments have been presented based on the
estimated effects of general repricing and prepayment assumptions. In the
current economic environment, refinancing activity is expected to remain at
historically low levels due to rising interest rates. Slow prepayment speeds
have been assumed for both mortgage loans and mortgage-backed securities.
Marketable securities that contain call provisions are assumed not to call.
Consumer loans are also assumed to prepay at below average speeds. Time
deposits, money market accounts, high rate savings accounts, escrow accounts,
and wholesale borrowed funds reflect the contractual maturities of the
underlying deposits. Remaining transaction accounts and most of the Harris
Savings Bank's short-term savings accounts are considered not to be interest
rate sensitive and are assumed to mature beyond five years. Certain borrowings
that contain options to convert have been assumed to convert and refinance at
expected higher rates.
During January 2000, Harris Financial converted $100 million of short-term
borrowings to fixed-rate borrowings with a weighted-average maturity of greater
than four years. These actions were taken to reduce its three-year GAP to within
Harris Financial's policy threshold of + or - 15%.
Net interest income volatility analysis is used to measure the probable
effect of significant changes in market interest rates upon Harris Financial's
projected net interest income. Management considers one-year and two-year
projections for net interest income volatility to be most relevant for managing
Harris Financial's interest rate risk exposure. Harris Financial's standard
Asset/Liability Committee procedures include a review of monthly analysis
results for net interest income volatility. Using Harris Financial's asset and
liability portfolios as of March 31, 2000, management projects net interest
income for the one year projection to increase $0.3 million, or 0.4% if market
rates decrease 200 basis points over the next twelve months and to decrease $3.9
million, or 5.9% if market rates increase 200 basis points over the next twelve
months. These net interest income volatility values are within the thresholds
established by the Board of Directors for market rate shocks.
<TABLE>
<CAPTION>
Interest Rate Scenarios -200 bp -100 bp 0 bp +100 bp +200 bp
---------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Absolute change in net interest $ 0.3 $ 1.1 $ 0.0 ( $1.9) ($3.9)
income (in millions)
Relative change in net interest income 0.4% 1.6% 0.0% (2.8%) (5.9%)
Board of Directors' limit 10.0% 5.0% 0.0% (5.0%) (10.0%)
</TABLE>
Financial Instruments and Risk Management
As of March 31, 2000, Harris Financial had entered into six total return
swaps. The swaps are intended to hedge market value fluctuations in Harris
Financial's retail construction loan portfolio that are caused by changes in
market interest rates. Each swap contract has a duration of six to eight months
and consists of two components:
. Harris Financial exchanges fixed rate interest payments on a
designated mortgage-backed security pool for a floating rate interest
payment indexed to the London Interbank Offered Rate (LIBOR) minus 99
basis points. The settlement is made on a monthly basis between
Harris Financial and the counter party.
. A lump sum payment which reflects the change in market value of the
designated mortgage-backed security 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 Harris Financial and the
counter party. Harris Financial receives a payment if the market value
of the underlying mortgage-backed security pool declines. Conversely,
Harris Financial must pay the counter party if the value of the
mortgage-backed security 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. Harris
Financial has determined that there is a high degree of correlation between the
changes in the market value of the
56
<PAGE>
underlying mortgage-backed security pool and the fair market value of the hedged
loans. Accordingly, Harris Financial 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 ultimate gain or loss incurred by Harris
Financial as a result of the changes in the market value of the contract will be
recognized upon the sale of the construction loans. Harris Financial has
accounted for the interest rate swap portion of the contract using synthetic
instrument accounting. Under this method, income or losses related to the
interest rate swap are accrued as they occur. The notional amount of the
contracts and the fair value gain or loss of the swap as of March 31, 2000, are
shown in the following table:
Total Return Swaps (Dollars in thousands)
Contract Notional Fair Value
Date Category Amount Gain (loss)
------------ --------------- ---------- -----------
08/19/1999 7.0% FNMA Pool $ 7,500 $ 138
10/19/1999 7.0% FNMA Pool 5,000 60
11/30/1999 7.0% FNMA Pool 5,000 58
02/01/2000 7.0% FNMA Pool 5,000 (46)
03/02/2000 7.5% FNMA Pool 5,000 (20)
03/16/2000 7.5% FNMA Pool 5,000 (12)
----------- -----------
Total $ 32,500 $ 178
=========== ===========
As of March 31, 2000, Harris Financial had entered into three callable
interest rate swaps totaling $41.0 million. The callable interest rate swaps
are matched to callable certificates of deposits. The fixed interest rate
received by Harris Financial as a result of the swap is passed on to the holder
of the certificate of deposit. Each callable interest rate swap has the same
call date as the callable certificate of deposit to which it is matched. The
first callable interest rate swap was entered into on November 16, 1999. This
interest rate swap is matched to a callable certificate of deposit with a 10-
year final maturity and callable after one year. The second callable interest
rate swap was entered into December 6, 1999. This interest rate swap is matched
to a callable certificate of deposit with a seven year final maturity and
callable after one year. The third callable interest rate swap was entered into
on February 8, 2000. The interest rate swap is matched to a callable
certificate of deposit with a three and a half year final maturity and callable
after one year. For the first two interest rate swaps, Harris Financial pays a
rate of three month LIBOR less 9 basis points. For the third interest rate
swap, Harris Financial pays a rate of three month LIBOR less 8 basis points.
For the November 16, 1999 interest rate swap, Harris Financial receives an
interest rate of 7.35%, creating an effective borrowing rate of 6.00% as of
March 31, 2000. For the December 6, 1999 interest rate swap, Harris Financial
receives an interest rate of 7.00%, creating an effective borrowing rate of
6.03% as of March 31, 2000. For the February 8, 2000 interest rate swap, Harris
Financial receives an interest rate of 7.00%, creating an effective borrowing
rate of 6.01% as of March 31, 2000.
The notional amount of the contracts and the fair value of the callable
interest rate swaps as of March 31, 2000, are shown in the following table:
Callable Interest Rate Swaps (Dollars in thousands)
Fair Value
Contract Maturity Notional as of
Date Date Amount March 31, 2000
----------- ------------ --------- ---------------
11/16/1999 11/16/2009 $ 12,500 $ (130)
12/06/1999 12/06/2006 13,500 (167)
02/08/2000 08/08/2003 15,000 (262)
--------- ---------------
Total $ 41,000 $ (559)
========= ===============
Liquidity and Capital Resources
Harris Financial is required to maintain minimum levels of liquid assets as
defined by regulatory authorities. This requirement, which varies from time to
time depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. Harris Financial historically
has maintained a level of liquid assets in excess of regulatory requirements.
Harris Financial adjusts its liquidity levels in order to meet
57
<PAGE>
funding needs for deposit outflows, payment of real estate taxes from escrowed
funds, when applicable, and loan commitments. Harris Financial also adjusts
liquidity as appropriate to meet its asset/liability objectives.
Harris Financial's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities, Federal Home Loan Bank
advances, maturities of investment securities and other short-term investments,
and funds provided from operations. While scheduled loan and mortgage-backed
securities repayments are a relatively predictable source of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. Harris Financial manages the pricing of
its deposits to maintain a steady deposit balance. In addition, Harris
Financial invests excess funds in federal funds and other short-term interest-
earning assets and other assets which provides liquidity to meet lending
requirements.
Deposits and borrowings are Harris Financial's primary source of externally
generated funds. The level of deposit inflows during any given period is
heavily influenced by factors outside of management's control, such as the
general level of short- and long-term interest rates in the economy, as well as
higher alternative yields that investors may obtain on competing investment
instruments such as money market mutual funds. As noted previously, Harris
Financial places substantial reliance on wholesale funding sources to support
its investment leveraging strategy and, to a lesser extent, to supplement
funding from local market deposits. Harris Financial primarily relies upon
advances from the Federal Home Loan Bank of Pittsburgh and, to a lesser extent,
repurchase agreements with private corporations and brokered deposits. At March
31, 2000, Harris Financial had $1.123 billion of borrowings, including $915.0
million of Federal Home Loan Bank borrowings. Harris Financial's maximum
borrowing capacity with the Federal Home Loan Bank totaled $1.009 billion at
March 31, 2000. Harris Financial has the ability to generate substantial
additional funding, if required, through the use of additional repurchase
agreements and brokered deposits, through investment collateral restructuring,
and through the raising of out-of-market deposit funds.
In recent years, Harris Financial has maintained substantial excess
liquidity which, in this case, refers to the ability of Harris Financial to
generate an amount of cash over and above its current commitments without taking
any action that would diminish earnings or capital. Harris Financial
anticipates that it will have sufficient funds available from normal operations
to meet its current commitments. At March 31, 2000, Harris Financial had
commitments to originate loans, including funds available on construction loans,
of $62.6 million, and no commitments to purchase marketable securities. As of
March 31, 2000, Harris Financial was also obligated to pay $5.4 million under
its lease agreements for branch and administrative facilities. Certificates of
deposits that are scheduled to mature in one year or less as of March 31, 2000,
totaled $526.6 million, including $45.8 million of brokered certificates. Based
upon historical experience, management estimates that a significant portion of
its retail certificates of deposit will remain with Harris Financial. Harris
Savings Bank is required to maintain a certain level of liquid assets, as
determined by management and reviewed for adequacy by the FDIC during their
regular examination. The FDIC, however, does not prescribe by regulation a
minimum amount or percentage of liquid assets. The FDIC allows any marketable
security whose sale would not impair the capital adequacy to be eligible for
liquidity.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements of Harris Financial and Notes
thereto, presented elsewhere herein, have been prepared in accordance with
generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
Harris Financial's operations. Unlike most industrial companies, nearly all the
assets and liabilities of Harris Financial are monetary. As a result, interest
rates have a greater impact on Harris Financial's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.
58
<PAGE>
Effect of New Accounting Standards
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, establishes the standards for the reporting and display of
comprehensive income in the financial statements. Comprehensive income
represents net earnings and certain amounts reported directly in stockholders'
equity, such as the net unrealized gain or loss on available-for-sale
securities. Harris Financial adopted Statement of Financial Accounting
Standards No. 130 on June 30, 1998.
Statement of Financial Accounting Standards No. 131, Disclosure about
Segments of an Enterprise and Related Information, establishes disclosure
requirements for segment operations. Harris Financial adopted Statement of
Financial Accounting Standards No. 131 on July 1, 1998.
Statement of Financial Accounting Standards No. 132, Employers' Disclosures
about Pensions and other Postretirement Benefits, revises the disclosure
requirements for pension and other postretirement benefit plans. Harris
Financial adopted Statement of Financial Accounting Standards No. 132 on July 1,
1998.
During June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). The statement establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting treatment. SFAS 133
is effective for fiscal years beginning after June 15, 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.
59
<PAGE>
BUSINESS OF NEW HARRIS FINANCIAL
General
New Harris Financial was formed in March 2000 to facilitate the conversion
and merger and has no historical business activities or results of operations.
New Harris Financial will be the successor to Harris Financial and York
Financial after the conversion and merger. As a result, please refer to the
Business of Harris Financial below and the Business of York Financial on pages
___ of this prospectus for a discussion of the business of New Harris Financial.
BUSINESS OF HARRIS FINANCIAL AND HARRIS SAVINGS BANK
Harris Financial conducts its business activities through its wholly-owned
subsidiary, Harris Savings Bank. As a result, reference to Harris Financial in
the following discussion generally refers to Harris Financial and Harris Savings
Bank. Harris Savings Bank was formed in 1886. It presently operates 37 full
service offices, an operations center, a business center, a support center, five
loan production offices, a mortgage lending office and a business banking
office. Harris Savings Bank's primary business is attracting deposits from the
general public and investing such deposits in residential and commercial real
estate loans, commercial business loans, consumer loans and investment
securities. Harris Savings Bank primarily serves individuals and business
customers in the five central Pennsylvania counties of Dauphin, Cumberland,
York, Lancaster and Lebanon, and in the northern Maryland county of Washington.
Harris Savings Bank offers residential mortgage loans in Pennsylvania and
Maryland, and consumer loans throughout most of the eastern United States.
Market Area
Harris Financial was the third largest Pennsylvania thrift holding company,
based on assets as of March 31, 2000. Following the offering and the merger, New
Harris Financial will be the second largest Pennsylvania thrift holding company.
Harris Financial is headquartered and maintains its largest market presence in
the Harrisburg metropolitan area. It also serves the south-central region of the
state with 23 branch offices of Harris Savings Bank. Harris Financial maintains
four additional branch offices in the Hagerstown, Maryland metropolitan area.
Through the branch network of Harris Savings Bank, Harris Financial serves five
counties, while several loan production offices serve three additional counties
in southern and southeastern Pennsylvania. This network of branches provides
access to a population base that exceeds 1.5 million persons, and includes both
metropolitan areas and more rural sections of the state.
York Financial is the fifth largest Pennsylvania thrift holding company,
based on assets as of March 31, 2000, with 25 branch offices. York Financial is
headquartered in the city of York, which is centrally located in York County.
York Financial's largest market presence is York County, followed by Cumberland
County which is north of York County. York Financial operates 23 branch offices
through York Federal in four counties in south-central Pennsylvania, along with
two branches in Harford County, Maryland, located in the northeastern section of
Maryland.
The primary market area includes a mixture of rural, suburban and urban
markets, with the Harrisburg Metropolitan Statistical Area being the most
populous and more urban of the markets served by Harris Savings and York Federal
branches. Given the wide ranging presence of the branch network, the market area
of Harris Financial and York Financial has a fairly diversified economy, with
services, wholesale/retail trade, manufacturing, and state and local government
constituting the basis of the economy.
Competition
Harris Financial faces intense competition for deposits and loans in its
primary market area. Harris Financial's most direct competition for deposits
historically has come from commercial and savings banks operating in its primary
market area, credit unions, and, to a lesser but increasing extent, from other
financial services companies, such as brokerage firms and insurance companies.
While these entities continue to provide a source of competition for deposits,
Harris Financial increasingly faces significant competition for deposits from
the mutual fund industry as the public continues to invest relatively more
savings in securities than in insured deposits. Harris Financial also faces
significant competition for investors' funds from short-term money market
securities, corporate securities and government securities.
Harris Financial faces significant competition for loans from savings banks
and commercial banks in its market area, and from other financial service
providers, such as mortgage companies and mortgage brokers. Competition is
likely to increase as a result of the recent enactment of the Financial Services
Modernization Act of 1999, which eases restrictions on entry into the financial
services market by insurance companies and securities firms. Moreover, to the
extent that these changes permit banks, securities firms and insurance companies
to affiliate, the financial services industry could experience further
consolidation. This could result in a growing number of larger financial
institutions competing in Harris Financial's primary market area that offer a
wider variety of financial services than Harris Financial currently offers.
Competition for deposits, for the origination of loans and the provision of
other financial services may limit Harris Financial's growth and adversely
impact its profitability in the future.
60
<PAGE>
Analysis of Loan Portfolio
The following table sets forth selected data relating to the composition of
Harris Financial's loan portfolio, by type of loan on the dates indicated.
<TABLE>
<CAPTION>
At
--------------------------------------------------------------
March 31, 2000 1999 1998 1997
-------------------- -------------------- -------------------- ------------------
Amount Percent Amount Percent Amount Percent Amount Percent
---------- -------- ---------- -------- ---------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgage loans:
One- to four-family........ $ 537,225 40.88% $ 533,605 42.06% $ 566,438 53.65% $539,248 60.34%
Construction............... 19,383 1.47 23,270 1.83 29,032 2.76 35,209 3.94
Other...................... -- 0.00 20 0.00 6,962 0.66 1,605 0.19
---------- ------ ---------- ------ ---------- ------ -------- ------
Total residential mortgage
loans.................... 556,608 42.35 556,895 43.89 602,432 57.07 576,062 64.47
---------- ------ ---------- ------ ---------- ------ -------- ------
Business Banking:
Commercial real estate
loans..................... 133,630 10.17 105,791 8.34 67,138 6.36 20,948 2.34
Commercial business loans.. 139,890 10.64 139,384 10.99 82,525 7.82 27,743 3.11
Construction and site
development loans....... 8,740 0.67 5,517 0.43 1,943 0.18 5,278 0.59
Income-producing real
estate loans.............. 95,365 7.26 96,631 7.62 51,980 4.92 27,285 3.05
---------- ------ ---------- ------ ---------- ------ -------- ------
Total business banking
loans..................... 377,625 28.74 347,323 27.38 203,585 19.28 81,255 9.09
---------- ------ ---------- ------ ---------- ------ -------- ------
Consumer and other loans:
Manufactured housing....... 80,333 6.11 78,801 6.21 63,758 6.04 71,356 7.98
Home equity and second
mortgage.................. 184,104 14.02 179,180 14.12 155,310 14.71 155,861 17.44
Indirect automobile and
other(1).................. 115,443 8.78 106,514 8.40 30,647 2.90 9,097 1.02
---------- ------ ---------- ------ ---------- ------ -------- ------
Total consumer loans...... 379,880 28.91 364,495 28.73 249,715 23.65 236,314 26.44
---------- ------ ---------- ------ ---------- ------ -------- ------
Loans receivable, gross... 1,314,113 100.00 1,268,713 100.00 1,055,732 100.00 893,631 100.00
---------- ====== ---------- ====== ---------- ====== -------- ======
Plus:
Dealer reserves(2)......... 21,165 20,698 13,996 14,504
Less:
Unearned premiums.......... 274 296 471 855
Net deferred loans
origination fees.......... 9,327 9,259 8,527 8,182
Allowance for loan losses.. 12,032 11,873 9,088 8,192
------ ------ ------ ------
Loans receivable, net..... $1,313,645 $1,267,983 $1,051,642 $890,906
========== ========== ========== ========
Residential mortgage loans:
ARM........................ $ 58,444 10.50 $ 58,474 10.50 $ 65,725 10.91 $ 90,615 15.73
Fixed-rate................. 498,164 89.50 498,421 89.50 536,707 89.09 485,447 84.27
---------- ------ ---------- ------ ---------- ------ -------- ------
Total mortgage loans...... $ 556,608 100.00% $ 556,895 100.00% $ 602,432 100.00% $576,062 100.00%
========== ====== ========== ====== ========== ====== ======== ======
<CAPTION>
-----------------------------------------------
1996 1995
--------------------- ----------------------
Amount Percent Amount Percent
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Residential mortgage loans:
One- to four-family........ $514,694 62.31% $472,998 71.54%
Construction............... 25,647 3.11 23,415 3.54
Other...................... 21,777 2.63 23,015 3.48
-------- ------ -------- ------
Total residential mortgage
loans.................... $562,118 68.05 519,428 78.56
-------- ------ -------- ------
Business Banking:
Commercial real estate
loans..................... 17,636 2.13 2,240 0.34
Commercial business loans.. -- 0.00 -- 0.00
Construction and site
development loans....... -- 0.00 -- 0.00
Income-producing real
estate loans.............. 21,299 2.58 27,171 4.11
-------- ------ -------- ------
Total business banking
loans..................... 38,935 4.71 29,411 4.45
-------- ------ -------- ------
Consumer and other loans:
Manufactured housing....... 65,794 7.97 20,991 3.18
Home equity and second
mortgage.................. 153,464 18.58 83,031 12.56
Indirect automobile and
other(1).................. 5,672 0.69 8,289 1.25
-------- ------ -------- ------
Total consumer loans...... 224,930 27.24 112,311 16.99
-------- ------ -------- ------
Loans receivable, gross... 825,983 100.00 661,150 100.00
-------- ====== -------- ======
Plus:
Dealer reserves(2)......... 13,880 4,308
Less:
Unearned premiums.......... (327) (220)
Net deferred loans
origination fees.......... 7,952 7,959
Allowance for loan losses.. 8,322 6,114
------ ------
Loans receivable, net..... $823,916 $651,605
======== ========
Residential mortgage loans: $133,544 22.89 $114,185 20.89
ARM........................ 449,873 77.11 432,414 79.11
Fixed-rate.................
$583,417 100.00% $546,599 100.00%
Total mortgage loans...... ======== ====== ======== ======
</TABLE>
__________________________
(1) Includes credit card loans, education loans and unsecured personal loans.
(2) Represents reserves established for indirect auto and manufactured housing
loan portfolios.
61
<PAGE>
Loan Maturity Schedule
The following table sets forth information as of March 31, 2000, regarding
the dollar amount of loans in Harris Financial's portfolio based on their
contractual terms to maturity. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as due in one
year or less. Adjustable and floating rate loans are included in the period in
which interest rates are next scheduled to adjust rather than in which they
mature, and fixed rate loans and mortgage-backed securities are included in the
period in which the final contractual repayment is due.
<TABLE>
<CAPTION>
Over Over Over Over
One Two Three Five
Within Through Through Through Through
One Year Two Years Three Years Five Years 10 Years
-------- --------- ----------- ---------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Fixed-Rate Loans
----------------
Residential mortgage loans:
One- to four-family...................... $ 4,233 $ 1,841 $ 3,204 $ 11,936 $ 41,001
Construction............................. 1,101 -- -- -- 102
-------- ------- ------- -------- --------
Total residential mortgage loans....... 5,334 1,841 3,204 11,936 41,103
Commercial loans:
Commercial real estate loans............. 1,467 75 4,851 10,386 2,069
Commercial business loans................ 17,757 2,905 3,813 15,799 8,781
Construction and site development loans.. 303 299 297 1,167 --
Income-producing real estate loans....... 3,136 39 322 15,281 5,158
-------- ------- ------- -------- --------
Total commercial loans................. 22,663 3,318 9,283 42,633 16,008
Consumer and other loans:
Home equity and second mortgage.......... 677 2,396 5,313 23,854 46,139
Other.................................... 3,129 1,739 5,737 80,406 27,146
-------- ------- ------- -------- --------
Total consumer and other loans......... 3,806 4,135 11,050 104,260 73,285
-------- ------- ------- -------- --------
Total fixed-rate loans.............. 31,803 9,294 23,537 158,829 130,396
Adjustable-Rate Loans
----------------------
Residential mortgage loans:
One- to four-family...................... 31,921 5,304 8,123 12,298 798
Construction............................. -- -- -- -- --
-------- ------- ------- -------- --------
Total residential mortgage loans....... 31,921 5,304 8,123 12,298 798
Commercial loans:
Commercial real estate loans............. 37,962 3,129 9,105 48,792 15,121
Commercial business loans................ 57,049 8,116 111 5,929 6,836
Construction and site development loans.. 6,674 -- -- -- --
Income-producing real estate loans....... 21,788 4,831 12,677 25,951 6,183
-------- ------- ------- -------- --------
Total commercial loans................. 123,473 16,076 21,893 80,672 28,140
Consumer and other loans:
Home equity and second mortgage.......... 41,762 -- -- -- --
Other.................................... 131 -- -- -- --
-------- ------- ------- -------- --------
Total consumer and other loans......... 41,893 -- -- -- --
-------- ------- ------- -------- --------
Total adjustable-rate loans......... 197,287 21,380 30,016 92,970 28,938
-------- ------- ------- -------- --------
Loans receivable, gross................... $229,090 $30,674 $53,553 $251,799 $159,334
======== ======= ======= ======== ========
<CAPTION>
Over
10 Total
Through After
15 Years 15 Years Total
------------ ------------ ------------
<S> <C> <C> <C>
Fixed-Rate Loans
----------------
Residential mortgage loans:
One- to four-family...................... $ 94,206 $322,360 $ 478,781
Construction............................. 2,027 16,153 19,383
-------- -------- ----------
Total residential mortgage loans....... 96,233 338,513 498,164
Commercial loans:
Commercial real estate loans............. -- 673 19,521
Commercial business loans................ 12,793 -- 61,848
Construction and site development loans.. -- -- 2,066
Income-producing real estate loans....... -- -- 23,936
-------- -------- ----------
Total commercial loans................. 12,793 673 107,371
Consumer and other loans:
Home equity and second mortgage.......... 60,523 3,441 142,343
Other.................................... 13,558 63,929 195,644
-------- -------- ----------
Total consumer and other loans......... 74,081 67,370 337,987
-------- -------- ----------
Total fixed-rate loans.............. 183,107 406,556 943,522
Adjustable-Rate Loans
----------------------
Residential mortgage loans:
One- to four-family...................... -- -- 58,444
Construction............................. -- -- --
-------- -------- ----------
Total residential mortgage loans....... -- -- 58,444
Commercial loans:
Commercial real estate loans............. -- -- 114,109
Commercial business loans................ -- -- 78,041
Construction and site development loans.. -- -- 6,674
Income-producing real estate loans....... -- -- 71,430
-------- -------- ----------
Total commercial loans................. -- -- 270,254
Consumer and other loans:
Home equity and second mortgage.......... -- -- 41,762
Other.................................... -- -- 131
-------- -------- ----------
Total consumer and other loans......... -- -- 41,893
-------- -------- ----------
Total adjustable-rate loans......... 9,183 -- 370,591
-------- -------- ----------
Loans receivable, gross................... $183,107 $406,556 $1,314,113
======== ======== ==========
</TABLE>
62
<PAGE>
The following table sets forth the dollar amount of all loans maturing or
repricing after March 31, 2000 which have predetermined interest rates and have
floating or adjustable interest rates.
Floating or
Predetermined Adjustable
Rates Rates Total
------------- ----------- -------
(In Thousands)
Mortgage loans.................... $ 498,164 $ 58,444 $ 556,608
Commercial loans.................. 107,371 270,254 377,625
Consumer and other loans.......... 337,987 41,893 379,880
----------- --------- ----------
Total........................... $ 943,522 $ 370,591 $1,314,113
============ ========= ==========
Residential Mortgage Lending
Mortgage lending traditionally has been Harris Financial's primary
business. In recent years, Harris Financial has increased its emphasis on its
business banking, and decreased its reliance on traditional one- to four-family
residential real estate lending. Although the total amount of one- to four-
family residential real estate loans has remained relatively stable over the
last five years, such loans have decreased to 42.4% of total loans at March 31,
2000 from 78.6% of total loans at December 31, 1995, due primarily to the growth
of Harris Financial's business loan portfolio.
One- to Four-Family Real Estate Loans. Historically, Harris Financial's
primary lending activity was the origination of loans secured by one- to four-
family residential real estate located in its primary market area. At March 31,
2000, $537.2 million, or 40.9%, of Harris Financial's net loans consisted of
one-to four- family mortgage loans. Of the one- to four-family loans outstanding
at that date, 88.6% were fixed-rate mortgage loans with an average yield of
7.0%, and 11.4% were adjustable-rate loans with an average yield of 7.77%. More
recently, Harris Financial has sold into the secondary mortgage market a
substantial portion of the conforming one- to four-family residential real
estate loans that it originates. For the three months ended March 31, 2000 and
the year ended December 31, 1999, Harris Financial sold 58.1% and 33.7%,
respectively, of its one- to four-family mortgage loan originations.
Harris Financial originates fixed-rate fully amortizing loans with
maturities generally ranging between 10 and 30 years, and adjustable-rate
mortgage loans with an interest rate based on the one year Constant Maturity
Treasury Bill index. Management establishes interest rates charged on loans
based on market conditions. Harris Financial offers mortgage loans that conform
to Fannie Mae and Freddie Mac guidelines, as well as jumbo loans, which
presently are loans in amounts over $252,700. Most one- to four-family loans
recently sold by Harris Financial have been sold on a non-recourse basis with
the servicing rights released.
Harris Financial also currently offers adjustable-rate mortgage loans with
terms of up to 30 years, with an interest rate based on the one year Constant
Maturity Treasury Bill index, which adjust annually from the outset of the loan
or which adjust annually after a three or five year initial fixed period.
Interest rate adjustments on such loans are typically limited to no more than 2%
during any adjustment period and 6% over the life of the loan. Adjustable-rate
loans may possess a conversion option whereby the borrower may convert the loan
to a fixed interest rate after a predetermined period of time, generally between
the 13th and 60th months of the loan term. Harris Financial currently retains in
portfolio most of its adjustable-rate mortgage loan originations. Those
adjustable-rate loans that are sold are sold on a servicing released basis.
Adjustable-rate mortgage loans held in Harris Financial's portfolio help
reduce Harris Financial's exposure to changes in interest rates. There are,
however, unquantifiable credit risks resulting from the potential of increased
costs due to changed rates to be paid by borrowers. It is possible that during
periods of rising interest rates, the risk of default on adjustable-rate
mortgage loans may increase as a result of repricing and the increased payments
required to be paid by borrowers. In addition, although adjustable-rate mortgage
loans allow Harris Financial to increase the sensitivity of its asset base to
changes in interest rates, the extent of this interest sensitivity is limited by
the annual and lifetime interest rate adjustment limits. Because of these
considerations, Harris Financial has no assurance that yields on adjustable-rate
mortgage loans will be sufficient to offset increases in Harris Financial's cost
of funds during periods of rising interest rates. Harris Financial believes
these risks, which have not had a material adverse effect on Harris Financial to
date, generally are lower than the risks associated with holding long-term
fixed-rate loans in its portfolio in a rising interest rate environment.
Harris Financial underwrites fixed- and adjustable-rate one- to four-family
residential mortgage loans with loan-to-value ratios of up to 95%, provided that
a borrower obtains private mortgage insurance on loans that exceed
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80% of the appraised value or sales price, whichever is less, of the secured
property. Harris Financial also requires that title insurance, hazard insurance
and, if appropriate, flood insurance be maintained on all properties securing
real estate loans made by Harris Financial. A licensed appraiser appraises all
properties securing one- to four-family first mortgage loans.
In an effort to provide financing for low and moderate income buyers,
Harris Financial offers Pennsylvania Housing Finance Agency mortgage loans to
qualified individuals. These loans are offered with fixed-rates of interest and
terms of up to 30 years, and must be secured by one- to four-family residential
property that is occupied by the owner. All of these loans are originated using
modified underwriting guidelines, based on rates and terms established by the
Pennsylvania Housing Finance Agency. These loans are generally offered with a
discounted interest rate (approximately 75 to 100 basis points). All
Pennsylvania Housing Finance Agency loans are originated in amounts of up to 95%
of the lower of the property's appraised value or the sale price. Private
mortgage insurance is required on all such loans. All of these loans are sold on
a servicing released basis to the Pennsylvania Housing Finance Agency
immediately after loan closing.
Construction Loans. Harris Financial originates construction loans to
individuals to acquire lots and construct personal residences. At March 31,
2000, residential construction loans amounted to $19.4 million, or 1.5% of
Harris Financial's total loans. At March 31, 2000, the unadvanced portion of
construction loans totaled $24.8 million.
Harris Financial's residential construction loans generally provide for the
payment of interest only during the construction phase, which is usually six
months. At the end of the construction phase, the loan converts to a permanent
mortgage loan. In most cases, Harris Financial buys a hedge for the six month
construction period and then sells into the secondary market the permanent
mortgage loan into which the construction loan converts. The cost of the hedge
is usually passed through to the borrower in the form of a fee or higher
interest rate.
Construction loans can be made with a maximum loan to value ratio of 95%,
provided that the borrower obtains private mortgage insurance on the loan if the
loan balance exceeds 80% of the appraised value or sales price, whichever is
less, of the secured property. At March 31, 2000, the largest outstanding
residential construction loan commitment was for $700,000, of which $254,000 was
outstanding. This loan was performing according to its terms at March 31, 2000.
Before making a commitment to fund a residential construction loan, Harris
Financial requires an appraisal of the property by an independent licensed
appraiser. Harris Financial also reviews and inspects each property before
disbursement of funds during the term of the construction loan. Loan proceeds
are disbursed after inspection based on the percentage of completion method.
Construction financing is generally considered to involve a higher degree
of credit risk than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan depends largely upon the accuracy of the
initial estimate of the property's value at completion of construction compared
to the estimated cost (including interest) of construction and other
assumptions. Additionally, if the estimate of value proves to be inaccurate,
Harris Financial may be confronted with a project, when completed, having a
value less than the loan amount.
Business Banking
Harris Financial created its Business Banking Group in 1996 to offer
commercial financial products and services to businesses in its primary market
area. The Business Banking group originates commercial real estate loans,
commercial business loans, construction and site development loans and loans on
income-producing real estate. At March 31, 2000, Harris Financial's commercial
loan portfolio consisted of $133.6 million in commercial real estate loans,
$139.9 million in commercial business loans, $8.7 million in construction and
site development loans and $95.4 million in income-producing real estate loans.
In addition, at such date, Harris Financial had $143.0 million of unadvanced
commercial lines of credit.
Commercial Real Estate Loans. Harris Financial's commercial real estate
loans are generally secured by owner-occupied properties used for business
purposes such as small office buildings, industrial facilities or retail
facilities primarily located in Harris Financial's primary market area. Although
there may be occasional exceptions to the loan policy, commercial real estate
underwriting policies provide that such real estate loans may be made in amounts
of up to 80% of the lower of cost or appraised value of the property provided
such loans comply with Harris Financial's current in house loans-to-one borrower
limit. Harris Financial's commercial real estate loans may be made with terms of
up to ten years, amortization not to exceed 20 years, and with three to five
year fixed interest rates or variable interest rates tied to market indices. In
evaluating a commercial real estate loan application, Harris
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Financial considers the net operating income of the borrower's business, the
borrower's expertise, credit history and profitability and the value of the
underlying property. In addition, with respect to commercial real estate rental
properties, Harris Financial will also consider the term of the lease and the
quality of the tenants. Harris Financial has generally required that the
properties securing these real estate loans have debt service coverage ratios
(the ratio of cash flow before debt service to debt service) of at least 1.20x.
Environmental surveys are generally required for commercial real estate loans.
Generally, commercial real estate loans made to corporations, partnerships and
other business entities require personal guarantees by principals of the
borrower. At March 31, 2000, Harris Financial's largest commercial real estate
loan had a carrying value of $13.4 million, was secured by a first mortgage
lien, and was performing according to its original terms.
Commercial real estate loans are generally considered to involve more risk
than one- to four-family residential real estate loans. Loans secured by
commercial real estate properties generally involve larger principal amounts.
Because payments on loans secured by commercial real estate properties often
depend on the successful operation or management of the properties, repayment of
such loans may be affected by adverse conditions in the real estate market or
the economy. Moreover, unlike one- to four-family residential mortgage loans,
which generally are made on the basis of the borrower's ability to make
repayment from his or her employment or other income, and which are secured by
real property with a more easily ascertainable value, commercial real estate
loans typically are made on the basis of the borrower's ability to make
repayment from the cash flow of the borrower's business. As a result, the
availability of funds for the repayment of commercial real estate loans may
depend substantially on the success of the business itself.
Commercial Business Loans. Harris Financial makes commercial business loans
primarily in its market area to a variety of professionals, sole proprietorships
and small- to medium-size businesses. At March 31, 2000, Harris Financial's
portfolio of commercial business loans totaled $139.9 million, or 10.6% of
Harris Financial's total loans. Harris Financial offers a variety of commercial
lending products, including term loans for fixed assets and working capital,
revolving lines of credit, letters of credit, and Small Business Administration
guaranteed loans. Generally, the maximum amount of a commercial business loan is
limited by Harris Financial's loans-to-one-borrower limit. Term loans are
generally offered with initial fixed rates of interest for the first three to
five years and with terms of up to ten years. Business lines of credit have
floating rates of interest and are payable on demand, subject to annual review
and renewal. Business loans with variable rates of interest adjust on a daily
basis and are generally indexed to Harris Financial's prime rate. When making
commercial business loans, Harris Financial considers the financial statements
of the borrower, Harris Financial's lending history with the borrower, the debt
service capabilities of the borrower, the projected cash flows of the business
and the value of the collateral. Commercial business loans are generally secured
by a variety of collateral, primarily accounts receivable, inventory and
equipment, and are supported by personal guarantees. However, Harris Financial
also makes unsecured commercial loans available to business clients with strong
credit and who are well-known to Harris Financial. Unsecured commercial loans
are generally limited to short-term single payment loans or lines of credit used
to provide general corporate liquidity or to provide for seasonal liquidity
needs. These loans generally are offered at floating rates of interest and are
payable on demand or at a stated short-term maturity. At March 31, 2000, Harris
Financial's largest commercial business loan was an $11.0 million unsecured line
of credit, which was performing according to its original terms.
Commercial business loans also generally are considered to involve more
risk than one- to four-family residential real estate loans. Because commercial
business loans often depend on the successful operation or management of the
business, repayment of such loans may be affected by adverse conditions in the
economy. Moreover, unlike one- to four-family residential mortgage loans, which
generally are made on the basis of the borrower's ability to make repayment from
his or her employment or other income, and which are secured by real property
whose value tends to be more easily ascertainable, commercial business loans
typically are made on the basis of the borrower's ability to make repayment from
the cash flow of the borrower's business. As a result, the availability of funds
for the repayment of commercial loans may depend substantially on the success of
the business itself. Any collateral securing commercial business loans may
depreciate over time, may be difficult to appraise and to liquidate, and may
fluctuate in value. Further, to the extent the commercial business loan is
unsecured, Harris Financial will depend exclusively on the cash flow of the
business itself for repayment.
Construction and Site Development Loans. Harris Financial also originates
construction and site development loans to developers and builders primarily to
finance the construction of single-family homes and subdivisions, the
construction of commercial development projects, and site development projects.
At March 31, 2000, such loans totaled $8.7 million, or 0.7% of Harris
Financial's total loans. Loans to finance the construction of single-family
homes and subdivisions are generally offered to experienced builders with whom
Harris Financial has an established relationship. Residential development loans
are typically offered with terms of up to 36 months. The maximum loan-to-value
limit applicable to these loans is 80% of the appraised post-construction value.
Construction loan proceeds are disbursed periodically in increments as
construction progresses and as inspection by Harris
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Financial's approved appraisers warrants. At March 31, 2000, Harris Financial's
largest construction and site development loan totaled $5.0 million and was
secured by a first mortgage lien. This loan was performing according to its
original terms at March 31, 2000.
Harris Financial also makes construction loans for commercial development
projects. The projects include multi-family, apartment, industrial, retail and
office buildings. These loans generally have an interest-only phase during
construction, and convert to permanent financing when construction is completed.
Disbursement of funds is at the sole discretion of Harris Financial and is based
on the progress of construction. The maximum loan-to-value limit applicable to
these loans is 75% of the appraised post-construction value.
Harris Financial also originates land loans to local contractors and
developers for the purpose of improving the property, or for the purpose of
holding or developing the land for sale. Such loans are secured by a lien on the
property, are limited to 70% of the lower of the acquisition price or the
appraised value of the land, and have a term of up to two years with a floating
interest rate based on Harris Financial's internal base rate. Harris Financial's
land loans are generally secured by property in its primary market area. Harris
Financial requires title insurance and, if applicable, a hazardous waste survey
reporting that the land is free of hazardous or toxic waste.
Construction and site development financing is generally considered to
involve a higher degree of credit risk than long-term financing on improved,
owner-occupied real estate. Risk of loss on a construction loan depends largely
upon the accuracy of the initial estimate of the property's value at completion
of construction compared to the estimated cost (including interest) of
construction and other assumptions. If the estimate of construction cost proves
to be inaccurate, Harris Financial may be required to advance funds beyond the
amount originally committed in order to protect the value of the property.
Additionally, if the estimate of value proves to be inaccurate, Harris Financial
may be confronted with a project, when completed, having a value that is
insufficient to assure full repayment.
Income-Producing Real Estate Loans. At March 31, 2000, income-producing
real estate loans totaled $95.4 million, or 7.3% of Harris Financial's total
loan portfolio. Harris Financial's income-producing real estate loans are
construction or permanent mortgage loans secured by properties such as office
buildings and multi-family buildings located in Harris Financial's primary
market area. Typically, the borrower will occupy 50% or less of the property
securing the loan. Although there may be occasional exceptions to this loan
policy, income-producing real estate underwriting policies provide that such
loans may be made in amounts up to 80% of the lower of cost or appraised value
of the property provided such loans comply with Harris Financial's current
loans-to-one-borrower limit. Income-producing real estate loans may be made with
terms of up to ten years, with amortization not to exceed 20 years. Interest
rates may be fixed for up to five years, or may be adjustable tied to market
indices. When making a decision on a income-producing real estate loans, Harris
Financial verifies historic income and expense information and, when possible,
reviews copies of all current leases on the property. In addition, the terms of
leases, creditworthiness of tenants and turn-over of tenants is considered. The
term of the lease(s) is intended to correspond to the term of the loan request.
A detailed cash flow analysis on the property is performed to ascertain how well
the income from the property will support the loan. Harris Financial considers a
debt coverage ratio of 1.2x to 1.3x standard for most loan requests.
Environmental surveys are generally required for income-producing real estate
loans.
Income-producing real estate loans involve more risk than standard
commercial real estate loans. Repayment of income-producing real estate loans
largely depends upon the rental income. The loss of a large tenant or default by
a tenant or tenants can have a significant impact on the cash flow of the
borrower.
Consumer and Other Loans
Harris Financial offers a variety of consumer and other loans, including
loans secured by manufactured housing, home equity and second mortgage loans
that are secured by owner-occupied one- to four-family residences, indirect home
improvement loans, indirect automobile loans and other loans. At March 31,
2000, Harris Financial's total consumer and other loans totaled $379.9 million,
or 28.9% of the total loan portfolio.
Home Equity and Second Mortgage Loans. At March 31, 2000, home equity and
second mortgage loans totaled $184.1 million, or 14.0% of Harris Financial's
total loans. Of this amount, $133.2 million were fixed-term installment loans,
$39.0 million were home equity lines of credit, and $11.9 million were indirect
home improvement loans. Additionally, at March 31, 2000, the unadvanced amounts
of home equity lines of credit totaled $59.1 million. The underwriting standards
employed by Harris Financial for home equity and second mortgage loans include a
determination of the applicant's credit history, an assessment of the
applicant's ability to meet existing obligations and payments on the proposed
loan and the value of the collateral securing the loan. Home equity lines of
credit have adjustable rates of interest which are indexed to the prime rate as
reported in The Wall Street Journal.
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Interest rates on home equity lines of credit may be adjusted to no more than
18%. Generally, the maximum loan-to-value ratio on home equity lines of credit,
including the outstanding amount of any first mortgage loan, is 90%. A home
equity line of credit may be drawn down by the borrower for a period of 10 years
from the date of the loan agreement. During this period, the borrower has the
option of paying, on a monthly basis, either principal and interest or only the
interest. The borrower has to repay the amount outstanding under the line of
credit at the end of a 20 year period. Harris Financial offers fixed- and
adjustable-rate home equity and second mortgage loans with terms up to 20 years.
The loan-to-value ratios of both fixed-rate and adjustable-rate home equity and
second mortgage loans are generally limited to 90% of the appraised value of the
real estate collateral.
Indirect home improvement loans are installment sales contracts and
installment loan agreements originated by home improvement contractors and
assigned to Harris Financial. These contractors are approved by Harris Financial
based on a review assessing their financial condition, industry reputation and
trade references. Indirect home improvement loans are either unsecured or
secured by deeds of trust or mortgages, which generally are subordinate to other
mortgages on the same residential properties. Harris Financial originates
Federal Housing Authority Title I insured dealer loans and conventional non-
insured home improvement loans. FHA Title I loans are originated in accordance
with FHA regulations. Each indirect home improvement loan is acquired by Harris
Financial only after a review in accordance with its established underwriting
procedures. The underwriting procedures of Harris Financial are designed to
provide a basis for assessing the borrower's ability and willingness to repay
the loan. In conducting this assessment, Harris Financial considers the
borrower's ratio of debt to income and evaluates the borrower's credit history
through a review of a written credit report compiled by a recognized consumer
credit reporting bureau. For FHA Title I insured loans, equity is not a
determining factor in deciding whether a loan will be granted. In underwriting
the loan, Harris Financial emphasizes prior credit history and ability to repay
regardless of whether the loan is secured or unsecured. The borrower's equity in
the collateral is of secondary importance in Harris Financial's analysis.
Generally, the value of the related mortgaged property is determined by Harris
Financial based on the purchase price and value of such mortgaged property as
represented by the borrower if the loan is originated within two years of such
purchase or, if the loan is originated after two years of such purchase, based
on such purchase price and value, recent tax assessments and other relevant
factors. Generally, loans for amounts greater than $40,000 require appraisals
performed by licensed appraisers to determine the value of the related mortgaged
properties. Harris Financial's guidelines are intended only to provide a basis
for lending decisions, and exceptions to such guidelines may, within certain
limits, be made based upon the credit judgment of the lending officer. Harris
Financial conducts quality audits to ensure compliance with its established
policies and procedures.
Prior to funding an indirect home improvement loan, Harris Financial
requires the borrower to sign a certificate of completion that indicates that
the project has been completed to the borrower's satisfaction. Harris Financial
then contacts each borrower by phone in order to review the terms and conditions
of the loan and to reconfirm that all work was completed according to the terms
of the contractor's agreement with the borrower. Following receipt of the
certificate of completion and telephone validation, Harris Financial funds the
loan. Funds are disbursed to the related home improvement contractor by
cashier's check. For certain large indirect home improvement loans, Harris
Financial may offer staged funding in which portions of the contract amount are
payable as the work is completed. Checks for staged funding are issued to both
the contractor and the customer.
Harris Financial offers borrowers the option to extend the contractual
period between the funding date for an indirect home improvement loan and the
first scheduled due date to 45, 60 or 90 days depending on the type of loan.
Interest will accrue on the original principal balance of such indirect home
improvement loan during the deferral period regardless of its length. The
indirect home improvement loan will be considered current unless the borrower
fails to make the first scheduled payment on its contractual due date. Scheduled
payments will commence on the first contractual due date of the indirect home
improvement loan and continue each month thereafter.
Manufactured Housing Loans. At March 31, 2000, Harris Financial's
portfolio of manufactured housing loans amounted to $80.3 million, or 6.1% of
its total loans. Harris Financial originates manufactured housing loans through
service companies that act as agent in brokering such loans. Each service
company must be approved by Harris Financial after consideration of the service
company's reputation, past experience, financial resources, and its ability to
service loans throughout the geographic areas in which it originates such loans.
Each service company is subject to an annual review by Harris Financial,
including a review of annually updated financial statements and supporting
documentation. At March 31, 2000, Harris Financial had in its portfolio
manufactured housing loans originated by two service companies, but was doing
origination business with one service company at that time.
All manufactured housing loans are initially underwritten by the service
company based on guidelines specified by Harris Financial. However, before the
loan is closed, it is also separately underwritten by Harris Financial
personnel. The loans are secured by the manufactured home for which the loan
funds are advanced. Harris Financial will accept, as additional collateral, a
perfected first lien against land that an applicant owns, free and clear of all
liens, where the manufactured home will be located.
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To underwrite its manufactured housing loans, Harris Financial reviews the
applicant's written credit report and verifies all income and employment for the
past two years. The maximum loan amount currently is $90,000. The unit must
meet certain minimum standards for construction and safety, must be single-
family residential and must be less than ten model years old.
The minimum down payment is 5% in cash or trade, based on the sales price
plus tax. If an applicant owns a tract of land free and clear, Harris Financial
will accept a first lien position on the land in lieu of the down payment
provided that 75% of the appraised value of the land is equal to or more than
the 5% minimum down payment required. The maximum term for manufactured housing
loans ranges from 180 months to 300 months, depending upon the amounts financed
and the size of the unit.
Each manufactured housing loan originated is acquired by Harris Financial
at a premium to its net asset value. The premium paid to acquire the loan is
capitalized and amortized as a yield adjustment over the term of the loan. One-
third of the premium is advanced to the service company when a contract is
purchased. The remaining two-thirds of the service fee is deposited into non-
interest-bearing reserve accounts which are held on deposit at Harris Financial
with restricted access. The amounts held in the reserve accounts are used for
potential losses on a manufactured home loan and to recapture the unearned
service fee due from the service company in the event of a payoff of a loan
prior to its scheduled maturity. A service company's fee is fully-earned only
when a loan reaches full maturity. At March 31, 2000, Harris Financial's
deferred premium on manufactured housing loans totaled $17.1 million and amounts
held in reserve accounts totaled $7.6 million.
Indirect Auto and Other Consumer Loans. Harris Financial originates
indirect auto loans through a network of auto dealers, and was actively doing
business with approximately 47 dealers at March 31, 2000. Harris Financial has
been in the indirect auto lending business since August 1998 and has increased
its portfolio of indirect auto loans from $30.6 million at December 31, 1998 to
$115.4 million at March 31, 2000 (net of unearned discount). No one dealership
originated more than $11.8 million of the loan balances outstanding in Harris
Financial's portfolio at March 31, 2000. In developing its network, Harris
Financial has continued to focus on dealers in its primary market area. A
consumer lending sales officer has been dedicated full time to serve dealers in
order to expand on those relationships and to develop potential new dealer
relationships. The growth of the dealer network has been achieved through an
emphasis on quality service and the development of long term relationships with
the owners and managers of the dealerships. Since the program began, no dealer
has voluntarily ceased doing business with Harris Financial. Harris Financial
does not currently engage in auto lease financing.
Management believes that indirect auto lending has several advantages,
including the following: (i) the dealer network creates numerous "loan centers"
throughout Harris Financial's market area; (ii) Harris Financial can increase
the network without increasing its operating expenses significantly; and (iii)
the network develops a pool of customers to whom Harris Financial can cross-sell
other products and services.
Harris Financial makes indirect auto loans to purchase both new and used
cars. The loans have terms up to six years for loans secured by new and used
vehicles. As of March 31, 2000, approximately 35% of Harris Financial's indirect
auto loans were secured by new cars and 65% were secured by used cars. Harris
Financial originated $97.5 million and $16.9 million of indirect auto loans
during 1999 and the first three months of 2000, respectively.
To underwrite its indirect auto loans, Harris Financial reviews the credit
history of applicants and determines appropriate debt to income and loan to
value ratios. Harris Financial also believes that the quality of its indirect
auto portfolio is positively affected by its efforts to build and maintain
relationships with auto dealers who attract creditworthy customers. Harris
Financial tries to identify such dealers based on Harris Financial's knowledge
of car dealers in its market area.
In connection with the origination of indirect auto loans, the interest
rate charged to the borrower on the underlying loan is generally one to two
percentage points higher than the "buy rate" or rate earned by Harris Financial.
The difference between the two rates is referred to as the "spread." At loan
inception, the dollar value of the spread over the contractual term of the loan
is prepaid by Harris Financial to the auto dealer. Such prepaid amounts are
generally subject to rebate to Harris Financial in the event the underlying loan
is prepaid or goes into default resulting in a repossession. The risk of loss of
amounts previously advanced to the dealer primarily depends upon loan
performance but also depends upon the financial condition of the dealer.
Consequently, the dealer's ability to refund any portion of the prepaid interest
which is unearned is subject to economic conditions, generally, and the
financial condition of the dealer. Since Harris Financial began indirect auto
lending, it has not written off interest spread prepaid to dealers where the
dealer failed to refund any portion of unearned prepaid interest. At March 31,
2000, Harris Financial's unearned pre-paid interest on indirect auto loans
totaled $4.1 million.
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Indirect auto lending entails greater risks than residential mortgage
lending to owner occupants. Although Harris Financial has not experienced
significant delinquencies in this portfolio to date, borrowers are more likely
to default on an auto loan than on a residential mortgage loan secured by their
primary residence. Moreover, automobiles depreciate rapidly and, in the event of
a default, principal loss as a percent of the loan balance depends upon the
mileage and condition of the vehicle at the time of repossession, over which
Harris Financial has no control.
Consumer loans entail greater risk than residential mortgage loans,
particularly in the case of loans that are unsecured or secured by rapidly
depreciating assets such as automobiles. In these cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections depend on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Loans to One Borrower. Harris Financial has an internal limitation on the
amount of loans that it will extend to an individual borrower. In addition,
banking regulations establish a maximum amount that may be loaned to an
individual or related group of borrowers. At March 31, 2000, Harris Financial's
internal limit on loans to a single borrower was $10.0 million, although
exceptions are permitted subject to approval requirements set forth in the loan
policy. Its statutory limit on loans to one borrower or related group of
borrowers was $24.4 million. As of March 31, 2000, Harris Financial's five
largest loans to a single borrower, including the borrower's related interests,
were as follows:
The largest lending relationship, including the borrower's related
interests, was an approximately $20.0 million unsecured commitment and consisted
of five separate short term notes. These loans were performing according to
their original terms at March 31, 2000.
The second largest lending relationship, including the borrower's related
interests, was approximately $19.0 million and consisted of three separate loans
with common guarantors. These loans are secured by income-producing real estate
and were performing according to their original terms at March 31, 2000.
The third largest lending relationship, including the borrower's related
interests, was approximately $16.0 million and consisted of five different loans
with common guarantors and ownership. These loans were secured by a combination
of income-producing real estate and business assets and were performing
according to their original terms at March 31, 2000.
The fourth largest lending relationship, including the borrower's related
interests, was approximately $12.0 million and consisted of one loan. This loan
was secured by business assets and was performing according to its original
terms at March 31, 2000.
The fifth largest lending relationship, including the borrower's related
interests, was approximately $9.0 million and consisted of one loan. This loan
was secured by income-producing real estate and business assets and was
performing according to its original terms at March 31, 2000.
Loan Approval Procedures and Authority. Harris Financial's lending
activities follow written, non-discriminatory, underwriting standards and loan
origination procedures established by Harris Financial's board of directors and
management. Harris Financial's policies and loan approval limits are established
by management and are approved by the board of directors. The board of directors
has designated certain individuals of Harris Financial and certain branch
managers to consider and approve loans within their designated authority.
All one- to four-family mortgage loans secured by the borrower's primary
residence and all residential construction and second mortgage loans and home
equity lines of credit may be approved by any two designated individuals.
All commercial loans, including commercial real estate loans, multi-family
loans, commercial construction and development loans and commercial business
loans in amounts of up to $10.0 million may be approved by the two designated
individuals, one of who must be Harris Financial's Chief Credit Officer. All
commercial loans in excess of $10.0 million and up to $15.0 million require the
approval of Harris Financial's loan committee and the Chief Executive Officer.
All commercial loans in excess of $15.0 million require the approval of the
executive committee of the board of directors or the full board of directors.
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Consumer loans, automobile loans and unsecured personal loans may be
approved by either one or two designated individuals depending on the amount of
the loan.
Loan Originations, Purchases and Sales. Harris Financial's mortgage lending
activities are conducted by its salaried and commissioned loan personnel.
Currently, Harris Financial uses 12 loan originators who solicit and originate
mortgage loans on behalf of Harris Financial. These loan originators accounted
for all of the mortgage loans originated by Harris Financial in the first three
months of 2000 and in 1999. Commercial loan originators are compensated by a
commission, which currently is 50 basis points of the loan amount. All loans
originated by the loan originators are underwritten in conformity with Harris
Financial's loan underwriting policies and procedures. At March 31, 2000, Harris
Financial serviced $223.5 million of loans for others. From time to time, Harris
Financial will purchase loans or participation interests in loans, although only
$22.7 million of loans have been purchased since December 31, 1995.
The following table sets forth Harris Financial's gross loan originations,
loans purchased and loans sold for the periods indicated.
<TABLE>
<CAPTION>
Three Months
Ended
March 31, Years Ended December 31,
------------------- ------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Loans originated:
Residential mortgage loans:
One- to four-family................. $ 8,400 $ 43,050 $114,000 $277,900 $128,900 $147,200 $ 69,000
Construction........................ 12,500 27,700 103,100 189,900 141,100 147,100 68,900
Other............................... 1,000 750 6,100 8,900 6,100 6,000 2,800
-------- -------- -------- -------- -------- -------- --------
Total residential mortgage loans... $ 21,900 $ 71,500 $223,200 $476,700 $276,100 $300,300 $140,700
======== ======== ======== ======== ======== ======== ========
Commercial loans:
Commercial real estate loans........ $ 19,864 $ 17,000 $ 63,087 $ 46,005 $ 20,170 $ 566 $ --
Commercial business loans........... 13,903 32,500 105,024 102,810 13,762 18,403 --
Construction and site
development loans.................. -- 2,800 7,155 2,863 989 482 --
Income-producing real estate loans.. 21,633 9,000 38,034 30,422 13,979 4,849 --
-------- -------- -------- -------- -------- -------- --------
Total commercial loans............. 55,400 61,300 213,300 182,100 48,900 24,300 --
-------- -------- -------- -------- -------- -------- --------
Consumer and other loans:
Manufactured housing................ 3,400 10,900 26,300 5,400 11,900 37,700 13,300
Home equity and second mortgage..... 13,400 14,700 94,900 68,000 46,900 73,200 42,800
Indirect automobile and other....... 20,400 26,560 109,000 29,900 2,600 800 600
Total consumer loans............... 37,200 51,160 230,200 103,300 61,400 111,700 56,700
-------- -------- -------- -------- -------- -------- --------
Total loans originated............. $114,500 $183,960 $666,700 $762,100 $386,400 $436,300 $197,400
======== ======== ======== ======== ======== ======== ========
Loans purchased:
Residential mortgage loans:
One- to four-family................. $ -- $ -- $ -- $ -- $ -- $ 8,500 $ 14,200
-------- -------- -------- -------- -------- -------- --------
Total loans purchased.............. $ -- $ -- $ -- $ -- $ -- $ 8,500 $ 14,200
======== ======== ======== ======== ======== ======== ========
Loans sold:
Residential mortgage loans:
One- to four-family................. $ 12,700 $ 32,457 $199,400 $127,000 $ 81,500 $183,700 $ 18,300
Construction........................ -- -- -- -- -- -- --
Other............................... -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total residential mortgage loans... 12,700 32,457 199,400 127,000 81,500 183,700 18,300
-------- -------- -------- -------- -------- -------- --------
Total loans sold................... $ 12,700 $ 32,457 $199,400 $127,000 $ 81,500 $183,700 $ 18,300
======== ======== ======== ======== ======== ======== ========
</TABLE>
Loan Commitments. Harris Financial issues loan commitments to prospective
borrowers conditioned on the occurrence of certain events. Commitments are made
in writing on specified terms and conditions and are generally honored for up to
60 days from approval. At March 31, 2000, Harris Financial had loan commitments
and unadvanced loans and lines of credit totaling $236.8 million.
Loan Fees. In addition to interest earned on loans, Harris Financial
receives income from fees derived from loan originations, loan modifications,
late payments and for miscellaneous services related to its loans. Income from
these activities varies from period to period depending upon the volume and type
of loans made and competitive conditions. On loans originated by third-party
originators, Harris Financial may pay a premium to compensate an originator for
loans where the borrower is paying a higher rate on the loan.
70
<PAGE>
Harris Financial charges loan origination fees which are calculated as a
percentage of the amount borrowed. As required by applicable accounting
principles, loan origination fees, discount points and certain loan origination
costs are deferred and recognized over the contractual remaining lives of the
related loans on a level yield basis. At March 31, 2000, Harris Financial had
approximately $9.6 million of net deferred loan fees. Harris Financial amortized
$211,000 and $1.6 million of net deferred loan fees during the three months
ended March 31, 2000 and the year ended December 31, 1999, respectively.
Nonperforming Assets, Delinquencies and Impaired Loans. All loan payments
on first mortgages are due on the first day of each month. When a borrower fails
to make a required loan payment, Harris Financial attempts to cure the
deficiency by contacting the borrower and seeking the payment. A late notice is
mailed on the 16th day of the month. In most cases, deficiencies are cured
promptly. If a delinquency continues beyond the 16th day of the month, the
account is referred to an in-house collector. While Harris Financial generally
prefers to work with borrowers to resolve problems, Harris Financial will
institute foreclosure or other proceedings after the 90th day of a delinquency,
as necessary, to minimize any potential loss.
Management informs the board of directors monthly of the amount of loans
delinquent more than 30 days and all foreclosed and repossessed property that
Harris Financial owns. Harris Financial ceases accruing interest on mortgage
loans when principal or interest payments are delinquent 90 days or more unless
management determines the loan principal and interest to be fully secured and in
the process of collection. Once the accrual of interest on a loan is
discontinued, all interest previously accrued is reversed against current period
interest income once management determines that interest is uncollectible.
On January 1, 1995, Harris Financial adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended by SFAS No. 118 "Accounting by Creditors for Impairment of a
Loan--an amendment to SFAS No. 114." At March 31, 2000 and December 31, 1999 and
1998, Harris Financial had a $9.2 million, $9.5 million and $0, respectively,
recorded investment in impaired loans, all of which had no specific allowances.
Non-Performing Loans. The following table sets forth information regarding
non-accrual loans, accruing loans delinquent 90 days or more, other non-
performing assets and restructured loans at the dates indicated:
<TABLE>
<CAPTION>
At
March 31, At December 31,
--------------------------------------------------
2000 1999 1998 1997 1996 1995
------- ------- ------- ------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual mortgage loans...................... $ 9,909 $ 9,280 $ 5,762 $ 5,544 $ 4,827 $1,970
Non-accrual other loans......................... 865 727 1,889 1,394 798 40
------- ------- ------- ------- ------- ------
Total non-accrual loans/(1)/................... 10,774 10,007 7,651 6,938 5,625 2,010
Loans 90 days or more delinquent and still
accruing...................................... 5,125 6,128 -- -- -- --
------- ------- ------- ------- ------- ------
Total non-performing loans..................... 15,899 16,135 7,651 6,938 5,625 2,010
Total foreclosed other......................... 1,127 1,149 -- -- -- --
Total foreclosed real estate/(2)/.............. 394 396 7,188 6,711 7,042 6,563
------- ------- ------- ------- ------- ------
Total non-performing assets..................... $17,420 $17,680 $14,839 $13,649 $12,667 $8,573
======= ======= ======= ======= ======= ======
Total non-performing loans to total loans/(3)/.. 1.21% 1.27% 0.73% 0.78% 0.68% 0.31%
Total non-performing loans and foreclosed real
estate to total assets......................... 0.63% 0.66% 0.59% 0.62% 0.72% 0.68%
</TABLE>
________________________
/(1)/ Harris Financial would have recorded additional interest income on non-
accrual loans, had they been current, of $200,000 during the three months
ended March 31, 2000, $300,000 in 1999, $400,000 in 1998, $400,000 in
1997, $300,000 in 1996, and $100,000 in 1995. No interest was included in
interest income in these periods related to these loans.
/(2)/ This amount includes a foreclosed apartment complex with a carrying value
of $6.0 million that was sold in 1999.
/(3)/ Total loans excludes loans held for sale.
71
<PAGE>
Harris Financial's three largest nonaccruing loans at March 31, 2000 were
as follows:
The largest nonaccrual loan, which was secured by commercial real estate,
had a carrying value of $5.4 million. Subsequent to March 31, 2000, the entire
carrying value of this loan was paid off in full.
The second largest nonaccrual loan, which was secured by commercial real
estate, had a carrying value of $1.7 million. Subsequent to March 31, 2000, the
entire carrying value of this loan was paid off in full.
The third largest nonaccrual loan, which was secured by commercial real
estate, had a carrying value of $600,000.
Real Estate Owned. Real estate acquired by Harris Financial as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until sold. When property is acquired it is recorded at fair market value at the
date of foreclosure, establishing a new cost basis. Holding costs and declines
in fair value result in charges to expense after the property is acquired. At
March 31, 2000, Harris Financial had $394,000 of net real estate owned.
Asset Classification. Banking regulators have adopted various regulations
and practices regarding problem assets of savings institutions. Under such
regulations, federal and state examiners have authority to identify problem
assets during examinations and, if appropriate, require their classification.
There are three classifications for problem assets: substandard, doubtful and
loss. Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, it is charged
off in the quarter in which it is so classified, the insured institution
establishes specific allowances for loan losses for the full amount of the
portion of the asset classified as loss. All or a portion of general loan loss
allowances established to cover probable losses related to assets classified
substandard or doubtful can be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses
generally do not qualify as regulatory capital. Assets that do not currently
expose the insured institution to sufficient risk to warrant classification in
one of the aforementioned categories but possess weaknesses are designated
"special mention." Harris Financial performs an internal analysis of its loan
portfolio and assets to classify such loans and assets similar to the manner in
which such loans and assets are classified by the federal banking regulators. In
addition, Harris Financial regularly analyzes the losses inherent in its loan
portfolio and its nonperforming loans in determining the appropriate level of
the allowance for loan losses.
Allowance for Loan Losses. In originating loans, Harris Financial
recognizes that losses will be experienced on loans and that the risk of loss
will vary with, among other things, the type of loan being made, the
creditworthiness of the borrower over the term of the loan, general economic
conditions and, in the case of a secured loan, the quality of the security for
the loan. Harris Financial maintains an allowance for loan losses to absorb
losses inherent in the loan portfolio. The allowance for loan losses represents
management's estimate of probable losses based on information available as of
the date of the financial statements. The allowance for loan losses is based on
management's evaluation of the collectibility of the loan portfolio, including
past loan loss experience, known and inherent risks in the nature and volume of
the portfolio, information about specific borrower situations and estimated
collateral values, and economic conditions.
The loan portfolio and other credit exposures are regularly reviewed by
management to evaluate the adequacy of the allowance for loan losses. The
methodology for assessing the appropriateness of the allowance includes
comparison to actual losses, peer group comparisons, industry data and economic
conditions. In addition, the regulatory agencies, as an integral part of their
examination process, periodically review Harris Financial's allowance for loan
losses and may require Harris Financial to make additional provisions for
estimated losses based upon judgments different from those of management.
In assessing the allowance for loan losses, loss factors are applied to
various pools of outstanding loans. Harris Financial segregates the loan
portfolio according to risk characteristics (i.e., mortgage loans, home equity,
commercial and consumer). Loss factors are derived using Harris Financial's
historical loss experience and may be adjusted for significant factors that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date.
In addition, management assesses the allowance using factors that cannot be
associated with specific credit or loan categories. These factors include
management's subjective evaluation of local and national economic and
72
<PAGE>
business conditions, portfolio concentration and changes in the character and
size of the loan portfolio. The allowance methodology reflects management's
objective that the overall allowance appropriately reflects a margin for the
imprecision necessarily inherent in estimates of expected credit losses.
At March 31, 2000, Harris Financial had an allowance for loan losses of
$12.0 million which represented 0.91% of total loans receivable and 75.68% of
nonperforming loans at that date. Although management believes that it uses the
best information available to establish the allowance for loan losses, future
adjustments to the allowance for loan losses may be necessary and results of
operations could be adversely affected if circumstances differ substantially
from the assumptions used in making the determinations. Furthermore, while
Harris Financial believes it has established its existing allowance for loan
losses in conformity with generally accepted accounting principles, there can be
no assurance that regulators, in reviewing Harris Financial's loan portfolio,
will not request Harris Financial to increase its allowance for loan losses. In
addition, because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that the existing allowance
for loan losses is adequate or that increases will not be necessary should the
quality of any loans deteriorate as a result of the factors discussed above. Any
material increase in the allowance for loan losses may adversely affect Harris
Financial's financial condition and results of operations.
Analysis of the Allowance for Loan Losses. The following table sets forth
information regarding Harris Financial's allowance for loan losses and net
charge-offs to average loans outstanding at the dates indicated.
<TABLE>
<CAPTION>
At
March 31, At December 31,(1)
------------------------------------------
2000(1) 1999 1998 1997 1996 1995
------ ---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period................ $11,873 $ 9,088 $ 8,192 $8,322 $6,114 $6,269
Addition due to acquisition................... -- -- -- -- 1,074 --
Provision for loan losses..................... 835 3,180 2,540 610 1,957 --
Provision component related to unfunded
commitments................................. -- 617 (503) (422) -- --
Charge-offs:
Commercial................................... -- (50) (591) -- -- --
One- to four-family mortgage loans........... (48) (253) (173) (341) (649) (5)
Other mortgage loans......................... -- -- (83) (19) (35) (71)
Consumer and other loans..................... (709) (970) (344) (8) (176) (99)
------- ------- ------- ------ ------ ------
Total charge-offs............................ (757) (1,273) (1,191) (368) (860) (175)
------- ------- ------- ------ ------ ------
Recoveries:
Commercial................................... 2 61 -- -- -- --
One- to four-family mortgage loans........... -- 73 -- 10 19 --
Other mortgage loans......................... -- -- 2 14 -- --
Consumer and other loans..................... 79 127 48 26 18 20
------- ------- ------- ------ ------ ------
Total recoveries............................. 81 261 50 50 37 20
------- ------- ------- ------ ------ ------
Balance at the end of the period............. $12,032 $11,873 $ 9,088 $8,192 $8,322 $6,114
======= ======= ======= ====== ====== ======
Net charge-offs to average loans outstanding.. 0.21% 0.08% 0.12% 0.04% 0.10% 0.03%
======= ======= ======= ====== ====== ======
</TABLE>
_____________________
/(1)/ No foreign loans were held during the periods noted.
73
<PAGE>
Allocation of Allowance for Loan Losses. The following table sets forth the
allocation for loan losses by loan category at the dates indicated.
<TABLE>
<CAPTION>
At March 31, At December 31,
--------------------------------------------------------------------------
2000 1999 1998 1997
----------------------- ----------------------- ----------------------- ----------------------
% of Loans in % of Loans in % of Loans in % of Loans in
Each Category Each Category Each Category Each Category
Amount to Total Loans Amount to Total Loans Amount to Total Loans Amount to Total Loans
------ -------------- ------ -------------- ------ -------------- ------ --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family loans.. $ 838 42.36% $ 838 42.06% $ 969 53.65% $1,352 60.34%
Commercial loans........... 7,218 28.74 7,154 27.38 4,909 19.28 2,160 9.09
Consumer and other loans... 3,250 28.90 3,073 30.56 2,358 27.07 3,041 30.57
Unallocated............... 726 N/A 808 N/A 852 N/A 1,639 N/A
------- ------ ------- ------ ------ ------ ------ ------
Total..................... $12,032 100.00% $11,873 100.00% $9,088 100.00% $8,192 100.00%
======= ====== ======= ====== ====== ====== ====== ======
Reserve for unfunded
commitments.............. $ 308 $ 308 $ 925 $ 422
------- ------- ------ ------
<CAPTION>
----------------------------------------------------------
1996 1995
--------------------------- --------------------------
% of Loans in % of Loans in
Each Category Each Category
Amount to Total Loans Amount to Total Loans
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
One- to four-family loans.. $2,777 62.31% $1,627 71.54%
Commercial loans........... 2,720 4.71 1,851 4.45
Consumer and other loans... 1,780 32.98 716 24.01
Unallocated............... 1,045 N/A 1,920 N/A
------ ------ ------ ------
Total..................... $8,322 100.00% $6,114 100.00%
====== ====== ====== ======
Reserve for unfunded
commitments..............
</TABLE>
74
<PAGE>
Investment Activities
The board of directors reviews and approves Harris Financial's investment
policy on an annual basis. The President, Chief Financial Officer and Chief
Investment Officer, as authorized by the Board, implement this policy based on
the established guidelines within the written policy, and other established
guidelines, including those set periodically by the Asset/Liability Management
Committee. Investment decisions are based upon the quality of a particular
investment, its inherent risks, the composition of the balance sheet, Harris
Financial's maturity and amortization schedules, market expectations, liquidity,
income and collateral needs, and how the investment fits within Harris
Financial's interest rate risk strategy given its interest rate sensitivity.
Harris Financial's investment policy is designed primarily to manage the
interest rate sensitivity of its assets and liabilities, to generate a favorable
return without incurring undue interest rate and credit risk, to complement its
lending activities and to provide and maintain liquidity while minimizing Harris
Financial's tax liability. Harris Financial also uses a leveraged investment
strategy for the purpose of enhancing returns to stockholders. Pursuant to this
strategy, during periods of relatively weak loan demand in its market area,
Harris Financial has increased the size of its investment portfolio and has
relied heavily on wholesale borrowing to support such investments.
Investment Portfolio
Securities can be classified as trading, held to maturity, or available for
sale at the date of purchase. Harris Financial does not currently engage in
trading investment securities and does not anticipate doing so in the future.
During 1998, Harris Financial discontinued the use of its held-to-maturity
portfolio by selling certain assets from the held-to-maturity portfolio while
transferring the remainder to the available-for-sale portfolio. The net
unrealized after tax loss related to the available-for-sale securities was $29.3
million at December 31, 1999, compared to a net unrealized after tax gain of
$8.1 million at December 31, 1998. At March 31, 2000, all of Harris Financial's
securities were classified as "available-for-sale." Management emphasizes
flexibility and liquidity in its investment portfolio, as evidenced by the
discontinuance of the held-to-maturity portfolio. The weighted average yield of
Harris Financial's investment portfolio was 6.72% at March 31, 2000.
In an effort to maintain the credit quality of the investment portfolio,
Harris Financial maintains a significant portion of the investment portfolio in
U.S. Government and agency obligations, which amounted to $324.5 million, or
24.4% of the total investment portfolio at March 31, 2000. At March 31, 2000,
over 89.0% of the securities in Harris Financial's investment portfolio were
rated "AAA," with the remainder rated "AA" or "A."
Harris Financial also invests significantly in mortgage-backed securities,
including primarily floating-rate and fixed-rate collateralized mortgage
obligations. The market value of this portfolio totaled $737.2 million at March
31, 2000. A portion of these mortgage-backed securities is directly insured or
guaranteed by the Federal Home Loan Mortgage Corporation and the Federal
National Mortgage Association. Harris Financial also maintains a substantial
investment in "private label" collateralized mortgage obligations (i.e., non-
agency collateralized mortgage obligations), the market value of which totaled
$500.5 million (or 67.9% of the total mortgage-backed securities portfolio) at
March 31, 2000. Private-issue collateralized mortgage obligations carry higher
credit risks than collateralized mortgage obligations insured or guaranteed by
agencies of the U.S. Government. At March 31, 2000, Harris Financial did not own
any investment or mortgage-backed securities of a single issuer, other than U.S.
Government and agency securities, which had an aggregate book value in excess of
10% of its capital at that date.
Harris Financial invests in a large variety of mortgage-backed securities,
including balloon and fixed-rate certificates. Harris Financial generally
purchases short-term or planned amortization class collateralized mortgage
obligations. At March 31, 2000, all of Harris Financial's mortgage-backed
securities had contractual maturities greater than ten years. The weighted
average yield of the mortgage-backed securities portfolio at March 31, 2000 was
6.88%. Based on current prepayment trends, management anticipates $564.7
million of its mortgage-backed securities will prepay or reprice within three
years.
In addition to the foregoing investment securities, Harris Financial
maintains a significant portfolio of tax-advantaged instruments for the purpose
of enhancing earnings. The market value of such investments was $181.7 million
at March 31, 2000, consisting of $62.3 million of municipal bonds and $119.4
million of preferred equity investments. The weighted average yield on Harris
Financial's municipal bond portfolio was 5.73% at March 31, 2000 and the
weighted average yield on its preferred equity investments was 6.07%.
Harris Financial's portfolio of equity securities totaled $119.4 million at
March 31, 2000. Substantially all of Harris Financial's equity securities
investments are held by Harris Savings Bank. Harris Savings Bank is prohibited
from investing in equity securities other than those issued by certain
government-sponsored agencies. For all periods
75
<PAGE>
presented, Harris Savings Bank's equity securities portfolio included only
equity securities of government-sponsored entities.
The remainder of the investment portfolio is invested in corporate bonds,
primarily investment grade issues rated by Standard & Poors or Moody's. These
bonds represent trust-preferred issues of major financial institutions. At March
31, 2000, Harris Financial had a corporate bond portfolio of $60.4 million,
representing 4.5% of the total investment portfolio. The weighted average yield
on this portfolio at March 31, 2000 was 7.01%. All of the securities in this
portfolio had a scheduled maturity in excess of ten years.
Harris Financial's investment policy permits it to be a party to financial
instruments with off-balance sheet risk in the normal course of business in
order to manage interest rate risk. The investment policy authorizes Harris
Financial to be involved in and purchase various types of derivative
transactions and products, including interest rate swap, cap and floor
agreements. Currently, Harris Financial is using total return swap agreements
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. In addition, Harris Financial is using
callable interest rate swaps matched against callable certificates of deposit.
All of Harris Financial's securities and mortgage-backed securities carry
market risk insofar as increases in market rates of interest may cause a
decrease in their market values. They also carry pre-payment risk, insofar as
they may be called or repaid before maturity in times of low market interest
rates, so that Harris Financial may have to invest the funds at a lower interest
rate. The marketable equities securities portfolio also carries equity-price
risk in that, if equity prices decline due to unfavorable market conditions or
other factors, Harris Financial's capital would decrease.
Investment Portfolio. The following table sets forth the carrying value of
Harris Financial's investment securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At
March 31, At December 31,
---------------------- ---------------------------------------------------------------------------
2000 1999 1998 1997
---------------------- --------------------- -------------------------- ----------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value
---------- ---------- ---------- -------- --------- ------- ---------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
U.S. Government and
agencies.................. $ -- $ -- $ -- $ -- $ -- $ -- $ 67,933 $ 68,651
Mortgage-backed securities:
FNMA PCs...................... -- -- -- -- -- -- 4,050 4,150
Private Issue CMOs............ -- -- -- -- -- -- 24,429 24,744
Total securities
held-to-maturity........... $ -- $ -- $ -- $ -- $ -- $ -- $ 96,412 $ 97,545
Available for sale:
U.S. government
and agencies............... $ 348,108 $ 324.545 $ 348,705 $ 324,619 $ 298,247 $ 299,196 $ 184,033 $ 184,503
Corporate bonds............... 63,429 60,433 63,352 59,826 148,731 142,240 20,117 20,115
Municipal securities.......... 62,664 62,301 63,980 63,492 113,557 119,223 109,351 114,023
Equity........................ 116,232 119,382 118,434 122,111 149,982 161,344 146,829 154,817
Asset-backed securities....... -- -- -- -- 15,146 15,661 24,551 24,837
Mortgage-backed securities:
FHLMC PC's.................. -- -- -- -- 1,421 1,494 2,920 3,066
GNMA CMO's.................. 25,000 25,031 -- -- -- -- -- --
FNMA CMO's.................. 98,988 95,026 99,032 98,267 104,276 105,864 151,067 152,433
FHLMC CMO's................. 123,413 116,650 139,328 136,584 75,137 75,157 272,927 274,281
Private issue CMO's......... 523,878 500,457 473,170 452,704 355,199 354,648 173,419 174,707
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total mortgage-backed
securities.................. 771,279 737,164 711,530 687,555 536,033 537,163 600,333 604,487
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total securities available
for sale.................... 1,361,712 1,303,825 1,306,001 1,257,603 1,261,696 1,274,837 1,085,214 1,102,782
Other interest-earning
securities:
FHLB daily investment......... 26,737 26,737 36,860 36,860 22,423 22,423 11,840 11,840
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total marketable securities
and interest earning
investments................. $1,388,449 $1,330,562 $1,342,861 $1,294,463 $1,284,119 $1,297,260 $1,193,466 $1,212,167
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
76
<PAGE>
Investment Portfolio Maturities
The table below sets forth the scheduled maturities, carrying values, and
average yields for Harris Financial's investment securities at March 31, 2000.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
One Year After One Through After Five Through
or Less Five Years Ten Years Over 10 years
------------------------ ---------------------- --------------------- -------------------
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- -------- --------- --------- ---------- --------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. government and
agency obligations.............. $ -- 0.00% $ 6,626 6.61% $252,198 6.49% $ 89,284 7.28%
Corporate bonds................... -- 0.00 -- 0.00 -- 0.00 63,429 7.01
Municipal securities(2)........... -- 0.00 -- 0.00 482 5.74 62,182 5.73
Equity(1)(2)...................... -- 0.00 -- 0.00 -- 0.00 116,232 6.07
Mortgage-backed securities(3)(4)
FNMA CMO's....................... 5,371 6.93% 26,910 6.85% 28,572 6.88% 38,136 6.91%
FHLMC CMO's...................... 8,072 6.81 39,199 6.87 33,789 6.88 42,354 6.88
GNMA CMO's....................... 326 7.42 4,886 7.42 5,265 7.42 14,521 7.42
Private issue CMO's.............. 27,566 6.86 141,210 6.86 135,306 6.87 219,796 6.86
------- ---- -------- ---- -------- ---- -------- ----
Total mortgage-backed
securities....................... 41,335 6.86 212,205 6.87 202,932 6.89 314,807 6.89
------- ---- -------- ---- -------- ---- -------- ----
Total securities available
for sale......................... $41,335 6.86% $218,831 6.87% $455,612 6.67% $645,934 6.70%
======= ==== ======== ==== ======== ==== ======== ====
<CAPTION>
---------------------------------------------
Total
---------------------------------------------
Weighted
Amortized Market Average
Cost Value Yield
------------- ----------- --------------
<S> <C> <C> <C>
Available for sale:
U.S. government and
agency obligations.............. $ 348,108 $ 324,545 6.69%
Corporate bonds................... 63,429 60,433 7.01
Municipal securities(2)........... 62,644 62,301 5.73
Equity(1)(2)...................... 116,232 119,382 6.07
Mortgage-backed securities(3)(4)
FNMA CMO's....................... 98,989 95,026 6.89%
FHLMC CMO's...................... 123,414 116,651 6.87
GNMA CMO's....................... 24,998 25,031 7.42
Private issue CMO's.............. 523,878 500,456 6.86
---------- ---------- ----
Total mortgage-backed
securities....................... 771,279 737,164 6.88
---------- ---------- ----
Total securities available
for sale......................... $1,361,712 $1,303,825 6.72%
========== ========== ====
</TABLE>
_____________________
(1) Includes FHLMC, FNMA and FHLB stocks.
(2) The yield on municipal obligations and certain equity issues have not been
computed on a tax equivalent basis.
(3) Based on current prepayment trends, $564.7 million of mortgage-backed
securities are anticipated to prepay or reprice within three years.
(4) Amortized cost on mortgage-backed securities include schedules principal
repayments in each period.
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<PAGE>
Subsidiary Activities
Harris Financial conducts its business activities through its wholly-owned
subsidiary, Harris Savings Bank. Harris Financial has no other direct
subsidiaries. The following are subsidiaries of Harris Savings Bank:
Harris Delaware Corporation. Harris Delaware Corporation was incorporated
in 1995 and manages certain investments in marketable securities on behalf of
Harris Savings Bank.
H.S. Service Corporation. H.S. Service Corporation was incorporated in
1974 and primarily invests in joint ventures engaged in residential and real
estate development.
First Harrisburg Service Corporation. First Harrisburg Service Corporation
was incorporated in 1972 and is mainly involved with title, life, annuity and
other insurance activities. It also serves as the holding company for Second
Harrisburg Service Corporation, an inactive real estate development company.
The remaining two subsidiaries, C.B.L. Service Corporation and AVSTAR
Mortgage Corporation currently are inactive and have negligible assets and
liabilities. Harris Savings Bank had originated VA/FHA and sub-prime loans
through AVSTAR Mortgage Corporation, its mortgage subsidiary, until 1999 when
these operations were discontinued.
Sources of Funds
General. Deposits are the primary source of Harris Financial's funds for
lending and other investment purposes. In addition to deposits, Harris Financial
obtains funds from the amortization and prepayment of loans and mortgage-backed
securities, the sale or maturity of investment securities, operations and
advances from the Federal Home Loan Bank of Pittsburgh. Scheduled loan principal
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by market interest
rates. Borrowings may be used on a short-term basis to compensate for reductions
in the availability of funds from other sources or on a longer term basis for
general business purposes. Harris Financial has used wholesale funding sources
such as Federal Home Loan Bank advances to support an investment leveraging
strategy for the purpose of increasing interest income and increasing return on
equity.
Deposits. Consumer and commercial deposits are obtained primarily from
Harris Financial's primary market area through the offering of a broad selection
of deposit instruments including checking, regular savings, money market
deposits and time deposits, including certificate of deposit accounts and
individual retirement accounts. The maturities of Harris Financial's certificate
of deposit accounts ranges from 30 days to 10 years. In addition, Harris
Financial offers a variety of commercial business products to small businesses
operating within its primary market area. Currently Harris Financial does not
generally negotiate interest rates to attract jumbo certificates, but accepts
deposits of $100,000 or more based on posted rates. Deposit account terms vary
according to the minimum balance required, the time periods the funds must
remain on deposit, limits on the number of transactions, and the interest rate,
among other factors. Harris Financial regularly evaluates the internal cost of
funds, surveys rates offered by competing institutions, reviews Harris
Financial's cash flow requirements for lending, monitors deposit withdrawal
trends and liquidity and changes the rate as appropriate.
While Harris Financial does not generally solicit funds outside its primary
market area, it does accept brokered deposits as liquidity demands require.
Included in Harris Financial's time deposits at March 31, 2000, December 31,
1999 and December 31, 1998 were $86.7 million, $77.1 million and $50.0 million,
respectively, of brokered deposits. Historically, Harris Financial has rarely
used premiums to attract deposits.
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<PAGE>
Average Balance and Costs of Deposits. The following table sets forth the
average balance, interest expense, and average cost of Harris Financial's
deposits.
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
----------------------------------------------------------- ----------------------------
2000 1999 1999
---------------------------- ---------------------------- ----------------------------
Average Average Average Average Average Average
Balance Interest Cost Balance Interest Cost Balance Interest Cost
---------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Savings deposits........... $ 124,200 $ 676 2.18% $ 143,872 686 1.91% $ 139,098 $ 2,931 2.11%
Time deposits.............. 940,971 12,689 5.39 768,883 10,094 5.25 810,444 42,648 5.26
NOW and money
market accounts........... 334,029 2,217 2.65 292,092 1,690 2.31 315,812 7,228 2.29
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total...................... $1,399,200 $15,582 4.45% $1,189,694 $12,470 4.14% $1,265,354 $52,807 4.17%
========== ======= ==== ========== ======= ==== ========== ======= ====
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------------
1998 1997
---------------------------- ----------------------------
Average Average Average Average
Balance Interest Cost Balance Interest Cost
-------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Savings deposits........... $ 147,954 $ 3,285 2.22% $ 147,738 $ 4,072 2.76%
Time deposits.............. 726,316 40,153 5.53 782,578 43,760 5.59
NOW and money
market accounts........... 258,504 7,094 2.74 220,557 6,551 2.97
---------- ------- ---- ---------- ------- ----
Total...................... $1,132,774 $50,532 4.46% $1,150,873 $54,383 4.73%
========== ======= ==== ========== ======= ====
</TABLE>
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<PAGE>
Time Deposits by Rates. The following table sets forth the time deposits in
Harris Financial classified by rates as of the dates indicated.
<TABLE>
<CAPTION>
At
March 31, At December 31,
----------------------------
2000 1999 1998 1997
-------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
4% or less......................... $ 4,545 $ 5,230 $ 6,042 $ 8,321
4.01-6.00%......................... 642,799 714,568 653,261 580,914
6.01-8.00%......................... 316,373 189,092 102,588 173,243
8.01-9.00%......................... 366 499 3,280 6,260
-------- -------- -------- --------
Total.............................. $964,083 $909,389 $765,171 $768,738
======== ======== ======== ========
</TABLE>
Time Deposit Maturity Schedule. The following table sets forth the amount
and maturities of certificates of deposit at March 31, 2000.
<TABLE>
<CAPTION>
Amount Due
-----------------------------------------------
Weighted Average Less Than 1-2 2-3 After
Rate One Year Years Years 3 Years Total
---- -------- -------- ------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
4% or less.................... $ 4,545 $ -- $ -- $ -- $ 4,545
4.01-6.00%.................... 448,965 133,353 23,485 36,996 642,799
6.01-8.00%.................... 64,409 138,627 17,537 95,800 316,373
8.01-9.00%.................... 361 5 -- -- 366
-------- -------- ------- -------- --------
Total....................... $518,280 $271,985 $41,022 $132,796 $964,083
======== ======== ======= ======== ========
</TABLE>
Certificates of Deposit $100,000 and More. The following table indicates
the amount of Harris Financial's certificates of deposit and other time deposits
of $100,000 or more by time remaining until maturity.
<TABLE>
<CAPTION>
At March 31, At December 31,
-------------------------------
2000 1999 1998 1997
------------ -------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Three months or less................... $ 14,056 $ 12,318 $11,237 $12,452
Over three months through six months... 12,456 17,455 8,959 7,149
Over six months through twelve months.. 30,839 28,937 18,515 11,131
Over twelve months..................... 61,409 44,774 23,838 23,532
-------- -------- ------- -------
Total................................. $118,760 $103,484 $62,549 $54,264
======== ======== ======= =======
</TABLE>
Borrowings. In recent years, Harris Financial has also borrowed from
wholesale sources and the Federal Home Loan Bank system to support an investment
leveraging strategy and to supplement funding provided by customer deposits.
The objective of the investment leveraging strategy is to increase interest
income and return on equity by deploying excess capital into interest-earning
investments. However, this strategy reduces net interest margins due to the
higher cost of non-deposit funds as compared to core deposits. A significant
portion of Harris Financial's wholesale borrowings are placed with the Federal
Home Loan Bank of Pittsburgh. At March 31, 2000, Harris Financial had $1.123
billion of borrowings, including $915.0 million of Federal Home Loan Bank
borrowings and $208.4 million of repurchase agreements.
The Federal Home Loan Bank functions as a central reserve bank providing
credit for Harris Financial and other member financial institutions. As a
member, Harris Financial is required to own capital stock in the Federal Home
Loan Bank and is authorized to apply for advances on the security of such stock
and certain of its home mortgages and other assets provided certain standards
related to creditworthiness have been met. Advances are made pursuant to
several different programs. Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based either on a fixed percentage of a member institution's net
worth or on the Federal Home Loan Bank's assessment of the institution's
creditworthiness. Harris Financial's maximum borrowing capacity with the
Federal Home Loan Bank totaled $1.009 billion at March 31, 2000.
Harris Financial has entered into sales of securities under agreements to
repurchase with nationally-recognized securities dealers. Reverse repurchase
agreements are accounted for as borrowings by Harris Financial and are secured
by designated investment securities. The proceeds of these transactions are
used to purchase
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<PAGE>
investments yielding a higher rate than the borrowed funds and to meet cash flow
needs of Harris Financial. Harris Financial intends to use these agreements in
the future when management believes it is prudent to do so.
The following table sets forth information regarding borrowings by Harris
Financial at or for the dates indicated.
<TABLE>
<CAPTION>
At or for
Three Months
Ended
March 31, At or for Years Ended December 31,
----------------------- ------------------------------------
2000 1999 1999 1998 1997
---------- --------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Outstanding at end of period:
FHLB................................... $ 915,000 $ 751,520 $ 805,000 $ 746,581 $575,440
Repurchase agreements.................. 208,375 313,000 313,000 322,673 277,548
ESOP................................... -- -- -- -- 990
---------- ---------- ---------- ---------- --------
Total................................ $1,123,375 $1,064,520 $1,118,000 $1,069,254 $853,978
========== ========== ========== ========== ========
Weighted average rate at end of period:
FHLB................................... 6.03% 5.31% 5.59% 5.32% 5.85%
Repurchase agreements.................. 5.60 5.36 5.63 5.41 5.87
ESOP................................... 0.00 0.00 0.00 0.00 5.75
---------- ---------- ---------- ---------- --------
Total................................ 5.95% 5.32% 5.60% 5.35% 5.85%
========== ========== ========== ========== ========
Maximum amount outstanding at any month
during the period:
FHLB................................... $ 915,000 $ 756,540 $ 870,000 $ 720,639 $600,702
Repurchase agreements.................. 208,375 313,000 313,000 358,157 279,366
ESOP................................... -- -- -- -- 990
---------- ---------- ---------- ---------- --------
Total................................ $1,123,375 $1,069,540 $1,183,000 $1,078,796 $881,058
========== ========== ========== ========== ========
Average amount outstanding during the
period:
FHLB................................... $ 790,569 $ 744,301 $ 800,105 $ 644,727 $496,627
Repurchase agreements.................. 306,387 316,009 313,743 352,117 156,830
ESOP................................... -- -- -- 416 990
---------- ---------- ---------- ---------- --------
Total................................ $1,096,956 $1,060,310 $1,113,848 $ 997,260 $654,447
========== ========== ========== ========== ========
Weighted average rate during the period:
FHLB................................... 5.95% 5.28% 5.40% 5.67% 5.83%
Repurchase agreements.................. 5.70 5.40 5.50 5.67 5.79
ESOP................................... -- -- -- 5.75 5.75
---------- ---------- ---------- ---------- --------
Total................................. 5.88% 5.32% 5.43% 5.67% 5.82%
========== ========== ========== ========== ========
</TABLE>
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<PAGE>
Properties
Harris Financial currently conducts its business through its main office
located in Harrisburg, Pennsylvania and 37 full-service offices. The aggregate
net book value of Harris Financial's premises and equipment was $27.6 million at
March 31, 2000.
Harris Financial's accounting and record keeping activities are maintained
on an in-house data processing system. Harris Financial owns data processing
equipment it uses for its internal processing needs. The net book value of such
data processing equipment and related software at March 31, 2000 was $4.6
million.
Legal Proceedings
In March 1998 Plaintiffs Mr. and Mrs. Laureano brought a legal action in
the Court of Common Pleas of Berks County, Pennsylvania against Avstar Mortgage
Corporation, a presently inactive subsidiary of Harris Savings Bank, several of
its former officers and employees and other individuals and corporations. Mr.
and Mrs. Laureano in October of 1999 brought another action in Berks County
Court against various additional defendants including Harris Savings Bank,
Harris Financial and three other ex officers and employees of Avstar. Both cases
arise out of the Laureanos' claims that they were sold a house and given a
mortgage by Avstar for more than the house was worth. The Laureanos have
characterized their complaints as class actions. Harris Financial, Harris
Savings Bank, Avstar and its former employees are actively contesting both the
legal and factual basis of the Laureanos' claims as well as their suitability
for class action status. As of June 5, 2000 preliminary objections of all
defendants to the Laureanos' third amended complaint are pending before the
court. Because of the preliminary status of the proceedings, the extent of the
potential damages, losses or costs, if any, of Harris Financial or its
subsidiary is not ascertainable at this time and will not likely be determinable
in the immediate future.
Harris Financial is aware that as the result of the Laureano suit, the
Department of Housing and Urban Development is engaged in an on-going
investigation of the Federal Housing Administration insured lending activities
of Avstar Mortgage Corporation. The Department of Housing and Urban Development
has indicated the likelihood that it will initiate administrative and
potentially civil proceedings for sanctions against Avstar and Harris Savings
Bank as its parent. Because Harris Financial and Harris Savings Bank are not
aware of the commencement of any legal action, and believe that there are
currently no claims pending, the extent of the potential damages, losses or
costs, if any, of Harris Financial or its subsidiary is not ascertainable at
this time and will not likely be determinable in the immediate future.
In addition, to the matter discussed above, there are various claims and
lawsuits in which Harris Financial is periodically involved incident to Harris
Financial's business. In the opinion of management, no material loss is expected
from any of such pending claims or lawsuits.
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<PAGE>
REGULATION
Prior to the completion of the mutual-to-stock conversion, Harris Savings
Bank will convert its charter to that of a federal stock savings bank, and will
be subject to the regulation and supervision of the Office of Thrift Supervision
("OTS"). As a result of the Harris Savings Bank charter conversion, Harris
Financial will become a unitary savings and loan holding company and will also
be subject to the regulation and supervision of the OTS. After the charter
conversion, the Pennsylvania Department of Banking will no longer regulate or
supervise Harris Financial or Harris Savings Bank, and the Board of Governors of
the Federal Reserve system will no longer regulate or supervise Harris
Financial. Set forth below is a brief description of certain laws and
regulations that relate to the regulation of New Harris Financial and Harris
Savings Bank after the conversion, including a comparison of the principal
differences between the regulation of Harris Savings Bank and Harris Financial
before and after the conversion. This description does not purport to be
complete and is qualified in its entirety by reference to the applicable laws
and regulations.
General
Harris Savings Bank currently is a Pennsylvania-chartered savings bank, and
its deposit accounts are insured up to applicable legal limits by the Federal
Deposit Insurance Corporation (the "FDIC") under the Savings Association
Insurance Fund (the "SAIF"). Harris Savings Bank currently is subject to
extensive regulation, examination and supervision by the Pennsylvania Department
of Banking as its chartering agency, and by the FDIC as the insurer of its
deposit accounts. Harris Savings Bank files reports with the Department and the
FDIC concerning its activities and financial condition, and it must obtain
regulatory approval prior to entering into certain transactions, such as mergers
with, or acquisitions of, other depository institutions.
Harris Financial, as the sole shareholder of Harris Savings Bank, currently
is a bank holding company subject to comprehensive regulation, examination and
supervision by the Federal Reserve Board under the Bank Holding Company Act of
1956, as amended, and the regulations of the Federal Reserve Board. The Federal
Reserve Board also has extensive enforcement authority over bank holding
companies, including the ability to assess civil money penalties, to issue cease
and desist or removal orders and to require that a holding company divest
subsidiaries (including its bank subsidiaries). In general, enforcement actions
may be initiated for violations of law and regulations and for unsafe or unsound
practices.
Prior to the completion of the conversion, Harris Savings Bank will convert
its charter to that of a federal stock savings bank, and the OTS will become
Harris Savings Bank's chartering authority and primary regulator. The FDIC will
continue to insure the deposits of Harris Savings Bank and will continue to have
supervisory and enforcement authority over the savings bank. The Pennsylvania
Department of Banking will no longer have authority to regulate or supervise
Harris Savings Bank. As a result of the charter conversion, Harris Financial
also will become subject to regulation and supervision by the OTS as a savings
and loan holding company, and neither the Pennsylvania Department of Banking nor
the Federal Reserve Board will continue to regulate and supervise Harris
Financial. Both before and after completion of the conversion, Harris Financial
will be required to file certain reports with, and otherwise comply with, the
rules and regulations of the Securities and Exchange Commission under the
Federal securities laws.
Any change in the laws and regulations affecting New Harris Financial or
Harris Savings Bank could have a material adverse impact on operations and
stockholders.
Harris Savings Bank
General. As a federally chartered, SAIF-insured savings bank, Harris
Savings Bank will be subject to extensive supervision, examination and
regulation by the OTS and the FDIC. Lending activities and other investments
must comply with federal statutory and regulatory requirements. This
comprehensive federal regulation and supervision is intended primarily for the
protection of the capital of a savings bank, the SAIF and a savings bank's
depositors. This regulatory structure gives the regulatory authorities extensive
discretion in connection with
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<PAGE>
their supervisory and enforcement activities and examination policies, including
policies regarding the classification of assets and the establishment of
adequate loan loss reserves.
The OTS will examine Harris Savings Bank not less frequently than once
every two years and will prepare a report of its examination findings for the
Harris Savings Bank board of directors. Harris Savings Bank's relationship with
its depositors and borrowers also will be regulated by federal law, especially
in such matters as the ownership of savings accounts and the form and content of
its mortgage documents. Harris Savings Bank also must file periodic reports with
the OTS and the FDIC concerning its activities and financial condition, and must
obtain regulatory approvals prior to entering into certain transactions such as
mergers with or acquisitions of other financial institutions.
Regulation of Harris Savings Bank as a federal savings bank following the
conversion will be comparable in many respects to the regulation of Harris
Savings Bank as a Pennsylvania savings bank prior to the conversion, but with
several key differences. Set forth below is a summary description of certain
laws and regulations that apply to Harris Savings Bank as a federal savings
bank, as well as a summary of the material differences between such federal
regulation and supervision and its regulation and supervision as a Pennsylvania
savings bank prior to the charter conversion.
Lending and Investment Powers and Limitations. As a federal savings bank,
Harris Savings Bank will subject to the lending and investment powers and
limitations set forth in the Home Owners' Loan Act. Under the Home Owners' Loan
Act, a federal savings bank may originate or invest in loans secured by
residential real estate without limitation as a percentage of the savings bank's
total assets. Loans secured by nonresidential real estate may not in the
aggregate exceed 400% of the savings bank's capital. Secured and unsecured
commercial business loans may not exceed 20% of the total assets of a federal
savings bank, and such loans in excess of 10% of assets must be for small
business loans. A federal savings bank may invest up to 35% of its assets in
consumer loans, and there are no limits on credit card loans and student loans.
A federal savings bank may invest up to 3% of its assets in one or more service
corporation subsidiaries, provided that at least 50% of any investment that
exceeds 1% of assets is for community development purposes. Service corporations
may engage in a broader range of activities than a federal savings bank may
engage directly, including securities and insurance agency and real estate
development. A Pennsylvania-chartered savings bank has no limitations as a
percentage of assets on originations or investment in loans secured by
residential or commercial real estate. There are no limitations as a percentage
of assets on commercial business loans, provided that commercial business loans
with terms of less than10 years may not exceed 20% of a Pennsylvania savings
bank's assets. Consumer loans may not exceed 30% of assets. A Pennsylvania
saving bank also may invest in a service corporation with the prior approval of
the Pennsylvania Department of Banking, and a service corporation may engage in
bank support activities and real estate development, director or through joint
ventures.
Qualified Thrift Lender Test. Federal savings banks must meet a qualified
thrift lender test or they become subject to certain operating restrictions. The
qualified thrift lender test requires that a federal savings bank maintain at
least 65% of its assets in mortgages, mortgage-based securities, certain other
securities issued by, or backed by the full faith and credit of, the United
States, education loans, consumer loans and small business loans. This means
that a significant portion of Harris Savings Bank's assets must be invested in
mortgages or mortgage-related securities. A Pennsylvania savings bank is not
subject to the qualified thrift lender test, although there are certain
limitations on permissible investments by a Pennsylvania savings bank. As of
March 31, 2000, Harris Savings Bank maintained 80.1% of its portfolio assets in
qualified thrift investments.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards. The standards are tangible capital
equal to 1.5% of adjusted total assets, core capital equal to at least 3% of
total adjusted assets, and risk-based capital equal to at least 8% of total
risk-weighted assets. Harris Savings Bank's pro forma capital ratios are set
forth under "Regulatory Capital Compliance."
Tangible capital is defined as core capital less all intangible assets and
mortgage servicing rights. Core capital is defined as common stockholders'
equity, noncumulative perpetual preferred stock and minority interests in
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<PAGE>
the equity accounts of consolidated subsidiaries, nonwithdrawable accounts and
pledged deposits of mutual savings associations and qualifying supervisory
goodwill, less nonqualifying intangible assets, and mortgage servicing rights.
Federal savings banks must maintain total risk-based capital equal to at
least 8% of risk-weighted assets. Risk-based capital consists of core and
supplementary capital. Supplementary capital includes, among other items,
cumulative perpetual preferred stock, perpetual subordinated debt, mandatory
convertible subordinated debt, intermediate-term preferred stock, and the
portion of the allowance for loan losses not designated for specific loan
losses. The portion of the allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets.
Overall, supplementary capital is limited to 100% of core capital. A federal
savings bank must calculate its risk-weighted assets by multiplying each asset
and off-balance sheet item by various risk factors as determined by the OTS,
which range from 0% for cash to 100% for delinquent loans, property acquired
through foreclosure, commercial loans, and other assets.
OTS rules require a deduction from capital for institutions which have
unacceptable levels of interest rate risk. The OTS calculates the sensitivity of
an institution's loan portfolio to interest rate risk based on data submitted by
the institution in a schedule to its quarterly Thrift Financial Report and using
the interest rate risk measurement model adopted by the OTS. The amount of the
interest rate risk component, if any, is deducted from an institution's total
capital in order to determine if it meets its risk-based capital requirement.
The Pennsylvania Department of Banking has capital guidelines requiring 6%
leverage capital and 10% risk-based capital. The components of leverage and
risk-based capital are substantially the same as those defined by the FDIC,
which are described below.
Deposit Insurance. The deposit accounts of Harris Savings Bank are insured
by the SAIF, a division of the FDIC, to a maximum of $100,000 as permitted by
law, and such insurance will not be affected by the charter conversion.
Insurance of deposits may be terminated by the FDIC if it finds that a savings
bank has engaged in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law, regulation,
rule, order or condition imposed by the FDIC.
The FDIC sets deposit insurance premiums based upon the risks a particular
bank or savings institution poses to its deposit insurance funds. Under the
risk-based deposit insurance assessment system, the FDIC assigns an institution
to one of three capital categories based on the institution's financial
information, as of the reporting period ending six months before the assessment
period. The three capital categories are (i) well capitalized, (ii) adequately
capitalized and (iii) undercapitalized. The FDIC also assigns an institution to
one of three supervisory subcategories within each capital group. With respect
to the capital ratios, institutions are classified as well capitalized,
adequately capitalized or undercapitalized using ratios that are substantially
similar to the prompt corrective action capital ratios discussed below. The FDIC
also assigns an institution to a supervisory subgroup based on a supervisory
evaluation provided to the FDIC by the institution's primary federal regulator
and information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds (which may
include, if applicable, information provided by the institution's state
supervisor).
An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied. Assessment rates for deposit insurance currently
range from 0 basis points to 27 basis points. The capital and supervisory
subgroup to which an institution is assigned by the FDIC is confidential and may
not be disclosed. A bank's rate of deposit insurance assessments will depend
upon the category and subcategory to which the bank is assigned by the FDIC. Any
increase in insurance assessments could have an adverse effect on the earnings
of insured institutions, including Harris Savings Bank.
The FDIC may terminate the insurance of an institution's deposits upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated
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<PAGE>
any applicable law, regulation, rule, order or condition imposed by the FDIC.
The management of Harris Savings Bank does not know of any practice, condition,
or violation that might lead to termination of its deposit insurance.
Dividend and Other Capital Distribution Limitations. The OTS imposes
various restrictions or requirements on capital distributions by savings banks,
which include (i) any distribution of cash or other property, such as a
dividend, to a savings bank's owners, (ii) any payment to repurchase, redeem,
retire, or otherwise acquire any of shares or stock of the savings bank, (iii)
any payment to repurchase, redeem or otherwise acquire debt instruments included
in capital, (iv) any extension of credit to finance an affiliate's acquisition
of those shares or interests, (v) any direct or indirect payment of cash or
other property to owners or affiliates made in connection with a corporate
reorganization, and (vi) any transaction that the OTS or the FDIC determines, by
order or regulation, to be in substance a distribution of capital. Finally, a
capital distribution under OTS rules is any other distribution charged against a
savings bank's capital accounts if the savings bank would not be well
capitalized following the distribution.
OTS rules require a savings bank to file a notice or an application for
approval before making a capital distribution under the following circumstances.
A savings bank must file an application if: (i) it is not eligible for expedited
treatment under the applications processing rules of the OTS; (ii) the total
amount of all capital distributions, including the proposed capital
distribution, for the applicable calendar year would exceed an amount equal to
the savings bank's net income for that year to date plus the savings banks's
retained net income for the preceding two years; (iii) the savings bank is not
adequately capitalized after the capital distribution; or (iv) the distribution
would violate a statute, rule or agreement.
A savings bank that does not have to file an application for approval to
make a capital distribution must nevertheless file a notice with the OTS before
making a capital distribution if: (i) the savings bank would not be adequately
capitalized following the capital distribution; (ii) the capital distribution
would reduce the amount of, or retire any part of the savings bank's common or
preferred stock, or retire any part of debt instruments included in the savings
bank's capital; or (iii) the savings bank is a subsidiary of a savings and loan
holding company.
No application or notice must be made to the OTS if none of the foregoing
conditions or circumstances exists. Harris Savings Bank, as a subsidiary of New
Harris Financial, will be required to file a capital distribution notice with
the OTS before paying any dividend to New Harris Financial. However, capital
distributions by Harris Financial, as a savings and loan holding company, are
not subject to the OTS capital distribution rules.
The OTS may disapprove a notice or deny an application if: (i) the savings
bank would be undercapitalized, following the capital distribution; (ii) the
proposed capital distribution raises safety and soundness concerns; or (iii) the
proposed capital distribution would violate a prohibition contained in any
statute, regulation or agreement.
A Pennsylvania savings bank may pay dividends from accumulated net earnings
provided that its surplus amount is at least equal to its capital.
Loans to One Borrower. With certain limited exceptions, a deral savings
bank may lend to a single or related group of borrowers on an unsecured basis an
amount up to 15% of its unimpaired capital and surplus. An additional amount may
be lent, up to 10% of unimpaired capital and surplus, if such loan is secured by
readily marketable collateral. Readily marketable collateral is defined to
include securities and bullion, but generally does not include real estate. A
Pennsylvania savings bank is subject to substantially the same loans to-one-
borrower restrictions as those applicable to a federal savings bank.
Liquidity Requirements. A federal savings bank is required to maintain an
average daily balance of liquid assets equal to a percentage of the sum of its
average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. Depending on economic conditions and savings flows,
the OTS can vary the liquidity requirements from time to time between 4% and
10%. Monetary penalties may be imposed on institutions for liquidity requirement
violations.
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Transactions With Affiliates. Transactions between a federal savings bank
or its subsidiaries and its affiliates must be on terms as favorable to the
savings bank as comparable transactions with non-affiliates. In addition, some
transactions are restricted to an aggregate percentage of the savings bank's
capital. Collateral in specified amounts must usually be provided by affiliates
in order to receive loans from the savings bank. In addition, a savings bank may
not extend credit to any affiliate engaged in activities not permissible for a
bank holding company or acquire the securities of any affiliate that is not a
subsidiary. The OTS has the discretion to treat subsidiaries of savings bank as
affiliates on a case-by-case basis.
Transactions between a Pennsylvania savings bank and its affiliates are
subject to Sections 23A and 23B of the Federal Reserve Act and regulations of
the FDIC. Such restrictions are substantially similar to the restrictions
applicable to transactions between a federal savings bank and its affiliates.
Currently, a subsidiary of a bank that is not also a depository institution is
not treated as an affiliate of the bank for the purposes of Sections 23A and
23B. However, the Federal Reserve Board has proposed treating any subsidiary of
a bank that is engaged in activities not permissible for bank holding companies
under the Bank Holding Company Act, as an affiliate for purposes of Section 23A
and 23B. Sections 23A and 23B limit the extent to which the bank or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such bank's capital stock and surplus, and limit all such
transactions with all affiliates to an amount equal to 20% of such capital stock
and surplus. The statutory sections also require that all such transactions be
on terms that are consistent with safe and sound banking practices. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of guarantees and other similar types of transactions. Further, most loans by a
bank to any of its affiliates must be secured by collateral in amounts ranging
from 100% to 130% of the loan amounts. In addition, any covered transaction by a
bank with an affiliate and any purchase of assets or services by a bank from an
affiliate must be on terms that are substantially the same, or at least as
favorable, to the bank as those that would be provided to a non-affiliate.
Prohibitions Against Tying Arrangements. Banks are subject to the
prohibitions of 12 U.S.C. Section 1972 on certain tying arrangements. A
depository institution is prohibited, subject to certain exceptions, from
extending credit to or offering any other service, or fixing or varying the
consideration for such extension of credit or service, on the condition that the
customer obtain some additional service from the institution or certain of its
affiliates or not obtain services of a competitor of the institution.
Uniform Real Estate Lending Standards. The federal banking agencies have
adopted uniform regulations prescribing standards for extensions of credit that
are secured by liens on interests in real estate or made for the purpose of
financing the construction of a building or other improvements to real estate.
Under the joint regulations adopted by the federal banking agencies, all insured
depository institutions must adopt and maintain written policies that establish
appropriate limits and standards for extensions of credit that are secured by
liens or interests in real estate or are made for the purpose of financing
permanent improvements to real estate. These policies must establish loan
portfolio diversification standards, prudent underwriting standards (including
loan-to-value limits) that are clear and measurable, loan administration
procedures, and documentation, approval and reporting requirements. The real
estate lending policies must reflect consideration of the Interagency Guidelines
for Real Estate Lending Policies that have been adopted by the federal bank
regulators.
The Interagency Guidelines, among other things, require a depository
institution to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits:
. for loans secured by raw land, the supervisory loan-to-value limit is
65% of the value of the collateral;
. for land development loans (i.e., loans for the purpose of improving
unimproved property prior to the erection of structures), the
supervisory limit is 75%;
. for loans for the construction of commercial, multi-family or other
non-residential property, the supervisory limit is 80%;
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. for loans for the construction of one- to four-family properties, the
supervisory limit is 85%; and
. for loans secured by other improved property (e.g., farmland,
completed commercial property and other income-producing property,
including non-owner occupied, one- to four-family property), the limit
is 85%.
Although no supervisory loan-to-value limit has been established for owner-
occupied, one to four-family and home equity loans, the Interagency Guidelines
state that for any such loan with a loan-to-value ratio that equals or exceeds
90% at origination, an institution should require appropriate credit enhancement
in the form of either mortgage insurance or readily marketable collateral.
Federal Home Loan Bank System. Harris Savings Bank is a member of the
Federal Home Loan Bank of Pittsburgh, which is one of 12 regional Federal Home
Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank for
its members within its assigned region. It is funded primarily from funds
deposited by financial institutions and proceeds derived from the sale of
consolidated obligations of the Federal Home Loan Bank System. It makes loans to
members pursuant to policies and procedures established by the board of
directors of the Federal Home Loan Bank.
As a member, Harris Savings Bank is required to purchase and maintain stock
in the Federal Home Loan Bank of Pittsburgh in an amount equal to at least 1% of
its aggregate unpaid residential mortgage loans, home purchase contracts or
similar obligations at the beginning of each year, or 20% of its outstanding
advances, whichever is larger. Harris Savings Bank currently is in compliance
with this requirement and will be in compliance following the conversion. The
Federal Home Loan Bank imposes various limitations on advances such as limiting
the amount of real estate related collateral to 30% of a member's capital and
limiting total advances to a member.
Federal Reserve System. The Federal Reserve System requires all depository
institutions, regardless whether they are chartered under state or federal law,
to maintain noninterest bearing reserves at specified levels against their
checking, NOW, and Super NOW checking accounts and non-personal time deposits.
The balances maintained to meet the reserve requirements imposed by the Federal
Reserve System may be used to satisfy the OTS liquidity requirements. Savings
banks have authority to borrow from the Federal Reserve System "discount
window," but Federal Reserve System policy generally requires savings
institutions to exhaust all other sources before borrowing from the Federal
Reserve System.
Interstate Acquisitions and Branching. A federal savings bank may branch
nationwide without regard to state law. Pennsylvania law authorizes financial
institutions (or their holding companies) located in Delaware, Kentucky, the
District of Columbia, Maryland, New Jersey, Ohio, Virginia and West Virginia to
acquire Pennsylvania-chartered institutions and to establish branches in
Pennsylvania, in each case subject to the condition that their home state offers
reciprocal rights to savings institutions located in Pennsylvania. Pennsylvania-
chartered savings institutions may also branch interstate, subject to the
Department of Banking's approval and certain other conditions. Currently,
Delaware, Kentucky, Maryland, New Jersey, Ohio and West Virginia have laws that
permit Pennsylvania institutions to branch into such states and/or acquire
savings institutions located in such states.
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"),
any insured depository institution, including Harris Savings Bank, has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community. The CRA requires the OTS
to assess the depository institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications by such institution, including applications for additional branches
and acquisitions.
The CRA requires an institution's primary federal banking regulator to
provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system and requires public disclosure of an
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institution's CRA rating. Harris Savings Bank received a "satisfactory" overall
rating in its most recent CRA examination. The CRA applied to Harris Savings
Bank as a FDIC-insured Pennsylvania Savings Bank, and after the conversion will
continue to apply to Harris Savings Bank as a federal savings bank.
Safety and Soundness Standards. Each federal banking agency, including the
OTS and the FDIC, has adopted guidelines establishing general standards relating
to internal controls, information and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, asset
quality, earnings and compensation, fees and benefits. In general, the
guidelines require, among other things, appropriate systems and practices to
identify and manage the risks and exposures specified in the guidelines. The
guidelines prohibit excessive compensation as an unsafe and unsound practice and
describe compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director, or principal shareholder.
In addition, applicable regulations require a federal savings bank that is
given notice by the FDIC that it is not satisfying any of such safety and
soundness standards to submit a compliance plan to the applicable federal
banking regulator. If, after being so notified, a savings bank fails to submit
an acceptable compliance plan or fails in any material respect to implement an
accepted compliance plan, the federal banking regulator may issue an order
directing corrective and other actions of the types to which a significantly
undercapitalized institution is subject under the "prompt corrective action"
provisions of federal law. If a savings bank fails to comply with such an order,
the federal banking regulator may seek to enforce such an order in judicial
proceedings and to impose civil monetary penalties.
Prompt Corrective Action. Federal law authorizes the federal banking
agencies to require prompt corrective action to resolve the problems of
undercapitalized institutions. The federal banking regulators have adopted
regulations governing the supervisory actions that may be taken against
undercapitalized institutions. The regulations establish five categories,
consisting of "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized." The OTS's
regulations define the five capital categories as follows: Generally, an
institution will be treated as "well capitalized" if its ratio of total capital
to risk-weighted assets is at least 10%, its ratio of Tier 1 capital to risk-
weighted assets is at least 6%, its ratio of Tier 1 capital to total assets is
at least 5%, and it is not subject to any order or directive by the OTS to meet
a specific capital level. An institution will be treated as "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier 1 capital to risk-weighted assets is at least 4%, and its
ratio of Tier 1 capital to total assets is at least 4% (3% if the bank receives
the highest rating under the Uniform Financial Institutions Rating System) and
it is not a well-capitalized institution. An institution that has total risk-
based capital of less than 8%, Tier 1 risk-based-capital of less than 4% or a
leverage ratio that is less than 4% (or less than 3% if the institution is rated
a composite "1" under the Uniform Financial Institutions Rating System) would be
considered to be "undercapitalized." An institution that has total risk-based
capital of less than 6%, Tier 1 capital of less than 3% or a leverage ratio that
is less than 3% would be considered to be "significantly undercapitalized," and
an institution that has a tangible capital to assets ratio equal to or less than
2% would be deemed to be "critically undercapitalized."
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as a savings bank's capital
decreases within the three undercapitalized categories. All savings banks are
prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person if, following such distribution, the
bank would be undercapitalized. The OTS is required to monitor closely the
condition of an undercapitalized bank and to restrict the growth of its assets.
An undercapitalized bank is required to file a capital restoration plan within
45 days of the date the bank receives notice that it is within any of the three
undercapitalized categories, and the plan must be guaranteed by any parent
holding company. If a bank fails to submit an acceptable plan, it is treated as
if it were "significantly undercapitalized." Banks that are significantly or
critically undercapitalized are subject to a wider range of regulatory
requirements and restrictions.
The FDIC has a broad range of grounds under which it may appoint a receiver
or conservator for an insured savings bank. If one or more grounds exist for
appointing a conservator or receiver for a savings bank, the FDIC
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may require the bank to issue additional debt or stock, sell assets, be acquired
by a depository bank holding company or combine with another depository bank.
The FDIC is required to appoint a receiver or a conservator for a critically
undercapitalized savings bank within 90 days after the savings bank becomes
critically undercapitalized or to take such other action that would better
achieve the purposes of the prompt corrective action provisions. Such
alternative action can be renewed for successive 90-day periods. However, if the
savings bank continues to be critically undercapitalized on average during the
quarter that begins 270 days after it first became critically undercapitalized,
a receiver must be appointed, unless the FDIC makes certain findings that the
bank is viable.
Loans to a Bank's Insiders. A bank's loans to its executive officers,
directors, any owner of 10% or more of its stock (each, an insider) and any of
certain entities affiliated with any such person (an insider's related interest)
are subject to the conditions and limitations imposed by Section 22(h) of the
Federal Reserve Act and the Federal Reserve Board's Regulation O thereunder.
Under these restrictions, the aggregate amount of the loans to any insider and
the insider's related interests may not exceed the loans-to-one-borrower limit
applicable to national banks, which is comparable to the loans-to-one-borrower
limit applicable to Harris Savings Bank's loans. See "--Loans-to-One Borrower
Limitations." All loans by a bank to all insiders and insiders' related
interests in the aggregate may not exceed the bank's unimpaired capital and
unimpaired surplus. With certain exceptions, loans to an executive officer,
other than loans for the education of the officer's children and certain loans
secured by the officer's residence, may not exceed the lesser of $100,000 or the
greater of $25,000 or 2.5% of the bank's capital and unimpaired surplus.
Regulation O also requires that any proposed loan to an insider or a related
interest of that insider be approved in advance by a majority of the board of
directors of the bank, with any interested director not participating in the
voting, if such loan, when aggregated with any existing loans to that insider
and the insider's related interests, would exceed either $500,000 or the greater
of $25,000 or 5% of the bank's unimpaired capital and surplus. Generally, such
loans must be made on substantially the same terms as, and follow credit
underwriting procedures that are not less stringent than, those that are
prevailing at the time for comparable transactions with other persons.
An exception is made for extensions of credit made pursuant to a benefit or
compensation plan of a bank that is widely available to employees of the bank
and that does not give any preference to insiders of the bank over other
employees of the bank.
Harris Financial
General. Prior to the conversion, Harris Financial was regulated as a bank
holding company by the Federal Reserve Board under the Bank Holding Company Act
and the regulations of the Federal Reserve Board. The Federal Reserve Board also
has extensive enforcement authority over bank holding companies, including,
among other things, the ability to assess civil money penalties, to issue cease
and desist or removal orders and to require that a holding company divest
subsidiaries (including its bank subsidiaries). In general, enforcement actions
may be initiated for violations of law and regulations and unsafe or unsound
practices. Following the conversion, Harris Financial will be regulated as a
savings and loan holding company under the Home Owners' Loan Act, and will be
subject to the exclusive regulation, reporting requirements and supervision of
the OTS. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to Harris Savings
Bank.
Regulatory Capital Requirements. Savings and loan holding companies do not
have any regulatory capital requirements, and after the charter conversion
Harris Financial will no longer be subject to the capital requirements of the
Federal Reserve Board. As a bank holding company, Harris Financial was subject
to the Federal Reserve Bank's capital adequacy guidelines on a consolidated
basis. Under Federal Reserve Board policy, a bank holding company must serve as
a source of strength for its subsidiary bank. Under this policy the Federal
Reserve Board may require, and has required in the past, a holding company to
contribute additional capital to an undercapitalized subsidiary bank.
Savings and Loan Holding Company Powers. After the conversion and merger,
New Harris Financial will be a unitary savings and loan holding company
regulated by the OTS and will be permitted to engage in a moderately broader
range of activities than those permitted to Harris Financial as a bank holding
company. As a unitary savings
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and loan holding company formed or applied for after May 4, 1999, New Harris
Financial will be authorized to engage in (i) activities permissible for a
"financial holding company," as defined in the Gramm-Leach-Bliley Act, which
activities include insurance and securities agency and underwriting activities,
(ii) activities permissible for bank holding companies under the Bank Holding
Company Act, and (iii) certain additional enumerated activities, such as real
estate development.
The Bank Holding Company Act generally prohibits a bank holding company,
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by Federal Reserve Board regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The list of activities permitted by the Federal Reserve
Board includes, among other things, operating a savings association, mortgage
company, finance company, credit card company or factoring company; performing
certain data processing operations; providing certain investment and financial
advice; underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings Bonds;
real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers. The Gramm-Leach-Bliley Act has expanded the
permissible activities of bank holding companies that elect to be regulated as
financial holding companies to include securities and insurance agency and
underwriting activities.
Mergers and Acquisitions. The Home Owners' Loan Act prohibits a savings and
loan holding company from, directly or indirectly, acquiring more than 5% of the
voting stock of another savings association or savings and loan holding company
or from acquiring such an institution or company by merger, consolidation or
purchase of its assets, without the prior written approval of the OTS. In
evaluating applications by holding companies to acquire savings associations,
the OTS would consider the financial and managerial resources and future
prospects of New Harris Financial and the institution involved, the effect of
the acquisition on the risk to the insurance funds, the convenience and the
needs of the community and competitive factors. As a savings bank holding
company prior to the conversion, Harris Financial was required to obtain the
approval of the Pennsylvania Department of Banking and the Federal Reserve Board
before merging with or acquiring another bank or thrift holding company. The
approval standards used by the Federal Reserve Board are similar to those used
by the OTS with some exceptions, including that the OTS does not impose capital
requirements on savings and loan holding companies.
Dividends. OTS regulations do not restrict the ability of a savings and
loan holding company to pay dividends. The Federal Reserve Board has issued a
policy statement on the payment of cash dividends by bank holding companies,
which expresses the Federal Reserve Board's view that a bank holding company
should pay cash dividends only to the extent that the holding company's net
income for the past year is sufficient to cover both the cash dividends and a
rate of earning retention that is consistent with the holding company's capital
needs, asset quality and overall financial condition. The Federal Reserve Board
also indicated that it would be inappropriate for a company experiencing serious
financial problems to borrow funds to pay dividends. Furthermore, under the
prompt corrective action regulations adopted by the Federal Reserve Board, the
Federal Reserve Board may prohibit a bank holding company from paying any
dividends if the holding company's bank subsidiary is classified as
"undercapitalized."
Bank holding companies are required to give the Federal Reserve Board prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth. The Federal Reserve Board may disapprove such a purchase or
redemption if it determines that the proposal would constitute an unsafe or
unsound practice or would violate any law, regulation, Federal Reserve Board
order, or any condition imposed by, or written agreement with, the Federal
Reserve Board. This notification requirement does not apply to any company that
meets the well-capitalized standard for commercial banks, has a safety and
soundness examination rating of at least a "2" and is not subject to any
unresolved supervisory issues.
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Effect of Qualified Thrift Lender Test. To be regulated as a savings and
loan holding company by the OTS (rather than as a bank holding company by the
Federal Reserve Board), Harris Savings Bank must qualify as a Qualified Thrift
Lender. To qualify as a Qualified Thrift Lender, Harris Savings Bank must
maintain compliance with the test for a "domestic building and loan
association," as defined in the Internal Revenue Code, or with a Qualified
Thrift Lender Test. Under the Qualified Thrift Lender Test, a savings
institution is required to maintain at least 65% of its "portfolio assets"
(total assets less: (1) specified liquid assets up to 20% of total assets; (2)
intangibles, including goodwill; and (3) the value of property used to conduct
business) in certain "qualified thrift investments" (primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities) in at least nine months out of each 12 month period. As of March 31,
2000, Harris Savings Bank maintained 80.1% of its portfolio assets in qualified
thrift investments. Harris Savings Bank also met the Qualified Thrift Lender
test in each of the last 12 months and, therefore, met the Qualified Thrift
Lender test.
Federal Securities Laws. New Harris Financial has filed with the Securities
and Exchange Commission a registration statement under the Securities Act for
the registration of the common stock to be issued in the stock offering. Upon
completion of the stock offering, Harris Financial's common stock will be
registered with the Securities and Exchange Commission under the Exchange Act.
New Harris Financial will, as now, have to observe the information, proxy
solicitation, insider trading restrictions and other requirements under the
Exchange Act.
The registration under the Securities Act of shares of the issuance of
common stock in the stock offering does not cover the resale of such shares.
Shares of the common stock purchased by persons who are not affiliates of New
Harris Financial may be resold without registration. The resale restrictions of
Rule 144 under the Securities Act govern shares purchased by an affiliate of New
Harris Financial. If New Harris Financial meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of New Harris
Financial who complies with the other conditions of Rule 144 (including those
that require the affiliate's sale to be aggregated with those of other persons)
would be able to sell in the public market, without registration, a number of
aggregated shares not to exceed, in any three-month period, the greater of (1)
1% of the outstanding shares of New Harris Financial or (2) the average weekly
trading volume in such shares during the preceding four calendar weeks.
Provision may be made in the future by New Harris Financial to permit affiliates
to have their shares registered for sale under the Securities Act under specific
circumstances.
FEDERAL AND STATE TAXATION
Federal Taxation
General. Harris MHC, Harris Financial and Harris Savings Bank are subject
to federal income taxation in the same general manner as other corporations,
with some exceptions discussed below. The following discussion of federal
taxation is intended only to summarize certain pertinent federal income tax
matters and is not a comprehensive description of the tax rules applicable to
these entities.
Method of Accounting. For federal income tax purposes, Harris Financial
follows the accounting methodology set forth in SFAS 109, Account for Income
Taxes. Under SFAS 109, Harris Financial establishes deferred tax assets and
liabilities for temporary differences between the financial reporting and tax
basis of Harris Financial's assets and liabilities based on enacted tax rates
expected to be in effect when such amounts are realized or settled. Harris
Financial uses a tax year ending December 31 for filing its consolidated federal
income tax returns.
Bad Debt Reserves. The Small Business Protection Act of 1996 (the "1996
Act") eliminated the use of the reserve method of accounting for bad debt
reserves by savings institutions, effective for taxable years beginning after
1995. Prior to the 1996 Act, Harris Savings Bank was permitted to establish a
reserve for bad debts and to make annual additions to the reserve. These
additions could, within specified formula limits, be deducted in arriving at
Harris Savings Bank's taxable income. Bad debt reserves were subject to
recapture into taxable income if a savings bank failed to meet certain thrift
based and definitional tests. As a result of the 1996 Act, Harris Savings Bank
must use the specific charge off method in computing its bad debt deduction
beginning with its 1996 Federal tax return. In addition, the 1996 Act requires
the recapture (over a six year period) of the excess of tax bad debt reserves at
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December 31, 1995 over those established as of December 31, 1987. The amount of
such reserves subject to recapture as of March 31, 2000, was approximately $2.6
million. Pre-1988 reserves remain subject to recapture if a savings bank makes
certain non-dividend distributions. At March 31, 2000, Harris Savings Bank's
total federal pre-1988 reserve was approximately $29.2 million. This reserve
reflects the cumulative effects of federal tax deductions by the bank for which
no Federal income tax provision has been made.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a rate
of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. Harris
Savings Bank has not been subject to the alternative minimum tax and has no such
amounts available as credits for carryover.
Net Operating Loss Carryovers. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 5, 1997. At March 31, 2000, Harris Savings
Bank had no net operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. Harris Financial may exclude from
its income 100% of dividends received from Harris Savings Bank as a member of
the same affiliated group of corporations.
State and Local Taxation
Pennsylvania Taxation. Harris Financial is subject to the Pennsylvania
corporate net income tax and capital stock and franchise tax. The corporate net
income tax rate for 2000 is 9.99% and is imposed on Harris Financial's
unconsolidated taxable income for federal purposes with certain adjustments. In
general, the capital stock tax is a property tax imposed at the rate of
approximately .9% of a corporation's capital stock value, which is determined in
accordance with a fixed formula based upon average net income and net worth.
Harris Savings Bank is taxed under the Pennsylvania Mutual Thrift
Institutions Tax Act (the "MTIT"), as amended to include thrift institutions
having capital stock. Pursuant to the MTIT, Harris Savings Bank's tax rate is
11.5%. The MTIT exempts Harris Savings Bank from all other taxes imposed by the
Commonwealth of Pennsylvania for state income tax purposes and from all local
taxation imposed by political subdivisions, except taxes on real estate and real
estate transfers. The MTIT is a tax upon net earnings, determined in accordance
with GAAP with certain adjustments. The MTIT, in computing GAAP income, allows
for the deduction of interest earned on state and federal securities, while
disallowing a percentage of a thrift's interest expense deduction in the
proportion of interest income on those securities to the overall interest income
of Harris Savings Bank. Net operating losses, if any, thereafter can be carried
forward three years for MTIT purposes.
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MANAGEMENT OF HARRIS FINANCIAL
Directors and Executive Officers of Harris Financial
Directors. Harris Financial's Board of Directors consists of ten members.
Prior to the completion of the merger, the number of directors of Harris
Financial will be increased by seven directors. At the completion of the merger,
the Board of Directors of Harris Financial will elect seven directors of York
Financial to fill the seven vacancies created by the increase in number of
directors. Directors of Harris Financial are generally elected to serve for a
three year period or until their respective successors shall have been elected
and shall qualify. The following table sets forth certain information as of
March 31, 2000 regarding the composition of Harris Financial's Board of
Directors. In addition, the table presents information regarding persons who are
currently directors of York Financial and who will become directors of New
Harris Financial following the merger.
<TABLE>
<CAPTION>
Directors of Director Current Term
Harris Financial (1) Age Position Since to Expire
------------------------- ------- --------------------------- ------------ ------------
<S> <C> <C> <C> <C>
Charles C. Pearson, Jr. 60 President, Chief Executive 1999 2001
Officer and Chairman of
the Board (2)
Ernest P. Davis 67 Director 1997 2001
Jimmie C. George 70 Director 1997 2002
Robert A. Houck 67 Director 1997 2002
Bruce S. Isaacman 69 Director 1997 2001
William E. McClure, Jr 58 Director 1997 2003
Robert E. Poole 55 Director 1997 2001
William A. Siverling 58 Director 1997 2002
Frank R. Sourbeer 50 Director 1997 2001
Donald B. Springer 64 Director 1997 2003
Directors of York Financial
who will become Directors
of New Harris Financial:
Robert W. Pullo 60 Co-Chairman(2)(3) NA NA(4)
Randall A. Gross 56 Director(3) NA NA(4)
Carolyn E. Steinhauser 60 Director(3) NA NA(4)
Thomas W. Wolf 50 Director(3) NA NA(4)
Robert L. Simpson 52 Director(3) NA NA(4)
Cynthia A. Dotzel 45 Director(3) NA NA(4)
Byron M. Ream 55 Director(3) NA NA(4)
</TABLE>
----------------------
(1) The mailing address for each current Harris Financial director is 235 North
Second Street, Harrisburg, Pennsylvania 17101. The mailing address for each
current York Financial director is 101 South George Street, York,
Pennsylvania 17401. Directors of Harris Financial are also Directors of
Harris MHC.
(2) At the completion of the merger, Mr. Pearson will become the Co-Chairman,
President and Chief Executive Officer of New Harris Financial, and Mr. Pullo
will be appointed the Co-Chairman of the Board of Directors of New Harris
Financial.
(3) Currently a director of York Financial who will become a director of New
Harris Financial only upon completion of the merger.
(4) Two of the current directors of York Financial will be appointed to two of
the three classes of New Harris Financial's Board of Directors, and three
current directors of York Financial will be appointed to the third class.
Executive Officers. The following table sets forth information as of March
31, 2000 regarding the current executive officers of Harris Financial, and their
positions with Harris Financial. The table also identifies the executive
officers of York Financial who will become executive officers of New Harris
Financial upon the completion of the merger, and the positions such persons hold
at York Financial.
<TABLE>
<CAPTION>
Name Age Position
---------------- ----- --------------------
<S> <C> <C>
John W. Atkinson 62 Executive Vice President and Chief Operating
Officer
James L. Durrell 63 Executive Vice President and Chief Financial
Officer
Jane B. Tompkins 47 Senior Vice President and Chief Credit Officer
William M. Long 49 Senior Vice President - Lending
Richard C. Ruben 56 Senior Vice President, Chief Legal Officer and
Corporate Secretary
John C. Coulson 48 Senior Vice President and Chief Information Officer
Andrew S. Samuel 38 Senior Vice President - Business Banking Group
Executive Officers of York
Financial who will become
Executive Officers of Harris
Financial
Robert A. Angelo 52 Executive Vice President of York Financial
James H. Moss 46 Senior Vice President and Chief Financial Officer of York Financial
Harry Zimmerman 53 Executive Vice President of York Federal
Lynn D. Kramer-Crenshaw 49 Executive Vice President of York Federal
Robert P. O'Hara 48 Executive Vice President of York Federal
</TABLE>
94
<PAGE>
Harris Financial Directors' Biographical Information
The business experience for at least the past five years of each of the
persons who are currently directors of Harris Financial is as follows:
Charles C. Pearson, Jr. is President and Chief Executive Officer of Harris
Savings Bank, Harris Financial, Inc., and Harris Financial, MHC. He also assumed
the position of Chairman of the Board in April 1999. Before his appointment as
an officer and Director in 1998, Mr. Pearson was Regional President of PNC Bank,
Central Pennsylvania Region. Prior to that, he was President and Chief Executive
Officer of United Federal Bancorp of State College, Pennsylvania, which was
acquired by PNC in 1994.
Ernest P. Davis is an independent agent for New York Life Insurance Company
and other insurance companies, offering a variety of insurance and financial
products. He has been a member of Harris Savings Bank's Board since 1989.
Jimmie C. George has been a co-owner of George's Flowers, a local flower
shop, for the past 39 years. Mr. George is a partner in two non-profit housing
development companies. He has been a member of Harris Savings Bank's Board since
1988.
Robert A. Houck was formerly the Executive Vice President, Chief Financial
Officer, Secretary and Treasurer of HERCO, Inc., a hotel resort company located
in Hershey, Pennsylvania, until his retirement in 1988. He has been a member of
Harris Savings Bank's Board since 1979.
Bruce S. Isaacman is a partner in Isaacman Kern & Co., an accounting firm.
Prior to the merger of First Federal Savings and Loan Association of Harrisburg
and Harris Savings Bank, Mr. Isaacman was Chairman of the Board of First
Harrisburg Bancorp, Inc., parent company of First Federal Savings and Loan
Association of Harrisburg. On May 21, 1996, Mr. Isaacman was appointed to the
Board of Directors of Harris Savings Bank. Mr. Isaacman intends to retire as an
active member of the Board after the 2001 Annual Meeting pursuant to Harris
Financial's By-Laws which provide 70 years of age as the superannuation
retirement age for Board Members.
William E. McClure, Jr., is Chief Executive Officer of McClure Co., Inc. a
mechanical contracting and engineering company, a wholly owned subsidiary of
PP&L, Resources. Mr. McClure was elected to the Board of Harris Savings Bank in
April 1997.
Robert E. Poole has been the President and Chief Executive Officer of S&A
Custom Built Homes, builders of various types of single and multi-family
housing, land development and commercial development since 1980. He has also
been the President and Director on the Second Mile Board. He has been a member
of Harris Savings Bank's Board since 1998.
William A. Siverling is the President and co-owner of Commercial Industrial
Realty Company, a commercial real estate brokerage firm with which he has been
associated for over 24 years. He has been a member of Harris Savings Bank's
Board since 1989. Mr. Siverling is also a director of H S Service Corporation, a
wholly-owned subsidiary of Harris Savings Bank.
Frank R. Sourbeer has been President, Chairman of the Board of Directors
and controlling owner of Wilsbach Distributors, a beverage distribution company
since 1988. He is also President of the Partnership for Regional Investment and
Development Enterprises, an industrial development company. He has been a member
of Harris Savings Bank's Board since 1989.
Donald B. Springer is founder and President of Phoenix Contact, Inc., a
manufacturer of electrical and electronic components. Mr. Springer was elected
to the Board of Harris Savings Bank in April 1997.
Biographical Information Regarding York Financial Directors who will Become
Directors of New Harris Financial
The business experience for at least the last five years for each of the
persons who are currently directors of York Financial and who will become
directors of New Harris Financial is as follows:
Robert W. Pullo of York, Pennsylvania, is President and Chief Executive
Officer of York Financial. He is also Chairman of the Board of Directors and
Chief Executive Officer of York Federal and serves as Chairman of the Board of
Directors of its subsidiary company, York Financial Investment Corp. of
Delaware. Mr. Pullo is a member
95
<PAGE>
of the Board of Directors and Chairman of the Board of subsidiaries of York
Financial Corp.: First Capital Brokerage Services, Inc., New Service Corp.,
First Capital Insurance Services, Inc. and Y-F Service Corp. He also serves on
the Advisory Board of Meridian Venture Partnership, a venture capital company.
He is a member of the American Community Bankers' National Task Force for
Electronic Banking and serves as a Pennsylvania State liaison to the America's
Community Bankers' Legislative Committee. He is the founding Chairman of the
Board of the White Rose Foundation, a member of the Board of York Foundation,
and a member of the Board of Anna Huber Community Health Initiatives. He is a
member and past President of the Penn State York Campus Advisory Board, and Co-
Chairman of York College, York Federal Institute of Regional Affairs. Mr. Pullo
serves as a member of the Board and Executive Committee of Memorial Hospital of
York and the parent company, Memorial Health Systems Corporation. He is the
current Chairman of the York County Alliance for Learning, a business, education
and a school-to-work partnership, a member of the Advisory Board of Junior
Achievement, the Junior League of York, the York YWCA, and Youth Build. Mr.
Pullo was the charter Chairman of the United Way Housing Initiatives. He
currently serves on the Steering Committee of the Crispus Attucks Boundary
Avenue Urban Development Project. He is a founding board member of The Cultural
Alliance of York County, Inc. and is a member of the York Area Capital Campaign
Review Association and Better York, Inc. He is a Past Chairman of the York Area
Chamber of Commerce. Mr. Pullo is the recipient of the Minority Businessmen
Association's Volunteer of the Year Award and the Excellence Award from the
Human Relations Commission for his work with minorities.
Randall A. Gross of York, Pennsylvania, is President of RG Industries. He
earned his BBA and MBA from the University of Cincinnati. Mr. Gross was formerly
Chairman of the York Area Chamber of Commerce and also Chairman of its
Reaccreditation Committee. He also served with the Chamber of Commerce as
Chairman of the Local Government Committee, Vice President of Community Affairs,
member of the Executive Committee, Budget and Finance Committee, and Board of
Directors. Mr. Gross is a member of the Board of Trustees of York College, and
Board of Directors of Tighe Industries, York Graphic Services and Valin
Corporation. He is also a member of the Chief Executive Officers (CEO)
Organization. He is Past Chairman of the Keystone Chapter of the Young
Presidents' Organization where he had previously served as Education Chairman.
Mr. Gross is licensed by the State of Georgia as a Certified Public Accountant.
Carolyn E. Steinhauser of York, Pennsylvania, is Executive Director of York
Foundation. A graduate of Middlebury College, Ms. Steinhauser is a member of the
board of Commonwealth Community Foundations (PA) and a Trustee of York College
of Pennsylvania. She was formerly Vice President/Campaign of the United Way of
York County and Executive Director of the York YWCA.
Thomas W. Wolf of Mount Wolf, Pennsylvania, is President of The Wolf
Organization, Inc. where he has been affiliated since 1979. Mr. Wolf earned a
Bachelor of Arts degree from Dartmouth College, a Master of Philosophy from the
University of London, and a Ph.D. from the Massachusetts Institute of
Technology. Mr. Wolf is past Chairman of the Board of the York Area Chamber of
Commerce, Past Chairman of the Board of the United Way of York County, past
Chairman of the Board of WITF Public Broadcasting Station, Vice Chairman of the
Board of York College of Pennsylvania, and President of Better York, Inc. Mr.
Wolf served in the U.S. Peace Corps in India.
Robert L. Simpson of York, Pennsylvania, is Executive Director of the
Crispus Attucks Association, a multi-purpose community center, a position he has
held since 1979. Mr. Simpson serves on the Board of Directors and the Medical
Affairs and Community Health Care Committees of the York Hospital, is a Trustee
of York College of Pennsylvania and is a member of the Board of Directors of
WITF Public Broadcasting Station. Mr. Simpson also serves on the Board of
Directors of the York Health Bureau, the White Rose Foundation, the Martin
Memorial Library, and the York County Industrial Development Corporation. A
member of the Rotary Club of York, he serves on the Rotary and York City School
District Drop-Out Prevention Program Committee, and serves on the Atkins House
Advisory Committee. He has also served on the boards of the County Drug Task
Force, York 2000 Committee, the YMCA, York Area Chamber of Commerce, and the
Junior League.
Cynthia A. Dotzel of York, Pennsylvania, is a Certified Public Accountant,
practicing with Dotzel & Company, Inc., Certified Public Accountants. She earned
a Bachelor of Science degree in Accounting from York College after completing
undergraduate work at York College and Bloomsburg University. Ms. Dotzel is a
member of the Cyber Center Management Group. She is a member of the Finance
Committees of St. Patricks Church in York and the York Foundation.
Byron M. Ream of York, Pennsylvania, is Executive Vice President of R&R
Components, Inc. He formerly served as the Director of Property Management and
as a realtor for Bennett Williams, Inc., York. Mr. Ream attended Wesleyan
University and Pennsylvania State University, York Campus. He is a member of
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<PAGE>
the Building Committee of the United Way of York County, a past President of the
Board of Trustees of Asbury United Methodist Church, and a member of the Board
of Directors of Bell Socialization Services and B.U.I.L.D., Inc.
Executive Officers of Harris Financial who are not Directors
The following are executive officers of Harris Financial and/or Harris
Savings Bank who are not also directors of Harris Financial.
John W. Atkinson is Executive Vice President and Chief Operating Officer of
Harris Financial and Harris Savings Bank since May, 1998. Mr. Atkinson was
Executive Vice President and Chief Operating Officer of United Federal Bancorp
and, after its acquisition, PNC Bank's State College region from 1992 until
1995. Mr. Atkinson was retired from 1996 until his employment by Harris
Financial and Harris Savings Bank in 1998. Mr. Atkinson plans to retire
following the merger.
James L. Durrell is Executive Vice President and Chief Financial Officer of
Harris Financial and Harris Savings Bank. Mr. Durrell was appointed Executive
Vice President of Harris Savings Bank in 1995 and has been Chief Financial
Officer of Harris Savings Bank since 1988 when he began his employment with
Harris Savings Bank. Mr. Durrell is a Director of H.S. Service Corporation,
First Harrisburg Service Corporation, Avstar Mortgage Corporation and Chairman
of Harris Delaware Corporation wholly owned subsidiaries of Harris Savings Bank.
Mr. Durrell plans to retire following the merger.
Jane B. Tompkins was appointed Senior Vice President, Chief Credit Officer
in April 1998, when she was employed by Harris Savings Bank. Mrs. Tompkins has
spent the past 19 years working in the banking industry and most recently
employed by PNC Bank as a Regional Chief Credit Policy Officer and Senior Credit
Officer. Following the merger, Ms. Tompkins will continue to serve as Senior
Vice President and Chief Credit Officer.
William M. Long has been Senior Vice President of Lending for Harris
Savings Bank since 1989, and was first employed by Harris Savings Bank in March
1989. Mr. Long is Chairman of the Board of Avstar Mortgage Corporation, a wholly
owned subsidiary of Harris Savings Bank. Mr. Long plans to retire following the
merger.
Richard C. Ruben is Senior Vice President and Secretary of Harris
Financial. Mr. Ruben has been Senior Vice President, Chief Legal Officer and
Corporate Secretary of Harris Savings Bank since August, 1997. He was engaged in
the private practice of Law in Harrisburg, Pennsylvania between 1978 and 1997.
Mr. Ruben is President and a Director of H.S. Service Corporation, a wholly
owned subsidiary of Harris Savings Bank. Following the merger, Mr. Rubin will
continue to serve as Senior Vice President and Secretary of Harris Financial and
Senior Vice President, Chief Legal Officer and Corporate Secretary of Harris
Savings Bank.
John D. Coulson was appointed Senior Vice President, Chief Information
Officer of Harris Savings Bank in August, 1997. From 1993 to 1997, he was
employed by Dauphin Deposit Bank & Trust Company in various positions including
Chief Information Officer and as a member of First Maryland Bancorp's Merger,
Acquisition and Consolidation Group. Following the merger Mr. Coulson will
continue to serve as Senior Vice President and Chief Information Officer of
Harris Savings Bank.
Andrew S. Samuel was appointed Senior Vice President, Business Banking
Group in April 1998. Mr. Samuel has been employed with Harris Savings Bank since
1996. He was previously employed by Fulton Bank. He serves on various Community
Boards and Committees. Following the merger, Mr. Andrew will continue to serve
as Senior Vice President of the Business Banking Group.
Executive Officers of York Financial who are not Directors, and who will Become
Executive Officers of New Harris Financial
The following are executive officers of York Financial and/or York Federal
who are not also directors of York Financial. Each of the following executive
officers of York Financial will serve as executive officers of New Harris
Financial following the merger.
Robert A. Angelo, Esq., of York, Pennsylvania, is Executive Vice President,
Secretary and General Counsel of York Financial and President and Chief
Operating Officer of York Federal. Prior to becoming Executive Vice President in
August, 1991, Mr. Angelo was Senior Vice President of York Financial. He
obtained a Bachelor of Science Degree from La Salle University, Philadelphia,
Pennsylvania and his Juris Doctor Degree from the University of Baltimore,
School of Law, Baltimore, Maryland. Mr. Angelo is a member of the Board of
Directors of the Small Enterprise Development Company, South George Street
Community Partnership, the York County
97
<PAGE>
Chamber of Commerce and Misericordia Convalescent Home. Mr. Angelo is past
Chairman of the Pennsylvania Association of Savings Institutions Legal
Committee. Mr. Angelo is past Chairman of the Board and Executive Committee of
the Housing Initiatives Corporation of the United Way of York County. Mr. Angelo
is expected to be Chief Administrative Officer of New Harris Financial following
the merger.
James H. Moss joined York Federal in November 1984 and currently serves as
Senior Vice President, Chief Financial Officer/Treasurer for York Financial and
Executive Vice President of the Administrative Services Group and Chief
Financial Officer/Treasurer for York Federal. Mr. Moss is a Certified Public
Accountant and from January 1978 to November 1984 served in various audit
capacities with Ernst & Young LLP. He is a graduate of Elizabethtown College. He
is a member of the American and Pennsylvania Institutes of Certified Public
Accountants. In addition, Mr. Moss serves as a member of the Board of Directors
of the York County United Way and is the chairperson of the United Way's Fund
Distribution Division. Mr. Moss is expected to be Chief Financial Officer of New
Harris Financial following the merger.
Harry M. Zimmerman of York, Pennsylvania, is the Executive Vice President
of the Business Banking Group of York Federal and has over 30 years of
experience in the banking industry. Mr. Zimmerman joined York Federal in April
1997. From 1992 to 1997, he was Senior Vice President and Corporate Banking
Division Manager at Bank One in Youngstown, Ohio. He is a graduate of the
University of Delaware with a Bachelor of Science Degree in Business Management
and Psychology and has completed studies at the University of Oklahoma, Graduate
School of Banking and the Rutgers University Stonier Graduate School of Banking.
Current responsibilities include overseeing the activities of the Business
Banking Group, which includes all commercial lending, commercial real estate
lending and commercial cash management services. He is also a member of York
Federal's Senior Loan Committee. He has been active in numerous civic and
community organizations, including the York County Economic Development
Corporation, the United Way of York County, the York YMCA, Salvation Army, Pen-
Mar Organization, and the York Adams Area Council of the Boy Scouts of America.
Lynn D. Kramer-Crenshaw is Executive Vice President of the Retail Group of
York Federal. A graduate of Towson State University, Ms. Kramer-Crenshaw had
over 15 years of commercial banking experience before joining York Federal as
Vice President of Marketing in 1993. A resident of northern Baltimore County,
Maryland, Ms. Kramer-Crenshaw is a member of the York County Private Industry
Council. She is a past board member and chairman of the Marketing Committee for
Child Care Consultants, a York County non-profit organization. She is a also a
past board member of the Central Atlantic Bank Marketing Association and a past
member of the Citizen Advisory Committee for the Gunpowder Falls State Park and
North Central Hike and Bike Trail board.
Robert P. O'Hara of Hunt Valley, Maryland, is Executive Vice President of
the York Federal Savings and Loan Association Mortgage Banking Group. Mr. O'Hara
joined York Federal Savings and Loan Association in February 1999. Prior to
joining York Federal, Mr. O'Hara had over 20 years of experience in all aspects
of Mortgage Banking. From 1989 through 1999, he worked for First Maryland
Bancorp and served as President of the Mortgage Company from 1995 -1998. He is a
graduate of Loyola College in Maryland. Mr. O'Hara is a member of the Board of
Governors of the Maryland Mortgage Bankers Association and a past President of
Maryland Mortgage Bankers Association and former Advisory Board member for
Fannie Mae's South Eastern region. Mr. O'Hara is expected to supervise New
Harris Financial's mortgage lending following the merger.
Harris Financial Executive Compensation
Harris Financial executive officers receive compensation from Harris
Savings Bank. Shown below is information concerning the annual compensation for
services in all capacities to Harris Savings Bank for the fiscal years ended
December 31, 1999, 1998 and 1997, of those persons who were, at December 31,
1999, the Chief Executive Officer, and the four other most highly compensated
executive officers of Harris Savings Bank (together, Named Executive Officers).
98
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Annual Compensation Long-term Compensation
--------------------------------------------------------------------------
Awards Payouts
Year -----------------------------------
Name and Ended Other Options/ All
Principal Position December Annual Restricted Stock Other
31, Salary Bonus(1) Compensation(2) Stock Appreciation LTIP Compensation(3)
Awards Rights Payouts (4)(5)
(#)
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charles C. Pearson, Jr., 1999 $356,056 $144,324 -- -- 75,000 -- $31,181
President and Chief 1998 275,000 140,663 $175,221 -- 25,000 -- 2,063
Executive Officer(1) 1997(1) -- -- -- -- -- -- --
---------------------------------------------------------------------------------------------------------------------------------
John W. Atkinson 1999(6) 235,925 61,490 -- -- 15,000 -- 20,685
Executive Vice President 1998(7) 128,800 45,102 -- -- 10,000(6) -- --
and Chief Operating Officer
---------------------------------------------------------------------------------------------------------------------------------
James L. Durrell 1999 217,819 51,500 -- -- 15,000 -- 34,949
Executive Vice President 1998 148,034 56,742 -- -- -- -- 37,979
and Chief Financial Officer 1997 136,780 39,848 -- -- -- -- 11,558
---------------------------------------------------------------------------------------------------------------------------------
Jane B. Tompkins 1999(6) 150,174 36,013 -- -- 6,000 -- 13,202
Senior Vice President and 1998(8) 94,962 -- -- 6,000(6) -- 28,241
Chief Credit Officer
---------------------------------------------------------------------------------------------------------------------------------
William M. Long 1999 148,223 31,240 -- -- 6,000 -- 17,425
Senior Vice 1998 101,697 35,656 -- -- -- -- 18,367
President--Lending Division 1997 95,566 26,048 -- -- -- -- 10,911
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Charles C. Pearson, Jr., was appointed President and Chief Executive
Officer effective January 5, 1998. No compensation was earned in 1997.
(2) Includes contractual one time payments of: $157,813 for loss of prior
employment stock options, $2,063 for employer match for 401(k) prior to
enrollment and $15,345 for house settlement fees.
(3) Includes contributions in 1999 of $27,498, $16,498, $31,266, $13,965 and
$9,884, respectively, for Messrs. Pearson, Atkinson, Durrell, Long and Mrs.
Tompkins for the Supplemental Executive Retirement Plan.
(4) Includes employer matching contributions in 1999 of $2,400, $2,507 $2,400,
$2,177 and $2,035, respectively, for Messrs. Pearson, Atkinson, Durrell,
Long and Mrs. Tompkins under Harris Savings Bank's 401(k) Retirement Plan.
(5) Includes contributions in 1999 of $1,283 for each of the following:
Messrs. Pearson, Atkinson, Durrell, Long and Mrs. Tompkins to Harris
Financial's Employee Stock Ownership Plan.
(6) These options were cancelled in 1999 and, in lieu thereof, Recognition
Retention Plan Stock grant awards of 5,039 and 3,023 shares, at the closing
price of $11.75 per share, were awarded respectively to Mr. Atkinson and
Mrs. Tompkins.
(7) Jane B. Tompkins started employment on April 14, 1998.
Aggregate Option Awards and Exercises During 1999 and Option Values at
December 31, 1999. Harris Savings Bank's 1994, 1996 and 1999 incentive stock
option plans are available to officers and other employees of Harris Savings
Bank and its affiliates. The plans are administered by a committee of outside
directors. The plans authorize the grant of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, "non-statutory
options," which do not qualify as incentive stock options, and certain "Limited
Rights," exercisable only upon a change of control of Harris Savings Bank,
Harris Financial or Harris MHC. The following tables set forth certain
information regarding awards under Harris Savings Bank's incentive stock option
plans, including the options awarded during 1999, shares acquired and the value
realized during 1999 by Named Executive Officers upon exercise of options and
the number of shares of Harris Financial common stock underlying options and the
value of options held by Named Executive Officers at December 31, 1999. Neither
the conversion nor the merger will be considered a change in control for
purposes of the incentive stock option plans.
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<PAGE>
Set forth in the tables that follow is information relating to options
granted under the stock option plan to the Named Executive Officers during 1999.
<TABLE>
<CAPTION>
==================================================================================================================
OPTION GRANTS IN LAST FISCAL YEAR
------------------------------------------------------------------------------------------------------------------
Individual Grants
------------------------------------------------------------------------------------------------------------------
Percent of
Total Options Potential Realized Value at
Granted to Assumed Annual Rates of Stock
Options Employees in Exercise or Expiration Price Appreciation for Option
Name Granted FY 1999 Base Price Date(3) Terms(1)
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
5% 10%
------------------------------------------------------------------------------------------------------------------
Charles C. Pearson, Jr. 50,000(2) 24.4% $14.5000 01/05/09 457,000 1,160,000
25,000 11.1% $12.5000 500,000
------------------------------------------------------------------------------------------------------------------
John W. Atkinson 15,000 6.7% $12.5000 02/16/09 116,000 300,000
------------------------------------------------------------------------------------------------------------------
James L. Durrell 15,000 6.7% $12.5000 02/16/09 116,000 300,000
------------------------------------------------------------------------------------------------------------------
Jane B. Tompkins 6,000 2.7% $12.5000 02/16/09 47,000 120,000
------------------------------------------------------------------------------------------------------------------
William M. Long 6,000 2.7% $12.5000 02/16/09 47,000 120,000
==================================================================================================================
</TABLE>
___________________________
(1) Rounded to nearest thousand dollars.
(2) Awarded pursuant to terms of employment agreement described elsewhere.
(3) The effective date for vesting purposes is April 20, 1999.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised in-
Underlying Options at the-Money Options at
Number of December 31, 1999 December 31, 1999
Shares
Acquired on Value Realized Exercisable/ Exercisable/
Name Exercise -------- Unexercisable Unexercisable(1)
---- -------- ------------- ----------------
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charles C. Pearson. Jr. 0 -- 5,000/95,000 $ 0/$0
President and Chief
Executive Officer
------------------------------------------------------------------------------------------------------------------
John W. Atkinson -- -- 0/15,000(2) $ 0/$0
Executive Vice
President and Chief
Operating Officer
------------------------------------------------------------------------------------------------------------------
James L. Durrell 4,500 $28,764 30,500/15,000 $111,935/$0
Executive Vice
President and Chief
Financial Officer
------------------------------------------------------------------------------------------------------------------
Jane B .Tompkins -- -- 0/6,000(3) $ 0/$0
Senior Vice President
Chief Credit Officer
------------------------------------------------------------------------------------------------------------------
William M. Long 7,500 $78,127 0/6,000 $ 0/$0
Senior Vice President
Lending Division
------------------------------------------------------------------------------------------------------------------
</TABLE>
_______________________
(1) Based on the last sale price of $7.00 on December 31, 1999.
(2) Of these options, 10,000 granted in 1998 were cancelled in 1999 by mutual
consent.
(3) Of these options, 6,000 granted in 1998 were cancelled in 1999 by mutual
consent.
100
<PAGE>
Employment Contracts. Harris MHC entered into a rolling three-year
Employment Agreement with Mr. Pearson on December 19, 1997 effective January 5,
1998, through December 31, 2000. Mr. Pearson was employed as President and
Chief Executive Officer of Harris MHC and its subsidiaries at an initial annual
salary of $275,000 per year with a guaranteed first year bonus of 30% of base
salary. In addition, Mr. Pearson was promised other material considerations.
He was awarded qualified stock options to purchase a total of 25,000 shares of
Harris Financial common stock at an exercise price of $20.25 per share in equal
installments on the first five anniversaries of the effective date of his
employment. Harris Financial further agreed to an award of 50,000 non-qualified
options to purchase common stock of Harris Financial, which were awarded subject
to receipt of all required regulatory and shareholder approvals for the 1999
Plans out of which these options were intended to be granted. The agreement
provides for re-pricing the non-qualified options based upon performance of
Harris Financial stock relative to its peers and the S&P 500 Index. Mr. Pearson
is also entitled to participate in all Harris Savings Bank benefit plans
generally available to executive officers, a company vehicle, country club
membership, a relocation allowance and legal fees. He was, furthermore, granted
an alternative payment to compensate for in-the-money options lost as the result
of his employment by Harris Financial. His contract includes a change-in-
control provision which would pay a severance benefit to Mr. Pearson equal to
2.99 times his base compensation (defined as total cash remuneration received by
the executive in all capacities with Harris Financial and affiliates, as
reported on Form 10-2) if Mr. Pearson's employment is terminated within two
years following a change in control. Under the employment agreement, Mr.
Pearson may voluntarily terminate employment within one year of a change in
control, in his sole discretion, and receive the severance benefit. Mr. Pearson
will also be entitled to health benefits for himself and his spouse until each
of them attain age 65 or become eligible for Medicare. If payments and benefits
received in connection with a change in control would constitute an excess
parachute payment under Section 280G of the Code, then such payments would be
reduced to one dollar less than the excess parachute amount if the reduced
amount would be greater the unreduced payments less the excise tax the executive
would owe. Neither the conversion nor the merger will be considered a change in
control for purposes of Mr. Pearson's employment. The employment agreement also
contains a severance benefit if Mr. Pearson's employment is terminated without
cause for reasons other than a change in control.
Change in Control Agreements. Effective April 1, 1998, Harris Savings
Bank and Harris MHC entered into a Change In Control Agreement with each of
Messrs. Durrell, Ruben, Long and Coulson, and Mrs. Tompkins and Messrs. Atkinson
and Samuel at the dates of their appointment. Each Change In Control Agreement
has a three-year term. The Board of Directors votes annually on whether to
renew the agreements for an additional year. The Board voted at its February,
2000, Board Meeting to renew the agreements for an additional year. Each Change
In Control Agreement provides that, at any time following a change-in-control of
Harris Savings Bank or Harris MHC, if Harris Savings Bank or Harris MHC
terminates the executive's employment for any reason, other than for cause, or
if the executive terminates employment following demotion, loss of title, loss
of significant authority, reduction in compensation or relocation of principal
place of employment, the executive, or in the event of death, his/her
beneficiary, is entitled to receive a severance payment equal to three times the
annual compensation. Each Change In Control Agreement also provides that Harris
Savings Bank or Harris MHC will continue the executive's life, health, dental
and disability coverage for a three-year period. A change-in-control is defined
in the Change In Control Agreement to mean an event that would constitute a
change-in-control of Harris Savings Bank or Harris MHC, as the case may be,
under Harris Savings Bank Holding Company Act or the Change in Bank Control Act;
a plan of reorganization, merger, merger conversion, consolidation or sale of
all or substantially all of the assets of Harris Savings Bank or Harris MHC or a
similar transaction in which Harris Savings Bank or Harris MHC is not the
resulting entity; or a change in the composition of the Board of Directors of
Harris Savings Bank or of Harris MHC that results in a change of a majority of
such directors. If payments and benefits under a Change In Control Agreement
would constitute an excess parachute payment under Section 280G of the Code,
then such payment may be reduced to one dollar less than the excess parachute
amounts if the reduced amount would be greater than the unreduced payments less
the excise tax that the executive would owe under Section 4999 of the Internal
Revenue Code. Neither the conversion nor the merger will be considered a change
in control for purposes of the change in control agreements.
Pension Plan. Harris Financial presently has no separate pension
plan. Harris Savings Bank maintains a non-contributory defined benefit plan for
all employees hired before January 1, 1999, who are at least 21 years of age and
who have completed one year of service during which they worked at least 1,000
hours. The plan is intended to be a "qualified" plan under section 401(a) of
the Code. The plan provides for a monthly benefit to the participant upon his
or her retirement at the age of 65 with at least five years of service.
Benefits are also payable upon the participant's death or disability or early
retirement at age 55 with at least five years of service. The benefit to which
a participant is entitled is determined in accordance with a formula based upon
the participant's average monthly compensation, which is defined in the plan to
be monthly compensation averaged over the highest five years of service. The
benefit formula is the sum of (a) 2% of average monthly compensation multiplied
by years of service, up to 15 years, (b) .5% of average monthly compensation
multiplied by years of service in excess of 15 years
101
<PAGE>
(maximum 20 years under this part) and (c) .5% of average monthly compensation
in excess of one-twelfth of Social Security covered compensation multiplied by
years of service up to 35 years. Harris Savings Bank is required to make annual
contributions to the plan based upon actuarial estimates provided by the actuary
retained by the plan. During 1999 no contribution was required.
Harris Savings Bank has discontinued the defined benefit pension plan for
employees hired after December 31, 1998. Consequently, no additional persons
will become eligible for benefits under the Pension Plan as a result of the
merger. For employees hired on or after January 1, 1999, the defined benefit
plan has been replaced by an increased employer contribution to the employee's
401(k) Plan.
The following table illustrates monthly pension benefits at age 65 under
the most advantageous defined benefit plan provisions available at various
levels of compensation and years of service.
YEARS OF SERVICE
----------------
Compensation 15 20 25 30 35
------------ -- -- -- -- --
$ 40,000 1,031 1,125 1,219 1,313 1,406
$ 60,000 1,656 1,833 2,011 2,188 2,365
$ 80,000 2,281 2,542 2,802 3,063 3,323
$100,000 2,906 3,250 3,594 3,938 4,281
$120,000 3,531 3,958 4,386 4,813 5,240
$140,000 4,156 4667 5,177 5,688 6,198
$170,000 5,094 5,729 6,365 7,000 7,636
As of December 31, 1999, Messrs. Durrell, Long and Samuel had 12, 15 and
four years of credited service, respectively. Messrs. Pearson, Ruben and Coulson
and Mrs. Tompkins each had two years of credited service.
Supplemental Executive Retirement Plan. Harris Savings Bank maintains a
Supplemental Executive Retirement Plan (the "SERP") for certain employees
designated by the Board of Directors. The Plan makes up benefits lost by the
employee under Harris Savings Bank's three qualified retirement plans due to the
Internal Revenue Service ("IRS") compensation limit effective January 1, 1994.
The compensation limit for 1999 was $160,000, and is increased to $170,000 for
2000. The SERP includes a defined benefit component and a defined contribution
component. The amount of the annual defined contribution is included in the
Summary Compensation Table. The amount of the defined benefit component is
described in the table below. The benefit may be paid in a lump sum, or over a
10 year period. The following table sets forth the present value at age 65 of
the defined benefit that will be received based on a participant's years of
service and average annual compensation over the last five years prior to
reaching age 65.
YEARS OF SERVICE/(1)/
----------------------
Compensation 15 20 25 30 35
------------ -- -- -- -- --
$170,000 0 0 0 0 0
$200,000 117,000 133,000 149,000 164,000 180,000
$225,000 215,000 244,000 273,000 301,000 330,000
$250,000 313,000 355,000 396,000 438,000 480,000
$275,000 411,000 465,000 520,000 575,000 630,000
$300,000 509,000 576,000 644,000 712,000 780,000
___________________________
(1) Represents the present value at age 65 of the Supplemental Executive
Retirement Plan benefit.
As of December 31, 1999, Messrs. Durrell, Long and Samuel had 12, 15 and 4
years of credited service, respectively. Messrs. Pearson, Ruben and Coulson and
Mrs. Tompkins each had 2 years of credited service.
Neither the conversion nor the merger will have any effect on benefits
provided under the Supplemental
102
<PAGE>
Executive Retirement Plan.
York Financial Executive Compensation
Summary Compensation Table. The following information is furnished for
York Financial's chief executive officer and named executive officers for the
year ended June 30, 1999. All compensation is paid by York Federal but
allocated between York Financial and York Federal based on approximate time
spent by the named executive officer on York Financial business.
<TABLE>
<CAPTION>
=================================================================================================================
Annual Compensation Long-Term Compensation
-----------------------------------------------------------------------------------------------------------------
Other All Other
Year Ended Annual Compen-
Name and principal position June 30, Salary($) Bonus($) Compen- Options(#)(2) sation($)(3)
sation(1)
($)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert W. Pullo, President of 1999 $375,011 $123,708 -- 3,970 $160,378
York Financial and York 1998 360,490 167,197(4) -- 24,970 111,910
Federal and Chief Executive 1997 330,502 105,884 -- 3,970 111,739
Officer
-----------------------------------------------------------------------------------------------------------------
Robert A. Angelo, Executive 1999 $192,400 $ 64,389 -- -- $ 27,982
Vice President, Secretary and 1998 185,000 87,530(4) -- 15,750 10,873
General Counsel of York 1997 170,000 60,255 -- -- 11,129
Financial; President of York
Federal
-----------------------------------------------------------------------------------------------------------------
James H. Moss, Senior Vice 1999 $143,929 $ 43,662 -- -- $ 7,231
President, Chief Financial 1998 135,000 64,428(4) -- 10,500 7,817
Officer/Treasurer of York 1997 126,445 43,811 -- -- 8,422
Financial; Executive Vice
President of York Federal
-----------------------------------------------------------------------------------------------------------------
Harry M. Zimmerman, 1999 $131,323 $ 35,798 -- -- $ 4,407
Executive Vice President of 1998 125,000 41,669 -- 10,500 3,793
York Federal 1997 19,231 829 -- 13,125 --
-----------------------------------------------------------------------------------------------------------------
Lynn D. Crenshaw, Executive 1999 $118,448 $ 32,542 -- -- $ 3,766
Vice President of York Federal 1998 112,000 38,282 -- 10,500 4,060
1997 109,444 5,884 -- -- 5,480
================================================================================================================
</TABLE>
_______________________
(1) Amounts not reportable as they do not exceed the lesser of $50,000 or 10%
of salary and bonus.
(2) The number of stock options indicated have been adjusted for stock
dividends.
(3) Includes contributions of $3,180, $3,180, $3,180, $3,180 and $3,115,
respectively, for Messrs. Pullo, Angelo, Moss and Zimmerman, and Ms.
Crenshaw to the York Financial employee stock ownership plan. Includes
contributions of $123,198, $23,902, $2,851,$1,227and $651, respectively,
for Messrs. Pullo, Angelo, Moss, and Zimmerman, and Ms. Crenshaw for life
insurance premiums and benefit accruals for Messrs. Pullo and Angelo for
the Supplemental Executive Retirement Plan. Includes $32,800 in
directors' fees paid to Mr. Pullo. Includes directors' fees of $1,200, $900
and $1,200, respectively, for Messrs. Pullo, Angelo and Moss for board
meetings of York Financial Investment Corp., a subsidiary of York Federal.
(4) Includes bonuses received in November 1997 under York Financial's Bonus
Plan for performance standards achieved in the 1996/1997 fiscal year.
103
<PAGE>
Option Grants Table. The following table sets forth, for the fiscal year
ended June 30, 1999, all grants to York Financial's Chief Executive Officer, of
options to purchase shares of York Financial common stock. No options were
granted to the other York Financial named executive officers during the fiscal
year ended June 30, 1999.
<TABLE>
<CAPTION>
Individual Grants(1)
------------------------------------------------------------------------------------------------
Potential Realizable Value at
Assumed Annual Rates of Stock
% of Total Options Price Appreciation for Option Term(2)
---------------------------------------
Granted to
Options Employees Exercise
Granted in Fiscal Price Expiration
Name (#) Year ($/Sh) Date 0%($) 5%($) 10%($)
------------------ ----------- ------------- ---------- ------------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert W. Pullo 3,970 19.59% $16.667 10/01/08 -- $41,613 $105,455
</TABLE>
____________________
(1) Only named executive officers receiving grants are listed.
(2) The amounts under the columns labeled "5%" and "10%" are included by York
Financial pursuant to rules of the Securities and Exchange Commission and
are not intended to forecast future appreciation, if any, in the price of
York Financial's common stock. Such amounts are based on the assumption
that the named persons hold the options granted for their full 10 year
term. The actual value of the options will vary in accordance with the
market price of York Financial's. The column headed "0%" is included to
demonstrate that the options were granted at fair market value and
optionees will not recognize any gain without an increase in the stock
price, which increase benefits all stockholders commensurately. York
Financial did not use an alternative formula to attempt to value options at
the date of grant, as management is not aware of any formula which
determines with reasonable accuracy a present value of options of the type
granted to the optionees.
Option Exercise Table. The following table sets forth all exercises of
options to purchase York Financial common stock by York Financial's Chief
Executive Officer and York Financial named executive officers for the fiscal
year ended June 30, 1999.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options
at Fiscal Year End(#)(1) at Fiscal Year End($)
--------------------------------- ------------------------------
Shares
Acquired on Value
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
------------------------- ---------------- --------------- --------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Robert W. Pullo 91,579 $995,570 119,170 17,378 $631,293 $1,896
Robert A. Angelo 73,572 746,968 57,916 13,178 256,662 1,896
James H. Moss 32,625 333,667 25,099 8,978 94,610 1,896
Harry M. Zimmerman -- -- 9,975 13,650 2,670 1,780
Lynn D. Crenshaw 1,000 5,632 23,133 8,978 99,784 1,896
</TABLE>
_____________________
(1) Number of shares acquired have been adjusted for 5% stock dividend paid
November 17, 1998.
On completion of the merger, each outstanding and unexercised stock option
to purchase shares of York Financial will no longer represent the right to
acquire shares of York Financial and will become the right to acquire shares of
New Harris Financial. The number of shares of New Harris Financial that each
option will be entitled to acquire will be based on the exchange ratio. The
merger constitutes a change in control such that all options that are not then
exercisable will become exercisable at the completion of the merger.
Supplemental Executive Retirement Plan. The Supplemental Executive
Retirement Plan is a non-qualified, unfunded deferred compensation plan
evidenced by two separate agreements that provide supplemental executive
retirement benefits to Messrs. Pullo and Angelo. The agreements are unfunded,
but York Financial and York Federal have purchased life insurance policies on
each executive that are actuarially designed to offset the annual expenses
associated with the agreements and will, if the actuarial assumptions are
accurate, offset all of the costs associated with the agreements during the life
of the executive and provide a complete recovery of all plan costs upon the
executive's death. York Financial and York Federal are the sole owners of all
the insurance policies. The amount of an executive's benefit will be determined
pursuant to the accrual of two accounts: (i) a pre-retirement account and (ii)
an index retirement benefit account. The pre-retirement account is a liability
reserve account on the books of York Financial and York Federal, and is
increased or decreased each year by an amount determined by the aggregate annual
after-tax income
104
<PAGE>
from specified life insurance contracts reduced by an "opportunity cost" which
is calculated by taking into account York Federal's after-tax cost of funds. The
index retirement benefit account is equal to the excess of the annual earnings
of the insurance policies over the "opportunity cost." Upon retirement at age 70
(normal retirement) or at age 60 with 23 years of service (early retirement),
the balance in the executive's pre-retirement account will be paid in a lump sum
within 30 days following the executive's retirement (unless the plan
administrator shall elect to pay such amount in annual installments). In
addition, upon normal or early retirement the executives will receive an index
retirement benefit annually until their death. Should the executives die prior
to having received the entire amount of their pre-retirement account, the unpaid
balance will be paid in a lump sum to their designated beneficiaries. The
executives are entitled to receive their benefit if they retire prior to age 60,
however, the payment of such benefits will not commence until the executive
reaches age 60. In the event of a change in control of York Federal, or the
executives' services with York Federal are terminated without cause, the
executives will be entitled to receive the amounts accumulated in their pre-
retirement account within 30 days of such event and will begin receiving the
annual index benefit. The benefits under the agreements are forfeitable by the
executives if they are terminated by York Federal for cause. At June 30, 1999,
the estimated annual benefit payable to Messrs. Pullo and Angelo upon normal
retirement would be approximately $294,313 and $240,192, respectively.
Harris Financial has agreed to honor all obligations under the York
Executive Supplemental Retirement Plans. Harris Financial has acknowledged that
a change in control will occur at the effective time and that all benefits
provided for therein will be 100% vested in accordance with the plans, fully
earned and nonforfeitable for any reason, including cause. Any expense accruals
which will arise after the acquisition under the executive supplemental
retirement plans will be offset by the increase in cash surrender value of the
life insurance policies that were purchased to informally fund the plans.
Split Dollar Death Benefits. York Federal has also entered into Life
Insurance Split Dollar Agreements with Messrs. Pullo and Angelo, whereby their
beneficiaries shall be paid $5,000,000 and $2,500,000, respectively, for certain
death benefits in the event that the executives should die while employed by
York Federal. Life insurance policies have been purchased to provide this
benefit. In the event that the executive should not be employed by York Federal
at his death, then the executive's beneficiaries shall receive an amount equal
to 4% of the amount that he would receive if the executive died while employed
by York Federal, multiplied by the number of full years of service the executive
had completed with York Federal, up to 25 year of service. York Federal is
entitled to an amount equal the cash value of the insurance policies, less any
policy loans and unpaid interest or cash withdrawals previously incurred by York
Federal and any applicable surrender charges.
Harris Financial has agreed to honor all obligations under the life
insurance split dollar agreements. Harris Financial has acknowledged that a
change in control will occur at the effective time and that all benefits
provided for therein will be 100% vested in accordance with the plans, fully
earned and nonforfeitable for any reason, including cause. Harris Financial and
New Harris Financial will incur no additional expense under the life insurance
split dollar agreements as a result of the acquisition.
Pension Plan Table. The following table indicates the annual retirement
benefit that would be payable under the Retirement Plan (as discussed herein)
upon retirement at age 65 to a participant electing to receive his or her
retirement benefit in the standard form of benefit, assuming various specified
levels of Retirement Plan compensation and various specified years of credited
service.
<TABLE>
<CAPTION>
Estimated Annual Pension For Representative Years of Service
------------------------------------------------------------
Average Earnings 10 15 20 25 30
---------------- ------------ ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
$ 25,000 $ 3,500 $ 5,250 $ 7,000 $ 8,750 $10,500
50,000 7,944 11,915 15,887 19,859 23,831
100,000 17,444 26,165 34,887 43,609 52,331
150,000 26,944 40,415 53,887 67,359 80,831
200,000 28,844 43,265 57,687 72,109 86,531
</TABLE>
The York Federal Pension Plan is a noncontributory defined benefit pension
plan. An employee becomes a participant in the Plan after completing one year
of service and attaining age 21. Plan participants with five or more years of
service are entitled to monthly retirement benefits beginning at the retirement
age of 65. The retirement pension is payable monthly as long as the participant
lives.
A participant's accumulated pension credits are equal to 1/12th of the sum
of the benefits earned through June 30, 1996 plus the benefits earned after July
1, 1996. Benefits earned through June 30, 1996 are equal to the sum of (i) 1.1%
of five year average compensation at June 30, 1996 for years of benefit service
before July 1, 1991; plus (ii) 1.4% of five year average compensation at June
30, 1996 for years of benefit service from July 1, 199, to June 30, 1996; plus
(iii) 0.5% of average compensation over $25,920, multiplied by the number of
years of service from July 1, 1991 to June
105
<PAGE>
30, 1996, up to 35 years of cumulative service. Benefits earned after July 1,
1996 are equal to 1.4% of annual compensation for each year of service after
July 1, 1996, plus 0.5% of pay over the Social Security Integration Level for
each year of service after July 1, 1996, provided, however, that no pension
benefit on compensation over the Social Security Integration Level accrues for
any year of service over 35 years. The amount of pension earned during a fiscal
year is based upon compensation during that year subject to limits imposed by
the Internal Revenue Code of 1986, as amended. During the last fiscal year,
compensation for the purposes of calculating benefits for a Plan participant was
limited by the Code to $160,000. The Social Security Integration Level for each
plan year is equal to 100% of the Maximum Social Security Covered Compensation
as of the first day of the year.
The Plan provides for normal retirement at age 65 and permits early
retirement at ages between 55 and 64. Upon retirement, married participants
automatically receive an actuarially equivalent joint and 50% survivor pension
unless otherwise elected. The Plan also provides for other options for pension
benefits which can be elected by a participant. If the present value of the
monthly pension does not exceed $5,000, a lump sum payment is automatically
paid. Employees terminating after completion of at least five years of service
are entitled to a vested deferred pension equal to the benefit accrued to the
date of termination.
At June 30, 1999, the credited years of service for Messrs. Pullo, Angelo,
Moss and Zimmerman, and Ms. Crenshaw were 24, 26, 15, 2 and 6, respectively.
York Federal will have the right to freeze or terminate the pension plan at
the effective time, and has retained the right to amend the plan, if the plan is
overfunded, to increase benefits to participants to eliminate such overfunding.
Harris Financial Compensation of Directors
Fees. Harris Financial has no separate compensation for its board members,
all of whom are currently directors of Harris Savings Bank and are compensated
by Harris Savings Bank. Harris Savings Bank directors receive an aggregate
annual fee of $10,000 and $1,000 for each regular board meeting attended,
including consolidated meetings of Harris Financial and Harris Savings Bank and
$600 for each special board meeting. Members of committees receive $550 for
each committee meeting attended. Employees who are also directors are not paid
for attending board or committee meetings. Directors Emeritus receive $850 for
each board meeting attended. In 1999, the Board of Directors received an
aggregate of $230,900 of fees.
Stock Option Plan for Outside Directors. Harris Savings Bank's 1994 Stock
Option Plan for Outside Directors is self-administering, and a total of 236,250
shares (split adjusted) of Harris Financial common stock are authorized for
issuance under the plan. The exercise price per share for each option issued
under the plan is the fair market value of a share of the underlying common
stock on the date of grant. A total of 225,000 options to purchase shares
Harris Financial common stock at a price of $3.33 1/3 per share (split
adjusted) were issued in connection with the initial grant in 1994. Since the
initial grants, Mr. Isaacman, elected in 1996, received 5,625 options and
Messrs. McClure and Springer, elected to the Board in 1997, and Mr. Poole
elected to the Board in 1998, also received 5,625 options.
Harris Financial's 1999 Stock Option Plan for Outside Directors was
approved by shareholders at the 1999 Annual Meeting. The plan is administered
by Harris Financial's Board as a whole. The plan authorized the issuance of
grants of 2,000 options yearly to each non-employee director (4,000 options to
the non-employee Chairman if applicable) exercisable at the fair market value on
the date of the grant and for the options to vest over five years. The grants
are subject to the meeting of at least 80% of performance objectives set for the
previous year by the Board. Grants were authorized by the Board for fiscal year
1998 and 1999 performance. A total of 125,000 shares of Harris Financial common
stock are authorized to be issued under the plan.
Neither the conversion nor the merger will be considered a change in
control for purposes of the 1994 or the 1999 Stock Option Plan for Outside
Directors.
Recognition and Retention Plan for Outside Directors. Awards of between
3,000 and 6,000 shares of common stock (split adjusted) were made in 1994 under
Harris Savings Bank's Recognition and Retention Plan for Outside Directors to
each outside director of Harris Savings Bank at such time. Awards under the
plan were fixed pursuant to a formula based upon years of Service. Mr. Isaacman
received 1,500 shares at the time of his appointment in 1996. Neither the
conversion nor the merger will be considered a change in control for purposes of
the Recognition and Retention Plan for Outside Directors.
York Financial Compensation of Directors
For service in fiscal 1999 as a member of the Board of Directors of York
Financial, each director received a fee of $500 for each meeting attended. For
services as a member of the Audit Committee, the chair received a retainer
106
<PAGE>
of $4,000 and each committee member received a retainer of $1,000. For services
as a member of the Compensation Committee and Nominating Committee, the
respective committee chair received a retainer of $2,000 and each committee
member received a retainer of $1,000. A fee of $400 was received by Audit
Committee members for each meeting attended. A fee of $200 was received by
Compensation Committee members and Nominating Committee members for each meeting
attended.
For service in fiscal 1999 as a member of the Board of Directors of York
Federal, each director received a retainer of $10,000 and a fee of $500 for each
meeting attended. For service as a member of the Executive Committee of York
Federal, each member received a retainer of $4,500 and a fee of $400 for each
meeting attended. For services as a member of the Pension Committee and
Building Committee of York Federal, the respective committee chair received a
retainer of $2,000 and each committee member received a retainer of $1,000. A
fee of $200 was received by Pension Committee members and Building Committee
members for each meeting attended.
For service in fiscal 1999, directors of York Financial who also served as
members of the Board of Directors of subsidiaries of York Financial, Y-F Service
Corp. and New Service Corp., received a fee of $200 for each meeting attended
and a retainer fee of $2,000.
Directors of York Financial are participants in the 1984 Non-Incentive
Stock Option Plan, the 1992 Non-Incentive Stock Option Plan for Directors and
the 1995 Non-Qualified Stock Option Plan for Directors. The plans were designed
to attract and retain the best available personnel as directors of York
Financial and to provide additional incentive for directors to promote the
success of the business. All options under the 1984 and 1992 Plans have been
granted, and there are unexercised options that remain outstanding. The 1995
Plan is a formula plan providing for an annual grant of options on October 1 of
each year (to the extent options are available) at the closing price of York
Financial stock on the last business day prior to October 1 of each year.
On completion of the merger, each outstanding and unexercised stock option
to purchase shares of York Financial will no longer represent the right to
acquire shares of York Financial and will become the right to acquire shares of
New Harris Financial. The number of shares of New Harris Financial that each
option will be entitled to acquire will be based on the exchange ratio. The
merger constitutes a change in control such that all options that are not then
exercisable will become exercisable at the completion of the merger.
In 1979, York Federal established a directors' deferred compensation plan
whereby York Federal agreed to pay retired or disabled directors with 10 or more
years of service a joint and several annuity based on compensation received by a
participating director during the last 60 months of service to York Federal.
Benefits under the plan normally begin at age 70 and are paid monthly for a
period of 10 years or until death of the director and spouse, whichever first
occurs. The plan is unfunded and benefits accrued under the plan are 100%
vested. In connection with the merger, additional accruals will be frozen. The
annual benefit under the plan will be based on the plan's compensation formula
as if each director's final year of service ended as of the effective time of
the merger. Harris Financial and New Harris Financial will incur no additional
expense under the 1979 Directors Deferred Compensation Plan as a result.
Compensation Committee Interlocks and Insider Participation
During 1999, Directors George, Springer, Houck, Sourbeer and Poole, served
on the Compensation and Benefits Committee. None of the committee's members is
a current or former officer or employee of Harris Financial, Harris Savings Bank
or any subsidiary of Harris Savings Bank. In addition, none of the members of
the Committee had any relationship with Harris Financial or Harris Savings Bank
that would require disclosure under Item 404 of Regulation S-K of the Securities
and Exchange Commission, relating to insider transactions and indebtedness of
management except for the single purchase of real estate identified below
involving an entity associated with Mr. Poole.
Transactions By Harris Financial with Related Persons
Harris Financial originates consumer loans and loans to purchase or
refinance personal residences to its officers, directors and employees. All of
these loans are made in the ordinary course of business, on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons, and do not involve more
than the normal risk of collectibility or present other unfavorable features.
Harris Savings Bank makes loans available to its officers, directors and
employees on a basis consistent with statutory requirements. In prior years,
Harris Savings Bank waived application fees on loans made to officers and
directors in accordance with regulations then in effect.
Except as set forth below there have been no material transactions between
Harris Savings Bank, nor are any material transactions proposed, with any
director or executive officer of Harris Financial or Harris Savings Bank, or any
associate of the foregoing persons.
107
<PAGE>
Harris Savings Bank used the services of NAI/Commercial Industrial Realty
Company (NAI/CIR), a commercial real estate brokerage firm co-owned by Director
William A. Siverling, to represent Harris Savings Bank in securing new branch
locations and for marketing the sale of raw land taken into its portfolio as the
result of a foreclosure. The total paid in 1999 to NAI/CIR for brokerage
commissions was $70,000.
In February 1999, Harris Savings Bank sold to Sears Run Associates a 40
plus acre parcel of undeveloped land in Hampden Township, Cumberland County,
Pennsylvania acquired through foreclosure. Sears Run Associates is a
partnership in which Mr. Robert E. Poole owns a substantial interest. The
purchase price of $420,000 is consistent with Harris Savings Bank's independent
appraisal and the market and was negotiated by Mr. William Long, Senior Vice
President of Harris Savings Bank. After marketing the property for over a year
this transaction represented the highest offer received.
Harris Financial is not involved in any lending operations at this time.
Harris Savings Bank has entered into, and intends to continue to enter into,
banking and financial transactions in the ordinary course of business with
directors and officers of Harris Savings Bank and Harris Financial and their
associates on comparable terms and with similar interest rates as those
prevailing from time to time as an employee benefit equally available to all
Harris Savings Bank employees without preference to insiders over other
employees of Harris Savings Bank. Total loans outstanding from Harris Savings
Bank as of March 31, 2000, to Harris Savings Bank's officers and directors as a
group and members of their immediate families and companies in which they had an
ownership interest of 10% or more was approximately $13.6 million (including
available but unused lines of credit). The largest aggregate amount of
indebtedness outstanding at any time during fiscal year 1999 to officers and
directors of Harris Savings Bank as a group was approximately $13.6 million.
Harris Savings Bank intends that all future transactions involving executive
officers, directors, holders of 10% or more of the shares of any class of its
stock , and affiliates thereof, will contain terms no less favorable to Harris
Savings Bank than Harris Savings Bank makes available generally to its non-
insider employees as an employee benefit. A majority of Harris Savings Bank's
independent outside directors, not having any interest in the transaction, will
approve future transactions.
York Financial Management's Indebtedness to York Federal
Applicable law and regulations require that all loans or extensions of
credit to executive officers and directors must be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons (unless the loan or
extension of credit is made under a benefit program generally available to all
employees and does not give preference to any insider over any other employee)
and does not involve more than the normal risk of repayment or present other
unfavorable features. York Federal has adopted a policy to this effect. At June
30, 1999, loans to all employees, officers and directors of York Federal totaled
$15.0 million.
108
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
Beneficial Ownership of Harris Financial Common Stock
The following table includes, as of March 31, 2000, information as to
Harris Financial common stock beneficially owned by all directors and executive
officers of Harris Financial, and by all such persons as a group, and by persons
or entities, including any "group" as that term issued in Section 13(d)(3) of
the Securities Exchange Act of 1934, who were known to Harris Financial to be
the beneficial owner of more than 5% of the issued and outstanding Harris
Financial common stock.
<TABLE>
<CAPTION>
Amount of Shares
Owned and Nature Percent of Shares
Name and Address of of Beneficial of Common Stock
Beneficial Owners Ownership Outstanding
--------------------- ------------------- ------------------
<S> <C> <C>
Beneficial Owners of More
Than 5%:
Harris Financial, M.H.C. 25,500,000 76.0%
235 North Second Street
Harrisburg, PA 17101
Directors:
Charles C. Pearson, Jr. 52,000 (1) *
Ernest P. Davis 14,516 (2) *
Jimmie C. George 40,782 (3) *
Robert A. Houck 20,477 (4) *
Bruce S. Isaacman 27,223 (5) *
William E. McClure, Jr 38,848 (6) *
Robert E. Poole 15,121 (7) *
William A. Siverling 44,499 (8) *
Frank R. Sourbeer 57,423 (9) *
Donald B. Springer 19,789(10) *
Executive Officers:
James L. Durrell 74,420(11) *
William M. Long 59,486(12) *
Lyle B. Shughart 47,371(13) *
John C. Coulson 4,650(14) *
Richard C. Ruben 27,861(15) *
John W. Atkinson 24,439(16) *
Jane B. Tompkins 5,223(17) *
Andrew S. Samuel 5,622(18) *
Total shares beneficially
owned by all Directors
and executive officers
as a group (20 persons) 629,915(19) 1.8(19)
</TABLE>
------------------------
(1) Includes 25,000 shares of Harris Financial common stock that may be
received upon exercise of options that have vested or will vest within 60
days of the date as of which beneficial ownership is determined.
(2) Includes 400 shares of Harris Financial common stock that may be received
upon exercise of options that have vested or will vest within 60 days of
the date as of which beneficial ownership is determined.
(3) Includes 400 shares of Harris Financial common stock that may be received
upon exercise of options that have vested or will vest within 60 days of
the date as of which beneficial ownership is determined, and includes
13,316 shares held individually by Mr. George's spouse and 1,200 shares
held in trust for Mr. George's children.
(4) Includes 9,275 shares of Harris Financial common stock that may be received
upon exercise of options that have vested or will vest within 60 days of
the date as of which beneficial ownership is determined.
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(5) Includes 5,625 shares of Harris Financial common stock that may be received
upon exercise of options that have vested or will vest within 60 days of
the date as of which beneficial ownership is determined; includes 1,000
shares held individually by Mr. Isaacman's spouse; and 698 shares in Harris
Savings Bank's Deferred Compensation Plan's Rabbi Trust.
(6) Includes 400 shares of Harris Financial common stock that may be received
upon exercise of options that have vested or will vest within 60 days of
the date as of which beneficial ownership is determined, and 500 shares in
Harris Savings Bank's Recognition and Retention Plan, and 1,976 shares in
Harris Savings Bank's Deferred Compensation Plan's Rabbi Trust.
(7) Includes 5,725 shares of Harris Financial common stock that may be received
upon exercise of options that have vested or will vest within 60 days of
the date as of which beneficial ownership is determined, and 698 shares in
Harris Savings Bank's Deferred Compensation Plan's Rabbi Trust.
(8) Includes 8,817 shares of Harris Financial common stock held individually by
Mr. Siverling's spouse and 5,241 shares held in a profit sharing plan of
which Mr. Siverling is the beneficiary. Includes 4,498 shares held in
Harris Savings Bank's Deferred Compensation Plan's Rabbi Trust and 400
shares that may be received upon exercise of options that have vested or
will vest within 60 days of the date as of which beneficial ownership is
determined.
(9) Includes 1,000 shares of Harris Financial common stock held individually by
Mr. Sourbeer's spouse, 400 shares that may be received upon exercise of
options that have vested or will vest within 60 days of the date as of
which beneficial ownership is determined, and 3,072 shares held in Harris
Savings Bank's Deferred Compensation Plan's Rabbi Trust.
(10) Includes 400 shares of Harris Financial common stock that may be received
upon exercise of options that have vested or will vest within 60 days of
the date as of which beneficial ownership is determined, 500 shares held in
Harris Savings Bank's Recognition and Retention Plan and 3,092 shares held
in Harris Savings Bank's Deferred Compensation Plan's Rabbi Trust.
(11) Includes 11,156 shares of Harris Financial common stock purchased and held
by Harris Savings Bank's employee stock ownership plan that are allocated
to Mr. Durrell's account and over which he exercises investment control and
33,500 shares of Harris Financial common stock that may be received upon
exercise of options that have vested or will vest within 60 days of the
date as of which beneficial ownership is determined.
(12) Includes 8,468 shares of Harris Financial common stock purchased and held
by Harris Savings Bank's employee stock ownership plan that are allocated
to Mr. Long's account and over which he exercises investment control and
1,200 of Harris Financial common stock that may be received upon exercise
of options that have vested or will vest within 60 days of the date as of
which beneficial ownership is determined.
(13) Includes 7,831 shares purchased and held by Harris Savings Bank's employee
stock ownership plan that are allocated to Mr. Shughart's account and over
which he exercises investment control, and 8,700 shares of Harris Financial
common stock that may be received upon exercise of options that have
vested or will vest within 60 days of the date as of which beneficial
ownership is determined.
(14) Includes 4,350 shares of Harris Financial common stock that may be received
upon exercise of options that have vested or will vest within 60 days of
the date as of which beneficial ownership is determined.
(15) Includes 852 shares of Harris Financial common stock held individually by
Mr. Ruben's spouse, 7,200 shares of Harris Financial common stock that may
be received upon exercise of options that have vested or will vest within
60 days of the date as of which beneficial ownership is determined, and
1,500 shares held in Harris Savings Bank's Recognition and Retention Plan.
(16) Includes 3,000 shares of Harris Financial common stock that may be received
upon exercise of options that have vested or will vest within 60 days of
the date as of which beneficial ownership is determined, and 10,900 shares
held in Harris Savings Bank's Deferred Compensation Plan's Rabbi Trust.
(17) Includes 1,200 shares of Harris Financial common stock that may be received
upon exercise of options that have vested or will vest within 60 days of
the date as of which beneficial ownership is determined.
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(18) Includes 1,200 shares of Harris Financial common stock that may be received
upon exercise of options that have vested or will vest prior to 60 after
March 31, 2000, and 2,922 shares held by Harris Savings Bank's employee
stock ownership plan that are allocated to Mr. Samuel's account over which
he exercises investment control.
(19) Assumes all outstanding options issued to the directors and officers have
been exercised.
Beneficial Ownership of York Financial Common Stock
Persons and groups owning in excess of 5% of York Financial's common stock
are required to file certain reports disclosing such ownership pursuant to the
Securities Exchange Act of 1934, as amended. Based upon such reports and
information, the following table sets forth, at the close of business on the
September 1, 1999, certain information as to those persons who were beneficial
owners of more than 5% of the outstanding shares of York Financial common stock.
Management knows of no persons other than the person set forth below who owned
more than 5% of the outstanding shares of York Financial's common stock at the
close of business on September 1, 1999. The table also sets forth information as
to the shares of York Financial common stock beneficially owned by the Chief
Executive Officer of York Financial, by York Financial's and York Federal's four
other most highly compensated individuals and by all executive officers and
directors of York Financial as a group.
<TABLE>
<CAPTION>
Percent of Shares of
Name and Address Amount and Nature of York Financial Common
of Beneficial Owner Beneficial Ownership(1) Stock Outstanding(1)
--------------------------- ------------------------ ------------------------
<S> <C> <C>
Beneficial Owners of More than 5%
Robert W. Pullo 588,096 (2) 6.13%
101 South George Street
York, Pennsylvania 17405
Directors
Cynthia A. Dotzel 105,580 (3) 1.10
Paul D. Mills 132,391 1.38
Byron M. Ream 95,239 0.99
Robert W. Erdos 168,459 (4) 1.76
Randall A. Gross 112,519 1.17
Carolyn E. Steinhauser 101,365 (5) 1.06
Thomas W. Wolf 316,699 (6) 3.30
Robert L. Simpson 49,782 (7) 0.52
Named Executive Officers (8)
Robert W. Pullo(9) 588,096 (2) 6.13
Robert A. Angelo, Esq. 244,699(10) 2.60
James H. Moss, CPA 149,534 1.56
Harry M. Zimmerman 10,280 0.11
Lynn D. Crenshaw 27,061 0.28
All Executive Officers and Directors
as a Group (19 Persons) 2,109,991(11) 21.98
</TABLE>
____________________
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a
person is deemed to be the beneficial owner, for purposes of this table, of
any shares of York Financial's common stock if he or she has shared voting
or investment power with respect to such security, or has a right to
acquire beneficial ownership at any time within 60 days from the close of
business on the date as of which beneficial ownership is determined. Except
as otherwise noted below, the table includes shares owned by spouses, other
immediate family members in trust and other forms of ownership, over which
the persons named in the table possess shared voting and investment power.
This table also includes shares of York Financial common stock subject to
outstanding options which will be exercisable within 60 days from the close
of business on the date as of which beneficial ownership is determined.
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<PAGE>
(2) Excludes 329,265 shares owned by the York Federal Employee Stock Ownership
Plan of which Mr. Pullo is the trustee. Also excludes 5,182 shares owned
by the spouse of Mr. Pullo for which he disclaims any voting or investment
power.
(3) Excludes 9,411 shares owned by the spouse of Ms. Dotzel, for which she
disclaims any voting or investment power. Excludes 20,637 shares Ms.
Dotzel holds as custodian for minor children under the Uniform Gifts to
Minors Act.
(4) Excludes 12,313 shares owned by the spouse of Mr. Erdos, for which he
disclaims any voting or investment power.
(5) Excludes 6,958 shares held by trusts for Ms. Steinhauser's children, of
which Ms. Steinhauser is a trustee.
(6) Includes 105,855 shares owned by affiliated companies of Mr. Wolf of which
he is an officer, director and principal stockholder. Excludes 5,897
shares owned by the spouse of Mr. Wolf, for which he disclaims any voting
or investment power. Excludes 3,435 shares Mr. Wolf holds as custodian for
minor children under the Uniform Gifts to Minors Act.
(7) Includes 5,383 shares held in trust in a Deferred Compensation Plan
sponsored by Mr. Simpson's employer.
(8) Securities and Exchange Act regulations define the term "named executive
officers" to include all individuals serving as chief executive officer
during the next recently completed year, regardless of compensation level,
and the four most highly compensated executive officers, other than the
chief executive officer, whose total annual salary and bonus for the last
completed fiscal year exceeded $100,000. Messrs. Pullo, Angelo, Moss and
Zimmerman, and Ms. Crenshaw were York Financial's "named executive
officers" for the fiscal year ended June 30, 1999.
(9) Mr. Pullo is also a director of York Financial.
(10) Excludes 4,753 shares owned by the spouse of Mr. Angelo for which he
disclaims any voting or investment power. Includes 53,072 shares owned by
the spouse of Mr. Angelo for which he shares voting and investment power.
(11) Includes 763,414 shares of common stock which may be received upon the
exercise of stock options which are exercisable within 60 days of the date
as of which beneficial ownership is determined.
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<PAGE>
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table presents certain information as to the approximate
purchases of New Harris Financial common stock by each director and executive
officer of Harris Financial, by each director and executive officer of York
Financial who will become a director or executive officer of New Harris
Financial, and by all such persons as a group. Indicated purchases include
purchases by associates of each person. The table does not include purchases by
the employee stock ownership plan. No individual has entered into a binding
agreement to purchase these shares and, therefore, actual purchases could be
more or less than indicated. For purposes of the following table, sufficient
shares are assumed to be available to satisfy subscriptions by all persons,
whether or not such person has priority subscription rights. All purchases by
the persons identified below will be for the same purchase price as is paid by
other subscribers.
Proposed Subscriptions
-----------------------------
Number
of
Name(1) Shares Amount
--------------------- ------ ------
Ernest P. Davis ..............
Jimmie C. George .............
Robert A. Houck ..............
Bruce S. Isaacman ............
William E. McClure, Jr. ......
Robert E. Poole ..............
William A. Silverling ........
Frank R. Sourbeer ............
Donald B. Springer ...........
Robert W. Pullo ..............
Cynthia A. Dotzel ............
Byron M. Ream ................
Randall A. Gross .............
Carolyn E. Steinhauser .......
Thomas W. Wolf ...............
Robert L. Simpson ............
John C. Coulson ..............
Richard C. Ruben .............
Jane B. Tompkins .............
Andrew S. Samuel .............
Robert A. Angelo. ............
James H. Moss ................
Harry M. Zimmerman ...........
Lynn D. Crenshaw .............
All current and proposed
directors and executive
officers as a group (__
persons) ...................
_______________________
(1) Purchases by each individual represent less than 1.0% of the shares sold in
the stock offering.
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<PAGE>
THE CONVERSION AND STOCK OFFERING
The Board of Directors of Harris Financial and New Harris Financial and the
Board of Trustees of Harris MHC have adopted the plan of conversion, and
submitted it to the Office of Thrift Supervision for approval. The plan of
conversion has not yet been approved by the Office of Thrift Supervision.
Approval of the plan of conversion by the Office of Thrift Supervision, should
such approval be given, will not constitute an endorsement of the offering by
the Office of Thrift Supervision.
General
On March 27, 2000, Harris MHC's Board of Trustees and New Harris
Financial's and Harris Financial's Board of Directors unanimously adopted the
plan of conversion, which has since been amended, pursuant to which the
corporate existence of Harris MHC will end and the interest of Harris Financial
owned by Harris MHC will be sold in a stock offering. The stock offering
includes a subscription offering to qualifying depositors of Harris Savings Bank
and Harris Savings Bank's employee stock ownership plan. Shares may also be
offered for sale in a community offering and an underwritten public offering.
New Harris Financial will be a savings and loan holding company regulated
by the Office of Thrift Supervision. Harris MHC and Harris Financial have each
applied to the Office of Thrift Supervision to become a savings and loan holding
company, and Harris Savings Bank has applied to become a federally-chartered
savings bank. The plan of conversion must be approved by Harris Savings Bank's
depositors, Harris Financial's stockholders, and by the Office of Thrift
Supervision. The plan of conversion has been submitted to the Office of Thrift
Supervision for approval but has not yet been approved. The plan has also been
submitted to a vote of Harris Savings Bank's depositors and Harris Financial's
stockholders at a special meeting that will be held on September __, 2000.
The aggregate price of the shares of common stock to be issued in the
conversion will be within the stock offering range, subject to a 15% increase.
The offering range has been established by Harris Financial and Harris MHC based
upon an independent appraisal of the estimated pro forma market value of the
common stock of New Harris Financial. The appraisal was prepared by RP
Financial, a consulting firm experienced in the valuation and appraisal of banks
and other financial institutions. The independent appraisal will be affirmed or,
if necessary, updated at the termination of the offering. See "--How We
Determined the Offering Range and the $10.00 Price Per Share" for additional
information as to the determination of the estimated pro forma market value of
the common stock.
All shares sold in the stock offering will be sold at $10.00 per share.
New Harris Financial intends to offer shares of its common stock in the
following general order of priority: (1) in a subscription offering; (2) in a
community offering; and (3) in an underwritten public offering. If New Harris
Financial does not receive orders for 19,550,000 shares in the subscription and
community offering, then, in Harris Financial's discretion in order to issue the
minimum number of shares necessary to complete the stock offering, up to
5,000,000 of the unsubscribed shares may applied to the acquisition by merger of
York Financial. New Harris Financial intends to reserve for sale in the public
offering 7,500,000 shares not subscribed in the subscription offering. If any
community offering shares are not accepted in order to accommodate the public
offering, Harris Financial and New Harris Financial will not allocated
unsubscribed shares to York Financial stockholders. The subscription offering
is expected to expire at 10:00 a.m., local time, on September __, 2000. The
community offering is expected to be conducted concurrently. The public offering
may commence during or as soon as practicable after the conclusion of the
subscription offering.
The following is a brief summary of the terms of the conversion. A copy of
the plan of conversion is available from Harris Savings Bank upon request and is
available for inspection at the offices of Harris Savings Bank and at the Office
of Thrift Supervision. The plan is also filed as an exhibit to the Registration
Statement of which this prospectus is a part, copies of which may be obtained
from the Securities and Exchange Commission. See "Additional Information."
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<PAGE>
Reasons for the Conversion
The conversion of Harris MHC from the mutual holding company form of
organization and New Harris Financial's stock offering are necessary to complete
the merger with York Financial. The stock offering and merger will allow New
Harris Financial to expand the products and services that are offered by Harris
Financial and York Financial and to offer such products and services to a larger
community. Because of the stock offering and merger, Harris Financial will be
in a better position to:
. increase its lending activities, especially to support the growth of
business banking;
. expand its branch office network;
. invest in securities;
. further diversify the products and services that it offers;
. improve and increase its delivery systems, such as expanding internet
banking services; and
. market its services to customers of other banks who have been
adversely affected by recent consolidations in the local banking
market.
The stock offering is also intended to provide an additional source of
capital for New Harris Financial to:
. finance acquisitions of other financial institutions or other
businesses related to banking; and
. pay dividends to stockholders.
After the stock offering, New Harris Financial will be able to issue
additional shares of common stock to raise capital or to finance acquisitions.
At the present time, New Harris Financial is not planning any additional capital
issuances, mergers, or material acquisitions. New Harris Financial believes that
the stock offering will give customers and the local community the opportunity
to become equity owners of New Harris Financial, and to participate in possible
stock price appreciation and cash dividends. New Harris Financial believes that
through expanded local stock ownership, existing customers and others who
purchase common stock will try to support New Harris Financial by consolidating
their banking business with, and increasing their referrals to, Harris Savings
Bank.
Harris Financial intends to initially invest the proceeds from the sale of
common stock in short-term investments, and later in longer-term investments and
loans, in order to enhance our profitability and facilitate growth.
Additionally, our stronger capital position after the offering will enhance
operating flexibility, support additional expansion and provide a cushion for
absorbing unanticipated losses. We will also use a portion of the cash proceeds
from the offering to extend a loan to the employee stock ownership plan to
permit it to purchase shares of common stock issued in the offering. Proceeds
may also be used to pay dividends to stockholders or for other general purposes.
See "How We Intend to Use the Proceeds From the Offering" for a description of
our intended use of proceeds.
After considering the advantages and risks of the conversion, as well as
applicable fiduciary duties, the Board of Trustees of Harris MHC and the Board
of Directors of Harris Financial and New Harris Financial unanimously approved
the plan of conversion as being in the best interests of Harris MHC, Harris
Financial, Harris Savings Bank, our depositors and the communities that we
serve.
The conversion, stock offering and merger are all inter-related. The
parties will not complete any of the transactions unless they complete all
three. The transactions will be completed simultaneously.
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<PAGE>
How Harris Financial Determined the Offering Range and the $10.00 Price Per
Share
The plan of conversion requires that the purchase price of the common stock
must be based on the appraised pro forma market value of the common stock, as
determined on the basis of an independent valuation. Harris MHC has retained RP
Financial to make the independent valuation. RP Financial's fees for its
services in making such appraisal are estimated to be $145,000. In addition,
Harris MHC has agreed to pay RP Financial $35,000 to assist Harris Financial to
prepare a business plan. Harris Financial and New Harris Financial will
indemnify RP Financial and its employees and affiliates against losses
(including any losses in connection with claims under the federal securities
laws) arising out of its services as appraiser, except where RP Financial's
liability results from its negligence or bad faith.
RP Financial relied on information presented in this prospectus, including
the consolidated financial statements, in preparing the appraisal. RP Financial
also considered the following factors, among others:
. the operating results and financial condition of Harris Financial,
Harris MHC and Harris Savings Bank, and the economic and demographic
conditions in Harris Savings Bank's existing market area;
. a comparative evaluation of the operating and financial statistics of
Harris Financial with those of other similarly situated financial
institutions located in the Mid-Atlantic region;
. the impact of the offering on Harris Financial's equity and earnings
potential;
. the pro forma impact of the acquisition of York Financial, including
the issuance of shares to the York Financial stockholders consistent
with the merger agreement;
. dividends that may be paid by New Harris Financial; and
. the trading market for securities of comparable institutions and
general conditions in the market for such securities.
On the basis of the foregoing, RP Financial has advised Harris Financial
and Harris MHC that, in its opinion, dated June 9, 2000, the midpoint of the
estimated range of the market value of the common stock of New Harris Financial
that will be issued in the mutual-to-stock conversion of Harris MHC, including;
. shares sold in the offering,
. shares for which subscription have not been accepted in the offering
and that are issued to York Financial stockholders as merger
consideration, and
. shares issued to Harris Financial stockholders in exchange for their
shares of Harris Financial,
was $302.8 million, and ranged from a minimum of $257.4 million to a maximum of
$348.3 million (the estimated valuation range). Including the shares issued to
York Financial stockholders in the merger, the midpoint of the pro forma range
of the market capitalization of New Harris Financial was $477.2 million, and
ranged from $414.1 million to $526.1 million. If New Harris Financial does not
receive orders for at least 19,550,000 shares in the subscription and community
offering, then, in New Harris Financial's discretion, in order to issue the
minimum number of shares necessary to complete the stock offering, up to
5,000,000 of the unsubscribed shares may be applied to the acquisition by merger
of York Financial. If all 5,000,000 shares are so issued, then the pro forma
market capitalization of New Harris Financial can range as low as $364.1
million. The number of shares that will be offered for sale in the offering,
based on the valuation range, will range from a minimum of 19,550,000 shares to
a maximum of 26,450,000 shares. The maximum of the estimated valuation range
may be increased by 15% and the
116
<PAGE>
number of shares of common stock to be issued in the stock offering may be
increased to 30,417,500 shares due to changes in the market and general
financial and economic conditions without the resolicitation of subscribers.
The Board of Trustees of Harris MHC and the Board of Directors of Harris
Financial held meetings to review and discuss the appraisal report prepared by
RP Financial. Representatives of RP Financial participated in the meeting to
explain the contents of the appraisal report. The boards reviewed the methods
that RP Financial used to determine the pro forma market value of the common
stock and the appropriateness of the assumptions that RP Financial used in
determining this value. The boards determined that the common stock will be sold
at $10.00 per share, which is the price most commonly used in conversion stock
offerings.
The valuation prepared by RP Financial is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
shares of New Harris Financial common stock. RP Financial did not independently
verify the consolidated financial statements and other information provided by
Harris Financial, Harris MHC, or Harris Savings Bank, nor did RP Financial value
independently the assets or liabilities of Harris Financial. The valuation
considers New Harris Financial as a going concern and should not be considered
as an indication of the liquidation value of New Harris Financial. Moreover,
because the valuation is necessarily based upon estimates and projections, all
of which are subject to change from time to time, no assurance can be given that
persons purchasing shares in the offering will thereafter be able to sell such
shares at prices at or above the purchase price.
The maximum of the estimated valuation range may be increased by up to 15%
and the number of shares of common stock to be issued in the stock offering may
be increased to up to 30,417,500 shares due to regulatory considerations,
changes in the market and general financial and economic conditions without the
resolicitation of subscribers. See "-- Limitations on Common Stock Purchases"
as to the method of distribution and allocation of additional shares that may be
issued in the event of an increase in the estimated valuation range.
New Harris Financial will not sell any shares of common stock unless RP
Financial confirms to Harris MHC, Harris Financial, New Harris Financial and to
the Office of Thrift Supervision that, to the best of its knowledge, nothing of
a material nature has occurred which, taking into account all relevant factors,
would cause RP Financial to conclude that the appraisal report is incompatible
with its estimate of the pro forma market value of the common stock upon the
conclusion of the offering.
If RP Financial concludes that the pro forma market value of the common
stock is either more than 15% above the maximum of the estimated valuation range
or less than the adjusted minimum of the estimated valuation range, Harris
Financial and New Harris Financial may:
. terminate the plan of conversion and return all subscription funds
promptly, paying interest at Harris Savings Bank's passbook savings
rate of interest and cancel all account withdrawal authorizations;
. establish a new estimated valuation range and either:
- hold a new offering; or
- provide subscribers the opportunity to change or cancel their
orders (a resolicitation); or
- take such other actions as permitted by the Office of Thrift
Supervision in order to complete the offering.
If a resolicitation is commenced, unless an affirmative response is
received from a subscriber within a designated period of time, all funds will be
promptly returned to the subscriber and account withdrawal authorizations
canceled as described above.
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<PAGE>
A copy of the appraisal report of RP Financial, including any amendments
made to it, and the detailed memorandum of the appraiser setting forth the
method and assumptions for such appraisal are available for inspection at the
main office of Harris Financial.
Subscription Offering and Subscription Rights
New Harris Financial has granted subscription rights to the following
persons in the following order of priority:
. First, eligible accounts holders. Depositors with deposits in Harris
Savings Bank with balances aggregating $50 or more ("qualifying
deposits") as of December 31, 1998.
. Second, Harris Savings Bank's employee stock ownership plan. Harris
Savings Bank's employee stock ownership plan will have a second
priority right to purchase up to 8% of the shares issued in the
offering.
. Third, supplemental eligible account holders. Depositors with
balances aggregating $50 or more in Harris Savings Bank on June 30,
2000, other than those depositors who qualify as eligible account
holders.
. Fourth, other depositors. Harris Savings Bank depositors on August
______, 2000, other than those depositors who qualify as eligible
account holders or supplemental eligible account holders.
All subscriptions will be subject to the terms of the plan of conversion
and the availability of common stock.
Priority 1: Eligible Account Holders. Each eligible account holder will
receive, as first priority and without payment, non-transferable rights to
subscribe for up to 500,000, or $5,000,000, of the common stock offered in the
offering. See "--Limitations on Common Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions
by eligible account holders, shares first will be allocated so as to permit each
subscribing eligible account holder to purchase a number of shares equal to the
lesser of 100 shares or the number of shares subscribed for. Thereafter,
unallocated shares will be allocated among the remaining eligible account
holders whose subscriptions remain unfilled in the proportion that the amount of
their respective qualifying deposit bears to the total amount of qualifying
deposits of all eligible account holders whose subscriptions remain unfilled.
However, no fractional shares shall be issued.
To ensure a proper allocation of stock, each eligible account holder must
list on his or her stock order form all deposit accounts in which such eligible
account holder had an ownership interest at December 31, 1998. Failure to list
an account or providing incorrect information could result in the loss of all or
part of an allocation that would have been made if all accounts had been
disclosed. The subscription rights of eligible account holders who are also
directors, trustees, or officers of Harris Savings Bank or Harris MHC or their
associates will be subordinated to the subscription rights of other eligible
account holders to the extent attributable to increased deposits in the one-year
period preceding December 31, 1998.
Priority 2: The Tax-Qualified Employee Benefit Plans. Harris Savings
Bank's employee stock ownership plan will receive, as a second priority and
without payment, non-transferable subscription rights to purchase up to 8% of
the common stock issued in the offering, including a number of shares equal to
8% of unsubscribed shares applied to the acquisition of York Financial.
Subscriptions by the employee stock ownership plan will not be aggregated with
shares of common stock purchased directly by or which are otherwise attributable
to any other participants in the offering, including subscriptions of directors,
officers or employees.
Priority 3: Supplemental Eligible Account Holders. To the extent that
there are shares remaining after
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<PAGE>
satisfaction of the subscriptions by eligible account holders and the employee
stock ownership plan, each supplemental eligible account holder will receive, as
a third priority and without payment, non-transferable rights to subscribe for
up to 500,000 shares, or $5,000,000, of the common stock offered in the
offering. See "--Limitations on Common Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions
by supplemental eligible account holders, available shares first will be
allocated among subscribing supplemental eligible account holders so as to
permit each supplemental eligible account holder to purchase a number of shares
equal to the lesser of 100 shares or the number of shares subscribed for.
Thereafter, unallocated shares will be allocated among the remaining
supplemental eligible account holders whose subscriptions remain unfilled in the
proportion that the amount of their respective qualifying deposit bears to the
total amount of qualifying deposits of all supplemental eligible account holders
whose subscriptions remain unfilled. However, no fractional shares shall be
issued.
To ensure proper allocation of stock, each supplemental eligible account
holder must list on his or her stock order form all deposit accounts in which
such supplemental eligible account holder had an ownership interest at June 30,
2000. Failure to list an account or providing incorrect information could result
in the loss of all or part of an allocation.
Priority 4: Other depositors. To the extent that there are shares
remaining after satisfaction of the subscriptions by eligible account holders,
the employee stock ownership plan and supplemental eligible account holders,
each other depositor will receive, as a third priority and without payment, non-
transferable rights to subscribe for up to 500,000 shares, or $5,000,000, of the
common stock offered in the offering. See "--Limitations on Common Stock
Purchases."
If there are not sufficient shares available to satisfy all subscriptions
by other depositors, available shares will be allocated among subscribing other
depositors in proportion to their subscriptions. However, no fractional shares
shall be issued.
To ensure proper allocation of stock, each other depositor must list on his
or her stock order form all deposit accounts in which such other depositor had
an ownership interest at August ________, 2000. Failure to list an account or
providing incorrect information could result in the loss of all or part of an
allocation.
Expiration Date for the Subscription Offering. The subscription offering
and all subscription rights will expire at 10:00 a.m., local time, on September
__, 2000, unless we extend the end of the offering period. We may extend the end
of the offering period for up to 45 days without notifying you. We may further
extend the end of the offering period with the approval of the Office of Thrift
Supervision, however, we will notify subscribers if we do so, and give
subscribers the opportunity to increase, decrease or rescind their
subscriptions. If the stock offering is not completed, all funds delivered to
Harris Financial will be returned promptly with interest at our passbook savings
rate and all withdrawal authorizations will be canceled.
Persons in Non-qualified States or Foreign Countries. We will make
reasonable efforts to comply with the securities laws of all states in the
United States in which persons entitled to subscribe for stock pursuant to the
plan of conversion reside. However, we are not required to offer stock in the
subscription offering to any person who resides in a foreign country.
Community Offering
To the extent that shares remain available for purchase after satisfaction
of all subscriptions received in the subscription offering, New Harris Financial
may offer shares for sale pursuant to the plan of conversion in a community
offering to the public with preference given to natural persons residing in
Harris Savings Bank's local community, stockholders of Harris Financial and York
Financial as of the voting record date. No person may purchase more than 500,000
shares, or $5,000,000, of the common stock offered in the offering. We may
accept or reject orders, in whole or in part, in the community offering at our
discretion. As to the
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orders or partial orders we accept, if sufficient shares are available, we will
satisfy each order up to 2% of the shares sold in the offering and thereafter
remaining shares will be allocated on an equal number of shares per order basis.
The community offering, if any, may commence concurrently with or
subsequent to the commencement of the subscription offering and will terminate
no later than 45 days after the expiration of the subscription offering unless
extended by Harris Financial and New Harris Financial, with the approval of the
Office of Thrift Supervision, if necessary. We may terminate the community
offering as soon as we have received orders for at least the minimum number of
shares available for purchase in the offering.
The opportunity to subscribe for shares of common stock in the community
offering is subject to our right, in our sole discretion, to accept or reject
any order in whole or in part either at the time of receipt of an order or as
soon as practicable following the expiration date. If we reject a subscription
in part, the subscriber will not have the right to cancel the remainder of the
subscription.
Marketing Arrangements in the Subscription and Community Offering
We have engaged Ryan, Beck & Co. as financial and marketing agent in
connection with the offering of the common stock. Ryan, Beck & Co. has agreed to
use its best efforts to assist us with the solicitation of subscriptions for
shares of common stock in the offering. Ryan, Beck is also Harris Financial's
financial advisor in the merger with York Financial.
Ryan, Beck & Co. will receive an advisory and management fee of $150,000,
and a fee of 1.2% of the dollar value of shares sold in the subscription and
community offering to persons other than officers, directors, employees, or
immediate family members of such persons, and the employee stock ownership plan.
Ryan, Beck & Co. will also be reimbursed for its reasonable out-of-pocket
expenses, including legal fees of up to $75,000. These fees are in addition to
the fees Ryan, Beck will receive as financial advisor in the merger.
Directors, Officers and Employees. Directors and executive officers of
Harris Financial and Harris Savings Bank may participate in the solicitation of
offers to purchase common stock. Other employees of Harris Savings Bank may
participate in the offering in ministerial capacities or provide clerical work
in effecting a sales transaction. Such other employees have been instructed not
to solicit offers to purchase common stock or provide advice regarding the
purchase of common stock. Harris Financial and New Harris Financial will rely on
Rule 3a4-1 under the Securities Exchange Act of 1934, and sales of common stock
will be conducted within the requirements of Rule 3a4-1, so as to permit
directors, officers and employees to participate in the sale of common stock. No
director, officer or employee of Harris Financial, New Harris Financial or
Harris Savings Bank will be compensated in connection with his or her
participation by the payment of commissions or other remuneration based either
directly or indirectly on transactions in common stock.
Procedure for Purchasing Shares in Subscription and Community Offerings
Use of Order Forms. To purchase shares in the subscription offering and the
community offering, an executed order form with the required payment for each
share subscribed for, or with appropriate authorization for withdrawal from a
subscriber's deposit accounts at Harris Financial (which must be given by
completing the appropriate blanks on the stock order form), must be received by
Harris Savings Bank by 10:00 a.m., local time, on the indicated expiration date,
unless extended. You may submit your order form by mail using the return
envelope provided or by overnight courier to the indicated address, or by
bringing your order form to our Stock Information Center. Order forms will not
be accepted in Harris Savings Bank's branch offices. Stock order forms which
are not received by such time or are executed defectively or are received
without full payment (or correct withdrawal instructions) are not required to be
accepted. In addition, we are not obligated to accept orders submitted on
photocopied or facsimiled order forms. We have the power to waive or permit the
correction of incomplete or improperly executed forms, but do not represent that
we will do so. Once received, an executed order form may not be modified,
amended or rescinded without our consent unless the conversion has not been
completed within 45 days of the end of the subscription offering or we conduct a
resolicitation of subscribers for some other reason. If
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resolicitation is commenced, subscribers will have an opportunity to change or
cancel their orders. Unless an affirmative response is received from a
subscriber by a designated time, all funds will be promptly returned to the
subscriber with interest at Harris Savings Bank's passbook savings rate, and all
account withdrawal authorizations will be canceled.
In order to ensure that eligible account holders, supplemental eligible
account holders and other depositors are properly identified as to their stock
purchase eligibility, depositors must list on the stock order form all deposit
accounts as of the applicable eligibility record date giving all names on each
account and the account numbers.
To ensure that each purchaser receives a prospectus at least 48 hours prior
to the expiration date for the offering, in accordance with Rule 15c2-8 of the
Securities Exchange Act of 1934, no prospectus will be mailed later than five
days prior to such date or hand delivered any later than two days prior to such
date. Execution of the stock order form will confirm receipt or delivery in
accordance with Rule 15c2-8. Order forms will only be distributed when preceded
or accompanied by a prospectus.
Payment for Shares. Payment for subscriptions may be made by personal
check, bank check, money order or by authorization of withdrawal from your
current deposit accounts maintained at Harris Savings Bank. Interest will be
paid on payments made by check, bank check or money order at our passbook
savings rate of interest from the date payment is received until the completion
or termination of the stock offering. If payment is made by authorization of
withdrawal from deposit accounts, the funds authorized to be withdrawn will
remain in the account and continue to accrue interest at the contractual rates
until completion or termination of the stock offering, but a hold immediately
will be placed on such funds, thereby making them unavailable to the depositor.
Harris Savings Bank will waive any applicable penalties for early
withdrawal from certificates of deposit. If the remaining balance in a
certificate account is reduced below the applicable minimum balance requirement
at the time that the funds are transferred under the authorization, the
certificate will be canceled at the time of the withdrawal, without penalty, and
the remaining balance will be converted into a statement savings account and
will earn interest at the passbook savings rate.
The employee stock ownership plan will not be required to pay for the
shares subscribed for at the time it subscribes. Rather, the employee stock
ownership plan may pay for such shares of common stock subscribed for at the
purchase price upon completion of the offering; provided, that there is in force
from the time of its subscription until such time, a loan commitment to lend to
the employee stock ownership plan the aggregate purchase price of the shares for
which it subscribed. Harris Financial intends to provide such a loan to the
employee stock ownership plan.
Owners of self-directed individual retirement accounts may use the assets
of such individual retirement accounts to purchase shares of common stock in the
subscription and community offerings, provided that such individual retirement
accounts are not maintained at Harris Savings Bank. Persons with individual
retirement accounts maintained at Harris Savings Bank must have their accounts
transferred to an unaffiliated institution or broker to purchase shares of
common stock in the subscription and community offerings. In addition, the
provisions of Employee Retirement Income Security Act and Internal Revenue
Service regulations require that officers, trustees and 10% stockholders who use
self-directed individual retirement accounts funds to purchase shares of common
stock in the subscription and community offerings make such purchases for the
exclusive benefit of the individual retirement accounts. Assistance on how to
transfer individual retirement accounts maintained at Harris Savings Bank can be
obtained by calling the Stock Information Center. Subscribers interested in
using funds in an individual retirement account to purchase common stock should
contact the Stock Information Center as soon as possible.
Certificates representing shares of common stock purchased will be mailed
to purchasers to the addresses specified in properly completed order forms, as
soon as practicable following completion of the offering. Any certificates
returned as undeliverable will be disposed of in accordance with applicable law.
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Stock Information Center
If you have any questions regarding the offering, please call the Stock
Information Center at (800) ______________, from _____ a.m. to _____ p.m., local
time, Monday through Friday. The Stock Information Center will be located at
Harris Savings Bank's operations center at 449 Eisenhower Boulevard, Harrisburg,
Pennsylvania 17111.
Restrictions on Transfer of Subscription Rights and Shares of Common Stock
Regulations prohibit any person with subscription rights from transferring
or entering into any agreement or understanding to transfer the legal or
beneficial ownership of the subscription rights issued under the plan of
conversion or the shares of common stock to be issued upon their exercise. Such
rights may be exercised only by the person to whom they are granted and only for
such person's account. Each person exercising such subscription rights will be
required to certify on the stock order form that such person is purchasing
shares solely for such person's own account and that such person has no
agreement or understanding regarding the sale or transfer of such shares. The
regulations also prohibit any person from offering or making an announcement of
an offer or an intent to make an offer to purchase such subscription rights or
shares of common stock prior to the completion of the offering.
We will pursue any and all legal and equitable remedies (including
forfeiture) in the event we become aware of the transfer of subscription rights
and will not honor orders known by us to involve the transfer of such rights.
Public Offering
Shares of common stock offered for sale, but not sold in the subscription
and community offering or issued to York Financial stockholders as part of the
merger consideration, may be sold to underwriters for resale to the general
public in a standby firm commitment underwritten public offering. In the public
offering, no person may purchase more than $5,000,000 of common stock. The
public offering will commence during or as soon as practicable following the
expiration of the subscription offering. It may terminated at any time, but no
later than 45 days after the expiration of the subscription offering.
As co-managers of the public offering, Ryan, Beck and Legg Mason may form
and manage a syndicate of underwriters that would include Ryan, Beck and Legg
Mason. An underwriting agreement between the co-managers and Harris Financial
and New Harris Financial specifying the terms of the underwriting, will not be
negotiated and entered into until immediately prior to the public offering.
Pursuant to the underwriting agreement, the underwriters will be obligated,
subject to certain conditions to purchase an agreed upon number of shares of
common stock offered for sale by Harris Financial and New Harris Financial that
have not been sold in the subscription or community offerings or issued as part
of the merger consideration in the merger with York Financial. Harris Financial
and New Harris Financial intend to reserve for sale in the public offering
7,500,000 shares not subscribed in the subscription offering. If an agreement
is entered into, the underwriters will purchase the shares from New Harris
Financial at $10.00 per share, less an underwriting discount, estimated to be
7%, and will resell the shares to the general public at a price of $10.00 per
share. If fewer than 7,500,000 shares are available, New Harris Financial will
pay Ryan, Beck and Legg Mason a standby fee of 1.5% of the difference between
$75.0 million and the gross proceeds of shares sold in the public offering, as
compensation for acting as standby underwriters. This fee will be in addition
to the underwriting discount on shares sold in the public offering. Harris
Financial and New Harris Financial will reimburse the underwriters for their
reasonable out-of-pocket expenses, including legal fees of up to $50,000.
In addition, for a period of 30 days following the public offering, New
Harris Financial expects to grant the underwriters an option to purchase
additional shares, not to exceed 15% of the shares sold in the public offering,
on
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the same terms as other shares purchased by the underwriters. The underwriters
may exercise the option to purchase additional shares solely to cover over-
allotments, if any, incurred in the public offering.
Harris Financial and New Harris Financial have agreed that, without the
prior consent of the underwriters, New Harris Financial will not, directly or
indirectly, offer, sell or otherwise dispose of any shares of common stock or
any securities which may be converted into common stock for a period of 180 days
after the date of this document, except for the grant or exercise of options
under stock option plans or the issuance of securities in connection with a
merger, acquisition or similar transaction. All officers and directors of Harris
Financial and New Harris Financial have agreed that, without the prior written
consent of the underwriters, they will not, directly or indirectly, offer, sell
or otherwise dispose of any share of common stock or any securities which may be
converted into or exchanged for such shares for a period of 180 days after the
date of this document.
Harris Financial and New Harris Financial have agreed to indemnify the
underwriters and persons who control the underwriters against liabilities,
including liabilities under the Securities Act of 1933 and liabilities arising
from breaches of the representations and warranties contained in the
underwriting agreement, and to contribute to payment that the underwriters may
be required to make for those liabilities.
Limitations on Common Stock Purchases and Ownership
The plan of conversion includes the following limitations on the number of
shares of common stock which may be purchased in the stock offering:
(1) No subscription for fewer than 25 shares will be accepted;
(2) No fractional shares will be allocated or issued;
(3) The tax-qualified employee benefit plans are permitted to purchase up
to 8% of the shares of common stock issued in the offering and, as a
tax-qualified employee benefit plan, the employee stock ownership plan
intends to purchase 8% of the shares of common stock issued in the
offering;
(4) The officers, directors, and trustees of Harris MHC, Harris Financial,
New Harris Financial and Harris Savings Bank and their associates in
the aggregate, excluding purchases by the tax-qualified employee
benefit plans, may purchase up to 25% of the shares of stock issued in
the offering; and
(5) Individual Purchase Limitation. Except for the tax-qualified employee
benefit plans, the maximum amount of common stock that may be
purchased in any category of the offering by any person is 500,000
shares, or $5,000,000, of common stock subject to increase or decrease
as described below.
(6) Group Purchase Limitation. Except for the tax-qualified employee
benefit plans, the maximum amount of common stock that may be
purchased in all categories of the offering by any person, together
with associates of, and groups of person acting in concert with, such
person, shall not exceed 5% of the shares issued in the stock
offering, subject to increase or decrease as described below. This
limitation does not apply to shares of New Harris Financial received
by York Financial stockholders in the York merger.
(7) Ownership Limitation. Except for the tax-qualified employee benefit
plans, no person or persons acting in concert may purchase shares in
the stock offering if, prior to the issuance in the acquisition of
York Financial, they will own more than 5.0% of the shares of New
Harris Financial common stock that will be outstanding after the
conversion and stock offering, subject to increase as described below.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, the maximum purchase and ownership limitations
may be altered by Harris Financial, New Harris Financial and Harris MHC, in
their sole discretion and without further notice to or solicitation of
subscribers or other prospective purchasers, in the following manner: (i) the
Individual and Group Purchase Limitations may each be increased to up to 9.99%
of the total shares issued in the stock offering (including shares applied to
the York Financial acquisition), provided that orders exceeding 5% of the shares
issued; (ii) the Ownership Limitation may be increased from 5% to 9.99%,
provided that orders exceeding 5% of the shares of New Harris Financial common
stock that will be outstanding after the conversion and stock offering, shall
not exceed in the aggregate 10% of the total shares of New Harris Financial
common stock that will be outstanding after the conversion and stock offering;
(iii) the Individual and Group Limitation may be decreased to not less than .10%
of the number of shares issued in the stock offering. If the purchase
limitations are increased, subscribers for the maximum amount in the
subscription offering will be given the opportunity to increase their
subscriptions up to the then applicable limit. Requests to purchase additional
shares of common stock under this provision will be determined by and in the
sole discretion of the Board of Directors of Harris Financial and the Board of
Trustees of Harris MHC and, if necessary, allocated giving priority in
accordance with the priorities set forth in the plan of conversion and described
in this prospectus.
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If Harris Financial increases the maximum of the offering range, the
additional shares will first be issued to the employee stock ownership plan to
satisfy its order for 8% of the total shares issued in the offering and then
will be allocated in accordance with the priorities and procedures described
above.
The term "acting in concert means (i) knowing participation in a joint
activity or interdependent conscious parallel action towards a common goal
whether or not pursuant to an express agreement; or (ii) a combination or
pooling of voting or other interests in the securities of an issuer for a common
purpose pursuant to any contract, understanding, relationship, agreement or
other arrangement, whether written or otherwise. A person or company which acts
in concert with another person or company ("other party") shall also be deemed
to be acting in concert with any person or company who is also acting in concert
with that other party, except that any tax-qualified employee stock benefit plan
will not be deemed to be acting in concert with its trustee or a person who
serves in a similar capacity solely for the purpose of determining whether stock
held by the trustee and stock held by the plan will be aggregated.
The term "associate" means (i) any corporation or organization (other than
Harris Financial, New Harris Financial, Harris Savings Bank or a majority-owned
subsidiary of Harris Savings Bank) of which such person is an officer or partner
or is, directly or indirectly, the beneficial owner of 10% or more of any class
of equity securities, (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity except that the term does not include any non-
tax-qualified employee stock benefit plan or any tax-qualified employee stock
benefit plan in which a person has a substantial beneficial interest or serves
as a trustee or in a similar fiduciary capacity, and except that, for purposes
of aggregating total shares that may be held by officers and directors the term
does not include any tax-qualified employee stock benefit plan, and (iii) any
relative or spouse of such person, or any relative of such spouse, who has the
same home as such person or who is a director or officer of Harris Financial,
New Harris Financial, Harris Savings Bank, or Harris MHC, or any of their
parents or subsidiaries.
We have the sole discretion to determine whether prospective purchasers are
"associates" or "acting in concert." Trustees, directors and officers are not
treated as associates of each other solely by virtue of holding such positions.
We have the right in our sole discretion to reject any order submitted by a
person whose representations we believe to be false or who we otherwise believe,
either alone or acting in concert with others, is violating or circumventing, or
intends to violate or circumvent, the terms and conditions of the plan of
conversion.
Restrictions on Purchase or Transfer of Shares After the Conversion
All shares of common stock purchased in connection with the offering by an
officer, director, or trustee of Harris Savings Bank, Harris Financial, New
Harris Financial or Harris MHC, or an officer or director of York Financial who
becomes an officer or director of New Harris Financial and Harris Savings Bank
will be subject to a restriction that the shares generally may not be sold for a
period of one year following the date of purchase, except in the event of the
death of such officer, director, or trustee. Each certificate for restricted
shares will bear a legend giving notice of this restriction on transfer, and
instructions will be issued to the effect that any transfer within this time
period of any certificate or record ownership of the shares other than as
provided above is a violation of the restriction. Any shares of common stock
issued at a later date as a stock dividend, stock split, or otherwise, with
respect to the restricted stock will be similarly restricted. The directors and
executive officers of New Harris Financial and Harris Savings Bank will also be
subject to the federal insider trading rules and any other applicable
requirements of the federal securities laws.
Purchases of outstanding shares of common stock of New Harris Financial by
directors, trustees or officers of Harris MHC, Harris Financial or Harris
Savings Bank and any person who was a director, trustee or officer at any time
after the date of the adoption of the plan of conversion, and their associates
during the three-year period following the offering may be made only through a
broker or dealer registered with the Securities and Exchange Commission, except
with the prior approval of the Office of Thrift Supervision. This restriction
does not apply,
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however, to negotiated transactions involving more than 1% of New Harris
Financial's outstanding common stock or to the purchase of stock pursuant to a
stock option plan or any tax qualified employee stock benefit plan or non-tax
qualified employee stock benefit plan of New Harris Financial or Harris Savings
Bank, including any employee plans, recognition plans or restricted stock plans.
Office of Thrift Supervision regulations applicable to New Harris Financial
as a result of the conversion restrict New Harris Financial's ability to
repurchase shares of its common stock for up to three years after the
conversion. The regulations as of the date of this prospectus prohibit
repurchases for a period of three years, except pursuant to a repurchase offer
approved by the Office of Thrift Supervision and made to all stockholders on a
pro rata basis, or the repurchase of qualifying shares of a Director. The
regulations also provide that notwithstanding the foregoing restriction and
except as provided below, beginning one year following completion of the
conversion, New Harris Financial may repurchase its common stock so long as:
(1) the repurchases within the following two years are part of an open-
market program not involving greater than 5% of its outstanding
capital stock during a 12-month period;
(2) the repurchases do not cause Harris Savings Bank to become
"undercapitalized" within the meaning of the Office of Thrift
Supervision prompt corrective action regulation; and
(3) New Harris Financial provides to the Regional Director of the Office
of Thrift Supervision no later than ten days prior to the commencement
of a repurchase program written notice containing a full description
of the program to be undertaken and such program is not disapproved by
the Regional Director.
In addition, under current Office of Thrift Supervision policies,
repurchases may be allowed in the first year following the conversion and in
amounts greater than 5% in the second and third years following the conversion
provided there are valid and compelling business reasons for such repurchases
and the Office of Thrift Supervision does not object to such repurchases.
Interpretation, Amendment and Termination
All interpretations of the plan of conversion by the Board of Trustees of
Harris MHC and/or the Board of Directors of Harris Financial will be final,
subject to the authority of the Office of Thrift Supervision. The plan of
conversion provides that, if deemed necessary or desirable, the plan of
conversion may be substantively amended as a result of comments from regulatory
authorities or otherwise at any time prior to solicitation of proxies from
depositors and stockholders with respect to the vote on the plan of conversion,
and at any time thereafter by the Board of Trustees of Harris MHC with the
concurrence of the Office of Thrift Supervision. Any amendment to this plan of
conversion made after approval by depositors and stockholders with the approval
of the Office of Thrift Supervision shall not necessitate further approval by
depositors unless otherwise required by the Office of Thrift Supervision. The
plan of conversion may be terminated by the Board of Trustees of Harris MHC at
any time prior to the vote of depositors and stockholders, and at any time
thereafter with the concurrence of the Office of Thrift Supervision.
Approvals Required
The plan of conversion must also be approved by a majority of the total
votes entitled to be cast by Harris Savings Bank depositors, and at least two-
thirds of the outstanding common stock of Harris Financial, including at least a
majority of the votes cast, in person or by proxy, by stockholders other than
Harris MHC. By their approval of the plan of conversion, depositors of Harris
MHC will also be deemed to approve the merger of the Harris MHC into Harris
Savings Bank and the merger of an interim savings bank into New Harris
Financial. Harris Savings Bank has filed an application with the Office of
Thrift Supervision to convert from a Pennsylvania savings bank to a federal
savings association. Accordingly, the plan of conversion must also be approved
by the Office of Thrift Supervision.
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Liquidation Rights
In the unlikely event of a complete liquidation of Harris Savings Bank
prior to the conversion, all claims of creditors of Harris Savings Bank,
including those of depositors to the extent of their deposit balances, would be
paid first. Thereafter, if there were any assets of Harris Savings Bank
remaining, these assets would be distributed to stockholders, including Harris
MHC. Were Harris MHC and Harris Financial to liquidate prior to the conversion,
all claims of creditors would be paid first. Then, if there were any assets of
Harris MHC remaining, members of Harris MHC would receive these remaining
assets, pro rata, based upon the deposit balances in their deposit account in
Harris Savings Bank immediately prior to liquidation. In the unlikely event
that Harris Savings Bank were to liquidate after conversion, all claims of
creditors, including those of depositors, would also be paid first, followed by
distribution of the "liquidation account" to certain depositors, with any assets
remaining thereafter distributed to New Harris Financial as the holder of Harris
Savings Bank's capital stock. Pursuant to applicable rules and regulations, a
post-conversion merger, consolidation, sale of bulk assets or similar
combination or transaction with another insured savings institution would not be
considered a liquidation and, in these types of transactions, the liquidation
account would be assumed by the surviving institution.
The plan of conversion provides for the establishment, upon the completion
of the conversion, of a special "liquidation account" for the benefit of
eligible account holders and supplemental eligible account holders in an amount
equal to the greater of:
. the sum of Harris MHC's ownership interest in the surplus and
reserves of Harris Financial as of the date of its latest balance
sheet contained in this prospectus, and the restricted retained income
account that reflects dividends waived by Harris MHC; or
. the retained earnings of Harris Savings Bank at the time it
reorganized into the mutual holding company structure.
The purpose of the liquidation account is to provide eligible account holders
and supplemental eligible account holders who maintain their deposit accounts
with Harris Savings Bank after the conversion with a distribution upon complete
liquidation of New Harris Financial after the conversion. Each eligible account
holder and supplemental eligible account holder, if he were to continue to
maintain his deposit account at Harris Savings Bank, would be entitled, on a
complete liquidation of New Harris Financial after the conversion to an interest
in the liquidation account prior to any payment to the stockholders of New
Harris Financial. Each eligible account holder and supplemental eligible
account holder would have an initial interest in the liquidation account for
each deposit account, including regular accounts, transaction accounts such as
negotiable order of withdrawal accounts, money market deposit accounts, and
certificates of deposit, with a balance of $50 or more held in Harris Savings
Bank on December 31, 1998, or June 30, 2000, respectively. Each eligible
account holder and supplemental eligible account holder will have a pro rata
interest in the total liquidation account for each such deposit account based on
the proportion that the balance of each such deposit account on December 31,
1998, or June 30, 2000, respectively, bore to the balance of all deposit
accounts in Harris Savings Bank on such dates.
If, however, on any December 31 annual closing date of Harris Savings Bank,
commencing after December 31, 2000, the amount in any such deposit account is
less than the amount in the deposit account on December 31, 1998, or June 30,
2000, respectively, or any other annual closing date, then the interest in the
liquidation account relating to such deposit account would be reduced from time
to time by the proportion of any such reduction, and such interest will cease
to exist if such deposit account is closed. In addition, no interest in the
liquidation account would ever be increased despite any subsequent increase in
the related deposit account. Payment pursuant to liquidation rights of eligible
account holders and supplemental eligible account Holders would be separate and
apart from any insured deposit accounts to such depositor. Any assets remaining
after the above liquidation rights of eligible account holders and supplemental
eligible account holders are satisfied would be distributed to New Harris
Financial as the sole shareholder of Harris Savings Bank.
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Tax Aspects
The conversion will be effected as follows:
. Harris Savings Bank has formed New Harris Financial as a first-tier
Pennsylvania stock holding company;
. New Harris Financial will charter an interim federal savings bank
("Interim Savings Bank");
. Harris Financial will convert to a federal subsidiary holding company
and will then exchange its charter for an interim stock savings bank
charter and simultaneous merge into Harris Savings Bank in a tax-free
reorganization under Section 368(a)(1)(A) of the Internal Revenue
Code, stockholders of Harris Financial will constructively exchange
their shares of all Harris Financial for shares of Harris Savings
Bank;
. Harris MHC will convert to a federal mutual holding company and will
then exchange its charter for an interim stock savings bank charter
and simultaneous merge into Harris Savings Bank in a tax-free
reorganization under Section 368(a)(1)(A) of the Internal Revenue
Code, each eligible account holder and supplemental eligible account
holder will receive an interest in a liquidation account of the Harris
Savings Bank in exchange for such person's interest in Harris MHC; and
. Interim Savings Bank will merge into Harris Savings Bank with Harris
Savings Bank's stockholders exchanging their Harris Savings Bank
common stock (which they constructively received when Harris Financial
merged into Harris Savings Bank) for New Harris Financial common stock
in a tax-free reorganization under Internal Revenue Code Section
368(a)(1)(A) by reason of Internal Revenue Code Section 368(a)(2)(E).
. Contemporaneously with the mergers set forth above, New Harris
Financial will offer its common stock for sale in a subscription and
community offering.
Consummation of the conversion is expressly conditioned upon the prior receipt
of an opinion of counsel or tax advisor with respect to federal and state income
taxation that indicates that the conversion will not be a taxable transaction to
Harris MHC, Harris Financial, New Harris Financial, Harris Savings Bank, Interim
Savings Bank, eligible account holders, supplemental eligible account holders,
or members of Harris MHC.
Pursuant to Revenue Procedure 00-3, the Internal Revenue Service has stated
that it will not rule on whether a transaction qualifies as a tax-free
reorganization under Internal Revenue Code Section 368(a)(1)(A), including a
transaction that qualifies under Internal Revenue Code Section 368(a)(1)(A) by
reason of Internal Revenue Code Section 368(a)(2)(E), or whether the taxpayer
qualifies under those sections for nonrecognition of income treatment but that
it would rule on significant sub-issues that must be resolved to determine
whether the transaction qualifies under the above sections. In several
instances, the Internal Revenue Service has ruled favorably on certain
significant sub-issues associated with downstream mergers of mutual holding
companies into their less than 80 percent owned subsidiary savings associations.
In these cases, the Internal Revenue Service has ruled that:
. the exchange of the member's equity interests in the mutual holding
company for interests in a liquidation account established at the
savings association will satisfy the continuity of interest
requirement with respect to the merger of the mutual holding company
into the savings association;
. pursuant to the merger of an interim savings association into the
savings association, the stock holding company will acquire "control,"
as defined in Internal Revenue Code Section 368(c), of the savings
association as the interests in the liquidation account and the shares
of savings association stock previously held by the mutual holding
company will be disregarded; and
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. the continuity of interest requirement will not be violated by the
exchange of stock holding company stock for savings association stock
in the merger of an interim savings association into the savings
association.
In December 1994, the Internal Revenue Service issued Revenue Procedure 94-
76 which states that the Internal Revenue Service will not issue private letter
rulings with respect to downstream mergers of a corporation into a "less than
80% distributee," i.e., a corporation, such as Harris Financial, in which the
merging corporation, i.e., Harris MHC, possesses less than 80% of the total
voting power of the stock of the corporation and less than 80% of the total
value of the stock of the corporation. The Internal Revenue Service assumed
this "no-rule" position to study whether these downstream mergers circumvent the
purpose behind the repeal of General Utilities & Operating Co. v. Helvering, 296
U.S. 200 (1935). In Notice 96-6, the Internal Revenue Service indicated that it
intended to close its study project on this issue, however, Rev. Proc. 96-22
made permanent the Internal Revenue Service decision not to issue advance
rulings on these downstream mergers. Counsel to Harris Financial is of a view
that the downstream merger to effect the conversion of Harris MHC to stock form,
where after consummation of the conversion, Harris Financial holds 100% of the
shares of Harris Savings Bank and the untaxed appreciation of Harris Savings
Bank remains in corporate solution, is not the type of downstream merger that
can be considered as circumventing the repeal of General Utilities. If,
however, the Internal Revenue Service were to conclude that these mergers
circumvent the repeal of General Utilities, the Internal Revenue Service could
issue correcting regulations that could have the effect of taxing to the merging
corporation, as of the effective time of the merger, the fair market value of
the assets of a corporation over its basis in these assets. If regulations are
issued, it is expected that they would apply on a prospective basis and would
have no effect on transactions consummated before their issuance. Harris
Financial will receive an opinion of counsel that, in the absence of a change in
the regulations prior to the consummation of the conversion, and based on
current law and regulations, the merger of Harris MHC into Harris Financial will
qualify as a tax-free merger under Internal Revenue Code Section 368(a)(1)(A),
as more fully discussed below.
Prior to the effective date of the conversion, Harris MHC and Harris
Financial will receive an opinion of counsel, Luse Lehman Gorman Pomerenk &
Schick, A Professional Corporation, which will indicate that the federal income
tax consequences of the conversion will be as follows:
(1) the conversion of Harris MHC from a Pennsylvania mutual holding
company to a federal mutual holding company and subsequent charter
exchange to become an interim stock savings bank will each constitute
a mere change in identity, form or place of reorganization within the
meaning of Internal Revenue Code Section 368(a)(1)(F);
(2) the conversion of Harris Financial to a federally chartered subsidiary
holding company and subsequent charter exchange to become an interim
stock savings bank will each constitute a mere change in identity,
form or place of organization within the meaning of Section
368(a)(1)(F) of the Internal Revenue Code;
(3) the simultaneous mergers of Harris MHC and Harris Financial with and
into Harris Savings Bank will each qualify as a reorganization within
the meaning of Internal Revenue Code Section 368(a)(1)(A);
(4) Harris Financial will not recognize any gain or loss on the transfer
of its assets to Harris Savings Bank in exchange for shares of common
stock in Harris Savings Bank which are constructively received by the
old Harris shareholders;
(5) no gain or loss will be recognized by Harris Savings Bank upon receipt
of the assets of Harris Financial;
(6) the basis of the assets of Harris Financial to be received by Harris
Savings Bank will be the same as the basis of such assets in the hands
of Harris Financial immediately prior to the transfer;
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(7) the holding period of the assets of Harris Financial (other than stock
in Harris Savings Bank) to be received by Harris Savings Bank will
include the holding period of those assets in the hands of Harris
Financial immediately prior to the transfer;
(8) Harris Financial shareholders will not recognize any gain or loss upon
their constructive exchange of Harris Financial common stock for
Harris Savings Bank common stock;
(9) the exchange of the members' equity interests in Harris MHC for
interests in a liquidation account established at Harris Savings Bank
will satisfy the continuity of interest requirement with respect to
the merger of Harris MHC into Harris Savings Bank;
(10) Harris MHC will not recognize any gain or loss on the transfer of its
assets to Harris Savings Bank in exchange for an interest in a
liquidation account established in Harris Savings Bank for the benefit
of Harris MHC members who remain depositors of the Bank;
(11) no gain or loss will be recognized by Harris Savings Bank upon the
receipt of the assets of Harris MHC in exchange for the transfer to
the Harris MHC members of an interest in a liquidation account in
Harris Savings Bank;
(12) the basis of the assets of Harris MHC, other than Harris Savings Bank
common stock, to be received by Harris Savings Bank will be the same
as the basis of those assets in the hands of Harris MHC immediately
prior to the transfer, the basis of Harris Financial common stock will
be zero;
(13) the holding period of the assets of Harris MHC to be received by
Harris Savings Bank will include the holding period of those assets in
the hands of Harris MHC immediately prior to the transfer;
(14) Harris MHC members will recognize no gain or loss upon the receipt of
an interest in the liquidation account in Harris Savings Bank in
exchange for their membership interest in Harris MHC;
(15) the conversion of Harris Savings Bank to a federal stock savings bank
will constitute a mere change in identity, form or place of
reorganization within the meaning of Internal Revenue Code Section
368(a)(1)(F);
(16) the merger of Interim Savings Bank into Harris Savings Bank with
Harris Savings Bank as the surviving institution qualifies as a
reorganization within the meaning of Internal Revenue Code Section
368(a)(1)(A), pursuant to Internal Revenue Code Section 368(a)(2)(E);
(17) Interim Savings Bank will not recognize any gain or loss on the
transfer of its assets to Harris Savings Bank in exchange for Harris
Savings Bank stock and the assumption by Harris Savings Bank of the
liabilities, if any, of Interim Savings Bank;
(18) Harris Savings Bank will not recognize any gain or loss on the receipt
of the assets of Interim Savings Bank in exchange for Harris Savings
Bank stock;
(19) Harris Savings Bank's basis in the assets received from Interim
Savings Bank in the proposed transaction will, in each case, be the
same as the basis of those assets in the hands of Interim Savings Bank
immediately prior to the transaction;
(20) Harris Savings Bank's holding period for the assets received from
Interim Savings Bank in the proposed transaction will, in each
instance, include the period during which those assets were held by
Interim Savings Bank;
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(21) New Harris Financial will not recognize any gain or loss upon its
receipt of Harris Savings Bank stock solely in exchange for New Harris
Financial common stock;
(22) Harris Savings Bank stockholders (formerly stockholders of Harris
Financial who constructively exchanged their shares of Harris
Financial for Harris Savings Bank common stock in the merger of Harris
Financial into Harris Savings Bank ) will not recognize any gain or
loss upon their exchange of Harris Savings Bank stock solely for
shares of New Harris Financial common stock;
(23) cash received in the merger of Interim Savings Bank into Harris
Savings Bank by a Harris Savings Bank stockholder in lieu of a
fractional share interest of New Harris Financial common stock will be
treated as having been received as a distribution in full payment in
exchange for a fractional share interest of New Harris Financial
common stock which the stockholders would otherwise be entitled to
receive, and will qualify as capital gain or loss, assuming Harris
Savings Bank common stock surrendered in exchange therefor was held as
a capital asset by the stockholder;
(24) each stockholder's aggregate basis in his or her New Harris Financial
common stock received in the exchange, including fractional shares
which the stockholders otherwise would be entitled to receive, will be
the same as the aggregate basis of the Harris Savings Bank common
stock surrendered in exchange therefor;
(25) each stockholder's holding period in his or her New Harris Financial
common stock received in the exchange, including fractional shares
which such stockholder otherwise would be entitled to receive, will
include the period during which Harris Savings Bank common stock
surrendered was held (such period shall also include the stockholder's
holding period of the Harris Financial common stock), provided that
Harris Savings Bank common stock surrendered is a capital asset in the
hands of the stockholder on the date of the exchange;
(26) New Harris Financial's basis in the Harris Savings Bank common stock
which it receives would be the same as the basis of the property
exchanged for the Harris Savings Bank common stock;
(27) no gain or loss will be recognized by New Harris Financial on the
receipt of money in exchange for New Harris Financial common stock in
the offering; and
(28) no gain or loss will be recognized by eligible account holders and
supplemental eligible account holders upon distribution to them of
nontransferable subscription rights to purchase New Harris Financial
common stock, provided that the amount paid for New Harris Financial
common stock equals its fair market value.
The form of this opinion has been filed with the Securities and Exchange
Commission as an exhibit to New Harris Financial's registration statement.
An opinion on the Pennsylvania state income tax consequences which will be
consistent with the federal tax opinion will be issued prior to the conversion
by ________________, tax advisors to Harris MHC and New Harris Financial.
In the view of RP Financial, which view is not binding on the Internal
Revenue Service, the subscription rights do not have any value, based on the
fact that these rights are acquired by the recipients without cost, are
nontransferable and of short duration, and afford the recipients the right only
to purchase the common stock at a price equal to its estimated fair market
value, which will be the same price as the subscription price for the
unsubscribed shares of common stock. If the subscription rights granted to
eligible account holders and supplemental eligible account holders are deemed to
have an ascertainable value, receipt of these rights could result in taxable
gain to those eligible account holders and supplemental eligible account holders
who exercise the subscription rights in an amount equal to the value and New
Harris Financial could recognize gain on a distribution.
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Eligible account holders and supplemental eligible account holders are
encouraged to consult with their own tax advisors as to the tax consequences in
the event that subscription rights are deemed to have an ascertainable value.
Unlike private rulings, an opinion of counsel is not binding on the
Internal Revenue Service and the Internal Revenue Service could disagree with
the conclusions reached therein. Depending on the conclusion or conclusions
with which the Internal Revenue Service disagrees, the Internal Revenue Service
may take the position that the transaction is taxable to any one or more of
Harris MHC and/or the members of Harris MHC, Harris Financial, the public
stockholders of Harris Financial, and/or the eligible account holders and
supplemental eligible account holders who exercise their subscription rights.
In the event of a disagreement, there can be no assurance that the Internal
Revenue Service would not prevail in a judicial or administrative proceeding.
MERGER WITH YORK FINANCIAL
On March 27, 2000, Harris Financial, Harris MHC and Harris Savings Bank
entered into a definitive agreement and plan of reorganization with York
Financial and York Federal. The agreement provides for the acquisition of York
Financial by Harris Financial, and the merger of York Financial with and into
New Harris Financial. Based on the agreement and plan of reorganization, all
outstanding shares of York Financial common stock will be automatically
converted into and become shares of New Harris Financial common stock based upon
an exchange ratio and other terms that the parties negotiated in the agreement
and plan of reorganization. The agreement and plan of reorganization was
unanimously approved by the boards of Harris MHC, Harris Financial, Harris
Savings Bank, York Financial and York Federal Savings and Loan Association.
Among the important provisions in the merger agreement are the following:
. The merger will occur only after all of the conditions to its
completion have been satisfied or waived, including approval of the
merger agreement by York Financial stockholders and Harris Financial
stockholders.
. The merger agreement may be terminated even after Harris Financial and
York Financial stockholders approve it under a variety of
circumstances, including upon mutual agreement of Harris Financial and
York Financial, by either of Harris Financial or York Financial if the
other of them has materially breached the merger agreement, by either
of them if the merger has not been completed by December 31, 2000,
unless Harris Financial exercises its right to extend the termination
date to March 31, 2001, by Harris Financial if the appraised value of
the shares issued in the offering is less than $255.0 million, and by
York Financial if the appraised value of the shares issued in the
offering is less than $255.0 million and Harris Financial does not
agree to maintain the York merger exchange ratio at 1.550.
. If New Harris Financial does not receive orders for 19,550,000 shares
in the subscription and community offering, then, in New Harris
Financial's discretion, in order to issue the minimum number of shares
necessary to complete the stock offering, up to 5,000,000 of the
unsubscribed shares may applied to the acquisition by merger of York
Financial.
As an inducement for Harris Financial to enter into the merger agreement,
York Financial has granted Harris Financial an option to purchase up to
2,011,346 shares of York Financial common stock at an exercise price of $12.25
per share. The stock option agreement is intended to increase the likelihood
that the merger will be completed in accordance with its terms because it has
the effect of discouraging offers by third parties to acquire York Financial.
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RESTRICTIONS ON ACQUISITION OF NEW HARRIS FINANCIAL
The following discussion is a summary of certain provisions of federal law
and regulations and Pennsylvania corporate law relating to stock ownership and
transfers, the Board of Directors and business combinations, all of which may be
deemed to have "anti-takeover" effects. The description of these provisions is
necessarily general and reference should be made to the actual law and
regulations.
Harris Savings Bank is currently a Pennsylvania savings bank regulated by
the Pennsylvania Department of Banking. Harris Savings Bank has filed an
application to re-charter as a Federal savings bank regulated by the Office of
Thrift Supervision. Harris Financial is currently a Pennsylvania corporation
and bank holding company regulated by the Federal Reserve Board, although it has
filed an application to re-charter as a Federal mid-tier stock holding company
regulated by the Office of Thrift Supervision. New Harris Financial will be a
savings and loan holding company regulated by the Office of Thrift Supervision.
The following discussion assumes that these applications have been approved, and
that Harris Savings Bank and Harris Financial are regulated by the Office of
Thrift Supervision.
Conversion Regulations
Office of Thrift Supervision regulations prohibit any person from making an
offer, announcing an intent to make an offer or participating in any other
arrangement to purchase stock or acquiring stock or subscription rights in a
converting institution or its holding company from another person prior to
completion of its conversion. Further, without the prior written approval of
the Office of Thrift Supervision, no person may make such an offer or
announcement of an offer to purchase shares or actually acquire shares in the
converting institution or its holding company, for a period of three years from
the date of the completion of the conversion if, upon the completion of such
offer, announcement or acquisition, that person would become the beneficial
owner of more than 10% of the outstanding stock of the institution or its
holding company. The Office of Thrift Supervision has defined "person" to
include any individual, group acting in concert, corporation, partnership,
association, joint stock company, trust, unincorporated organization or similar
company, a syndicate or any other group formed for the purpose of acquiring,
holding or disposing of securities of an insured institution. However, offers
made exclusively to an association or its holding company, or an underwriter or
member of a selling group acting on the converting institution's, or its holding
company's, behalf for resale to the general public are excepted. The regulation
also provides civil penalties for willful violation or assistance in any such
violation of the regulation by any person connected with the management of the
converting institution or its holding company or who controls more than 10% of
the outstanding shares or voting rights of a converting or converted institution
or its holding company.
As permitted by Office of Thrift Supervision regulations, Harris Savings
Bank's charter will contain a provision whereby the acquisition or offer to
acquire ownership of more than 10% of the issued and outstanding shares of any
class of equity securities of Harris Savings Bank by any person, either directly
or through an affiliate of such person, will be prohibited for a period of five
years following the date of consummation of the conversion. Any stock in excess
of 10% acquired in violation of the charter provision will not be counted as
outstanding for voting purposes.
Change of Control Regulations
Under the Change in Bank Control Act, no person may acquire control of an
insured federal savings association or its parent holding company unless the
Office of Thrift Supervision has been given 60 days' prior written notice and
has not issued a notice disapproving the proposed acquisition. In addition,
Office of Thrift Supervision regulations provide that no company may acquire
control of a savings association without the prior approval of the Office of
Thrift Supervision. Any company that acquires such control becomes a "savings
and loan holding company" subject to registration, examination and regulation by
the Office of Thrift Supervision.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the
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savings association's directors, or a determination by the Office of Thrift
Supervision that the acquiror has the power to direct, or directly or indirectly
to exercise a controlling influence over, the management or policies of the
institution. Acquisition of more than 10% of any class of a savings
association's voting stock, if the acquiror also is subject to any one of eight
"control factors," constitutes a rebuttable determination of control under the
regulations. Such control factors include the acquiror being one of the two
largest stockholders. The determination of control may be rebutted by submission
to the Office of Thrift Supervision, prior to the acquisition of stock or the
occurrence of any other circumstances giving rise to such determination, of a
statement setting forth facts and circumstances which would support a finding
that no control relationship will exist and containing certain undertakings. The
regulations provide that persons or companies which acquire beneficial ownership
exceeding 10% or more of any class of a savings association's stock must file
with the Office of Thrift Supervision a certification form that the holder is
not in control of such institution, is not subject to a rebuttable determination
of control and will take no action which would result in a determination or
rebuttable determination of control without prior notice to or approval of the
Office of Thrift Supervision, as applicable. There are also rebuttable
presumptions in the regulations concerning whether a group "acting in concert"
exists, including presumed action in concert among members of an "immediate
family."
The Office of Thrift Supervision may prohibit an acquisition of control if
it finds, among other things, that:
(i) the acquisition would result in a monopoly or substantially lessen
competition;
(ii) the financial condition of the acquiring person might jeopardize the
financial stability of the institution; or
(iii) the competence, experience or integrity of the acquiring person
indicates that it would not be in the interest of the depositors or
the public to permit the acquisition of control by such person.
Restrictions in the New Harris Financial Articles of Incorporation and Bylaws
and Pennsylvania Law
Certain provisions of New Harris Financial's Articles of Incorporation and
Bylaws and Pennsylvania law which deal with matters of corporate governance and
rights of stockholders might be deemed to have a potential anti-takeover effect.
Provisions in the New Harris Financial's Articles and Bylaws provide, among
other things, (i) that the Board of Directors of New Harris Financial shall be
divided into classes; (ii) that special meetings of stockholders may only be
called by the Board of Directors of New Harris Financial; (iii) that
stockholders generally must provide New Harris Financial advance notice of
stockholder proposals and nominations for director and provide certain specified
related information; (iv) that no person may acquire more than 10% of the issued
and outstanding shares of any class of security of New Harris Financial; and (v)
the authority to issue shares of authorized but unissued Common Stock and
Preferred Stock and to establish the terms of any one or more series of
Preferred Stock, including voting rights. Provisions of the Pennsylvania
Business Corporation Law of 1988, as amended, applicable to New Harris Financial
provide, among other things, that (i) New Harris Financial may not engage in a
business combination with an "interested shareholder" (generally a holder of 20%
of a corporation's voting stock) during the five-year period after the
interested shareholder became such except under certain specified circumstances,
(ii) holders of Common Stock may object to a "control transaction" involving New
Harris Financial (generally the merger by a person or group of persons acting in
concert of at least 20% of the outstanding voting stock of a corporation) and
demand that they be paid a cash payment for the "fair value" of their shares
from the "controlling person or group," and (iii) any "profit," as defined,
realized by any person or group who is or was a "controlling person or group"
with respect to New Harris Financial from the disposition of any equity security
of New Harris Financial to any person shall belong to and be recoverable by New
Harris Financial when the profit is realized in a specific manner.
The foregoing provisions of the Article of Incorporation and Bylaws of New
Harris Financial and Pennsylvania law could have the effect of discouraging an
acquisition of New Harris Financial or stock purchases in furtherance of a
merger, and could accordingly, under certain circumstances, discourage
transactions which might otherwise have a favorable effect on the price of the
Common Stock.
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In addition, certain provisions of certain existing stock option plans and
recognition and retention plans provide for accelerated benefits to participants
in the event of a change in control of New Harris Financial or Harris Savings
Bank. See "Management of New Harris Financial--Benefits." In addition, certain
employment agreements to which New Harris Financial will be made a party provide
for specified benefits in the event of a change in control of New Harris
Financial or Harris Savings Bank. See "Management of New Harris Financial--
Employment Agreements." The foregoing provisions and limitations may make it
more costly for companies or persons to acquire control of New Harris Financial.
The Board of Directors believes that the provisions described above are
prudent and will reduce vulnerability to takeover attempts and certain other
transactions that are not negotiated with and approved by the Board of Directors
of New Harris Financial. The Board of Directors believes that these provisions
are in the best interests of New Harris Financial and its stockholders. In the
Board of Directors' judgment, the Board of Directors is in the best position to
determine the true value of New Harris Financial and to negotiate more
effectively for what may be in the best interests of its stockholders.
Accordingly, the Board of Directors believes that it is in the best interests of
New Harris Financial and its stockholders to encourage potential acquirors to
negotiate directly with the Board of Directors and that these provisions will
encourage such negotiations and discourage hostile takeover attempts. It is
also the Board of Directors' view that these provisions should not discourage
persons from proposing a merger or other transaction at prices reflective of the
true value of New Harris Financial and where the transaction is in the best
interests of all stockholders.
DESCRIPTION OF CAPITAL STOCK OF NEW HARRIS FINANCIAL
General
New Harris Financial is authorized to issue capital stock consisting of
100,000,000 shares of common stock, par value $.01 per share, and 10,000,000
shares of preferred stock, which may be issued in series and classes having such
rights, preferences, privileges and restrictions as New Harris Financial's Board
of Directors may determine. Each share of common stock will have the same
relative rights as, and will be identical in all respects with, each other share
of common stock. New Harris Financial's Board of Directors is authorized to
approve the issuance of common stock up to the amount authorized by the Articles
of Incorporation without stockholder approval. The common stock represents
nonwithdrawable capital, is not an account of an insurable type, and is not
insured by the Federal Deposit Insurance Corporation or any other government
agency. The common stock is not guaranteed by New Harris Financial or Harris
Savings Bank. Upon payment of the purchase price for the shares of common stock
issued in the offering, all such shares will be fully-paid, duly issued and
nonassessable.
Common Stock
Voting Rights. The holders of the common stock possess exclusive voting
rights in New Harris Financial except to the extent that shares of serial
preferred stock issued in the future may have voting rights. Each holder of the
common stock is entitled to one vote for each share held, except that the
Articles of Incorporation eliminates voting rights with respect to those shares
that are beneficially owned by any person in excess of 10% of the common stock
then outstanding excluding tax-qualified employee benefit plans. Stockholders
will not be permitted to cumulate their votes in the election of directors.
Dividends. The holders of the common stock will be entitled to receive and
to share equally in such dividends as may be declared by the Board of Directors
out of legally available funds.
Liquidation. In the unlikely event of any liquidation, dissolution, or
winding up New Harris Financial, the holders of common stock (and the holders of
any class or series of stock entitled to participate with the common stock in
the distribution of assets) will be entitled to receive all assets of New Harris
Financial available for distribution in cash or in kind after the payment of all
debts and liabilities, the satisfaction of obligations to depositors having an
interest in any liquidation account maintained by Harris Savings Bank, and the
payment of any
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accrued dividend claims. If New Harris Financial issues preferred stock, the
holders thereof may also have priority over the holders of the common stock in
the event of liquidation or dissolution.
Preemptive Rights; Redemption. Holders of the common stock will not be
entitled to preemptive rights with respect to any additional shares which may be
issued. The common stock is not subject to call for redemption. If New Harris
Financial determined to issue authorized but unissued shares in the future to
persons other than, or in addition to the existing stockholders, the interests
of existing stockholders would be diluted to the extent of the additional
issuance.
Serial Preferred Stock
None of the 10,000,000 authorized shares of serial preferred stock of New
Harris Financial will be issued in the offering. The Board of Directors is
authorized, without stockholder approval, to issue serial preferred stock and to
fix and state voting powers, designations, preferences or other special rights
of such shares. If and when issued, the serial preferred stock may rank senior
to the common stock as to dividend rights, liquidation preferences, or both, and
may have full, limited or no voting rights. Accordingly, the issuance of
preferred stock could adversely affect the voting and other rights of holders of
common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is ________________.
EXPERTS
The consolidated financial statements of Harris Financial included in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto and are included herein in reliance upon the report
of said firm as experts in accounting and auditing in giving said reports.
The consolidated financial statements of York Financial Corp. at June 30,
1999 and 1998, and for each of the three years in the period ended June 30,
1999, appearing in this Prospectus have been audited by Ernst & Young, LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
RP Financial has consented to the publication herein of the summary of its
report to Harris Financial and Harris MHC setting forth its opinion as to the
estimated pro forma market value of Harris Financial's common stock and its view
with respect to subscription rights.
The opinion regarding the state tax treatment of the mutual-to-stock
conversion referred to in this prospectus and elsewhere in the Registration
Statement has been rendered by Arthur Andersen, independent public accountants
and has been referred to herein in reliance upon the authority of such firm as
expert in giving said opinion.
LEGAL OPINIONS
The legality of the common stock and the federal income tax consequences of
the conversion will be passed upon for Harris MHC and Harris Financial by Luse
Lehman Gorman Pomerenk & Schick, A Professional Corporation, Washington, D.C.,
special counsel to New Harris Financial and Harris Financial. Certain legal
matters will be passed upon for Ryan, Beck and Co. and Legg Mason Wood Walker,
Incorporated by Foley, Hoag & Eliot, LLP, Boston, Massachusetts.
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ADDITIONAL INFORMATION
Harris Financial has filed with the Securities and Exchange Commission a
registration statement under the Securities Exchange Act of 1933 with respect to
the common stock. As permitted by the rules and regulations of the Securities
and Exchange Commission, this prospectus does not contain all the information
included in the registration statement. This information, including the
conversion valuation appraisal report which is an exhibit to the Registration
Statement as well as other reports, can be examined without charge at the public
reference facilities of the Securities and Exchange Commission located at 450
Fifth Street, N.W., Washington, D.C. 20549, and copies of this material can be
obtained from the Securities and Exchange Commission at prescribed rates. In
addition, the Securities and Exchange Commission maintains a website; the
address of the website is "http://www.sec.gov." The statements contained in
this prospectus as to the contents of any contract or other document filed as an
exhibit to the registration statement are, of necessity, brief descriptions
thereof and are not necessarily complete.
Harris MHC and New Harris Financial have filed an application for
conversion with the Office of Thrift Supervision. Pursuant to the rules and
regulations of the Office of Thrift Supervision, this prospectus omits certain
information contained in that application. The application may be examined at
the principal office of the Office of Thrift Supervision, 1700 G Street, N.W.,
Washington, D.C. 20552 and at the Office of the Regional Director of the Office
of Thrift Supervision located at 10 Exchange Place, 18th Floor, Jersey City, New
Jersey 07302.
New Harris Financial has registered its common stock with the Securities
and Exchange Commission under Section 12(g) of the Securities Exchange Act of
1934, and Harris Financial and the holders of its stock are subject to the proxy
solicitation rules, reporting requirements and restrictions on stock purchases
and sales by directors, officers and greater than 10% stockholders, the annual
and periodic reporting and other requirements of the Securities Exchange Act of
1934. Under the plan of conversion, New Harris Financial has undertaken that it
will not terminate the registration for a period of at least three years
following the conversion.
A copy of the conversion valuation appraisal report is available for
inspection at Harris Financial's headquarters. A copy of the plan of
conversion, including the Articles of Incorporation and the Bylaws of New Harris
Financial and Harris Savings Bank are available without charge from Harris
Financial.
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HARRIS FINANCIAL, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditor's Report........................................................... F-1
Consolidated Statements of Financial Condition
as of March 31, 2000 (Unaudited) and December 31, 1999 and 1998...................... F-2
Consolidated Statements of Income
for the three months ended March 31, 2000 and 1999 (Unaudited) and the years ended
December 31, 1999, 1998 and 1997..................................................... 31
Consolidated Statements of Shareholders' Equity
for the three months ended March 31, 2000 (Unaudited) and the years ended
December 31, 1999, 1998 and 1997..................................................... F-4
Consolidated Statements of Cash Flows
for the three months ended March 31, 2000 and 1999 (Unaudited) and the
years ended December 31, 1999, 1998 and 1997......................................... F-5
Notes to Consolidated Financial Statements............................................. F-7
</TABLE>
All schedules are omitted as the required information is not applicable or the
information is presented in the consolidated financial statements.
Financial statements of Harris MHC are not presented herein because Harris MHC
has insignificant assets other than stock of Harris Financial, and has no
significant liabilities and conducts no other business.
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(in thousands, except for share data)
<TABLE>
<CAPTION>
March 31, December 31,
----------------------------
2000 1999 1998
------------- ----------------------------
Assets (unaudited)
<S> <C> <C> <C>
Cash and cash equivalents $ 54,532 $ 73,613 $ 56,741
Marketable securities available-for-sale (note 4) 1,303,825 1,257,603 1,274,837
Loans receivable, net (note 5) 1,313,645 1,267,983 1,051,642
Loans held for sale, net 1,761 1,646 14,418
Loan servicing rights (note 6) 1,839 7,616 10,996
Investments in real estate and other joint ventures 40 51 7,262
Premises and equipment, net (note 7) 27,565 23,228 21,614
Intangible assets (note 8) 16,735 17,617 16,909
Accrued interest receivable 16,898 18,302 15,523
Income taxes receivable - - 635
Deferred tax asset, net (note 16) 22,191 17,402 -
Other assets 8,019 6,339 26,892
------------- ----------------------------
Total assets $ 2,767,050 $ 2,691,400 $ 2,497,469
============= ============================
Liabilities and Stockholders' Equity
Deposits (note 9) $ 1,439,688 $ 1,373,870 $ 1,205,379
Escrow 3,354 3,511 7,906
Accrued interest payable 16,867 10,292 6,965
Other borrowings (note 10) 1,123,375 1,118,000 1,069,254
Postretirement benefit obligation (note 13) 2,670 2,538 2,452
Deferred tax liability, net (note 16) - - 5,472
Income taxes payable 2,377 2,302 -
Other liabilities 11,521 11,563 10,071
------------- ----------------------------
Total liabilities 2,599,852 2,522,076 2,307,499
------------- ----------------------------
Commitments (notes 12 and 18)
Common stock $.01 par value, authorized 100,000,000 shares;
34,024,875 shares issued and 33,575,575 outstanding at
March 31, 2000 and 34,023,625 shares issued and 33,574,325
shares outstanding at December 31, 1999 and 33,993,500 shares
issued and 33,584,200 shares outstanding at December 31, 1998 340 340 340
Paid in capital 30,348 30,323 29,960
Retained earnings 178,698 175,158 158,386
Accumulated other comprehensive income (note 25) (35,065) (29,347) 8,106
Employee stock ownership plan (note 14) (271) (296) (396)
Recognition and retention plans (note 15) (454) (456) (456)
Treasury stock, 449,300 shares at March 31, 2000 and December
31, 1999 and 409,300 shares at December 31, 1998 (note 1) (6,398) (6,398) (5,970)
------------- ----------------------------
Total stockholders' equity 167,198 169,324 189,970
------------- ----------------------------
Total liabilities and stockholders' equity $ 2,767,050 $ 2,691,400 $ 2,497,469
============================================
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except for per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31, Years Ended December 31,
------------------------------ ------------------------------------
Interest income: 2000 1999 1999 1998 1997
------------------------------ ------------------------------------
Loans receivable: (unaudited)
<S> <C> <C> <C> <C> <C>
First mortgage loans $ 9,744 $ 11,251 $ 44,444 $ 44,874 $ 43,929
Commercial loans 7,136 4,255 22,197 11,694 6,767
Consumer and other loans 7,791 5,681 26,945 20,286 19,442
Held-for-sale - 719 866 3,719 1,879
Taxable investments 7,298 7,998 29,520 31,505 21,239
Taxfree investments 861 1,583 5,395 6,232 5,746
Dividends 1,752 2,226 7,896 9,138 7,821
Mortgage-backed securities 12,621 7,979 37,460 36,480 34,075
Money market investments 33 16 106 84 169
------------------------------ ------------------------------------
Total interest income 47,236 41,708 174,829 164,012 141,067
------------------------------ ------------------------------------
Interest expense:
Deposits (note 9) 15,582 12,470 52,807 50,532 54,383
Borrowed funds (note 10) 16,120 14,092 60,494 56,528 38,586
Escrow 16 25 90 90 116
------------------------------ ------------------------------------
Total interest expense 31,718 26,587 113,391 107,150 93,085
------------------------------ ------------------------------------
Net interest income 15,518 15,121 61,438 56,862 47,982
Provision for loan losses (note 5) 835 795 3,180 2,540 610
------------------------------ ------------------------------------
Net interest income after provision for loan losses 14,683 14,326 58,258 54,322 47,372
------------------------------ ------------------------------------
Noninterest income:
Service charges on deposits 1,601 1,233 5,907 4,186 2,156
Other service charges/commissions/fees 293 324 1,280 883 1,355
Net servicing income 242 - 737 137 2,183
Gain (loss) on sale of mortgage-backed securities, net (287) 1,313 1,363 2,199 3,576
Gain (loss) on sale of other securities, net 271 40 337 2,385 481
Gain on sale of loans, net 508 1,172 238 5,020 2,472
Other 106 (61) 895 735 2,336
------------------------------ ------------------------------------
Total noninterest income 2,734 4,021 10,757 15,545 14,559
------------------------------ ------------------------------------
Noninterest expense:
Salaries and benefits 5,730 5,772 22,176 22,336 19,006
Equipment expense 1,016 962 3,976 3,300 2,183
Occupancy expense 1,001 802 3,152 3,012 2,886
Advertising and public relations 430 483 1,849 2,047 2,091
FDIC insurance (note 9) 68 169 713 696 751
Director fees 94 83 293 322 333
Income from real estate operations 5 (216) (3,191) (554) (770)
Amortization and write-off of intangibles (note 8) 720 600 2,640 2,487 2,393
Consulting and other fees 740 465 2,893 2,000 1,400
Supplies, telephone and postage 886 888 3,509 2,965 2,226
Other 1,142 1,584 4,697 4,718 3,349
------------------------------ ------------------------------------
Total noninterest expense 11,832 11,592 42,707 43,329 35,848
------------------------------ ------------------------------------
Income before income taxes 5,585 6,755 26,308 26,538 26,083
Income tax expense (note 16) 1,565 1,822 7,625 7,309 8,312
------------------------------ ------------------------------------
Net income $ 4,020 $ 4,933 $ 18,683 $ 19,229 $ 17,771
============================== ====================================
Basic earnings per share (notes 1, 3, and 21) $ 0.12 $ 0.15 $ 0.56 $ 0.57 $ 0.53
============================== ====================================
Diluted earnings per share (notes 1, 3, and 21) $ 0.12 $ 0.15 $ 0.55 $ 0.57 $ 0.52
============================== ====================================
</TABLE>
See accompanying notes to financial statements.
All per share data has been restated to give effect of a 3 for 1 stock split in
1997.
F-2
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
The Three Months Ended March 31, 2000 (unaudited) and
The Years Ended December 31, 1999, 1998 and 1997
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Compre-
Common Paid in Retained hensive
Stock Capital Earnings Income (Loss)
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $336 $25,678 $124,812 $ 3,615
Net income 17,771
Dividends paid at $.20 per share (1,540)
Exercised stock options 2 480
Unrealized gains (losses) on securities (1) 7,117
Comprehensive income (loss)
ESOP stock committed for release
Earned portion of RRP plan
Excess of fair value above cost of
ESOP stock committed for release 1,139
Excess of fair value above cost of
earned portion of RRP stock 492
Tax benefit of RRP shares awarded
and options exercised 227
----------------------------------------------------------------
Balance at December 31, 1997 338 28,016 141,043 10,732
Net income 19,229
Dividends paid at $.22 per share (1,886)
Exercised stock options 2 731
Unrealized gains (losses) on securities (1) (2,626)
Comprehensive income (loss)
ESOP stock committed for release
Earned portion of RRP plan
Excess of fair value above cost of
ESOP stock committed for release 641
Excess of fair value above cost of
earned portion of RRP stock 306
Tax benefit of RRP shares awarded
and options exercised 266
Treasury stock purchased 409,300 shares
----------------------------------------------------------------
Balance at December 31, 1998 340 29,960 158,386 8,106
Net income 18,683
Dividends paid at $.24 per share (1,911)
Exercised stock options 112
Unrealized gains (losses) on securities (1) (37,453)
Comprehensive income (loss)
ESOP stock committed for release
Excess of fair value above cost of
ESOP stock committed for release 238
Tax benefit of RRP shares awarded
and options exercised 13
Treasury stock purchased 40,000 shares
----------------------------------------------------------------
Balance at December 31, 1999 $340 $30,323 $175,158 $(29,347)
Net income 4,020
Dividends paid at $.06 per share (480)
Exercised stock options 4
Unrealized losses on securities (1) (5,718)
Comprehensive income (loss)
ESOP stock committed for release
Earned portion of RRP plan
Excess of fair value above cost of
ESOP stock committed for release 18
Excess of fair value above cost of
earned portion of RRP plan 3
----------------------------------------------------------------
Balance at March 31, 2000 (unaudited) $340 $30,348 $178,698 $(35,065)
================================================================
<CAPTION>
Stock And Compre-
ownership Retention Treasury hensive
Plan Plan Stock Total Income
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $(1,024) $(665) $ - $152,752
Net income 17,771 $ 17,771
Dividends paid at $.20 per share (1,540)
Exercised stock options 482
Unrealized gains (losses) on securities (1) 7,117 7,117
---------
Comprehensive income (loss) $ 24,888
=========
ESOP stock committed for release 495 495
Earned portion of RRP plan 99 99
Excess of fair value above cost of
ESOP stock committed for release 1,139
Excess of fair value above cost of
earned portion of RRP stock 492
Tax benefit of RRP shares awarded
and options exercised 227
---------------------------------------------
Balance at December 31, 1997 (529) (566) - 179,034
Net income 19,229 $ 19,229
Dividends paid at $.22 per share (1,886)
Exercised stock options 733
Unrealized gains (losses) on securities (1) (2,626) (2,626)
---------
Comprehensive income (loss) $ 16,603
=========
ESOP stock committed for release 133 133
Earned portion of RRP plan 110 110
Excess of fair value above cost of
ESOP stock committed for release 641
Excess of fair value above cost of
earned portion of RRP stock 306
Tax benefit of RRP shares awarded
and options exercised 266
Treasury stock purchased 409,300 shares (5,970) (5,970)
---------------------------------------------
Balance at December 31, 1998 (396) (456) (5,970) 189,970
Net income 18,683 $ 18,683
Dividends paid at $.24 per share (1,911)
Exercised stock options 112
Unrealized gains (losses) on securities (1) (37,453) (37,453)
---------
Comprehensive income (loss) $(18,770)
=========
ESOP stock committed for release 100 100
Excess of fair value above cost of
ESOP stock committed for release 238
Tax benefit of RRP shares awarded
and options exercised 13
Treasury stock purchased 40,000 shares (428) (428)
---------------------------------------------
Balance at December 31, 1999 $ (296) $(456) $(6,398) $169,324
Net income 4,020 $ 4,020
Dividends paid at $.06 per share (480)
Exercised stock options 4
Unrealized losses on securities (1) (5,718) (5,718)
---------
Comprehensive income (loss) $ (1,698)
=========
ESOP stock committed for release 25 25
Earned portion of RRP plan 2 2
Excess of fair value above cost of
ESOP stock committed for release 18
Excess of fair value above cost of
earned portion of RRP plan 3
---------------------------------------------
Balance at March 31, 2000 (unaudited) $ (271) $(454) $(6,398) $167,198
=============================================
</TABLE>
(1) Net of reclassification adjustment and net of tax effect of $(3,771) in
2000, $(24,086) in 1999, $(1,801) in 1998, and $4,658 in 1997. See
accompanying notes to consolidated financial statements.
All share and per share data have been restated to give effect for the 3 for 1
stock split on November 18, 1997.
F-3
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
2000 1999
------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,020 $ 4,933
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 835 795
Net depreciation, amortization and accretion (276) 1,286
(Increase) decrease in loans held for sale (115) 3,526
Net gain on sales of interest-earning assets (492) (2,525)
(Gain) loss on the sale of foreclosed real estate - (123)
Equity (income) losses from joint ventures (45) 57
Decrease (Increase) in accrued interest receivable 1,567 331
Increase in accrued interest payable 6,575 5,373
Amortization 720 600
Earned ESOP shares 43 101
Earned RRP shares 5 -
Provision for deferred income taxes (1,019) 559
Decrease in income taxes receivable 75 1,199
Other, net (4,123) 12,244
-----------------------
Net cash provided by operating activities 7,770 28,356
-----------------------
Cash flows from investing activities:
Proceeds from maturities and principal reductions of
marketable securities:
Held-to-maturity - -
Available-for-sale 7,517 136,651
Proceeds from sales of marketable securities; available-for-sale 59,192 133,841
Purchase of marketable securities:
Held-to-maturity - -
Available-for-sale (119,579) (227,766)
Loans sold 13,215 33,629
Net increase in loan originations less principal
payments of loans (59,483) (118,027)
Loan servicing rights sold 7,643 -
Acquisition of loan servicing rights (424) (570)
Investments in real estate held for investment and other joint ventures - 61
Proceeds from payments on real estate held for investment 58 161
Purchases of premises and equipment, net (5,556) (1,114)
Cash proceeds received from the sale of foreclosed
real estate 6 706
Cash proceeds received from the sale of premises
and equipment - -
Branch purchase - -
Payments for holding company formation - -
------------------------
Net cash used in investing activities $ (97,411) $ (42,428)
------------------------
<CAPTION>
Years Ended December 31,
---------------------------------------------
1999 1998 1997
---------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 18,683 $ 19,229 $ 17,771
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 3,180 2,540 610
Net depreciation, amortization and accretion 4,669 7,534 4,131
(Increase) decrease in loans held for sale 14,099 3,630 (4,008)
Net gain on sales of interest-earning assets (1,938) (9,604) (6,529)
(Gain) loss on the sale of foreclosed real estate (2,844) 107 (112)
Equity (income) losses from joint ventures 65 (187) 43
Decrease (Increase) in accrued interest receivable (2,779) (1,985) (1,486)
Increase in accrued interest payable 3,327 2,668 1,285
Amortization 2,640 2,487 2,393
Earned ESOP shares 338 774 1,634
Earned RRP shares - 416 591
Provision for deferred income taxes 1,234 (638) (76)
Decrease in income taxes receivable 2,936 5,122 -
Other, net 22,446 (20,497) 799
--------------------------------------------
Net cash provided by operating activities 66,056 11,596 17,046
--------------------------------------------
Cash flows from investing activities:
Proceeds from maturities and principal reductions of
marketable securities:
Held-to-maturity - 1,032 13,454
Available-for-sale 182,150 497,828 118,079
Proceeds from sales of marketable securities; available-for-sale 353,809 491,903 499,633
Purchase of marketable securities:
Held-to-maturity - - (500)
Available-for-sale (574,038) (1,062,717) (985,709)
Loans sold 199,595 132,093 83,980
Net increase in loan originations less principal
payments of loans (414,015) (300,973) (152,193)
Loan servicing rights sold 2,119
Acquisition of loan servicing rights (908) (1,372) (943)
Investments in real estate held for investment and other joint ventures (148) (159) 45
Proceeds from payments on real estate held for investment 504 259 826
Purchases of premises and equipment, net (5,487) (5,246) (5,685)
Cash proceeds received from the sale of foreclosed
real estate 10,590 1,383 1,381
Cash proceeds received from the sale of premises
and equipment 1,236 - -
Branch purchase 22,054 - -
Payments for holding company formation - - (94)
---------------------------------------------
Net cash used in investing activities $(222,539) $(245,969) $(427,726)
---------------------------------------------
</TABLE>
(continued)
F-4
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(continued)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31, Years Ended December 31,
--------------------------------- ------------------------------------
2000 1999 1999 1998 1997
--------------------------------- ------------------------------------
Cash flows from financing activities: (unaudited)
<S> <C> <C> <C> <C> <C>
Net increase (decrease) in deposits $ 65,818 $ 18,805 $ 131,218 $ 59,141 $ (27,185)
Net increase (decrease) in other borrowings 5,375 (4,734) 48,746 215,276 433,347
Net (decrease) increase in escrow (157) 3,787 (4,395) (646) 349
Cash dividends (480) (478) (1,911) (1,886) (1,540)
Payments to acquire treasury stock - - (428) (5,970) -
Proceeds from the exercise of stock options 4 33 125 733 482
-----------------------------------------------------------------------
Net cash provided by financing operations 70,560 17,413 173,355 266,648 405,453
-----------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (19,081) 3,341 16,872 32,275 (5,227)
Cash and cash equivalents at beginning of period 73,613 56,741 56,741 24,466 29,693
-----------------------------------------------------------------------
Cash and cash equivalents at end of period $ 54,532 $ 60,082 $ 73,613 $ 56,741 $ 24,466
=======================================================================
Supplemental disclosures:
Cash paid during the years for:
Interest on deposits, advances and other borrowings
(includes interest credited to deposit accounts) $ 24,720 $ 21,314 $ 110,132 $ 104,482 $ 74,260
Income taxes 2,528 125 3,657 6,823 10,238
Cash received during the years for:
Income tax refunds $ - $ - $ - $ 3,894 $ -
Non-cash investing activities:
Transfers from loans to foreclosed real estate $ 9 $ 144 $ 952 $ 1,581 $ 862
Branch acquisition:
Fair value of assets acquired $ - $ - $ 11,870 $ - $ -
Deposit premium paid 3,349 - -
Fair value of liabilities assumed 37,273 - -
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
March 31, 2000 and 1999 (unaudited) and December 31, 1999, 1998, and 1997
(All dollar amounts presented in the tables are in thousands)
(1) Summary of Significant Accounting Policies
The accounting and reporting policies of Harris Financial, Inc. (HFI) and its
subsidiaries conform to generally accepted accounting principles and to general
practices within the banking industry. The following is a description of the
more significant of those policies.
(a) Basis of Financial Statements
The Consolidated Financial Statements include the accounts of Harris Financial,
Inc. and its wholly owned subsidiary Harris Savings Bank ("HSB"). HSB is the
sole owner 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 significant intercompany
transactions and balances are eliminated in consolidation.
HSB is primarily engaged in attracting deposits from the general public and
investing deposit funds primarily in commercial loans, residential real estate
loans, consumer loans and marketable securities. HSB also provides commercial
services, sells non-deposit investment products, provides trust and asset
management services, and sells insurance products. Harris Delaware manages
certain investments in marketable securities. AVSTAR Mortgage Corporation is a
mortgage banking company that originates and sells primarily one-to-four family
residential loans. H.S. Service Corporation is primarily engaged in residential
real estate investments in joint ventures. First Harrisburg Service Corporation
is mainly involved with title, life, annuity, and other insurance activities and
an investment in a wholly owned subsidiary that is primarily engaged in real
estate investments in joint ventures. C.B.L Service Corporation is inactive and
has negligible assets and liabilities. HFI and HSB are subject to the
regulations of certain federal agencies and undergo periodic examinations by
those regulatory authorities.
(b) Use of Estimates
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for loan losses
and foreclosed real estate, management obtains independent appraisals for
significant properties.
(c) Cash and Cash Equivalents
For purposes of the statement of cash flows, HFI defines cash equivalents as
demand deposits with other financial institutions.
(d) Marketable Securities
Marketable securities are classified and accounted for as follows:
. Debt securities that HFI has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and
reported at amortized cost. HFI liquidated their held-to-maturity
portfolio in January 1998 and as a result, no securities purchased
subsequent to this time were classified in this category.
. Debt and equity securities not classified as held-to-maturity are
classified as available-for-sale securities and reported at fair
value, with unrealized gains and losses, net of tax, excluded from
earnings and reported as a component of comprehensive income.
Premiums and discounts are amortized or accreted over the term of the related
securities using a method that approximates the interest method, adjusted for
prepayments. Gains or losses upon sale are determined using the specific
identification method.
Federal law requires a member institution of the Federal Home Loan Bank ("FHLB")
system to hold stock of its district FHLB according to a predetermined formula.
This stock is recorded at cost and may be pledged to secure FHLB advances.
F-6
<PAGE>
(e) Loans Receivable
Loans receivable are stated at unpaid principal balances, adjusted for the
allowance for loan losses, net deferred loan origination fees and unearned
discounts and premiums.
Discounts and premiums on first mortgage loans are amortized to income using a
method that approximates the interest method over the remaining period to
contractual maturity, adjusted for prepayments. Discounts on consumer loans are
recognized over the lives of the loans using methods that approximate the
interest method.
Recognition of interest income on loans is computed using the interest method.
Interest on loans that are contractually past due ninety days and over is
reserved in accordance with regulatory requirements. Loans are returned to
accrual status when the collectibility of past due principal and interest is
reasonably assured.
Management considers current information and events regarding the borrowers'
ability to repay their obligations and considers a loan to be impaired when it
is probable that HFI will be unable to collect all amounts due according to the
contractual terms of the loan agreement. In evaluating whether a loan is
impaired, management considers not only the amount that HFI expects to collect
but also the timing of collection. Generally, if a delay in payment is
insignificant (e.g., less than 30 days), a loan is not deemed to be impaired.
When a loan is considered to be impaired, the amount of impairment is measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, at the loan's market price or fair value of
the collateral if the loan is collateral dependent. The majority of loans deemed
to be impaired by management are collateral dependent. Loans are evaluated
individually for impairment. HFI excludes smaller balance, homogeneous loans
(e.g., primarily consumer and residential mortgages) from the evaluation for
impairment.
Interest income on impaired loans is generally recorded as payments are
collected. Interest on impaired loans that are contractually past due ninety
days and over is reserved in accordance with regulatory requirements.
(f) Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or market, net of deferred fees relating to the
specific loans. Gains and losses on the sale of loans are determined using the
specific identification method.
(g) Allowance for Loan Losses
The allowance for loan losses represents management's best estimate of probable,
incurred losses at the end of the respective reporting periods. An analysis of
the reserve is prepared on a quarterly basis. The reserve required for
commercial loans is developed via an analysis of each loan within the portfolio
for evidence of a loss confirming event. Such events include delinquencies, loss
activity, decreases in cash flow or other adverse economic or demographic
events. Reserves for mortgage and consumer loans are determined by applying
reserve factors to pools of loans with similar risk attributes. These factors
are developed by considering charge-off history, delinquencies and credit
concentrations. Reserve factors are modified as specific events warrant.
Management believes that the allowances for losses on loans and foreclosed real
estate are adequate. While management uses available information to recognize
losses on loans and foreclosed real estate, future additions to the allowances
may be necessary based on changes in economic conditions and asset mix.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review HFI's allowances for losses on loans
and foreclosed real estate. Such agencies may require HFI to recognize additions
or deletions to the allowances based on their judgments of information available
to them at the time of their examination.
(h) Real Estate Held for Investment and Foreclosed Real Estate
HFI follows the provisions of Financial Accounting Standard No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" (SFAS 121). SFAS 121 provides guidance for recognition and measurement of
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to both assets to be held and used and assets to be disposed of. Real
estate properties acquired through loan foreclosure are initially recorded at
the lower of the carrying or fair value less estimated costs to sell at the date
of foreclosure. At the time of foreclosure, the excess, if any, of the carrying
value over the estimated fair value of the property is charged to the allowance
for loan losses. Real estate properties held for investment are carried at the
lower of cost, including cost of improvements and amenities incurred subsequent
to acquisition, or estimated net realizable value. Costs relating to development
and improvement of property are capitalized, whereas costs relating to holding
property are expensed.
Valuations are periodically performed by management on both real estate held for
investment and foreclosed real estate. An allowance for losses is established by
a charge to operations if the carrying value of real estate held for investment
exceeds its estimated net realizable value, or the carrying value of foreclosed
real estate exceeds its estimated fair value.
F-7
<PAGE>
(i) Premises and Equipment
Buildings, leasehold improvements, furniture, fixtures and equipment are carried
at cost, less accumulated depreciation and amortization. Buildings, furniture,
fixtures and equipment are depreciated using the straight-line method over the
estimated useful lives of the assets. The cost of leasehold improvements is
being amortized using the straight-line method over the lesser of the estimated
useful lives or the terms of the related leases.
(j) Loan Origination and Commitment Fees and Related Costs
Loan fees and certain direct loan origination costs are deferred and the net fee
or cost is recognized as an adjustment to interest income using the interest
method over the contractual life of the loans. Calculation of the interest
method is done on a loan-by-loan basis. The amortization of deferred fees and
costs is discontinued on non-performing loans.
(k) Intangible Assets
Deposit premiums are amortized using the straight-line method over the estimated
benefit period of approximately 7 years. The amortization period for deposit
premiums is subject to periodic review for reasonableness by management.
(l) Goodwill
Goodwill results when, under the purchase method of accounting for acquisitions,
the amount paid for the acquired entity is greater than the fair value of the
net assets acquired. HFI amortizes goodwill over its estimated useful life of 15
years of the assets acquired. The amortization period for goodwill is subject to
periodic review by management.
(m) Loan Servicing
HFI adopted the provisions of Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights, an amendment of FASB Statement
No. 65" (SFAS 122). SFAS 122 amended Statement 65 to require an institution to
recognize as separate assets the rights to service mortgage loans for others
when a mortgage loan is sold or securitized and servicing rights retained. On
January 1, 1997, HFI adopted SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" (SFAS 125)
which supersedes SFAS 122. SFAS 125 expands the method of accounting for loan
servicing rights to apply to purchased mortgage servicing rights. When
capitalizing mortgage servicing rights, HFI allocates the total cost of the
mortgage loans (the recorded investment in the mortgage loans including net
deferred fees or costs and any purchase premium or discount) to the mortgage
servicing rights and the loans (without the mortgage servicing rights) based on
their relative fair values. Such fair value is primarily based on observable
market prices. Mortgage servicing rights (including purchased mortgage
servicing) are amortized in proportion to, and over the period of, estimated net
servicing revenue based on management's best estimate of remaining loan lives.
HFI measures the impairment of servicing rights based on the difference between
the carrying amount of the servicing rights and their current fair value.
Impairment of servicing rights is recognized through a valuation allowance. The
amount of impairment recognized is the amount by which the capitalized mortgage
servicing rights exceed their fair value. For the purpose of evaluating and
measuring impairment of capitalized mortgage servicing rights, HFI stratifies
those rights based on the predominant risk characteristics of the underlying
loans. HFI primarily stratifies mortgage servicing rights by loan type (for
example, conventional or government guaranteed and adjustable rate or fixed rate
mortgage loans) and interest rate. Valuation techniques for measuring fair value
incorporate assumptions that market participants use in estimating future
servicing income and expense, including assumptions about prepayment, default
and interest rates.
(n) Income Taxes
HFI accounts for income taxes using the liability method. The objective of the
liability method is to establish deferred tax assets and liabilities for
temporary differences between the financial reporting and tax basis of HFI's
assets and liabilities based on enacted tax rates expected to be in effect when
such amounts are realized or settled.
(o) Derivative Financial Instruments
The Bank utilizes derivative financial instruments to hedge its exposure to
fluctuations in market interest rates. This exposure includes the impact of
interest rates on cash flows from interest-bearing assets and liabilities, as
well as the impact of interest rates on the market value of certain loans held-
for-sale. The Bank does not utilize derivative financial instruments for trading
purposes.
To qualify for hedge accounting, the contracts must meet defined correlation and
effectiveness criteria, be designated as hedges and result in cash flows and
financial statement effects that substantially offset those of the position
being hedged. Amounts receivable or payable under derivative financial
instrument contracts, when recognized, are reported on the consolidated balance
sheet. Gains and losses related to the fair value of the hedge contracts are
recorded as an adjustment to the value of the hedged item. The gains and losses
on the hedge contracts are recognized in the income statement upon sale of the
hedged item.
In relation to interest rate swaps, the differentials to be received or paid are
recognized in income over the life of the contract as an adjustment to interest
expense.
F-8
<PAGE>
(p) Earnings Per Share
Effective December 15, 1997, HFI adopted the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). SFAS
128 requires earnings per share to be reported as basic earnings per share and
diluted earnings per share. Basic earnings per share is based on the total
weighted average shares outstanding for a given period. Diluted earnings per
share is based on total weighted average shares outstanding, and also assumes
the exercise or conversion of all potentially dilutive instruments currently
outstanding.
In addition, the earnings per share calculations retroactively reflects the
impact of a three for one stock split effected in the form of a stock dividend
to shareholders of record as of November 4, 1997. The number of shares used to
compute diluted earnings per share were 33,620,210 for the three months ended
March 31, 2000, 33,683,114 for the three months ended March 31, 1999, 33,666,557
in 1999, 34,011,752 in 1998 and 34,076,061 in 1997.
(q) Dividends
HFI may not pay dividends on or repurchase any of its common stock if the effect
thereof would reduce net worth below the level of adequate capitalization as
defined by the FDIC and the Pennsylvania Department of Banking.
During the three month and twelve month periods in 2000, 1999, 1998 and 1997,
HFI's mutual holding company parent, Harris Financial, MHC, waived all of its
dividends due from HFI. These dividends, had they not been waived, would have
totaled $1,530,000 for the three months ended March 31, 2000, $1,530,000 for the
three months ended March 31, 1999, $6,119,000 in 1999, $5,610,000 in 1998, and
$5,100,000 in 1997.
(r) Stock-Based Compensation
HFI adopted Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123) for disclosure purposes only. SFAS 123
defines a fair value based method of accounting for employee stock compensation
plans. The pro forma disclosure of net income and earnings per share is included
in Note 15. HFI continues to account for stock-based compensation using the
intrinsic value based method under APB Opinion No. 25.
(s) Comprehensive Income
On January 1, 1998, HFI adopted SFAS No. 130, "Reporting Comprehensive Income"
(SFAS 130). This statement established standards for reporting and display of
comprehensive income and its components. SFAS 130 requires unrealized gains or
losses on HFI's marketable securities to be included in other comprehensive
income. In accordance with SFAS 130, HFI presents comprehensive income within
the consolidated statements of stockholders' equity.
(t) Treasury Stock
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, HFI 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.
HFI purchased 409,300 shares with a market value of $5,970,000 during 1998 and
40,000 shares with a market value of $428,125 in 1999. The shares will be used
to fund stock ownership and stock option plans.
(2) Regulatory Structure
HFI's primary regulators are the Pennsylvania Department of Banking ("the
Department"), the Federal Deposit Insurance Corporation ("FDIC") and the Federal
Reserve Bank ("FRB"). Both HFI and HSB are also bound by many of the provisions
of the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA").
Both HFI and HSB are subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on HFI's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, HFI must meet
specific capital guidelines that involve quantitative measures of HFI's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. HFI's capital amounts and classifications are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require HFI to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined by the regulations) to risk-
weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1999, that HFI
meets all capital adequacy requirements to which it is subject. As of August 24,
1999, the Department categorized HFI as "satisfactorily capitalized" under the
regulatory framework for prompt corrective action. As of March 18, 1998, the
most recent notification from the FDIC categorized HFI as "well capitalized".
F-9
<PAGE>
HFI's and HSB's actual capital amounts and ratios are presented in the following
table:
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Purposes
------ ------------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
HARRIS FINANCIAL, INC. (HFI)
As of December 31, 1999 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------- ------
Total Capital/Risk Weighted Assets $ 194,582 12.0% * $130,173 * 8.0% * $162,716 * 10.0%
Tier 1 Capital/Risk Weighted Assets 181,053 11.1% * 65,086 * 4.0% * 97,630 * 6.0%
Tier 1 Capital/Average Assets 181,053 6.8% * 106,502 * 4.0% * 133,127 * 5.0%
As of December 31, 1998 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------- ------
Total Capital/Risk Weighted Assets $ 179,157 12.0% * $119,160 * 8.0% * $148,949 * 10.0%
Tier 1 Capital/Risk Weighted Assets 164,955 11.1% * 59,580 * 4.0% * 89,370 * 6.0%
Tier 1 Capital/Average Assets 164,988 6.8% * 97,553 * 4.0% * 1,941 * 5.0%
HARRIS SAVINGS BANK (HSB)
As of December 31, 1999 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total Capital/Risk Weighted Assets $ 189,925 11.7% * $ 129,880 * 8.0% * $162,350 * 10.0%
Tier 1 Capital/Risk Weighted Assets 176,262 10.9% * 64,940 * 4.0% * 97,410 * 6.0%
Tier 1 Capital/Average Assets 176,262 6.6% * 106,347 * 4.0% * 132,934 * 5.0%
As of December 31, 1998 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total Capital/Risk Weighted Assets $ 174,663 11.8% * $118,879 * 8.0% * $148,598 * 10.0%
Tier 1 Capital/Risk Weighted Assets 160,317 10.8% * 59,439 * 4.0% * 89,159 * 6.0%
Tier 1 Capital/Average Assets 160,317 6.6% * 97,395 * 4.0% * 121,744 * 5.0%
</TABLE>
* denotes greater than or equal to.
The Department also required minimum regulatory leverage capital of 3% and risk-
based capital of 8% as of December 31, 1999 and December 31, 1998. Both HFI and
HSB exceeded minimum regulatory capital levels at December 31, 1999 and 1998.
(3) Corporate Reorganization and Stock Issuance
On January 25, 1994, Harris Savings Bank ("HSB") reorganized into a Pennsylvania
chartered mutual holding company through a purchase and assumption of assets and
liabilities whereby:
. HSB incorporated a Pennsylvania capital stock savings bank,
. HSB transferred most of its assets (except $1.0 million) and all of
its liabilities, including all of its deposit liabilities, to the
newly formed bank in exchange for all of the common stock of HSB not
sold in the Offering, and
. HSB adopted a new charter issued by the Pennsylvania Department of
Banking changing its form to that of a state chartered mutual holding
company.
Each savings account of HSB at the time of the reorganization became a savings
account in the newly formed bank in the same amount and upon the same terms and
conditions, except the holder of each such deposit account retains liquidation
rights with respect to the holding company rather than HSB.
On September 17, 1997, Harris Savings Bank and its existing mutual holding
company, Harris Financial, MHC, reorganized into a two-tier mutual holding
company structure with the establishment of a state chartered holding company,
HFI, as the parent of HSB. Under the terms of this reorganization, each share
of Harris Savings Bank stock was exchanged for one share of Harris Financial,
Inc. stock.
Prior to the consummation of this reorganization, HFI received the approval of
the Federal Reserve, the Pennsylvania Department of Banking, and the FDIC.
F-10
<PAGE>
On October 21, 1997, the Board of Directors of HFI declared a 3 for 1 stock
split to be effected in the form of a dividend to stockholders of record as of
November 4, 1997, and payable on November 18, 1997. All share and per share
information in this report have been restated to reflect the stock split as if
it had been in effect during all periods presented.
(4) Marketable Securities
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value for the available-for-sale securities by major security
type at March 31, 2000 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U. S. government and agencies $ 348,108 $ 16 $ (23,579) $ 324,545
Corporate bonds 63,429 - (2,996) 60,433
Municipal obligations 62,664 896 (1,259) 62,301
FHLB stock 45,750 - - 45,750
Other equities 70,482 4,616 (1,466) 73,632
Mortgage-backed securities:
GNMA CMO's 25,000 31 - 25,031
FNMA CMO's 98,988 19 (3,981) 95,026
FHLMC CMO's 123,413 450 (7,213) 116,650
Private issue CMO's 523,878 108 (23,529) 500,457
------------------------------------------------------------------------------------------------
Total mortgage-backed
securities 771,279 608 (34,723) 737,164
------------------------------------------------------------------------------------------------
Total securities
available-for-sale $ 1,361,712 $ 6,136 $ (64,023) $ 1,303,825
================================================================================================
</TABLE>
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value for the available-for-sale securities by major security
type at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U. S. government and agencies $ 348,705 $ 2 $ (24,088) $ 324,619
Corporate bonds 63,352 - (3,526) 59,826
Municipal obligations 63,980 958 (1,446) 63,492
FHLB stock 45,400 - - 45,400
Other equities 73,034 5,551 (1,874) 76,711
Mortgage-backed securities:
FNMA CMO's 99,032 92 (857) 98,267
FHLMC CMO's 139,328 967 (3,711) 136,584
Private issue CMO's 473,170 1,043 (21,509) 452,704
--------------------------------------------------------------------------------------------
Total mortgage-backed
securities 711,530 2,102 (26,077) 687,555
--------------------------------------------------------------------------------------------
Total securities $
available-for-sale 1,306,001 $ 8,613 $ (57,011) $ 1,257,603
============================================================================================
</TABLE>
F-11
<PAGE>
Amortized Fair
Cost Value
--------------------------
Available-for- sale:
Due in one year or less $ 5,000 $ 5,002
Due after one year through five years 1,500 1,500
Due after five years through ten years 254,004 239,947
Due after ten years 215,533 201,488
Equity securities 118,434 122,111
Mortgage-backed securities 711,530 687,555
--------------------------
Total securities available-for-sale $1,306,001 $1,257,603
==========================
Marketable securities having a market value of $8,741,000 at December 31, 1999
were pledged to secure public deposits. Marketable securities having a market
value of $348,015,000 were pledged as collateral for FHLB advances at December
31, 1999.
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value for held-to-maturity and available-for-sale securities by
major security type at December 31, 1998, were as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. government and agencies $ 298,247 $ 1,851 $ (902) $ 299,196
Corporate bonds 148,731 16 (6,507) 142,240
Municipal obligations 113,557 5,713 (37) 119,233
FHLB stock 37,579 - - 37,579
Other equities 112,403 11,686 (324) 123,765
Asset-backed securities 15,146 515 - 15,661
Mortgage-backed securities:
FHLMC PC's 1,421 73 - 1,494
FNMA CMO's 104,276 1,805 (217) 105,864
FHLMC CMO's 75,137 787 (767) 75,157
Private issue CMO's 355,199 1,373 (1,924) 354,648
------------------------------------------------------------
Total mortgage-backed securities 536,033 4,038 (2,908) 537,163
--------------------------------------------------------------
Total securities available-for-sale $1,261,696 $ 23,819 $ (10,678) $1,274,837
==============================================================
</TABLE>
Activity from the sale of marketable securities is as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, Years Ended December 31,
------------------------------------------- --------------------------------------------------
2000 1999 1999 1998 1997
------------------------------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C>
Proceeds $ 59,192 $ 133,841 $353,809 $491,903 $499,633
=========================================== ==================================================
Gross gains $ 404 $ 2,215 $ 4,774 $ 4,635 $ 4,280
Gross losses (420) (862) (3,074) (51) (223)
------------------------------------------- --------------------------------------------------
Net (loss) gain $ (16) $ 1,353 $ 1,700 $ 4,584 $ 4,057
=========================================== ==================================================
</TABLE>
F-12
<PAGE>
(5) Loans Receivable
Loans receivable at March 31, and December 31 are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
--------------------------
2000 1999 1998
--------------------------------------------
<S> <C> <C> <C>
First mortgage loans (principally conventional):
Principal balances:
Secured by 1-4 family residences $ 537,225 $ 533,605 $ 566,438
Construction loans (net of undistributed portion of
$24,761, $27,281 and $37,319) 19,383 23,270 29,032
Other - 20 6,962
--------------------------------------------
556,608 556,895 602,432
Less:
Unearned discounts 274 296 471
Net deferred loan origination fees 7,367 7,514 8,478
--------------------------------------------
Total first mortgage loans 548,967 549,085 593,483
--------------------------------------------
Commercial loans:
Principal balances:
Commercial 377,625 347,323 203,585
Less:
Net deferred loan origination fees 845 776 543
--------------------------------------------
Total commercial loans 376,780 346,547 203,042
--------------------------------------------
Consumer and other loans:
Principal balances:
Manufactured housing 80,333 78,801 63,758
Home equity and second mortgage 184,104 179,180 155,310
Other 115,443 106,514 30,647
--------------------------------------------
379,880 364,495 249,715
Plus:
Net deferred loan origination (fees)/costs (1,115) (969) 494
Dealer reserve 21,165 20,698 13,996
--------------------------------------------
Total consumer and other loans 399,930 384,224 264,205
--------------------------------------------
Less:
Allowance for loan loss 12,032 11,873 9,088
--------------------------------------------
Net loans $1,313,645 $1,267,983 $1,051,642
==============================================
</TABLE>
Loans having a carrying value of $589,065,000 and $595,831,000 were pledged as
collateral for FHLB advances at March 31, 2000 and December 31, 1999,
respectively.
During 1999, the Bank sold a portion of its conforming 30 year residential
mortgage loans resulting in a net loss of $1,955,935. The loans sold had a
carrying value of $125,796,623 on the date of sale.
Activity in the allowance for loan loss is summarized as follows for the three
months ended March 31, and the years ended December 31:
F-13
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31, Years Ended December 31,
------------------------------------- -------------------------------------------
2000 1999 1999 1998 1997
------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at the beginning of the year $11,873 $9,088 $ 9,088 $ 8,192 $8,322
Provision charge to income 835 795 3,180 2,540 610
Less: Portion of provision related to
unfunded commitments - - 617 (503) (422)
Charge-offs and recoveries, net (676) (228) (1,012) (1,141) (318)
---------------------------------- -------------------------------------------
Balance at the end of the year $12,032 $9,655 $ 11,873 $ 9,088 $8,192
================================== ===========================================
</TABLE>
Non-accrual and renegotiated loans for which interest has been reduced totaled
approximately $10,007,000 in 1999, $7,651,000 in 1998, and $6,938,000 in 1997.
Interest income foregone on these loans amounted to $289,000 in 1999, $366,000
in 1998, and $360,000 in 1997.
At December 31, 1999 the Bank had $9,517,000 in impaired loans. The December
31, 1999 allowance for loan losses has a reserve of $1,767,550 for these
impaired loans.
At December 31, 1998, the Bank had no impaired loans. In 1998, all impaired
loans were deemed uncollectible and charged off as of the respective year end.
Consequently, HFI recorded no impairment loss reserves at December 31, 1998. No
interest income was recognized on impaired loans during 1998.
(6) Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances
of these loans at December 31 are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
-------------------- --------------------------------------------------------------
2000 1999 1998 1997
-------------------- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage loan portfolios serviced for:
FHLMC $154,432 $560,074 $ 775,630 $ 670,426
FNMA 43,373 232,520 330,065 328,086
Other investors 25,687 26,023 977 68,389
-------------------- --------------------------------------------------------------
$223,492 $818,617 $1,106,672 $1,066,901
==================== ==============================================================
</TABLE>
Activity associated with mortgage servicing rights is summarized as follows:
<TABLE>
<CAPTION>
Purchased Originated Total
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1997 $ 8,682 $ 3,148 $11,830
Additions 2,630 1,099 3,729
Amortization (2,280) (1,190) (3,470)
Net change in valuation allowance (83) - (83)
Fair value of hedge on servicing rights (1,010) - (1,010)
------------------------------------------------------------------------------
Balance at December 31, 1998 7,939 3,057 10,996
Additions - 613 613
Servicing rights sales (2,169) - (2,169)
Amortization (1,450) (374) (1,824)
------------------------------------------------------------------------------
Balance at December 31, 1999 4,320 3,296 7,616
Additions - 423 423
Servicing rights sales 4,246) (2,123) (6,369)
Amortization (10) (21) (31)
Net change in valuation allowance 200 - 200
------------------------------------------------------------------------------
Balance at March 31, 2000 $ 264 $ 1,575 $ 1,839
==============================================================================
</TABLE>
F-14
<PAGE>
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $1,694,000 at March 31, 2000, $7,348,000 at
December 31, 1999, and $8,493,000 at December 31, 1998.
During 1998, HFI purchased an interest rate floor to hedge against the
deterioration in the carrying value of its mortgage servicing rights portfolio
resulting from prepayments of the underlying loans. The notional amount of the
hedge was $75,000,000 with a two- year term expiring in April 2000. The
derivative investment qualified for hedge accounting treatment. At December 31,
1998, the floor's fair value of $1,010,000 was recorded within other assets and
as an adjustment to the carrying value of mortgage servicing rights. Cash
payments received under the derivative contract were recorded as an adjustment
to the carrying value of the contract. Gains or losses resulting from the
contract were deferred and amortized over the remaining lives of the related
servicing rights. A premium of approximately $368,000 was paid in order to
obtain the interest rate floor. The premium was amortized over the two-year
life of the contract. During March, 1999, HFI sold both the mortgage servicing
rights portfolio associated with the floor and the floor itself at a combined
net loss of $220,000.
HFI performs a market value analysis of its mortgage servicing rights on a
quarterly basis. If the calculated market value is less than the carrying value
of the servicing rights, amortization is recorded to write down the servicing
rights to the market value. As of December 31, 1999, the mortgage servicing
rights reflected a fair market value of $11,217,367. HFI engages an external
consultant to perform the market value analysis. The analysis calculates the
net present value of the future cash flows expected from the servicing rights.
The underlying loans are stratified into homogenous pools by 100 basis point
interest rate bands. Once the loans are stratified, each pool is individually
valued using assumptions that are unique and characteristic of that pool. The
following table shows the significant factors used at December 31, 1999, to
value the servicing rights as well as the average value of each factor.
<TABLE>
<CAPTION>
Factor Average Value
------ -------------
<S> <C>
Foreclosure rate (first year) .5608%
Foreclosure costs (per loan) $865.98
Escrow reserve requirement 95%
Future interest rate 5.50%
Future cost of funds 8.25%
Discount rate 9.50%
Inflation rate - escrows 2.0%
Average prepayment rate 9.81%
</TABLE>
During 1999, HFI sold or committed to sell substantially all of its purchased
mortgage servicing rights. HFI expects to record a net gain of approximately
$1.5 million in the first quarter of 2000 related to a sales commitment entered
into in December, 1999.
(7) Premises and Equipment
A summary of premises and equipment at March 31and December 31 follows:
<TABLE>
<CAPTION>
March 31, December 31, Estimated
--------------------------------------
2000 1999 1998 Useful Lives
---------------------- -----------------------------------------------------------
<S> <C> <C> <C> <C>
Land $ 2,283 $ 2,283 $ 2,315
Buildings and improvements 18,296 14,792 13,827 5-50 years
Leasehold improvements 4,423 3,764 2,483 5-10 years
Furniture and equipment 15,794 14,859 16,374 5-10 years
Automobiles 214 214 241 3 years
Software 2,840 2,800 3,604 3-5 years
Accumulated depreciation (16,285) (15,484) (17,230)
---------------------- --------------------------------------
$ 27,565 $ 23,228 $ 21,614
====================== ======================================
</TABLE>
Depreciation expense for the three months ended March 31, 2000 and 1999 was
$803,996 and $727,484, respectively, and for the years ended December 31, 1999,
1998, and 1997 was $2,969,988, $2,358,222, and $1,551,000, respectively.
F-15
<PAGE>
(8) Intangible Assets
Total amortization expense recorded on intangible assets was $.7 million during
the first quarter 2000, $2.6 million during the year 1999, $2.5 million during
the year 1998 and $2.4 million during the year 1997. Accumulated amortization
was $10.7 million and $10.0 million as of March 31, 2000 and December 31, 1999,
respectively.
Effective June 25, 1999, HFI acquired a branch in the Lebanon market from
another regional bank. The acquisition included the purchase of $37.3 million
in deposits, $11.4 million in loans, and cash and other assets totaling $.7
million. The acquisition was accounted for as a purchase and resulted in a core
deposit intangible of $3.3 million, which is being amortized over a seven year
period using the straight-line method.
(9) Deposits
HFI pays deposit insurance premiums to the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). HFI's deposit
insurance premium rate was .005% for the first quarter 2000, .059% for the year
1999, .061% for the year 1998 and .064% for the year 1997 of its assessed
deposit base. This resulted in total premiums assessed of $68,000 for the first
quarter 2000, $713,000 for the year 1999, $696,000 for the year 1998, and
$751,000 for the year 1997.
On October 21, 1998 and December 11, 1997, HFI participated in brokered
certificate of deposit transactions with Merrill Lynch. The amount of the 1998
transaction was $25,000,000 with a maturity of 6 months. The amount of the 1997
transaction was $25,000,000 with a maturity of 3 years. During 1999, HFI
participated in brokered certificate of deposit transactions with Paine Webber
and Morgan Stanley/Dean Witter totaling $52,111,000. The certificates of
deposits have maturities ranging from 6 months to 7 years. During the first
quarter of 2000, HFI issued brokered certificates of deposit totaling
$15,000,000 with a maturity of 3.5 years. The transaction was with Morgan
Stanley/ Dean Witter. The certificates of deposits were issued in denominations
less than $100,000 and participated out by the broker.
(10) Other Borrowings
Borrowed funds at March 31 and December 31 are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
----------------------------------------------
2000 1999 1998
------------------------- ----------------------------------------------
<S> <C> <C> <C>
FHLB advances $ 915,000 $ 805,000 $ 746,581
Repurchase agreements 208,375 313,000 322,673
------------------------- ----------------------------------------------
Total other borrowings $1,123,375 $1,118,000 $1,069,254
========================= ==============================================
</TABLE>
Pursuant to collateral agreements with the FHLB, advances are fully secured by
certain debt securities and qualifying first mortgage loans. There were
available lines of credit totaling $1,009.4 million at March 31, 2000, $1,059.5
million at December 31, 1999 and $943.5 million at December 31, 1998.
As of March 31, 2000 and December 31, 1999, FHLB advances consisted of the
following:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------------------------------------- ------------------------------------------ ------------------
Amount Average Rate Amount Average Rate Maturities
------------------ ------------------ ------------------ ---------------- --------------------
<S> <C> <C> <C> <C>
$ 425,000 6.046% $415,000 5.618% 2000
25,000 6.157% 175,000 5.916% 2001
- 0.000% 75,000 5.837% 2002
50,000 5.075% 50,000 5.075% 2003
75,000 7.110% - 0.000% 2004
340,000 5.898% 90,000 4.894% 2005 and beyond
------------------ ------------------- --------------- ------------
$ 915,000 6.028% $805,000 5.588%
================== ==================== ============== ============
</TABLE>
During the three months ended March 31, 2000 and the years ended 1999 and 1998,
HFI sold repurchase agreements, the average balance of which was $306.4 million
for the first quarter 2000, $313.7 million for the year 1999, and $352.1 million
for the year 1998. The highest month-end balance outstanding was $208.4 million
during the three months ended March 31, 2000, $313.0 million during
F-16
<PAGE>
the year of 1999, and $358.2 million during the year of 1998. The securities
underlying the agreements were under HFI's control. As of March 31, 2000 and
December 31, 1999, repurchase agreements consisted of:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
--------------------------------------- ------------------------------------------------
Amount Average Rate Amount Average Rate Maturities
-------------- -------------------- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ - 0.000% $ - - 2000
20,000 6.550% - - 2001
- 0.000% 100,000 5.830% 2002
38,375 5.531% 63,000 5.605% 2003
- 0.000% 50,000 5.720% 2004
150,000 5.496% 100,000 5.385% 2005 and beyond
-------------- -------------------- ------------------------------------------------
$ 208,375 5.603% $313,000 5.625%
============== ==================== ================================================
</TABLE>
(11) Restrictions
HFI is required by the Federal Reserve Bank to maintain certain statutory cash
reserves. At March 31, 2000 and December 31, 1999, HFI's reserve requirement
was $11,993,000 and $12,318,000, respectively.
(12) Commitments to Extend Credit
HFI issues financial instruments with off-balance sheet risk in the normal
course of business to meet the financial needs of its customers. These
financial instruments include commitments to extend credit and performance
standby letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the balance sheet.
At March 31, 2000, December 31, 1999 and 1998, HFI had the following off-balance
sheet commitments:
<TABLE>
<CAPTION>
March 31, December 31,
------------------------------------------------------
2000 1999 1998
-------------- ------------------------------------------------------
Commitments:
To extend credit:
<S> <C> <C> <C>
Unused open-end consumer lines of credit $101,688 $57,311 $44,006
Unused open-end commercial lines of credit 59,321 96,481 39,429
Funds available on construction loans 24,761 27,281 37,319
Loan originations and purchases 37,866 31,087 86,286
To sell loans 8,871 7,633 14,418
Performance standby letters of credit 13,165 7,372 4,703
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
HFI evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by HFI upon extension of
credit, is based on management's credit evaluation of the customer. Collateral
held includes residential and income producing commercial properties.
Performance standby letters of credit are conditional commitments issued by HFI
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing and similar transactions. The terms
of the letters of credit vary from 6 months to 36 months and may have renewal
features. The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loans to customers. HFI holds collateral
supporting those commitments for which collateral is deemed necessary.
Most of HFI's business activity is with customers located within HFI's defined
market area. HFI grants commercial, residential and consumer loans throughout
central Pennsylvania and northern Maryland. Since the majority of HFI's loan
portfolio is located in central
F-17
<PAGE>
Pennsylvania and northern Maryland, a substantial portion of HFI's debtors'
ability to honor their contracts and increases or decreases in the market value
of the real estate collateralizing such loans may be significantly affected by
the level of economic activity in this area.
(13) Employee Benefits
HFI has a qualified non-contributory defined benefit pension plan covering
substantially all of its employees. Benefits are based on years of service and
the employee's average monthly pay using the five highest years of employment.
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future. HFI's
policy is to make the minimum contribution, as calculated by the Plan's actuary.
The following sets forth the plan's funded status and amounts recognized in
HFI's statement of financial condition at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------------------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 11,791 $ 9,799
Service cost 963 714
Interest cost 759 721
Actuarial loss 86 17
Actuarial loss due to changes in assumptions - 957
Benefits paid (454) (417)
--------------------------
Benefit obligation at the end of plan year 13,145 11,791
--------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 13,180 12,192
Actual return on plan assets 1,847 1,405
Benefits paid (454) (417)
--------------------------
Fair value of plan assets at end of year 14,573 13,180
--------------------------
Funded status 1,428 1,389
Unrecognized net actuarial (gain) (2,187) (1,467)
Unrecognized prior service cost 150 165
Unrecognized net asset (346) (384)
--------------------------
Accrued benefit cost $ (955) $ (297)
==========================
</TABLE>
The components of net pension expense for the years ended December 31, 1999,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Service cost benefits earned during the period $ 963 $ 714 $ 679
Interest cost on projected benefit obligation 759 721 652
Actual return on plan assets (1,847) (1,405) (1,695)
Net amortization and deferral of gains (1) 783 385 807
------------------------------------------
Net pension expense $ 658 $ 415 $ 443
==========================================
(1) This item is comprised of:
Current year's net asset gain deferred for later recognition $ 809 $ 446 $ 837
Amortization of prior service cost 15 15 15
Amortization of unrecognized net asset (38) (38) (38)
Amortization of net (gain) (3) (38) (7)
------------------------------------------
$ 783 $ 385 $ 807
==========================================
</TABLE>
F-18
<PAGE>
Assumptions used to develop the net pension expense were:
1999 1998 1997
---- ---- ----
Discount rate 6.5% 6.5% 7.5%
Expected long-term rate of return on assets 8.0% 8.0% 8.0%
Rate of increase in compensation levels 4.0% 4.0% 5.0%
Assets of the plan consist primarily of U.S. Government securities, corporate
bonds, and equity securities. During 1999, HFI amended its defined benefit
pension plan to exclude all employees hired after January 1, 1999.
HFI also has a defined contribution plan covering substantially all employees.
HFI provides a matching contribution of 25% of employee contributions to a
maximum of 6% of employee compensation. Expense related to the defined
contribution plan was $19,000 for the first quarter 2000, $150,000 for the year
1999, $123,000 for the year 1998, and $93,000 for the year 1997. During 1999,
HFI amended its defined contribution pension plan to provide a matching
contribution of 50% of employee contributions to a maximum of 6% of employee
compensation for all employees hired after January 1, 1999.
HFI also provides supplemental retirement benefits for executives. The
following sets forth the amounts recognized in HFI's statement of financial
condition as of December 31, 1999 and 1998:
1999 1998
--------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 491 $ 322
Service cost 26 23
Interest cost 16 24
Actuarial loss 145 104
Actuarial loss due to changes in assumptions - 18
--------------------
Benefit obligation at the end of plan year 678 491
--------------------
Fair value of plan assets at end of year - -
Funded status (678) (491)
Unrecognized net loss 285 146
Unrecognized prior service cost 125 141
--------------------
Accrued benefit cost $ (268) $ (204)
====================
The components of net pension cost for the supplemental retirement benefits for
executives for the years ended December 31, 1999, 1998 and 1997 are as follows:
1999 1998 1997
-----------------------
Service cost $ 26 $ 22 $ 15
Interest cost 16 24 18
Amortization of unrecognized prior service cost 16 16 16
Amortization of net loss 7 - -
-----------------------
Total net periodic post-retirement benefit cost $ 65 $ 62 $ 49
=======================
The accumulated benefit obligation for the supplemental retirement benefits for
executives was determined using a discount rate of 6.5%.
HFI also provides certain health care benefits for retired employees that
accumulate 25 years of service and were hired before October 1, 1995. HFI
accounts for these post-retirement benefits under the accrual method of
accounting.
F-19
<PAGE>
1999 1998
---------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 2,553 $ 1,721
Service cost 61 81
Interest cost 99 127
Actuarial loss - 194
Plan change (51) -
Actuarial loss due to changes in assumptions (941) 463
Benefits paid (32) (33)
---------------------
Benefit obligation at the end of plan year 1,689 2,553
---------------------
Fair value of plan assets at year end - -
Funded status (1,689) (2,553)
Unrecognized net (gain) loss (528) 391
Unrecognized prior service cost (321) (290)
---------------------
Accrued benefit cost $ (2,538) $ (2,452)
=====================
The components of net post-retirement benefit cost for the years ended December
31, 1999, 1998 and 1997 are as follows:
1999 1998 1997
---------------------
Service cost $ 61 $ 81 $ 71
Interest cost 99 127 116
Amortization of unrecognized prior
service cost (20) - -
Amortization of net (gain) (22) (20) (22)
---------------------
Total net periodic post-retirement
benefit cost $ 118 $ 188 $ 165
=====================
The post-retirement benefit obligation was determined using a discount rate of
7.0%. The assumed health care cost rate used in measuring the accumulated post
retirement benefit obligation was 5.0% for medical costs and 5.0% per year for
dental costs. The health care cost trend assumption has a significant impact on
the amounts reported. For example, a 1.0% increase in the health care trend
rate would increase the accumulated post-retirement benefits obligation by
approximately $365,219 at December 31, 1999 and increase the aggregate of the
service and interest cost components by $40,967 for the year ended December 31,
1999.
(14) Employee Stock Ownership Plan
On January 25, 1994, HFI established a leveraged employee stock ownership plan
("ESOP") for the benefit of substantially all employees. HFI makes annual
contributions to the ESOP equal to the ESOP's debt service less dividends
received on unearned shares. The ESOP shares initially were pledged as
collateral for its debt. As the debt is repaid, shares are released from
collateral and become eligible for allocation to employee accounts. Actual ESOP
share allocations to employee accounts are based on each employee's relative
portion of HFI's total eligible compensation recorded during the year shares are
earned. ESOP compensation expense was $43,000 for the first quarter 2000,
$338,000 for the year 1999, $773,000 for the year 1998, and $1,633,000 for the
year 1997.
HFI accounts for its ESOP in accordance with Statement of Position 93-6.
Accordingly, the shares pledged as collateral on ESOP borrowings are reported as
unearned ESOP shares in HFI's statement of condition. As shares are earned, HFI
reports compensation expense equal to the current market price of the shares and
the shares become outstanding for earnings-per-share ("EPS") computations.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings. Dividends on unallocated ESOP shares are recorded as a reduction of
accrued interest.
The ESOP shares as of December 31, 1999, 1998 and 1997 were as follows:
F-20
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Allocated shares 519,407 399,509 277,344
Shares released for allocation 29,700 148,500 147,300
Earned shares not yet released for allocation 29,700 29,700 148,500
Shares distributed (18,356) (28,602) (25,135)
Unearned shares 89,100 118,800 148,500
-----------------------------------------
649,551 667,907 696,509
=========================================
Fair value of unearned shares $ 668 $ 1,619 $ 2,951
=========================================
</TABLE>
(15) Stock Award and Option Plans
HFI's stock award plans include the Recognition and Retention Plan for Officers
and Employees and the Recognition and Retention Plan for Outside Directors ("the
RRPs") that were established on January 25, 1994. The RRPs provide for the
granting of restricted stock awards to key employees and unrestricted stock
awards to outside directors. Restricted stock awards will only vest if HFI
achieves certain financial goals over one-year performance periods. Recipients
of restricted and unrestricted stock awards are not required to provide
consideration to HFI other than rendering service and have the right to vote the
shares and receive dividends. The following table summarizes the activity in
HFI's RRPs during 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Restricted Unrestricted Shares in Total
Shares (1) Shares (1) Suspense (1) Shares (1)
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unearned on December 31, 1996 72,450 15,006 156,750 244,206
Plan activity during 1997:
Forfeited (16,875) - 16,875 -
Awarded - 4,500 (4,500) -
Earned (36,225) (15,506) - (51,731)
----------------------------------------------------------------------
Unearned on December 31, 1997 19,350 4,000 169,125 192,475
Plan activity during 1998:
Forfeited - - - -
Awarded 4,500 - (4,500) -
Earned (11,175) (1,500) - (12,675)
----------------------------------------------------------------------
Unearned on December 31, 1998 12,675 2,500 164,625 179,800
Plan activity during 1999:
Forfeited - - - -
Awarded 12,330 - (12,330) -
Earned (21,505) (1,500) - (23,005)
----------------------------------------------------------------------
Unearned on December 31, 1999 3,500 1,000 152,295 156,795
======================================================================
</TABLE>
(1) The number of shares granted under the Stock Option Plan and the weighted
average exercise price are adjusted for a three for one stock split that was
effective November 18, 1997.
At the time of inception of the RRPs, the cost of the plan shares was recorded
as unearned compensation in stockholders' equity. As granted shares are earned,
compensation is charged to expense at market value (restricted shares) or at
cost (unrestricted shares), unearned compensation is reduced at share cost
($3.33 per share), thereby increasing stockholders' equity, and paid in capital
is increased by the appreciated portion of the restricted shares' market value.
HFI recorded compensation expense for earned RRP shares totaling $6,000 for the
first quarter 2000, $173,000 for the year 1999, $173,000 for the year 1998, and
$592,000 for the year 1997.
HFI's stock option plans include the 1994 Incentive Stock Option Plan for key
employees and the 1994 Stock Option Plan for Outside Directors ("the Option
Plans") which were established on January 25, 1994. Recipients of options under
the Option Plans are required to pay consideration to the Bank to exercise
option shares as well as render service over the applicable vesting periods.
Recipients of
F-21
<PAGE>
options have no rights with respect to share voting or receipt of dividends on
unexercised option shares. Stock options under the Option Plans vest over
periods of one to five years, or at the time of certain qualified events, and
are exercisable within a ten-year period from the date the options were granted.
The Board of Directors adopted the Harris Savings Bank 1996 Stock Option Plan
("the 1996 Stock Option Plan") and reserved 75,000 shares of Common Stock for
issuance under the plan. This plan was approved by the stockholders at the
annual meeting of stockholders on April 16, 1996. Recipients of options under
the 1996 Stock Option Plan are required to pay consideration to HFI to exercise
option shares as well as render service over the applicable vesting periods.
Recipients of options have no rights with respect to share voting or receipt of
dividends on unexercised option shares. Stock options under the 1996 Stock
Option Plan vest over a period of three years, or at the time of certain
qualified events, and are exercisable within a ten-year period from the date the
options were granted.
In 1999, the Board of Directors adopted the Harris Financial, Inc. 1999
Incentive Stock Option Plan and the Harris Financial, Inc. 1999 Stock Option
Plan for Outside Directors ("the 1999 Stock Option Plans"). The Board of
Directors reserved 1,000,000 shares of Common Stock for issuance under the
Harris Financial, Inc. 1999 Incentive Stock Option Plan and 125,000 shares of
Common Stock for issuance under the Harris Financial, Inc. 1999 Stock Option
Plan for Outside Directors. The plans were approved by the stockholders at the
annual meeting of stockholders on April 20, 1999. Recipients of options under
the 1999 Stock Option Plans are required to pay consideration to the Bank to
exercise option shares as well as render service over the applicable vesting
periods. Recipients of options have no rights with respect to share voting or
receipt of dividends on unexercised option shares. Stock options under the 1999
Stock Option Plans vest over a period of five years, or at the time of certain
qualified events, and are exercisable within a ten-year period from the date the
options were granted.
The following table presents the activity in HFI's option plans during the
periods ending December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number (1) Price (1) Number (1) Price (1) Number (1) Price (1)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year 178,650 $ 9.50 332,125 $ 3.92 479,550 $ 3.41
Granted (forfeited) 226,850 (4) 11.76 49,625 (3) 22.49 (6,225) (2) 1.76
Exercised (30,125) 3.72 (203,100) 3.61 (141,200) 3.39
------------------------------------------------------------------------------------
Balance at end of year 375,375 $ 11.33 178,650 $ 9.50 332,125 $ 3.92
====================================================================================
Exercisable at end of year 117,275 77,925 220,975
============ ============ ============
Weighted average grant date
fair value of options granted
during the year $ 6.16 $ 6.48 $ 3.93
============ ============ ============
</TABLE>
(1) The number of shares granted under the Stock Option Plan and the
weighted average exercise price are adjusted for a three for one stock
split that was effective November 18, 1997.
(2) Includes 39,750 forfeited shares
(3) Includes 1,500 forfeited shares
(4) Includes 29,150 forfeited shares
The following table presents the options outstanding and exercisable at December
31, 1999:
<TABLE>
<CAPTION>
$0 - $5 $5 - $10 $10 - $15 $20-$25 Total
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Options Outstanding:
Number of options (1) 73,625 17,275 259,475 25,000 375,375
Weighted average exercise price (1) $ 3.33 $ 7.01 $ 13.03 $ 20.25 $ 11.33
Weighted average remaining contract life in years 4 7 9 8 8
Options Exercisable:
Number of options (1) 73,625 11,725 26,925 5,000 117,275
Weighted average exercise price (1) $ 3.33 $ 6.55 $ 13.66 $ 20.25 $ 6.74
</TABLE>
F-22
<PAGE>
(1) The number of shares granted under the Stock Option Plan and the weighted
average exercise price are adjusted for a three for one stock split that
was effective November 18, 1997.
HFI applies APB Opinion No. 25 and related interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized for its stock
option plans. Had compensation costs for HFI's 1996 and 1999 stock option plans
been determined consistent with FASB Statement No. 123, HFI's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
1999 1998 1997
------------------------------------------
Net income
As reported $ 18,683 $ 19,229 $ 17,771
Pro forma $ 17,932 $ 19,099 $ 17,738
Basic earnings per share (1)
As reported $ 0.56 $ 0.57 $ 0.53
Pro forma $ 0.53 $ 0.56 $ 0.53
Diluted earnings per share (1)
As reported $ 0.55 $ 0.57 $ 0.52
Pro forma $ 0.53 $ 0.56 $ 0.52
(1) All per share values have been adjusted to reflect the November 18, 1997
three for one stock split.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1999: dividend yield of 2.18 percent to 3.96
percent; expected volatility of 42.265 percent; risk-free interest rate of 4.67
percent to 6.16 percent; and expected lives of seven years. The following
weighted average assumptions are used for grants in 1998: dividend yield of 1.57
percent; expected volatility of 43.89 percent; risk-free interest rate of 4.52
percent; and expected lives of seven years. The following weighted average
assumptions are used for grants in 1997: a dividend yield of 3.34 percent;
expected volatility of 41.32 percent; risk-free interest rate of 5.60 percent;
and expected lives of seven years. The effects of applying SFAS No. 123 may not
be representative of the effects on reported net income in future years.
(16) Income Taxes
Income tax expense for the years ended December 31, 1999, 1998 and 1997 is
summarized as follows:
For the years ended December 31,
--------------------------------------
1999 1998 1997
--------------------------------------
Federal:
Current $ 4,589 $ 6,609 $ 6,905
Deferred 1,212 (903) (31)
--------------------------------------
5,801 5,706 6,874
State:
Current 1,802 1,338 1,483
Deferred 22 265 (45)
--------------------------------------
Income tax expense $ 7,625 $ 7,309 $ 8,312
======================================
Total income tax expense differed from the amounts computed by applying the U.S.
Statutory income tax rate for the years ended December 31, 1999, 1998 and 1997
to income before taxes as a result of the following:
F-23
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Estimated income tax expense at federal rate $ 9,208 $ 9,288 $ 9,129
State tax expense net of federal income taxes 1,180 1,041 979
Tax-exempt interest income (2,219) (2,271) (2,013)
Amortization of goodwill 322 322 318
Dividends received deduction (1,216) (1,677) (1,501)
Non-deductible employee stock option plan expense 83 224 399
Interest disallowance 291 352 306
Other, net (24) 30 695
------------------------------------------
Total $ 7,625 $ 7,309 $ 8,312
==========================================
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities as of December 31, 1999
and 1998 are presented below:
<TABLE>
<CAPTION>
1999 1998
---------------------------
<S> <C> <C>
Deferred tax asset:
Reserve for uncollected interest $ - $ 77
Deferred compensation expense 336 404
Post-retirement benefits expense 1,035 973
Pension expense 334 117
Excess loan servicing fees 47 69
Allowance for loan losses 4,264 3,505
Deposit intangible amortization 1,218 898
Accrued severance costs 61 134
Deferred interest income 290 242
Non-accrual interest 126 126
Stock-based compensation expense (27) 115
Net unrealized losses on marketable securities available for sale 19,051 -
Sale of loan servicing rights 559 -
Other 289 460
---------------------------
Total 27,583 7,120
---------------------------
Deferred tax liabilities:
Deferred loan costs and dealer reserves, net 6,715 3,877
Prepaid expenses 301 359
Depreciation 976 545
Net unrealized gains on marketable securities available for sale - 5,035
Deferred depreciation and amortization on acquistion related assets 155 224
Originated mortgage servicing rights 958 1,069
Excess tax bad debt reserves over base year 908 1,367
Other 168 116
---------------------------
Total 10,181 12,592
---------------------------
Net deferred tax asset (liability) $ 17,402 $ (5,472)
===========================
</TABLE>
Management has determined that it is not required to establish a valuation
reserve for its gross deferred tax asset of $27.6 million since it is more
likely than not that the deferred tax assets will be realized through future
reversals of existing temporary differences, future taxable income and the
implementation of prudent tax planning strategies.
(17) Leases
At December 31, 1999, HFI was obligated under non-cancelable operating leases
for office space. Certain leases contain escalation clauses providing for
increased rentals based on increases in the average consumer price index. Rental
expenses for these facilities
F-24
<PAGE>
aggregated $278,000 for the first quarter 2000, $1,070,000 for the year 1999,
$993,000 for the year 1998, and $1,022,000 for the year 1997.
The projected minimum rental payments under the terms of the leases at December
31, 1999, net of projected sub-lease rentals, are as follows:
Years ending
December 31, Amount
----------------- --------------
2000 $ 903
2001 795
2002 744
2003 620
2004 458
2005 and thereafter 1,254
-------------
$ 4,774
=============
(18) Fair Value Accounting
For HFI, as for most financial institutions, the majority of its assets and
liabilities are considered financial instruments as defined in SFAS 107. Many of
HFI's financial instruments, however, lack an available trading market as
characterized by a willing buyer and a willing seller engaging in an exchange
transaction. Since it is HFI's general practice not to engage in trading
activities, significant assumptions and estimations were used in calculating
present values in discounted cash flow models. Estimated fair values at December
31, 1999 and 1998 have been determined by HFI using the best available data, as
generally provided in Harris Savings Bank's call report as submitted to the FDIC
with an estimation methodology suitable for each category of financial
instrument.
Fair value estimates, methods and assumptions are set forth below for HFI's
financial instruments.
Cash and Cash Equivalents. The carrying amounts for short-term instruments
approximate fair value because of the short maturity of, and negligible credit
concerns within those instruments.
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
------------------------------------------------------------------------
Cash and cash equivalents $ 73,613 $ 73,613 $ 56,741 $ 56,741
============================== ==============================
</TABLE>
Marketable Securities. The fair value of marketable securities, all of which are
maintained as available-for-sale, has been valued based on quotations received
from an independent pricing service.
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------------------------
Estimated Amortized Estimated Amortized
Fair Value Cost Fair Value Cost
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available-for-sale $ 1,257,603 $ 1,306,001 $ 1,274,837 $ 1,261,696
-----------------------------------------------------------------------------------------
$ 1,257,603 $ 1,306,001 $ 1,274,837 $ 1,261,696
=========================================== ==========================================
</TABLE>
Deposit, Escrow, and Other Borrowings. Under SFAS 107, the fair value of
deposits with no stated maturity, such as demand deposit accounts, NOW accounts,
money market accounts and savings accounts, is equal to the amount payable on
demand. The fair value of time deposits and other borrowings is based on the
discounted value of contractual cash flows and current rates for debt with
similar terms and remaining maturities. The discount rate is estimated using the
rates currently offered for deposits of similar remaining maturities. The fair
value of escrow, which has no stated maturity, is equal to the amount on
deposit.
F-25
<PAGE>
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand and NOW accounts $ 156,118 $ 156,118 $ 144,689 $ 144,689
Money market accounts 172,550 172,550 152,057 152,057
Savings 135,813 135,813 143,462 143,462
Time deposits 915,405 909,389 722,244 765,171
----------------------------------------------------------------
Total deposits $1,379,886 $1,373,870 $1,162,452 $1,205,379
================================================================
Escrow $ 3,511 $ 3,511 $ 7,906 $ 7,906
================================================================
Other borrowings $1,094,348 $1,118,000 $1,065,173 $1,069,254
================================================================
</TABLE>
Loans. Fair values are estimated for portfolios of loans with similar
characteristics. Residential mortgages make up a substantial percentage of
HFI's loan portfolio. These residential mortgages, which are generally
underwritten to standards substantially in conformity with Federal Home Loan
Mortgage Corporation ("Freddie Mac") standards, have been estimated based on the
discounted value of expected cash flows.
Fair values for all commercial and other loans have been calculated by
discounting scheduled cash flows. The discount rate used in these calculations
is the market rate for similar instruments adjusted for noninterest operating
costs, credit risk and assumed prepayment risk.
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial loans $ 342,175 $ 347,323 $ 203,543 $ 203,585
Mortgage loans 539,794 556,895 603,086 602,432
Consumer loans 366,094 364,495 254,401 249,715
Less: Allowance for loan losses - (11,873) - (9,088)
-----------------------------------------------------------------
$1,248,063 $1,256,840 $1,061,030 $1,046,644
=================================================================
</TABLE>
Commitments to Extend Credit and Performance Standby Letters of Credit. The
fair value of commitments to extend credit is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and present creditworthiness of the counterparties. For
fixed rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
performance standby letters of credit is based upon fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties.
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------------
Contract Carrying Estimated Contract Carrying Estimated
Amount Amount (1) Fair Value Amount Amount (1) Fair Value
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commitments:
Commitments to extend credit:
Unused open-end consumer lines of credit $ 57,311 $ - $ - $ 44,006 $ - $ -
Unused open-end commercial lines of credit 96,481 391 391 39,429 275 275
Funds available on construction loans 27,281 704 704 37,319 902 902
Loan originations and purchases 31,087 436 436 86,286 477 477
Performance standby letters of credit 7,372 34 34 4,703 31 31
------------------------------------------------------------------------------
$219,532 $1,565 $1,565 $211,743 $1,685 $1,685
==============================================================================
Commitments to sell loans $ 7,633 $ - $ - $ 14,418 $ - $ -
Commitments to purchase securities $ - $ - $ - $ - $ - $ -
</TABLE>
(1) The amounts shown under "carrying amount" represent accruals or deferred
income arising from these unrecognized financial instruments.
Limitations. Fair value estimates are made at a specific point in time, based
on relevant market information and information about the financial instruments.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time HFI's
F-26
<PAGE>
entire holdings or of a particular financial instrument. Because no market
exists for a significant portion of HFI's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
institutions and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and, therefore, cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates. Management is concerned that reasonable comparability between
financial institutions may not be likely due to the wide range of permitted
valuation techniques and the estimates and assumptions that must be made.
(19) Derivative Financial Instruments
As of March 31, 2000, HFI has entered into six 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.
Each swap contract has a duration of 6 to 8 months and consists of two
components:
. 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 99 basis
points. The settlement is made on a monthly basis between HFI and
the counter party.
. 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. 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 accounted for the interest rate swap portion of
the contract using synthetic instrument accounting. Under this method, income
or losses related to the interest rate swap are accrued as they occur. The
notional amount of the contracts and the fair value gain or loss of the swap as
of March 31, 2000, are shown in the following table:
Total Return Swaps (All dollar amounts presented in table are in 000's)
Contract Notional Fair Value
Date Category Amount Gain/(loss)
---------- -------------- -------- -----------
08/19/1999 7.0% FNMA Pool 7,500 138
10/19/1999 7.0% FNMA Pool 5,000 60
11/30/1999 7.0% FNMA Pool 5,000 58
02/01/2000 7.0% FNMA Pool 5,000 (46)
03/02/2000 7.5% FNMA Pool 5,000 (20)
03/16/2000 7.5% FNMA Pool 5,000 (12)
------- ----
Total $32,500 $178
======= ====
As of March 31, 2000, the Bank has entered into three callable interest rate
swaps totaling $41.0 million. The callable interest rate swaps are matched to
callable certificates of deposits. The fixed interest rate received by the Bank
as a result of the swap is passed on to the holder of the certificate of
deposit. Each callable interest rate swap has the same call date as the
callable certificate of deposit to which it is matched. The first callable
interest rate swap was entered into on November 16, 1999. This interest rate
swap is matched to a callable certificate of deposit with a 10 year final
maturity and callable after one year. The second callable interest rate swap
was entered into December 6, 1999. This interest rate swap is matched to a
callable certificate of deposit with a 7 year final maturity and callable after
one year. The third callable interest rate swap was entered into on February 8,
2000. The interest rate swap is matched to a callable certificate of deposit
with a 3-1/2 year final maturity and callable after one year. For the first two
interest rate swaps, the Bank pays a rate of 3 month LIBOR less 9 basis points.
For the third interest rate swap, the Bank pays a rate of 3 month LIBOR less 8
basis points. For the November 16, 1999 interest rate swap, the Bank receives
an interest rate of 7.35%, creating an effective borrowing rate of 6.00% as of
March 31, 2000. For the December 6, 1999 interest rate swap, the Bank receives
an interest rate of 7.00%, creating an effective borrowing rate of 6.02875% as
of March 31, 2000. For the February 8, 2000 interest rate swap, the Bank
receives an interest rate of 7.00%, creating an effective borrowing rate of
6.01% as of March 31, 2000.
F-27
<PAGE>
The notional amount of the contracts and the fair value of the callable interest
rate swaps as of March 31, 2000, are shown in the following table:
Callable Interest Rate Swaps (All dollar amounts presented in table are in
000's)
Contract Maturity Notional as of
Date Date Amount 03/31/2000
---------- ---------- -------- ----------
11/16/1999 11/16/2009 $12,500 $ (130)
12/06/1999 12/06/2006 13,500 (167
02/08/2000 08/08/2003 15,000 (262)
------- ----------
Total $41,000 $ (559)
======= ==========
As of December 31, 1999, HFI has entered into five 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:
. 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.
. 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 estimated 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, income 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 swap as
of December 31, 1999, are shown in the following table:
Contract Notional Fair Value
Date Category Amount Gain/(loss)
---------- -------------- -------- -----------
06/04/1999 6.5% FNMA Pool $ 5,000 $131
07/26/1999 7.0% FNMA Pool 5,000 56
08/19/1999 7.0% FNMA Pool 7,500 96
10/19/1999 7.0% FNMA Pool 5,000 29
11/30/1999 7.0% FNMA Pool 5,000 28
-------- -----------
Total $27,500 $340
======== ===========
As of December 31, 1999, the Bank has entered into two callable interest rate
swaps totaling $26.0 million. The callable interest rate swaps are matched to
callable certificates of deposits. The fixed interest rate received by the Bank
as a result of the swap is passed on to the holder of the certificate of
deposit. Each callable interest rate swap has the same call date as the
callable certificate of deposit to which it is matched. The first callable
interest rate swap was entered into on November 16, 1999. This interest rate
swap is matched to a callable certificate of deposit with a 10 year final
maturity and callable after one year. The second callable interest rate swap
was entered into December 6, 1999. This interest rate swap is matched to a
callable certificate of deposit with a 7 year final maturity and callable after
one year. For both interest rate swaps, the Bank pays a rate of 3 month LIBOR
less 9 basis points. For the November 16, 1999 interest rate swap, the Bank
receives a fixed interest rate of 7.35%., creating an effective borrowing rate
of 5.980% as of December 31, 1999. For the December 6, 1999 interest rate swap,
the Bank receives a fixed interest rate of 7.00%, creating an effective
borrowing rate of 6.031% as of December 31, 1999.
F-28
<PAGE>
The notional amount of the contracts and the fair value of the callable interest
rate swaps as of December 31, 1999, are shown in the following table:
Fair Value
Contract Maturity Notional as of
Date Date Amount 12/31/1999
---------- ---------- -------- ----------
11/16/1999 11/16/2009 $12,500 $ 369
12/06/1999 12/06/2009 13,500 374
-------- ----------
Total $26,000 $ 743
======== ==========
(20) New Accounting Standards
During June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting treatment.
SFAS 133 is effective for fiscal years beginning after June 15, 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.
F-29
<PAGE>
21) Earnings Per Share
The following tables show the allocation of earnings per share to basic earnings
per share and diluted earnings per share.
<TABLE>
<CAPTION>
Per Share
For the three months ended March 31, 2000 Income Shares Amount
-------------------------------------------------------------
Basic earnings per share:
<S> <C> <C> <C>
Income available to common shareholders $ 4,020 33,578,078 $0.12
-------------------------------------------------------------
Dilutive effect of management and director 42,132
stock options ----------------------
Diluted earnings per share:
Income available to common shareholders plus
assumed conversions $ 4,020 33,620,210 $0.12
=============================================================
For the year ended December 31, 1999
Basic earnings per share:
Income available to common shareholders
$18,683 33,595,772 $0.56
-------------------------------------------------------------
Options held by management and 70,785
directors ----------------------
Diluted earnings per share:
Income available to common shareholders plus
assumed conversions $18,683 33,666,557 $0.55
=============================================================
For the three months ended March 31, 1999
Basic earnings per share:
Income available to common shareholders $ 4,933 33,593,065 $0.15
-------------------------------------------------------------
Dilutive effect of management and director 90,049
stock options
-------------------------------------------------------------
Diluted earnings per share:
Income available to common
shareholders plus assumed conversions $ 4,933 33,683,114 $0.15
=============================================================
For the year ended December 31, 1998
Basic earnings per share:
Income available to common shareholders $19,229 33,885,369 $0.57
-------------------------------------------------------------
Options held by management 126,383
and directors ----------------------
Diluted darnings per share:
Income available to common shareholders plus
assumed conversions $19,229 34,011,752 $0.57
=============================================================
For the year ended December 31, 1997
Basic earnings per share:
Income available to common shareholders $17,771 33,779,379 $0.53
-------------------------------------------------------------
Options held by management 296,682
and directors ----------------------
Diluted earnings per share:
Income available to common shareholders plus
assumed conversions $17,771 34,076,061 $0.52
=============================================================
</TABLE>
Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding for the year.
Diluted earnings per common share were computed by dividing net income by the
sum of the weighted average number of common shares outstanding, plus the amount
of shares outstanding assuming the conversion of stock options.
Options to purchase 276,031 shares of common stock, with exercise prices ranging
from $12.10 to $20.25, were outstanding during 1999 but were not included in the
computation of diluted earnings per share because the exercise prices are
greater than the average market price of the common shares during the period.
The options, which expire at various dates through March 15, 2009, were still
outstanding as of December 31, 1999.
Options to purchase 38,837 shares of common stock, with exercise prices ranging
from $20.25 to $26.50, were outstanding during 1998 but were not included in the
computation of diluted earnings per share because the exercise prices are
greater than the average market price of the common shares during the period.
The options, which expire at various dates through June 2, 2008, were still
outstanding as of December 31, 1998.
F-30
<PAGE>
An option to purchase 3,181 shares of common stock, with an exercise price of
$12.10, was outstanding during 1997 but was not included in the computation of
diluted earnings per share because the exercise price is greater than the
average market price of the common shares during the period. The option, which
expires on August 25, 2007, was still outstanding as of December 31, 1997.
(22) Harris Financial Corporation Financial Information (Parent Company Only)
<TABLE>
<CAPTION>
March 31, December 31,
---------------------------------
Consolidated Balance Sheet 2000 1999 1998
-------------------------- ------------------ ---------------------------------
(unaudited)
<S> <C> <C> <C>
Assets:
Cash $ 883 $ 709 $ 491
Marketable securities available for sale 3,300 3,450 3,450
Loans receivable 297 396 495
Investment in bank subsidiary 162,822 164,881 185,520
Other assets 992 830 176
------------------ --------------------------------
Total assets $168,294 $170,266 $190,132
================== ================================
Liabilities and Stockholders' Equity:
Accounts payable and other liabilities $ 1,096 $ 942 $ 162
Stockholders' equity 167,198 169,324 189,970
------------------ --------------------------------
Total liabilities and stockholders' equity $168,294 $170,266 $190,132
================== ================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Years Ended
March 31, December 31,
----------------------------------------------
Consolidated Statement of Income 2000 1999 1999 1998
-------------------------------- ----------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Income:
Interest income $ 52 $ 43 $ 185 $ 411
Loss on sale of securities - - - (6)
Harris/Wharton income (73) - (127) -
Other income - 1 1 -
----------------------------------------------
Total income (21) 44 59 405
Expense:
Other expense 165 126 777 609
----------------------------------------------
Net loss before equity in undistributed
net income of subsidiaries (186) (82) (719) (204)
Equity in undistributed net income of subsidiaries 4,206 5,015 19,402 19,433
----------------------------------------------
Net income $4,020 $4,933 $18,683 $19,229
==============================================
</TABLE>
F-31
<PAGE>
<TABLE>
<CAPTION>
Three Months Years Ended
Ended
March 31, December31,
--------------------------- ------------------------
Consolidated Statement of Cash Flows 2000 1999 1999 1998
------------------------------------ --------------------------- ------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,020 $ 4,933 $ 18,683 $ 19,229
Adjustments to reconcile net income to net cash provided by
operating activities:
Undistributed earnings of subsidiary (4,206) (5,015) (19,402) (19,433)
Net depreciation, amortization, and accretion - 11 79 150
Loss on sale of investments - - - 6
Equity losses from joint venture 73 - 127 -
Decrease(Increase) in loan to subsidiary 99 99 99 (495)
Decrease (increase) in other 154 106 59 122
--------------------------- ------------------------
Net cash used by operating activities: 140 134 (355) (421)
--------------------------- ------------------------
Cash flows from investing activities:
Purchase of available-for-sale securities, net - - - (510)
Sale of available-for-sale securities, net - - - 6,571
Investment in joint venture - - (300) -
--------------------------- ------------------------
Net cash provided by (used in) investing activities 0 0 (300) 6,061
--------------------------- ------------------------
Cash flows from financing activities:
Payments to acquire treasury stock - - (428) (5,970)
Payments from exercise of stock options 4 33 112 733
Dividends paid (480) (478) (1,911) (1,886)
Dividends received 510 1,000 3,100 1,888
--------------------------- ------------------------
Net cash (used in) provided by financing activities 34 555 873 (5,235)
--------------------------- ------------------------
Net increase in cash 174 689 218 405
Cash at the beginning of the period 709 491 491 86
--------------------------- ------------------------
Cash at the end of the period $ 883 $ 1,180 $ 709 $ 491
=========================== ========================
</TABLE>
(23) Segment Reporting
Effective January 1, 1998, HFI adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131), which requires disclosures about reportable segments of
an enterprise. The determination of these segments is based upon the manner in
which the chief operating decision maker of a particular enterprise evaluates
its financial information.
HFI consists of a holding company and a wholly-owned bank subsidiary, Harris
Savings Bank. Harris Savings Bank and its affiliated companies perform
financial service activities, which include making loans to individuals and
businesses, selling loans on the secondary market, attracting and reinvesting
deposits, providing other financial services through its bank delivery channels
and making investments in marketable securities. These services are
concentrated in southcentral Pennsylvania and northern Maryland. Both of these
markets possess similar characteristics. The operating results of Harris
Savings Bank as a single entity are used by HFI's executives to make operating
decisions. Therefore, the consolidated financial statements of HFI, as
presented, represent the results of a single financial services segment.
32
<PAGE>
(24) Consolidated Quarterly Financial Data
<TABLE>
<CAPTION>
2000 1999
----------------------- --------------------------------------------------------------
First First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter
----------------------- --------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Interest income $47,236 $41,708 $42,428 $44,989 $45,704
Interest expense 31,718 26,587 27,227 29,421 30,156
----------------------- --------------------------------------------------------------
Net interest income 15,518 15,121 15,201 15,568 15,548
Provision for loan loss 835 795 795 795 795
Noninterest income 2,734 4,021 3,511 2,477 748
Noninterest expense 11,832 11,592 11,333 11,564 8,218
----------------------- --------------------------------------------------------------
Income before income taxes 5,585 6,755 6,584 5,686 7,283
Income taxes 1,565 1,822 1,847 1,556 2,400
----------------------- --------------------------------------------------------------
Net income $ 4,020 $ 4,933 $ 4,737 $ 4,130 $ 4,883
======================= ==============================================================
Basic earnings per share $ 0.12 $ 0.14 $ 0.13 $ 0.12 $ 0.14
Diluted earnings per share $ 0.12 $ 0.14 $ 0.13 $ 0.12 $ 0.14
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
1998
------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
Interest income $40,407 $40,102 $41,402 $42,101
Interest expense 26,309 26,042 27,220 27,579
------------------------------------------------------------------------------------
Net interest income 14,098 14,060 14,182 14,522
Provision for loan loss 830 570 570 570
Noninterest income 4,928 3,052 4,198 3,367
Noninterest expense 9,823 10,399 10,856 12,251
------------------------------------------------------------------------------------
Income before income taxes 8,373 6,143 6,954 5,068
Income taxes 2,624 1,668 2,040 977
------------------------------------------------------------------------------------
Net income $ 5,749 $ 4,475 $ 4,914 $ 4,091
====================================================================================
Basic earnings per share $ 0.17 $ 0.13 $ 0.15 $ 0.12
Diluted earnings per share $ 0.17 $ 0.13 $ 0.15 $ 0.12
====================================================================================
</TABLE>
33
<PAGE>
(25) Components of Comprehensive Income
<TABLE>
<CAPTION>
Before- Tax Net-of-
Tax Expense or Tax
Amount Benefit Amount
---------------------------------------------------
<S> <C> <C> <C>
For the quarter ended March 31, 2000
Unrealized losses on securities:
Unrealized holding losses arising during period $(10,697) $ 4,251 $ (6,446)
Plus: Reclassification adjustment for losses
included in net income 1,208 (480) 728
---------------------------------------------------
Net unrealized losses $ (9,489) $ 3,771 $ (5,718)
===================================================
For the year ended December 31, 1999
Unrealized losses on securities:
Unrealized holding losses arising during period $(62,743) $ 24,557 $ (38,186)
Plus: Reclassification adjustment for losses
included in net income 1,204 (471) 733
---------------------------------------------------
Net unrealized losses $(61,539) $ 24,086 $ (37,453)
===================================================
For the year ended December 31, 1998
Unrealized losses on securities:
Unrealized holding losses arising during period $ (3,367) $ 1,370 $ (1,997)
Less: Reclassification adjustment for gains
included in net income (1,060) 431 (629)
---------------------------------------------------
Net unrealized losses $ (4,427) $ 1,801 $ (2,626)
===================================================
For the year ended December 31, 1997
Unrealized gains on securities:
Unrealized holding gains arising during period $ 13,720 $ (5,427) $ 8,293
Less: Reclassification adjustment for gains
included in net income (1,945) 769 (1,176)
---------------------------------------------------
Net unrealized gains $ 11,775 $ (4,658) $ 7,117
===================================================
</TABLE>
34
<PAGE>
YORK FINANCIAL CORP.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER INFORMATION
<TABLE>
<S> <C>
I. Excerpts from York Financial's Annual Report on Form 10-K for the Year Ended June 30, 1999
Part II, Item 7. Audited Consolidated Financial Statements of York Financial Corp.
and Subsidiaries and Report of Independent Auditors:
Report of Independent Auditors............................................................... G-1
Consolidated Balance Sheets as of June 30, 1999 and 1998..................................... G-2
Consolidated Statements of Income for the years ended June 30, 1999,
1998 and 1997.............................................................................. G-3
Consolidated Statements of Stockholder's Equity for the years ended
June 30, 1999, 1998 and 1997............................................................... G-4
Consolidated Statements of Cash Flows for the years ended June 30, 1999,
1998 and 1997.............................................................................. G-5
Notes to Consolidated Financial Statements................................................... G-7
Part II, Item 6. Management's Discussion and Analysis of Consolidated Financial Condition
And Results of Operations of York Financial Corp........................................... G-35
Part I, Item 1. Description of Business...................................................................... G-51
II. Excerpts from York Financial's Quarterly Report on Form 10-Q for the Quarter Ended
March 31, 2000
Part I, Item 1. Unaudited Consolidated Financial Statements of York Financial Corp.
and Subsidiaries:
Consolidated Balance Sheets as of March 31, 2000 and June 30, 1999........................... G-66
Consolidated Statements of Income for the three and nine months ended
March 31, 2000 and 1999.................................................................... G-67
Consolidated Statements of Changes in Stockholders' Equity for the nine
months ended March 31, 2000 and 1999....................................................... G-67
Consolidated Statements of Cash Flows for the nine months ended
March 31, 2000 and 1999.................................................................... G-68
Notes to Consolidated Financial Statements................................................... G-69
Part II, Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................................ G-75
</TABLE>
<PAGE>
Report of Independent Auditors
-------------------------------------------------------------------------------
The Board of Directors
York Financial Corp.
We have audited the accompanying consolidated balance sheets of York Financial
Corp. and subsidiaries as of June 30, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended June 30, 1999. These financial statements
are the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of York Financial
Corp. and subsidiaries at June 30, 1999 and 1998, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1999, in conformity with generally accepted accounting
principles.
Baltimore, Maryland /s/Ernst & Young LLP
July 21, 1999
G-1
<PAGE>
York Financial Corp. and Subsidiaries
Consolidated Balance Sheets
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30
1999 1998
---------------------------
(In Thousands)
<S> <C> <C>
Assets
Cash and due from banks:
Noninterest-earning $ 22,813 $ 17,934
Interest-earning 8,958 126,613
---------------------------
31,771 144,547
Loans held for sale, net 30,631 17,534
Securities available for sale 295,691 47,940
Securities held to maturity (fair value of $22,635--1999
and $5,775--1998) 22,618 5,784
Loans receivable, net 909,193 951,641
Real estate, net 8,633 10,994
Premises and equipment, net 20,842 19,634
Federal Home Loan Bank stock, at cost 7,976 7,976
Accrued interest receivable 8,581 8,088
Other assets 20,952 9,451
Investments in joint ventures 7,738 5,679
---------------------------
Total assets $1,364,626 $1,229,268
===========================
Liabilities and stockholders' equity
Liabilities:
Deposits 1,115,253 1,065,777
Federal Home Loan Bank advances and other
borrowings 113,962 27,861
Advances from borrowers for taxes and insurance 4,281 4,634
Other liabilities 20,720 21,771
---------------------------
Total liabilities 1,254,216 1,120,043
Stockholders' equity:
Preferred stock: 10,000,000 shares authorized and
unissued
Common Stock, $1.00 par value:
Authorized 20,000,000 shares; issued
1999-9,565,467 shares; 1998--8,968,031 shares 9,565 8,968
Additional capital 90,417 81,848
Retained earnings 15,028 18,886
Accumulated other comprehensive income (3,938) 318
Unearned ESOP shares (662) (795)
---------------------------
Total stockholders' equity 110,410 109,225
---------------------------
Total liabilities and stockholders' equity $1,364,626 $1,229,268
===========================
</TABLE>
See accompanying notes
G-2
<PAGE>
York Financial Corp. and Subsidiaries
Consolidated Statements of Income
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30
1999 1998 1997
----------------------------------------------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 69,880 $ 80,893 $ 80,820
Interest on securities held for trading 601 688 1,329
Interest and dividends on securities available for sale 8,120 3,770 3,711
Interest and dividends on securities held to maturity 1,308 930 951
Other interest income 6,456 2,285 830
-----------------------------------------------
Total interest income 86,365 88,566 87,641
Interest expense:
Interest on deposits 49,997 49,744 46,365
Interest on borrowings 1,829 2,100 5,423
-----------------------------------------------
Total interest expense 51,826 51,844 51,788
-----------------------------------------------
Net interest income 34,539 36,722 35,853
Provision for loan losses 3,632 3,737 2,424
-----------------------------------------------
Net interest income after provision for loan losses 30,907 32,985 33,429
Other income:
Mortgage banking 3,256 3,757 3,610
Gain on sales of securities available for sale 794 174 -
Gain on sales of real estate 1,599 193 91
Gain on sale of limited partnership interest - - 1,214
Fees and service charges 3,601 3,216 2,842
Income (loss) from joint ventures 1,241 1,411 (118)
Other operating income 1,547 1,401 1,057
-----------------------------------------------
Total other income 12,038 10,152 8,696
-----------------------------------------------
Other expenses:
Salaries and employee benefits 14,140 13,154 11,565
Occupancy 3,802 3,597 3,484
Federal deposit insurance 646 628 1,250
SAIF assessment - - 5,310
Real estate 872 1,403 1,602
Data processing 1,365 1,110 1,086
Advertising 1,157 1,081 978
Other 6,252 6,350 5,888
-----------------------------------------------
Total other expenses 28,234 27,323 31,163
-----------------------------------------------
Income before income taxes 14,711 15,814 10,962
Provision for income taxes 5,041 5,799 3,875
-----------------------------------------------
Net income $ 9,670 $ 10,015 $ 7,087
===============================================
Per share data:
Net income $ 1.01 $ 1.09 $ 0.80
===============================================
Net income-assuming dilution $ 0.97 $ 1.01 $ 0.75
===============================================
Cash dividends paid $ 0.51 $ 0.48 $ 0.44
===============================================
Weighted average shares 9,564,761 9,213,608 8,894,327
===============================================
Weighted average shares-
assuming dilution 9,919,118 9,892,913 9,423,215
===============================================
</TABLE>
See accompanying notes
G-3
<PAGE>
York Financial Corp. and Subsidiaries
Consolidated Statements of Stockholders' Equity
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other Unearned
Common Additional Retained Comprehensive ESOP
Stock Capital Earnings Income Shares Total
------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 $ 6,088 $ 67,809 $ 21,154 $ (451) $(1,060) $ 93,540
Comprehensive income:
Net income - - 7,087 - - 7,087
Net change in unrealized gains
on available-for-sale securities,
net of income tax of $331 - - - 530 - 530
---------
Total comprehensive income 7,617
---------
Cash dividends paid - - (3,919) - - (3,919)
Stock options exercised 242 1,383 - - - 1,625
Common stock issued under dividend
reinvestment plan 132 2,001 - - - 2,133
10% Common stock dividend - 611,694
shares at fair value 611 10,399 (11,032) - - (22)
Release of ESOP shares - 40 - - 133 173
Retirement of common stock (65) (999) - - - (1,064)
-----------------------------------------------------------------------------------------
Balance, June 30, 1997 7,008 80,633 13,290 79 (927) 100,083
Comprehensive income:
Net income - - 10,015 - - 10,015
Net change in unrealized gains
on available-for-sale securities,
net of income tax of $128 - - - 239 - 239
---------
Total comprehensive income 10,254
---------
Cash dividends paid - - (4,419) - - (4,419)
Stock options exercised 118 723 - - - 841
Income tax benefit of stock options
exercised - 531 - - - 531
Common stock issued under dividend
reinvestment plan 107 2,223 - - - 2,330
5-for-4 stock split effected in the
form of a 25% common stock
dividend-1,762,158 shares 1,762 (1,783) - - - (21)
Release of ESOP shares 172 - - 132 304
Retirement of common stock (27) (651) - - - (678)
-----------------------------------------------------------------------------------------
Balance, June 30, 1998 8,968 81,848 18,886 318 (795) 109,225
Comprehensive income:
Net income - - 9,670 - - 9,670
Net change in unrealized losses on
available-for-sale securities,
net of income tax benefits of $2,292 - - - (4,256) - (4,256)
---------
Total comprehensive income 5,414
---------
Cash dividends paid - - (4,896) - - (4,896)
Stock options exercised 287 1,542 - - - 1,829
Income tax benefit of stock options
exercised - 794 - - - 794
Common stock issued under dividend
reinvestment plan 151 2,114 - - - 2,265
5% Common stock dividend--459,408
shares at fair value 459 8,155 (8,632) - - (18)
Release of ESOP shares - 61 - - 133 194
Retirement of common stock (300) (4,097) - - - (4,397)
-----------------------------------------------------------------------------------------
Balance June 30, 1999 $ 9,565 $ 90,417 $ 15,028 $ (3,938) $ (662) $ 110,410
=========================================================================================
</TABLE>
See accompanying notes
G-4
<PAGE>
York Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30
1999 1998 1997
------------------------------------------
(In Thousands)
Operating Activities
<S> <C> <C> <C>
Net income $ 9,670 $ 10,015 $ 7,087
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Amortization and accretion on securities and loans, net (22) (181) (622)
Provision for loan losses 3,632 3,737 2,424
Provision for real estate losses 250 914 1,188
Depreciation and amortization 2,161 1,834 1,705
Deferred income taxes 3,174 (793) 847
Loans originated for sale (196,803) (158,494) (125,918)
Proceeds from sales of trading securities 175,963 152,221 127,145
Realized gains on trading securities (2,240) (2,377) (906)
Realized gains on sales of securities available for sale (794) (174) -
Gain on sale of limited partnership interest - - 1,214
(Increase) decrease in accrued interest and other assets (9,082) 2,161 392
Increase (decrease) in other liabilities (1,337) 3,858 (12,343)
Other (2,868) (2,251) (4,214)
------------------------------------------
Net cash provided by (used in) operating activities (18,296) 10,470 (2,001)
Investing Activities
Proceeds from sales and maturities of securities available for sale 61,582 14,191 -
Purchase of securities available for sale (268,815) (10,344) (50)
Proceeds from sale of limited partnership interest - - 1,343
Purchases of securities held to maturity and Federal Home Loan
Bank stock (22,352) (2,069) (1,231)
Proceeds from maturities of securities
held to maturity 5,500 5,090 57
Principal repayments on securities 21,673 10,137 8,162
Net decrease in short-term investments 77 - -
Loans originated or acquired, net of increase in deferred loan
fees (319,140) (256,092) (251,212)
Principal collected on loans 293,498 260,215 179,981
Proceeds from sales of loans 1,669 33,426 1,642
Purchases of real estate (370) (412) (425)
Proceeds from sales of real estate 7,069 6,072 6,324
Purchases of premises, equipment, and leasehold
improvements, net (3,039) (4,078) (2,452)
Other (2,324) 2,321 3,205
------------------------------------------
Net cash provided by (used in) investing activities (224,972) 58,457 (54,656)
</TABLE>
G-5
<PAGE>
York Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30
1999 1998 1997
---------------------------------------------------
(In Thousands)
Financing Activities
<S> <C> <C> <C>
Net increase in noninterest-bearing demand deposits,
interest-bearing transaction accounts, savings
accounts, and 31-day certificates of deposit 65,838 53,645 3,163
Net increase (decrease) in certificates of deposit (16,363) 19,026 81,820
Net increase (decrease) in short-term advances received from
Federal Home Loan Bank 84,400 (20,000) (53,000)
Increase in convertible advance received from Federal Home Loan Bank - - 25,000
Net increase (decrease) in other Federal Home Loan Bank advances and
other borrowings 1,701 1,625 (144)
Issuance of common stock:
Dividend Reinvestment Plan 2,265 2,330 2,133
Stock Option Plans 1,455 163 561
Cash dividends paid (4,896) (4,419) (3,919)
Retirement of stock (4,023) - -
Cash paid in lieu of fractional shares (18) (21) (22)
Release of ESOP shares 133 132 133
---------------------------------------------------
Net cash provided by financing activities 130,492 52,481 55,725
---------------------------------------------------
Increase (decrease) in cash and cash equivalents (112,776) 121,408 (932)
Cash and cash equivalents at beginning of year 144,547 23,139 24,071
---------------------------------------------------
Cash and cash equivalents at end of year $ 31,771 $ 144,547 $ 23,139
===================================================
</TABLE>
See accompanying notes
G-6
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
-------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Description of Business
York Financial Corp. (Corporation) is a unitary savings and loan holding
company. York Federal Savings and Loan Association (Association), a federally
chartered savings and loan association, is the primary operating unit of the
Corporation. The Association is a member of the Federal Home Loan Bank (FHLB) of
Pittsburgh and is subject to supervision, examination and regulation by the
Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation
(FDIC). The Association is primarily engaged in the business of attracting
deposits and investing these deposits into loans secured by residential and
commercial real property, commercial business loans, consumer loans and
investment securities. York Federal conducts its business through twenty-five
offices located in south central Pennsylvania and Maryland. In addition, York
Federal maintains a commissioned mortgage origination staff as well as mortgage
correspondent relationships which originate residential mortgage loans for the
Association primarily in Pennsylvania, Maryland and Virginia. The Association's
deposits are insured up to applicable limits by the Savings Association
Insurance Fund (SAIF) of the FDIC.
Basis of Presentation
The consolidated financial statements include the accounts of York Financial
Corp. and its wholly-owned subsidiaries including York Federal Savings and Loan
Association. All significant intercompany accounts and transactions have been
eliminated in consolidation. Preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
the estimates. Certain reclassifications have been made to the 1998 and 1997
consolidated financial statements to conform with the 1999 presentation.
Loans Held for Sale
The Corporation originates mortgage loans and creates mortgage-backed
securities generally through government sponsored agencies for sale in the
secondary market. During the period of origination, mortgage loans are
designated as held either for investment purposes or for sale. Loans held for
sale are carried at lower of cost or market based on quoted market prices of
securities collateralized by similar loans. Gains or losses on the sales of
loans held for sale are determined using the specific identification method.
Securities Held for Trading
The Corporation may at times have securities classified as "held for trading"
which are principally mortgage-backed securities held for sale in conjunction
with the Association's mortgage banking activities. These securities are carried
at fair value which is based on Statement of Financial Accounting Standards No.
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise". Unrealized gains and losses are reported in the statements of
income.
Securities Available for Sale and Held to Maturity
The classification of securities is determined at the time of acquisition and
is reevaluated at each reporting date. Securities are classified as "held to
maturity" based upon management's ability and positive intent to hold such
securities to maturity. Held to maturity securities are carried at amortized
cost.
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
-------------------------------------------------------------------------------
Securities not classified as trading or held to maturity are classified as
"available for sale." Available for sale securities are carried at fair value,
with unrealized gains and losses, net of taxes, reported as a component of other
comprehensive income in stockholders' equity.
The cost of securities classified as held to maturity or available for sale
is adjusted for amortization of premiums and accretion of discounts, both
computed using the interest method. Such amortization/accretion, as well as
interest and dividends, is included in interest income. Realized gains and
losses and declines in value judged to be other than temporary are included in
net gains on sales of securities available for sale in the statement of income.
The cost of securities sold is based on the specific identification method, and
all sales are recorded as of the trade date.
Loans Receivable
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal balance adjusted for any charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans.
Interest on loans is accrued and credited to operations based upon principal
amounts outstanding.
Loan origination and commitment fees and certain direct loan origination
costs are deferred and the net amount amortized as an adjustment of the related
loan's yield, generally over the contractual life of the related commitments or
loans.
The Association accounts for loans in accordance with Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
a Loan" as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures". As a result of applying the rules,
certain loans which are deemed to be impaired are reported at the present value
of expected future cash flows using the loan's effective interest rate, or as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent.
Loans (including loans impaired under Statement No. 114) are generally placed
on nonaccrual status when principal or interest is past due 90 days or more,
dependent upon type of loan and related collateral. After a loan is placed on
nonaccrual status, income is recognized only to the extent of cash received and
collection of principal is not in doubt.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb losses in its existing loan portfolio. It is management's
policy to establish reserves for losses on loans when deemed necessary. These
reserves are based on estimates, and ultimate losses are likely to vary from
such estimates. These estimates are reviewed periodically and, as adjustments
become necessary, they are reported in operations in the period in which they
become known. Management's determination of the adequacy of the allowance
reflects judgments of current loss exposure at the end of the period which is
based on the known and inherent risk characteristics in the portfolio, past loss
experience, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral, current economic conditions,
and such other relevant factors which in management's judgment deserve
recognition. The allowance for loan losses related to impaired loans was
determined in accordance with the provisions of Statement No. 114 as amended by
Statement No. 118. Actual losses or recoveries are charged or credited directly
to the allowance.
G-8
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
-------------------------------------------------------------------------------
Real Estate
Real estate consists of property held for investment and foreclosed assets
held for sale. Properties held for investment are carried at cost unless they
are determined to be impaired, in which case they are written down to fair
value. Costs related to development and improvement of real estate are
capitalized until the real estate reaches a saleable condition. Those costs
incurred related to holding the real estate are charged to real estate expenses.
Foreclosed assets held for sale are valued at the lower of cost or fair value
less costs to sell, and are reported net of valuation reserves thereby
establishing a new cost basis. Current valuations of real estate are
periodically performed by management. An allowance for real estate losses is
maintained at a level believed adequate by management to absorb potential real
estate losses.
Losses on sales of real estate are recognized at the time sales occur. Gains
on sales of real estate are recognized when the criteria for gain recognition
have been met in accordance with SFAS No. 66, "Accounting for Sales of Real
Estate".
Mortgage Servicing Rights
When the Association sells or securitizes mortgage loans and retains the
mortgage servicing rights, a separate asset for mortgage servicing rights is
recognized. The total cost of the mortgage loans is allocated to the loan and
the servicing right based on their relative fair value. A valuation allowance is
recorded where the fair value is below the carrying amount of certain mortgage
servicing assets, even though the overall fair value of the mortgage servicing
assets exceeds amortized cost. The mortgage servicing rights are amortized in
proportion to, and over the period of, estimated net servicing revenues.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on the straight-line
method over the estimated useful lives of the various assets. Estimated useful
lives of buildings and improvements are 15 to 39 years; and furniture, fixtures
and equipment lives are 5 to 7 years. Leasehold improvements are amortized over
the life of asset or lease term whichever is shorter except leasehold
improvements with related companies which use the life of the asset.
Income Taxes
The Corporation files a consolidated federal income tax return. Certain items
of income and expense are included in one period for financial reporting
purposes and another for income tax purposes. Deferred tax assets and
liabilities are determined based on the differences between financial statement
carrying amounts and the tax bases of existing assets and liabilities. These
differences are measured at the enacted tax rates that will be in effect when
these differences reverse.
Stock-Based Compensation
The Corporation has elected to follow the intrinsic value method to account
for compensation expense related to the award of stock options and to furnish
the pro forma disclosures required under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation".
G-9
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
-------------------------------------------------------------------------------
Comprehensive Income
The Corporation adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," as of July 1, 1998. Statement No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general -
purpose financial statements. The adoption of Statement No. 130 had no impact on
the Corporation's consolidated financial statements. The Corporation has elected
to disclose the required information in the Consolidated Statements of
Stockholders' Equity and accompanying notes. For purposes of comparability,
prior year financial statements have been reclassified to conform to the
Statement's requirements.
Business Segments
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," was effective July 1, 1998.
This Statement establishes standards for the way public enterprises report
information about operating segments in the financial statements. Based on the
guidance provided by the Statement, the Corporation does not have more than one
operating segment which would require additional disclosures in accordance with
the Statement.
Cash Flow Information
For purposes of the statements of cash flows, cash equivalents include cash
and amounts due from banks. During 1999, 1998 and 1997, the Association
exchanged loans for mortgage-backed securities in the amounts of $241,282,000,
$145,473,000 and $125,037,000, respectively. During 1999, 1998 and 1997, the
Association transferred unpaid loan balances from loans to real estate acquired
due to foreclosure of $4,919,000, $4,926,000 and $9,454,000, respectively.
During 1999, there was a noncash capital distribution from an investment in
joint venture of $2,205,000. There were no such distributions in 1998 or 1997.
In connection with the exercise of stock options, a portion of the exercise
price was represented by the surrender of shares which amounted to $374,000,
$678,000 and $1,064,000 in 1999, 1998 and 1997, respectively.
The Corporation paid $51,399,000, $51,810,000 and $51,758,000 in interest on
deposits and other borrowings during 1999, 1998 and 1997, respectively.
Recently Issued Accounting Guidance
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Statement No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. The effective
date of the Statement was deferred in June 1999 under Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133". This Statement is effective for
financial statements issued for all quarters of all fiscal years beginning after
June 15, 2000. The adoption of Statement No. 137 is not expected to have a
material impact on the Corporation's consolidated financial statements.
G-10
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
-------------------------------------------------------------------------------
2: Earnings Per Share
The Corporation computes earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share". Earnings per
common share ("basic") is computed using net income applicable to common stock
and weighted average common shares outstanding during the period. Earnings per
common share - assuming dilution ("diluted") is computed using net income
applicable to common stock and weighted average common shares outstanding during
the period after consideration of the potential dilutive effect of common stock
equivalents based on the treasury stock method using an average market price for
the period. The Corporation's common stock equivalents are solely related to
stock options.
Cash dividends paid per share are based on the number of shares outstanding
at each record date, adjusted for stock dividends and splits.
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Year Ended June 30
1999 1998 1997
-------------------------------------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C>
Basic:
Net Income $ 9,670 $ 10,015 $ 7,087
========== ========== ==========
Weighted average shares 9,564,761 9,213,608 8,894,327
========== ========== ==========
Net income per share $ 1.01 $ 1.09 $ 0.80
========== ========== ==========
Diluted:
Net income $ 9,670 $ 10,015 $ 7,087
========== ========== ==========
Weighted average shares 9,564,761 9,213,608 8,894,327
Dilutive effect of stock options 354,357 679,305 528,888
---------- ---------- ----------
Weighted average shares - assuming dilution
9,919,118 9,892,913 9,423,215
========== ========== ==========
Net income per share - assuming dilution
$ 0.97 $ 1.01 $ 0.75
========== ========== ==========
</TABLE>
G-11
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
-------------------------------------------------------------------------------
3: Restrictions on Cash and Due from Bank Accounts
The Association was required to meet reserve balance requirements as
established by the Federal Reserve. Reserve balance requirements are based on
outstanding transaction account balances and were satisfied by vault cash
positions held by the Association. During the year ended June 30, 1999 and 1998,
average reserve balances at the Federal Reserve necessary to meet requirements
were $0 and $8,000, respectively. The actual reserve balance at June 30, 1999
and 1998 was $0 and $16,000, respectively.
4: Securities Available for Sale and Held to Maturity
The following is a summary of available for sale and held to maturity
securities:
<TABLE>
<CAPTION>
June 30, 1999
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Available for Sale:
Equity securities $ 2,796 $ - $ (1,461) $ 1,335
U.S. Treasury and other U.S.
Government agencies 164,750 49 (2,943) 161,856
Mortgage-backed securities and
collateralized mortgage obligations 134,204 212 (1,916) 132,500
---------------------------------------------------------
$ 301,750 $ 261 $ (6,320) $ 295,691
=========================================================
Held to Maturity:
U.S. Treasury and other U.S.
Government agencies $ 3,498 $ - $ (14) $ 3,484
Corporate debt securities 18,903 103 (86) 18,920
Mortgage-backed securities 217 14 - 231
---------------------------------------------------------
$ 22,618 $ 117 $ (100) $ 22,635
=========================================================
June 30, 1998
---------------------------------------------------------
Available for Sale:
Equity Security $ 319 $ 19 $ - $ 338
U.S. Treasury and other U.S.
Government agencies 14,721 89 - 14,810
Mortgage-backed securities 32,411 414 (33) 32,792
---------------------------------------------------------
$ 47,451 $ 522 $ (33) $ 47,940
=========================================================
Held to Maturity:
U.S. Treasury and other U.S.
Government agencies $ 5,500 $ - $ (31) $ 5,469
Mortgage-backed securities 284 22 - 306
---------------------------------------------------------
$ 5,784 $ 22 $ (31) $ 5,775
=========================================================
</TABLE>
G-12
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
-------------------------------------------------------------------------------
The amortized cost and fair value of debt securities at June 30, 1999, as
presented in the following table are segregated by contractual maturity; where
applicable, contractual principal amortization schedules, adjusted for annual
prepayment assumptions based on consensus market forecasts, were utilized.
Expected maturities may differ from contractual maturities because the issuers
of the securities may have the right to prepay obligations without prepayment
penalties.
<TABLE>
<CAPTION>
Mortgage-backed
U.S. Treasury securities and
and other U.S. collaterialzed mortgage
Government agencies Corporate debt obligations Total
--------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value
--------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale:
Due in one year or
less $ 1,048 $ 1,052 $ - $ - $ 23,288 $ 23,017 $ 24,336 $ 24,069
Due after one year
through five years 82,833 81,358 - - 63,821 63,060 146,654 144,418
Due after five years
through ten years 79,187 77,757 - - 29,050 28,656 108,237 106,413
Due after ten years 1,682 1,689 - - 18,045 17,767 19,727 19,456
--------------------------------------------------------------------------------------------
$164,750 $161,856 $ - $ - $ 134,204 $132,500 $298,954 $294,356
============================================================================================
Held to Maturity:
Due in one year or
less $ - $ - $ - $ - $ 50 $ 54 $ 50 $ 54
Due after one year
through five years - - - - 135 144 135 144
Due after five years
through ten years 3,498 3,484 4,882 4,968 32 33 8,412 8,485
Due after ten years - - 14,021 13,952 - - 14,021 13,952
--------------------------------------------------------------------------------------------
$ 3,498 $ 3,484 $18,903 $18,920 $ 217 $ 231 $ 22,618 $ 22,635
============================================================================================
</TABLE>
Securities with an amortized cost of $302,669,000 and $52,916,000 on June 30,
1999 and 1998, respectively, were pledged to secure public deposits, repurchase
agreements, and for certain other purposes as required by law.
Gross realized gains of $794,000, $174,000 and $0 were realized on sales of
available for sale securities during 1999, 1998 and 1997, respectively. There
were no gross realized losses realized on sales of available for sale securities
during 1999, 1998 and 1997.
For the year ended June 30, 1999, trading securities with a fair value of
$5,223,000 were transferred to securities available for sale with related gains
of $45,000 included in earnings. For the year ended June 30, 1997, trading
securities with a fair value of $2,844,000 were transferred to securities
available for sale with related losses of $35,000 included in earnings. No such
transfers occurred in year ended June 30, 1998.
At June 30, 1999 and 1998, the aggregate book value of debt securities from a
single issuer did not exceed 10% of stockholders' equity.
G-13
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
-------------------------------------------------------------------------------
5: Loans Receivable
Loans receivable, net are summarized as follows:
<TABLE>
<CAPTION>
June 30
1999 1998
---------------------
(In Thousands)
<S> <C> <C>
First mortgage loans:
Conventional:
Residential $595,854 $680,779
Commercial 82,485 56,047
---------------------
678,339 736,826
Construction:
Residential 159,138 111,032
Commercial 30,269 14,258
---------------------
189,407 125,290
Commercial business loans 12,364 3,737
Consumer loans 144,558 139,040
---------------------
156,922 142,777
Less:
Undisbursed portion of
loans in process 106,088 45,382
Deferred expenses, net (1,416) (940)
Allowance for loan losses 10,803 8,810
---------------------
115,475 53,252
---------------------
$909,193 $951,641
=====================
</TABLE>
Generally, when the accrual of interest is discontinued, all unpaid accrued
interest is reversed. The interest excluded from interest income on loans on
nonaccrual status amounted to $0, $0 and $430,000 for the years ended June 30,
1999, 1998 and 1997, respectively. Effective June 30, 1999, the Association
implemented the Uniform Retail Credit Classification Policy. With the
implementation of the policy, a one-time charge to the allowance for loan losses
of $408,000 was recognized representing the total amount due on certain loans
identified in accordance with the policy, in excess of the net realizable value
of the underlying collateral. At June 30, 1999 and 1998, nonaccrual loans
totaled $919,000 and $0, respectively.
G-14
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
-------------------------------------------------------------------------------
At June 30, 1999 and 1998, the recorded investment in loans considered to be
impaired under Statement No. 114 was $0. During the years ended June 30, 1999
and 1997, the Corporation did not receive any cash payments representing
interest income on impaired loans. For the year ended June 30, 1998, a net
recovery totaling $186,000 of interest previously excluded from interest income
was recognized. The related allowance for loan losses associated with impaired
loans at June 30, 1999 and 1998 was $0. The average recorded investment in
impaired loans for the years ended June 30, 1999, 1998 and 1997 was $0, $275,000
and $1,500,000, respectively.
The primary market area for the Association's loan originations is
Pennsylvania, Maryland and Virginia.
The commercial loan portfolio is comprised of loans secured by commercial and
single family condominiums, land for development, hotel/motel/restaurant,
multifamily residential, office, industrial and retail buildings and other
properties. The total commercial loan portfolio of $107,765,000 at June 30, 1999
is collateralized by properties in Pennsylvania (75%), Maryland (10%), Virginia
(13%), and other (2%).
The Corporation does not have customer or group (borrowers engaged in similar
activities) concentrations in excess of 10% of total loans.
Related party loans to directors, executive officers and their associates were
less than 5% of stockholders' equity throughout the year and at June 30, 1999.
At June 30, 1999, the Association had outstanding commitments to sell
$25,300,000 in loans. The Association expects to satisfy these commitments with
loans currently classified as held for sale and loans originated/settled in the
commitment period.
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Year ended June 30
1999 1998 1997
----------------------------------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 8,810 $ 6,413 $ 6,609
Provision charged to expense 3,632 3,737 2,424
Recoveries credited to allowance 355 518 730
Less: Loan losses charged to
allowance (1,994) (1,858) (3,350)
----------------------------------
Balance at end of year $10,803 $ 8,810 $ 6,413
==================================
</TABLE>
G-15
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
-------------------------------------------------------------------------------
6: Mortgage Banking
The components of mortgage banking income are as follows:
<TABLE>
<CAPTION>
Year Ended June 30
1999 1998 1997
-----------------------------------
(In thousands)
<S> <C> <C> <C>
Gain on sales of loans and trading securities $ 2,240 $ 2,377 $ 906
Unrealized gain (loss) on loans and trading securities 45 (37) 972
Loan servicing fee income, net of amortization 496 677 1,222
Gain on sale of mortgage servicing rights 475 740 510
-----------------------------------
$ 3,256 $ 3,757 $ 3,610
===================================
</TABLE>
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage loans
serviced for others were $494,687,000, $487,092,000 and $548,202,000 at June 30,
1999, 1998 and 1997, respectively. Custodial escrow balances maintained in
connection with the foregoing loan servicing, and included in demand deposits,
were approximately $5,983,000, $7,151,000, and $3,468,000 at June 30, 1999, 1998
and 1997, respectively.
The changes in the Corporation's mortgage servicing assets are as follows:
Year Ended June 30
1999 1998
------------------------
(In Thousands)
Balance at beginning of year $ 3,118 $ 2,704
Additions 2,490 1,414
Less: Sales 462 558
Amortization 735 442
------------------------
Balance at end of year before
valuation allowance 4,411 3,118
Valuation allowance (260) (218)
------------------------
Net mortgage servicing assets $ 4,151 $ 2,900
========================
The estimated fair values of the mortgage servicing assets are $4,440,000 and
$2,938,000 at June 30, 1999 and 1998, respectively. Fair value is estimated by
discounting estimated future cash flows from the mortgage servicing assets
stratified based on loan type and interest rate using discount rates that
approximate current market rates and using current expected future prepayment
rates. A valuation allowance is recorded where the fair value is below the
carrying amount of certain mortgage servicing assets, even though the overall
fair value of the mortgage servicing assets exceeds amortized cost.
G-16
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
-------------------------------------------------------------------------------
The changes in the Corporation's valuation allowance for mortgage servicing
assets are as follows:
Year Ended June 30
1999 1998 1997
----------------------------
(In Thousands)
Balance at beginning of year $ (218) $ (145) $ (227)
Provision for impairment (42) (73) 54
Sales - - 28
----------------------------
Balance at end of year $ (260) $ (218) $ (145)
============================
7: Real Estate
A summary of real estate is as follows:
<TABLE>
<CAPTION>
June 30
1999 1998
--------------------------
(In Thousands)
<S> <C> <C>
Held for investment (net of accumulated depreciation
of $827 in 1999 and $863 in 1998) $ 1,733 $ 2,017
Foreclosed assets held for sale 6,945 9,093
--------------------------
8,678 11,110
Less: Allowance for real estate losses 45 116
--------------------------
$ 8,633 $ 10,994
==========================
</TABLE>
An analysis of the allowance for real estate losses is as follows:
<TABLE>
<CAPTION>
Year Ended June 30
1999 1998 1997
--------------------------------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 116 $ 365 $ 955
Provision charged to real estate expense 250 914 1,188
Recoveries credited to allowance - - 1
Less: Real estate losses charged to allowance (321) (1,163) (1,779)
--------------------------------
Balance at end of year $ 45 $ 116 $ 365
================================
</TABLE>
G-17
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
--------------------------------------------------------------------------------
8: Premises and Equipment
A summary of premises and equipment is as follows:
June 30
1999 1998
-----------------------
(In Thousands)
Land and improvements $ 5,687 $ 4,833
Buildings 13,620 12,794
Leasehold improvements 1,842 1,709
Furniture, fixtures, and equipment 12,046 11,063
----------------------
33,195 30,399
Less: Accumulated depreciation and amortization (12,353) (10,765)
----------------------
$ 20,842 $ 19,634
======================
The Corporation records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. During the years
ended June 30, 1999 and 1998, the Corporation did not have any long-lived assets
considered to be impaired.
9: Investments in Joint Ventures
The Corporation is a partner in an unconsolidated joint venture in which its
ownership percentage is greater than 20%. The Corporation's investment in this
joint venture is accounted for under the equity method of accounting. At June
30, 1999 and 1998, the carrying value of this investment was approximately
$3,787,000 and $4,157,000. The Corporation's share of the venture's net income
(loss) for the years ended June 30, 1999, 1998 and 1997 was $1,433,000,
$1,490,000 and ($297,000), respectively.
A subsidiary of the Corporation is a partner in an unconsolidated joint
venture in which its ownership percentage is greater than 20%. The purpose of
the venture is to acquire and develop real property for ultimate resale or for
management of the resulting income-producing property. At June 30, 1999 and
1998, the carrying value of this investment was approximately $333,000 and
$368,000, respectively. The Corporation's share of the venture's net income for
the years ended June 30, 1999, 1998 and 1997 was $21,000, $79,000 and $259,000,
respectively.
The Association is a limited partner in several partnerships (approximate
ownership position of 99%) for the purpose of acquiring, renovating, operating
and leasing qualified low income housing and historic properties. At June 30,
1999 and 1998, aggregate net equity investment in these partnerships
approximated $3,618,000 and $1,154,000, respectively. The Corporation's share of
the partnerships' net loss of $213,000, $260,000 and $80,000 for the years ended
June 30, 1999, 1998 and 1997, respectively, is included in operations under the
equity method of accounting.
G-18
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
-------------------------------------------------------------------------------
10: Deposits
Deposits are summarized as follows:
June 30
1999 1998
----------------------------
(In Thousands)
Demand and savings accounts:
Noninterest-bearing $ 22,470 $ 15,497
NOW accounts 107,107 99,491
Savings accounts 54,179 64,189
Money market accounts 328,775 267,515
----------------------------
512,531 446,692
Certificate accounts 602,722 619,085
----------------------------
$ 1,115,253 $ 1,065,777
============================
At June 30, 1999, the scheduled maturities of certificate accounts for the
succeeding five fiscal years are as follows: 2000-$337,781,000; 2001-
$185,499,000; 2002-$43,246,000; 2003-$20,630,000; 2004-$8,281,000 and
thereafter-$7,285,000.
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $90,999,000 and $85,608,000 at June 30, 1999 and
1998, respectively.
G-19
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
-------------------------------------------------------------------------------
11: Federal Home Loan Bank (FHLB) Advances
and Other Borrowings
Borrowings consist of the following:
<TABLE>
<CAPTION>
June 30
1999 1998
--------------------------
(In Thousands)
<S> <C> <C>
FHLB advances payable to FHLB Pittsburgh, secured by all
FHLB stock and certain first mortgage loans:
Short-term advances:
Due August 27, 1999, 5.12% $ 70,000 $ -
Due July 1, 1999, 5.57% 14,400 -
--------------------------
84,400 -
Convertible advance:
Due 2002, 5.46% 25,000 25,000
Other advances:
Due 2008, 2.00% 285 297
Due 2024, 4.25% 727 517
--------------------------
110,412 25,814
--------------------------
Other borrowings:
Advance to ESOP
Due 2004, prime plus .75% 662 795
Repurchase agreement:
Due July 1, 1999, 3.60% 2,888 1,252
--------------------------
$ 113,962 $ 27,861
==========================
</TABLE>
Maturities of FHLB advances and other borrowings are as follows: 2000-
$112,451,000; 2001-$164,000; 2002-$165,000; 2003-$166,000; 2004-$167,000;
thereafter-$849,000. The convertible advance of $25,000,000, due in the year
2002, is a five-year fixed rate advance which the FHLB has the option of
converting to a LIBOR adjustable rate advance quarterly. Upon conversion,
management has the right to exercise a return option to the FHLB with no
prepayment penalty. Accordingly, this amount is included in the 2000 maturities
based on the next conversion date.
The FHLB of Pittsburgh has an established credit policy which permits the
Association to borrow amounts up to twenty times the amount of the Association's
holding of FHLB stock at negotiated interest rates. At June 30, 1999, additional
borrowings available under this policy were approximately $49,114,000. The
Association may increase its borrowings over amounts currently available by
purchasing additional FHLB stock.
The Association has a credit agreement with the Federal Reserve Bank of
Philadelphia whereby the Association can borrow to meet short-term liquidity
requirements in amounts up to approximately $6,600,000. Mortgage loans in the
amount of $8,247,000 are held in safekeeping by the Federal Reserve Bank to
collateralize borrowings under this credit agreement. At June 30, 1999, there
were no borrowings under this credit agreement.
G-20
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
-------------------------------------------------------------------------------
During 1994, the Corporation on behalf of the Employee Stock Ownership
Trust arranged for a loan in the amount of $1,325,000 payable in equal annual
installments of $132,500 plus interest at prime plus .75% for a period of 10
years. The final maturity will be March 31, 2004. The proceeds were used to
acquire shares of the Corporation's stock for the benefit of the corporate
sponsored employee stock ownership plan (See note 13).
12: Income Taxes
The provision for income taxes in the consolidated statements of income consists
of the following:
Year Ended June 30
1999 1998 1997
----------------------------------------
(In Thousands)
Current:
Federal $ 1,846 $ 5,792 $ 2,501
State 21 800 527
----------------------------------------
1,867 6,592 3,028
Deferred:
Federal 2,971 (795) 901
State 203 2 (54)
----------------------------------------
3,174 (793) 847
----------------------------------------
Total provision for income taxes $ 5,041 $ 5,799 $ 3,875
========================================
The provision for income taxes includes $342,000, $394,000 and $253,000 in
1999, 1998 and 1997, respectively, of applicable income taxes related to gains
on sales of securities of $1,108,000, $1,044,000 and $670,000, respectively.
Income tax expense for the Corporation is different than the amounts computed by
applying the statutory federal income tax rate to income before income taxes
because of the following:
Percentage of Income
Before Income Taxes
------------------------------------
Year Ended June 30
1999 1998 1997
------------------------------------
Income tax expense at federal
statutory rate 35.0 % 35.0 % 35.0 %
Tax-exempt income (0.3) (0.1) (0.1)
State income taxes, net of federal
benefit 1.0 3.3 2.8
Federal tax credits (1.3) (0.6) (2.1)
Other (0.2) (0.9) (0.2)
------------------------------------
Effective tax rate 34.2 % 36.7 % 35.4 %
====================================
G-21
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
-------------------------------------------------------------------------------
The Corporation made income tax payments of $3,467,000, $5,912,000, and
$3,404,000 during 1999, 1998, and 1997, respectively.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at June 30 are as
follows:
1999 1998
-----------------------
(In Thousands)
Deferred tax assets:
Bad debt $ 3,775 $ 3,102
Securities valuation adjustment - 57
Other 1,123 1,541
-----------------------
Total gross deferred tax assets 4,898 4,700
-----------------------
Deferred tax liabilities:
Deferred loan expenses 529 297
Depreciation and amortization 509 549
Joint ventures 1,042 549
Securities valuation adjustment 95 -
Servicing rights 1,549 1,114
Other 1,078 1,213
-----------------------
Total gross deferred tax liabilities 4,802 3,722
-----------------------
Net deferred tax asset $ 96 $ 978
=======================
The Corporation has determined that a valuation reserve for the net
deferred tax asset is not required since it is more likely than not that the net
deferred tax asset can be principally realized through carryback to taxable
income in prior years and future reversals of existing taxable temporary
differences.
The before-tax amounts and tax effects of unrealized holding gains (losses)
on available for sale securities were ($5,754,000) and ($2,014,000),
respectively, at June 30, 1999, $541,000 and $189,000, respectively, at June 30,
1998 and $861,000 and $331,000, respectively, at June 30, 1997.
The before-tax amounts and tax effects of the reclassification adjustments
for gains included in net income were $794,000 and $278,000, respectively, at
June 30, 1999, $174,000 and $61,000, respectively, at June 30, 1998 and $0 and
$0, respectively, for June 30, 1997.
13: Employee Stock Ownership Plan and Pension Plan
The Corporation sponsors an employee stock ownership plan (ESOP) which
provides all eligible employees an opportunity to share in the ownership of the
Corporation's common stock. The ESOP generally acquires shares of common stock
with contributions made to the ESOP. Expenses related to ESOP contributions
amounted to $281,000, $395,000 and $346,000 in 1999, 1998 and 1997,
respectively. In May 1994, the ESOP borrowed $1,325,000 and acquired 111,552
shares (as adjusted for subsequent stock dividends) of the Corporation's common
stock to be released and allocated to eligible employees as the borrowing is
repaid. In accordance with
G-22
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
-------------------------------------------------------------------------------
the provisions of AICPA Statement of Position 93-6 "Employers' Accounting for
Employee Stock Ownership Plans", the borrowing is reflected as a liability and
the related shares as a contra equity account, unearned ESOP shares, on the
Corporation's consolidated balance sheet. At June 30, 1999 and 1998, the ESOP
debt outstanding was $662,000 and $795,000 and the fair value of related shares
(65,825 and 72,505, respectively, including shares acquired through the
dividends paid on unearned ESOP shares) was $963,000 and $1,514,000,
respectively. The Corporation has committed to make contributions sufficient to
provide for ESOP debt service requirements.
The Corporation and its subsidiaries have a noncontributory pension plan
covering all eligible employees. The benefits are based on the employee's
compensation and years of service. The Corporation's funding policy is to
contribute amounts required under ERISA.
The following table sets forth the pension plan's funded status and amounts
recognized in the Corporation's consolidated financial statements.
June 30
1999 1998
-------------------
(In Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 6,282 $ 5,141
Service cost (net of expenses) 381 327
Interest cost 435 388
Benefits paid (155) (148)
Change in assumptions (509) 467
Experience loss 2 107
-------------------
Benefit obligation at end of year 6,436 6,282
-------------------
Change in plan assets:
Fair value at beginning of year 6,884 5,450
Actual return on plan assets (net of expenses) 487 1,121
Employer contribution 125 461
Benefits paid (155) (148)
Adjustment for payable at beginning of year (11) -
-------------------
Fair value at end of year 7,330 6,884
-------------------
Funded status 894 602
Unrecognized net asset at transition (246) (295)
Unrecognized prior service costs 149 171
Unrecognized net (gain) loss (13) 408
-------------------
Prepaid pension expense $ 784 $ 886
===================
Plan assets include investments in York Financial Corp.'s stock with a fair
value of $761,000 and $999,000 in 1999 and 1998, respectively. Other plan assets
include debt and equity funds. At June 30, 1999, the plan held 52,021 shares of
the Corporation's stock which earned dividends of $25,814 during the year.
G-23
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
-------------------------------------------------------------------------------
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation was 7.5% and 4.5%, respectively, at June 30, 1999,
7.0% and 4.0%, respectively, at June 30, 1998 and 7.5% and 4.5%, respectively,
at June 30, 1997. The expected long-term rate of return on plan assets in 1998,
1997, and 1996 was 9.0%.
Net pension cost included the following components:
Year Ended June 30
1999 1998 1997
-----------------------------------
(In Thousands)
Service cost-benefits earned during the
period $ 441 $ 385 $ 358
Interest cost on projected benefit
obligation 435 388 345
Actual return on plan assets (547) (1,178) (843)
Amortization of unrecognized net
transition asset (49) (49) (49)
Amount of unrecognized prior service
cost 22 22 22
Amortization of unrecognized net loss - 7 46
Asset gain (loss) deferred (75) 672 465
-----------------------------------
Net periodic pension cost $ 227 $ 247 $ 344
===================================
Beginning in fiscal 1999, the Corporation provided a Supplemental Executive
Retirement Plan (SERP) to certain key executives. The SERP is funded through
life insurance policies. The cash surrender value of the policies was $9.4
million at June 30, 1999 and is included in other assets in the accompanying
consolidated balance sheet. Total income recognized on the SERP for the year
ended June 30, 1999 amounted to $198,000. For the year ended June 30, 1999,
salaries and employee benefits expense included $67,000 in connection with the
SERP.
14: Stockholders' Equity
Retained earnings of the Association includes $14,470,000 of accumulated
earnings for which no provision for federal income tax has been made. The amount
represents deductions for bad debt reserve for tax purposes only which were
allowed to savings institutions which met certain definitional tests prescribed
by the Internal Revenue Code of 1986, as amended. The Small Business Job
Protection Act of 1996 passed on August 20, 1996 eliminates the special bad debt
deduction granted solely to thrifts. Under the terms of the Act, there would be
no recapture of the pre-1988 (base year) reserves. However, these pre-1988
reserves would be subject to recapture under the rules of the Internal Revenue
Code section 593(e), if the Association itself redeems its shares, pays a cash
dividend in excess of earnings and profits, or liquidates.
The Association is subject to various regulatory capital requirements
administered by the OTS. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators, that if undertaken, could have a direct material effect on the
Association's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective
G-24
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
-------------------------------------------------------------------------------
action, the Association must meet specific capital guidelines that involve
quantitative measures of the Association's assets, liabilities, and certain off-
balance sheet items as calculated under regulatory accounting practices. The
Association's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth in the
table below) of tangible, core and risk-based capital as defined in the
regulations. At June 30, 1999, the Association meets all capital adequacy
requirements to which it is subject.
At June 30, 1999, the most recent notification from the OTS categorized the
Association as well capitalized under the regulatory framework for prompt
corrective action. There were no conditions or events since that notification
that management believes have changed the Association's category.
The following table sets forth OTS capital requirements as compared to the
capital position of the Association as of June 30, 1999 and 1998:
<TABLE>
<CAPTION>
To be well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------------------------------------------------------------------
Minimum Required Minimum Required
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------ -------------------------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1999: (Dollars In Thousands)
Tangible capital $ 96,473 7.1% $ 20,344 1.5% $ N/A N/A
Tier 1 (core) capital 96,473 7.1% 54,250 3.0% 67,812 5.0%
Tier 1 risk-based capital 96,473 11.7% N/A N/A 49,431 6.0%
Total risk-based capital 105,654 12.8% 65,930 8.0% 82,384 10.0%
As of June 30, 1998:
Tangible capital $ 93,439 7.7% $ 18,273 1.5% $ N/A N/A
Tier 1 (core) capital 93,439 7.7% 48,727 3.0% 60,904 5.0%
Tier 1 risk-based capital 93,439 12.0% N/A N/A 46,732 6.0%
Total risk-based capital 102,102 13.1% 62,310 8.0% 77,887 10.0%
</TABLE>
The Association may make dividend distributions to the Corporation up to
100% of its net income in the calendar year plus an amount that would reduce its
surplus risk-based capital ratio at the beginning of the calendar year by one-
half. At June 30, 1999 and 1998, the total allowable dividend distribution was
$20,651,000 and $20,197,000, respectively.
G-25
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
-------------------------------------------------------------------------------
15: Stock Option Plans
At June 30, 1999, the Corporation has reserved 1,462,031 shares of common
stock for options granted or available for grant to certain directors and
officers under Stock Option Plans (Plans), as amended. Incentive stock options
granted under the Plans become exercisable over periods of five to eight years
on a cumulative basis, beginning on the date of grant, and expire ten years
after the date of grant. Nonincentive stock options granted under the Plans
become exercisable over periods determinable at the date of grant and expire ten
years after the date of grant. Performance-based options granted under the Plans
become exercisable when the Corporation achieves certain performance measurement
targets. Options under the Plans are granted at prices not less than 100% of the
fair market value at the date of option grant. During 1999 and 1998, 6,300 and
47,775 shares, respectively, of performance-based options were granted under the
Plans. If performance measurement targets are not achieved in accordance with
the terms of the option, the options are forfeited. In case of termination of
employment, options and grants not yet exercisable are subject to the risk of
forfeiture.
Under the Plans, the Corporation may also grant stock appreciation rights,
either singly or in tandem with stock options. No stock appreciation rights were
outstanding at June 30, 1999 and 1998.
Stock options transactions, adjusted for stock dividends, under the Plans were
as follows:
<TABLE>
<CAPTION>
Year Ended June 30
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
1999 Price 1998 Price 1997 Price
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of year 1,145,349 $ 9.64 1,155,806 $ 8.25 1,427,45 $ 7.36
Options granted at $12.21 to $20.95 per share 52,030 16.70 122,880 19.51 57,520 12.72
Options exercised at $3.76 to $12.59 per share (298,124) 6.13 (129,006) 7.00 (318,057) 6.41
Options forfeited (6,463) 18.99 (4,331) 10.48 (11,116) 9.76
------------ ----------- -----------
Options outstanding at end of year 892,792 11.16 1,145,349 9.64 1,155,806 8.25
============ =========== ===========
Options available for grant at June 30 569,239
============
Options exercisable at June 30 at $3.76
to $19.62 per share 800,678 10.35 1,011,719 8.81 1,048,436 8.00
============ =========== ===========
</TABLE>
The following options were outstanding and exercisable at June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number of Exercise Remaining Number of Exercise
Exercise Prices Shares Price Life (Years) Shares Price
------------------------------------------------------------------ ----------------------------
<S> <C> <C> <C> <C> <C>
$0.00-$5.00 75,565 $ 3.76 1.6 75,565 $ 3.76
$5.01-$10.00 439,179 9.29 5.0 439,179 9.29
$10.01-$15.00 218,388 11.85 6.0 198,724 11.68
$15.01-$20.00 159,660 18.86 8.9 87,210 18.38
------------ ------------
892,792 11.16 5.7 800,678 10.35
============ ============
</TABLE>
G-26
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
-------------------------------------------------------------------------------
The Corporation uses the Black-Scholes Option Pricing Model to calculate
the grant-date fair value. The weighted average grant-date fair value of options
granted during 1999, 1998 and 1997 was $3.25, $4.42 and $3.39, respectively. The
following significant assumptions were used to calculate the estimated fair
value of the options granted:
<TABLE>
<CAPTION>
June 30
1999 1998 1997
-------------------------------------
<S> <C> <C> <C>
Risk free interest rate 5.725% 5.470% 6.625%
Expected life 4 years 4 years 4 years
Expected volatility 24.5% 30.3% 21.7%
Expected dividends 3.59% 2.50% 3.37%
</TABLE>
Under Accounting Principles Board Opinion No. 25, because the exercise
price of the Corporation's stock options equals the market value of the
underlying stock on the date of grant, no compensation expense was recognized.
If the fair value method had been used to measure compensation expense, the
Corporation's net income and earnings per share would be the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Year Ending June 30
1999 1998 1997
-----------------------------------------------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C>
Net Income
As reported $ 9,670 $ 10,015 $ 7,087
Pro forma 9,422 9,848 7,053
Earnings Per Share
As reported 1.01 1.09 0.80
Pro forma 0.99 1.07 0.80
Earnings Per Share
Assuming Dilution
As reported 0.97 1.01 0.75
Pro forma 0.95 1.00 0.75
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Corporation's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of the stock options granted.
G-27
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
--------------------------------------------------------------------------------
16: York Financial Corp. (Parent Company Only)
Financial Information
<TABLE>
<CAPTION>
June 30
Balance Sheets 1999 1998
-------------- -----------------------
(In Thousands)
<S> <C> <C>
Assets
Cash $ 6,421 $ 5,266
Securities 1,336 338
Loan receivable, net 2,315 2,382
Prepaid expenses and other assets 189 127
Investment in joint venture 3,787 4,157
Investments in subsidiaries:
York Federal Savings and Loan Association 93,649 94,190
Other 4,264 4,095
-----------------------
Total investments in subsidiaries 97,913 98,285
-----------------------
$ 111,961 $ 110,555
=======================
Liabilities
Other borrowings $ 662 $ 795
Accrued expenses and other liabilities 889 535
Stockholders' equity 110,410 109,225
-----------------------
$ 111,961 $ 110,555
=======================
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30
Statements of Income 1999 1998 1997
-------------------- ---------------------------------------
Dividend income: (In Thousands)
<S> <C> <C> <C>
York Federal Savings and Loan Association $ 5,579 $ 1,870 $ 2,630
Other 29 37 29
Interest Income 470 485 387
Gain on sales of real estate 589 16 14
Income (loss) from joint venture 1,433 1,490 (297)
Other Income 9 10 7
---------------------------------------
8,109 3,908 2,770
Other expenses 714 659 612
---------------------------------------
Income before equity in undistributed net
income of subsidiaries and income taxes 7,395 3,249 2,158
Equity in undistributed net income of
subsidiaries:
York Federal Savings and Loan Association 2,753 7,303 3,991
Other 264 12 732
---------------------------------------
Income before income taxes 10,412 10,564 6,881
Provision for income taxes (benefit) 742 549 (206)
---------------------------------------
Net Income $ 9,670 $ 10,015 $ 7,087
=======================================
</TABLE>
G-28
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statements of Cash Flows
------------------------ Year Ended June 30
1999 1998 1997
--------------------------------
(In Thousands)
<S> <C> <C> <C>
Operating activities
Net income $ 9,670 $ 10,015 $ 7,087
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed
net income of subsidiaries (3,017) (7,315) (4,723)
Other 310 (1,254) 713
--------------------------------
Net cash provided by operating
activities 6,963 1,446 3,077
Investing activities
Purchase of securities
available for sale (271) (320) -
Loans originated or acquired - (33) (684)
Principal collected on loans 33 28 16
Disposal (Purchase) of equipment 4 - (26)
Increase in investment in joint venture (415)
Distribution from joint venture - 1,196 -
Increase in investments in
subsidiaries (8) (25) (322)
Other 4 - -
--------------------------------
Net cash provided by (used in)
investing activities (653) 846 (1,016)
Financing activities
Issuance of common stock:
Dividend Reinvestment Plan 2,265 2,330 2,133
Stock Option Plans 1,455 163 561
Retirement of common stock (4,023) - -
Cash dividends paid (4,896) (4,419) (3,919)
Cash in lieu of fractional shares (18) (21) (22)
Release of ESOP shares 133 132 133
Other (71) 39 (93)
--------------------------------
Net cash used in financing
activities (5,155) (1,776) (1,207)
--------------------------------
Increase in cash 1,155 516 854
Cash at beginning of year 5,266 4,750 3,896
--------------------------------
Cash at end of year $ 6,421 $ 5,266 $ 4,750
================================
</TABLE>
G-29
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
-------------------------------------------------------------------------------
17: Financial Instruments with Off-Balance Sheet Risk
The Association is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers.
Financial instruments with off-balance sheet risk are summarized as follows:
June 30
1999 1998
--------------------
(In Thousands)
Commitments to extend credit:
Loan origination commitments:
Fixed interest rates $ 8,530 $ 21,085
Variable interest rates 28,269 12,264
--------------------
36,799 33,349
Unused home equity lines of credit 57,596 50,672
Unused unsecured lines of credit 28,701 7,025
--------------------
$ 123,096 $ 91,046
====================
Standby letters of credit $ 3,044 $ 2,744
====================
Loans sold with recourse $ 27,356 $ 35,701
====================
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. The Association evaluates each
customer's credit worthiness on a case-by-case basis using the same credit
policies in making commitments and conditional obligations as it does for on-
balance sheet instruments. The amount of collateral obtained, if deemed
necessary by the Association upon extension of credit, is based on management's
credit evaluation of the customer and generally consists of real estate.
Standby letters of credit are conditional commitments issued by the
Association to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers. The Association holds collateral,
when deemed necessary, supporting those commitments.
The Association has sold loans to the Federal National Mortgage Association
(FNMA) which include certain recourse provisions for the life of the loans
whereby the Association is required to repurchase the buyer's interest in
individual loans on which foreclosure proceedings have been completed. The
Association does not believe that its recourse obligations subject it to
material risk of loss in the future. There were no sales of loans with recourse
in fiscal years ending June 30, 1999 and 1998.
G-30
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
-------------------------------------------------------------------------------
18: Fair Value of Financial Instruments
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments,"
requires disclosure of the fair value of financial instruments. A substantial
portion of the Corporation's assets and liabilities are considered financial
instruments. Significant assumptions were used in the calculation of fair market
values. The following assumptions and methods were used by the Corporation to
estimate the fair values of each type of the Corporation's Financial
Instruments.
Cash and Due from Banks - Noninterest and Interest Earning
The fair value for cash and due from banks is book value, due to the short
maturity of, and negligible credit concerns within, those instruments.
Loans Held for Sale
Loans held for sale are generally fixed rate mortgage loans. The fair value
for such loans is based on quoted market prices of securities collateralized by
similar loans.
Securities Available for Sale
The fair value for securities available for sale is based on available market
quotes. If a market quote is not available, fair value is approximated by using
the market price of a similar security.
Securities Held to Maturity
The fair value for securities held to maturity which includes the Federal
Home Loan Bank (FHLB) stock is based on available market quotes and the cost for
the FHLB stock. If a market quote is not available, fair value is approximated
by using the market price of a similar security.
Loans
The fair value of adjustable rate loans that reprice frequently is
approximately their carrying value. The fair value of fixed rate loans and
adjustable rate loans with repricing frequencies of greater than one year is
estimated by discounting the future cash flows using the current rate at which
similar loans would be made to borrowers with similar credit ratings. Mortgages
and certain consumer loans include prepayment assumptions.
Other Financial Assets
Currently other financial assets consist of mortgage servicing rights whose
fair values are calculated based on the present values of their estimated future
cash flows.
G-31
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
-------------------------------------------------------------------------------
Deposits
The fair value of deposits with no stated maturity, such as noninterest
bearing deposits, NOW accounts, savings accounts, and money market accounts is,
by definition, equal to the amount payable on demand (i.e., their carrying
amounts). The fair value of fixed rate certificates of deposit is based on the
discounted value of cash flows, using Federal Home Loan Bank borrowing rates
with similar remaining maturities. The carrying amounts for variable rate
certificates of deposit approximate their fair values. The estimated fair value
of core deposits does not include the benefits commonly referred to as a core
deposit intangible resulting from low-cost funding compared to the cost of
borrowing funds in the financial markets nor is such benefit recorded as an
intangible asset on the balance sheet.
FHLB Advances and Other Borrowings
The fair value of adjustable rate borrowings that reprice frequently is
approximately their carrying value. The fair value of long term borrowings is
calculated based on the discounted value of contractual cash flows, using rates
currently existing for borrowings from the Federal Home Loan Bank with similar
remaining maturities.
Off-Balance Sheet Financial Instruments
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account market
interest rates, the remaining terms and present creditworthiness of the
counterparties. The fair value of guarantees and letters of credit is based on
fees currently charged for similar agreements.
The fair values estimated are dependent upon subjective assumptions and
involve significant uncertainties resulting in estimates that vary with changes
in assumptions. Any changes in assumptions or estimation methodologies may have
a material effect on the estimated fair values disclosed.
G-32
<PAGE>
York Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
-------------------------------------------------------------------------------
The Corporation's estimated fair values of financial instruments based on
assumptions disclosed above are as follows:
<TABLE>
<CAPTION>
June 30
1999 1998
-------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Cash and Due from banks - Noninterest
and interest-earning $ 31,771 $ 31,771 $ 144,547 $ 144,547
Loans held for sale 30,631 30,631 17,534 17,534
Securities available for sale 295,691 295,691 47,940 47,940
Securities held to maturity 30,594 30,611 13,760 13,751
Loans:
Residential 666,257 662,420 753,627 760,074
Commercial 107,765 107,135 66,844 67,212
Consumer 144,558 145,757 139,040 139,564
-----------------------------------------------
Total Gross Loans 918,580 915,312 959,511 966,850
Other Financial Assets 4,127 4,403 2,862 2,887
Noninterest-bearing deposits 22,470 22,470 15,497 15,497
NOW accounts 107,107 107,107 99,491 99,491
Savings accounts 54,179 54,179 64,189 64,189
Money market accounts 328,775 328,775 267,515 267,515
Certificates of deposit 602,722 609,644 619,085 629,394
-----------------------------------------------
Total Deposits 1,115,253 1,122,175 1,065,777 1,076,086
FHLB Advances and other borrowings 113,962 113,191 27,861 27,715
Off-balance-sheet financial instruments:
Commitments to extend credit $ (551) $ (250)
Standby letters of credit (46) (52)
</TABLE>
19: Commitments and Contingencies
In the ordinary course of business, the Corporation has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Corporation is
a defendant in certain claims and legal actions arising in the ordinary course
of business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to have a
material adverse effect on the consolidated financial condition of the
Corporation.
G-33
<PAGE>
York Financial Corp. and Subsidiaries
Supplementary Consolidated Financial Data
-------------------------------------------------------------------------------
Summaries of consolidated results of operations on a quarterly basis for the
years ended June 30, 1999 and 1998 are as follows:
Three Months Ended
September 30 December 31 March 31 June 30
--------------------------------------------
(Unaudited)
FISCAL YEAR 1999 (Dollars in Thousands, Except Per Share Data)
----------------
Interest income $21,884 $21,317 $21,149 $22,015
Interest expense 13,241 13,042 12,593 12,950
------------------------------------------
Net interest income 8,643 8,275 8,556 9,065
Provision for loan losses 865 992 915 860
------------------------------------------
Net interest income after
provision for loan losses 7,778 7,283 7,641 8,205
Securities gains 789 5 - -
Other income 2,294 2,155 1,949 4,846
Other expenses 6,804 6,906 6,885 7,639
Income tax expense 1,504 915 782 1,840
------------------------------------------
Net income $ 2,553 $ 1,622 $ 1,923 $ 3,572
==========================================
Per share data:
Net income $ 0.27 $ 0.17 $ 0.20 $ 0.37
==========================================
Net income-assuming dilution $ 0.26 $ 0.16 $ 0.19 $ 0.36
==========================================
Cash dividends paid $ 0.125 $ 0.125 $ 0.130 $ 0.130
==========================================
FISCAL YEAR 1998
----------------
Interest income $22,166 $22,271 $22,023 $22,106
Interest expense 13,025 12,969 12,757 13,093
------------------------------------------
Net interest income 9,141 9,302 9,266 9,013
Provision for loan losses 753 1,060 716 1,208
------------------------------------------
Net interest income after
provision for loan losses 8,388 8,242 8,550 7,805
Securities gains - - - 174
Other income 2,095 3,311 2,577 1,995
Other expenses 6,424 6,768 7,594 6,537
Income tax expense 1,626 1,874 1,297 1,002
------------------------------------------
Net income $ 2,433 $ 2,911 $ 2,236 $ 2,435
==========================================
Per share data:Net income $ 0.27 $ 0.32 $ 0.24 $ 0.26
==========================================
Net income-assuming dilution $ 0.25 $ 0.29 $ 0.22 $ 0.25
==========================================
Cash dividends paid $ 0.115 $ 0.115 $ 0.125 $ 0.125
==========================================
All per share data is adjusted for stock dividends and splits effected through
June 30, 1999.
G34
<PAGE>
Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations of York Financial Corp.
--------------------------------------------------------------------------------
The purpose of this discussion is to provide additional information about
York Financial Corp. ("York Financial" or "Corporation"), its financial
condition and results of operations. Readers of this annual report should refer
to the consolidated financial statements and other financial data presented
throughout this report to fully understand the following discussion and
analysis.
Forward-Looking Statements
In addition to historical information, this Annual Report contains forward-
looking statements. The forward-looking statements contained in the following
sections 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, interest rate trends, the general economic climate in the
Corporation's market area and the country as a whole, the ability of the
Corporation to control costs and expenses, competitive products and pricing,
loan delinquency rates and changes in federal and state regulation. Readers
should not place undue reliance on these forward-looking statements, as they
reflect management's analysis only as of the date of this report. The
Corporation has no obligation to update or revise these forward-looking
statements to reflect events or circumstances that occur after the date of this
report. Readers should carefully review the risk factors described in other
documents the Corporation files periodically with the Securities and Exchange
Commission.
Financial Review
York Financial is a unitary savings and loan holding company incorporated
in Pennsylvania. In August 1986, York Financial became the sole stockholder of
York Federal Savings and Loan Association ("York Federal" or "Association"), a
federally chartered stock savings and loan association. Presently, the primary
business of York Financial is the business of York Federal. At June 30, 1999,
the Corporation had consolidated assets of $1.4 billion, total deposits of $1.1
billion and stockholders' equity of $110.4 million. The Association is a member
of the Federal Home Loan Bank ("FHLB") of Pittsburgh and is subject to
supervision, examination and regulation by the Office of Thrift Supervision
("OTS") and the Federal Deposit Insurance Corporation ("FDIC"). The Association
is primarily engaged in the business of attracting deposits and investing these
deposits into loans secured by residential and commercial real property,
commercial business loans, consumer loans, and investment securities. York
Federal conducts its business through twenty-five offices located in south
central Pennsylvania and Maryland. In addition, York Federal maintains a
commissioned mortgage origination staff as well as mortgage correspondent
relationships which originate residential mortgage loans for the Association
primarily in Pennsylvania, Maryland and Virginia, although loans are originated
in 11 states within the Mid- Atlantic region. The Association's deposits are
insured up to applicable limits by the Savings Association Insurance Fund
("SAIF") of the FDIC.
The Corporation's net income is highly dependent on the interest rate
spread between the average rate earned on loans and securities and the average
rate paid on deposits and borrowings as well as the amount of the respective
assets and liabilities
G-35
<PAGE>
Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations of York Financial Corp. (continued)
-------------------------------------------------------------------------------
outstanding. Other operating income is an important supplement to York Federal's
interest income and is primarily the result of mortgage banking activities
including gains on sales of mortgage-backed securities and related value
attributed to mortgage servicing rights created from loan originations and
service fee income derived from the portfolio of loans serviced for others.
Other operating income also includes gains and losses on sales of securities
available for sale, gains and losses on sales of real estate, equity in earnings
of limited partnership interests, and fees and service charges assessed on loan
and deposit transactions.
Interest Rate Sensitivity Management and Market Risk
Market risk is the risk of loss from adverse changes in market prices and
rates. The Association's market risk arises principally from interest rate risk.
In an effort to maintain control over such risks, management of York Federal
focuses its attention on managing the interest rate sensitivity of assets and
liabilities and controlling the volume of lending, securities, deposit, and
borrowing activities. The Association's principal financial objective is to
achieve long-term profitability while reducing (controlling) its exposure to
fluctuating market interest rates. By managing the ratio of interest rate
sensitive assets to interest rate sensitive liabilities repricing in the same
periods, the Corporation seeks to minimize the adverse effect of interest rate
fluctuations to net interest income and net portfolio value. The Corporation's
assets and liabilities are not directly exposed to foreign currency or commodity
price risk. At June 30, 1999, the Corporation had no off-balance sheet
derivative financial instruments.
Management utilizes an Asset/Liability Committee (ALCO), which meets at
least once each month, to review the Association's interest sensitivity position
on an ongoing basis and prepare strategies that outline the overall acquisition
and allocation of funds to maximize earnings and maintain the interest rate
sensitivity position at acceptable levels in order to insulate earnings from the
effects of interest rate fluctuations. The Corporation originates for portfolio
principally short and intermediate term and adjustable rate loans and sells most
fixed rate permanent loan originations. The funding sources for these portfolio
loans are deposits and borrowings with various maturities.
The ALCO monitors the Corporation's interest rate risk position by
utilizing simulation analysis. Net interest income fluctuations and the net
portfolio value ratio are determined in various interest rate scenarios and
monitored against acceptable limitations established by management and approved
by the Board of Directors. Such rate scenarios include immediate rate shocks
adjusting rates in +/- 100 basis point (bp) increments resulting in projected
changes to net interest income over the next 12 months and projected net
portfolio value ratios as indicated in the following table.
G-36
<PAGE>
Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations of York Financial Corp. (continued)
-------------------------------------------------------------------------------
An analysis of hypothetical changes in interest rates as of June 30, 1999
compared to June 30, 1998 is as follows:
<TABLE>
<CAPTION>
June 30
1999 1998
-------------------------------------- -----------------------------------
Percentage change in
-----------------------------------------------------------------------------
Change in interest rates Net interest Net portfolio Net interest Net portfolio
(In basis points) income (1) ratio (2) income (1) ratio (2)
---------------------------- --------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
+300 (14.00%) 4.70% (7.00%) 8.00%
+200 (9.00%) 5.75% (4.00%) 8.31%
+100 (4.00%) 6.69% (2.00%) 8.53%
0 0.00% 7.49% 0.00% 8.70%
(100) 4.00% 8.15% 1.00% 8.86%
(200) 6.00% 8.41% 3.00% 9.05%
</TABLE>
--------------------
(1) The percentage change in this column represents net interest income for
12 months in a stable interest rate environment versus net interest
income in the various rate scenarios.
(2) The net portfolio value ratio in this column represents net portfolio
value of the Association in various rate scenarios, divided by the
present value of expected net cash flows from existing assets in those
same scenarios. Net portfolio value is defined as the present value of
expected net cash flows from existing assets, minus the present value
of expected net cash flows from existing liabilities, plus or minus the
present value of expected net cash flows from existing off-balance-
sheet contracts.
Simulation results are influenced by a number of estimates and assumptions
which are primarily related to embedded options, prepayment behaviors, pricing
strategies and cashflows. The risk profile of the Association has increased from
year to year as indicated in the preceding table. This increase resulted
primarily from the deployment of excess liquid funds into higher yielding
investments with inherently more interest rate risk. Additionally, construction
mortgage conversions to fixed rate permanent mortgages were retained in
portfolio and partially funded with available liquid assets and overnight
borrowings as required. Assumptions and estimates used in simulation analysis
are inherently subjective and, as a consequence, results will neither precisely
estimate net interest income or net portfolio value nor precisely measure the
impact of higher or lower interest rates on net interest income or net portfolio
value ratio. The results of these simulations are reported to the Corporation's
Board of Directors on a quarterly basis. Management has determined that the
level of interest rate risk is within acceptable limits at June 30, 1999.
The management of York Federal is committed to managing the asset and
liability portfolios in order to maximize earnings and maintain an interest rate
sensitivity position that insulates earnings from the potential negative effect
of interest rate fluctuations.
Asset Quality
Management is aware of the risks inherent in lending and continually
monitors risk characteristics of the loan portfolio. The Association has
developed a Business Banking Group to offer financial products and services to
small and mid-sized businesses in the Association's branch market area. The
nature of these products and services and
G-37
<PAGE>
Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations of York Financial Corp. (continued)
-------------------------------------------------------------------------------
the financial characteristics of the target client group may have the effect of
increasing the Association's credit risk exposure. The Association has employed
management expertise and has adopted credit management policies to control the
credit risk exposure inherent in this activity.
The Association's policy is to maintain the allowance for loan losses at a
level believed adequate by management to absorb losses in the existing loan
portfolio. The allowance for loan loss is an estimate, however, these estimates
are reviewed periodically and, any adjustments necessary, are recognized in
operations in the period adjustments become known. Management's determination of
the adequacy of the allowance is performed by an internal loan review committee
and is based on known and inherent risk characteristics in the portfolio, past
loss experience, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral, current economic
conditions, and such other relevant factors which in management's judgment
deserve recognition. The allowance for loan losses related to impaired loans was
determined in accordance with Statement of Financial Accounting Standards No.
114, as amended by Statement No. 118. Actual losses or recoveries are charged or
credited directly to the allowance.
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Year Ended June 30
1999 1998 1997 1996 1995
--------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total allowance for loan losses at beginning of period $ 8,810 $ 6,413 $ 6,609 $ 5,840 $ 4,492
Loans charged-off:
Real estate-mortgage:
Residential 1,581 1,701 1,304 1,151 1,138
Commercial 16 68 1,820 620 5
Consumer 397 89 226 100 127
--------- ------- ------- ------- -------
Total charge-offs 1,994 1,858 3,350 1,871 1,270
Recoveries:
Real estate-mortgage:
Residential 325 212 210 156 185
Commercial 24 294 516 184 92
Consumer 6 12 4 - 1
--------- ------- ------- ------- -------
Total recoveries 355 518 730 340 278
--------- ------- ------- ------- -------
Net loans charged-off 1,639 1,340 2,620 1,531 992
Provision for loan losses 3,632 3,737 2,424 2,300 2,340
--------- ------- ------- ------- -------
Total allowance for loan losses at end of period $ 10,803 $ 8,810 $ 6,413 $ 6,609 $ 5,840
========= ======= ======= ======= =======
Percentage of net charge-offs to average loans
outstanding during the period 0.18% 0.13% 0.26% 0.17% 0.13%
========= ======= ======= ======= =======
Percentage of allowance for loan losses to adjusted
total loans 1.17% 0.92% 0.64% 0.70% 0.69%
========= ======= ======= ======= =======
</TABLE>
The allowance for loan losses totaled $10.8 million or 1.17% of adjusted
total loans of $919.9 million at June 30, 1999. With the implementation of the
Uniform Retail Credit Classification Policy at June 30, 1999, a one-time charge
to the allowance for loan losses of $408,000 was recognized representing the
total amount due on
G-38
<PAGE>
Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations of York Financial Corp. (continued)
-------------------------------------------------------------------------------
certain loans identified in accordance with the policy, in excess of the net
realizable value of the underlying collateral. With this adjustment to the
allowance for loan losses, net charge-offs increased compared to the prior year.
Over the last two years, the composition of the loan portfolio has changed
with an increase of $66.2 million in the commercial loan portfolio. The
commercial loan portfolio as a percentage of total loans represented 12.2% at
June 30, 1999 compared to 5.7% at June 30, 1997. Because of the increased
inherent risk within the portfolio, the allowance for loan losses has been
increased $4.4 million or 68.5% within the past two years. Management believes
that a provision in excess of net charge-offs is warranted due to the changing
composition within the loan portfolio and increased inherent risk. However,
management believes the allowance for loan loss is adequate relative to its
assessment of existing risk characteristics within the loan portfolio. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on specific circumstances
related to future problem loans, increased risk due to a change in mix within
the portfolio as well as changes in economic conditions.
An analysis of nonperforming assets is summarized as follows:
<TABLE>
<CAPTION>
June 30
1999 1998 1997 1996 1995
----------- -------- ------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate-mortgage:
Residential $ 870 $ - $ - $ - $ -
Commercial - - 950 1,481 3,498
Land - - - 200 -
Consumer 49 - - - -
----------- -------- ------- -------- --------
Total nonaccrual loans 919 - 950 1,681 3,498
Accruing loans which are contractually past
due 90 days or more:
Real estate-mortgage:
Residential 8,311 14,487 12,735 10,029 9,133
Consumer 823 1,194 702 383 433
----------- -------- ------- -------- --------
Total of 90 days past due loans 9,134 15,681 13,437 10,412 9,566
----------- -------- ------- -------- --------
Total of nonaccrual and 90 days past due loans $ 10,053 $ 15,681 $14,387 $ 12,093 $ 13,064
=========== ======== ======= ======== ========
As a percent of total loans 1.07% 1.63% 1.43% 1.28% 1.53%
=========== ======== ======= ======== ========
Real estate owned:
Real estate acquired through foreclosure or
repossession by loan type:
Real estate:
Residential $ 4,571 $ 4,543 $ 4,978 $ 4,913 $ 5,981
Commercial 1,055 2,687 2,714 2,370 2,278
Land 1,319 1,863 2,895 3,349 5,107
Loans classified as in substance foreclosure - - - - 200
Allowance for real estate losses (45) (116) (365) (955) (630)
----------- -------- ------- -------- --------
Total real estate owned $ 6,900 $ 8,977 $10,222 $ 9,677 $ 12,936
=========== ======== ======= ======== ========
As a percent of total assets 0.51% 0.73% 0.88% 0.87% 1.28%
=========== ======== ======= ======== ========
Total nonperforming assets $ 16,953 $ 24,658 $24,609 $ 21,770 $ 26,000
=========== ======== ======= ======== ========
As a percent of total assets 1.24% 2.01% 2.12% 1.96% 2.57%
=========== ======== ======= ======== ========
</TABLE>
G-39
<PAGE>
Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations of York Financial Corp. (continued)
-------------------------------------------------------------------------------
The Association's nonaccrual policy generally covers loans which are 90 or
more days past due, dependent upon type of loan and related collateral. All
commercial real estate loans are placed on nonaccrual status when the
collectibility of interest is uncertain based on specific circumstances
evaluated on a loan by loan basis or when interest is more than 90 days past
due. In the case of residential real estate and consumer loans, the Association
implemented the Uniform Retail Credit Classification Policy effective June 30,
1999 and follows this policy for placing loans on nonaccrual. As noted in the
previous table, loans contractually past due 90 days or more and real estate
acquired through foreclosure have decreased as compared to the prior period.
This is primarily due to the result of favorable economic conditions, an
ongoing, more aggressive, collection effort to reduce delinquencies and the
impact of sales of real estate owned.
Management recognizes the risk of potential reduction in value of real estate
owned during the holding period and provides for such risk by maintaining an
allowance for real estate losses (such allowance is separate from and in
addition to the allowance for loan losses). In fiscal 1999, net charge-offs were
$321,000 and additions to the allowance totaled $250,000 resulting in a decrease
in the allowance to $45,000. Management continually monitors the risk profile of
real estate owned and maintains an allowance for real estate losses at a level
believed adequate to absorb potential losses within the real estate portfolio.
Liquidity
The primary purpose of asset/liability management is to maintain adequate
liquidity and a desired balance between interest sensitive assets and
liabilities. Liquidity management focuses on the ability to meet the cash flow
requirements of customers wanting to withdraw or borrow funds for their personal
or business needs. Interest rate sensitivity management focuses on consistent
growth of net interest income in times of fluctuating interest rates. The
management of liquidity and interest rate sensitivity must be coordinated since
decisions involving one may influence the other.
Liquidity needs can be met by either reducing assets or increasing
liabilities. Sources of asset liquidity include short term investments,
securities available for sale, maturing and repaying loans, and monthly cash
flows from mortgage-backed securities. The loan portfolio provides an additional
source of liquidity due to York Federal's participation in the secondary
mortgage market. Liquidity needs can also be met by attracting deposits and
utilizing borrowing arrangements with the FHLB and the Federal Reserve Bank of
Philadelphia for short and long-term advances as well as other short-term
borrowings.
Deposits represent the Association's primary source of funds. The Association
does not rely on brokered deposits as a source of funds. During fiscal 1999, the
Association's deposits increased $49.5 million and is attributed to deposit
pricing decisions to facilitate maintenance and expansion of customer
relationships. In addition, York Federal has supplemented its deposit gathering
efforts through borrowings from the FHLB of Pittsburgh.
At June 30, 1999, York Federal had $110.4 million in FHLB advances outstanding
at a weighted average interest rate of 5.24%, an increase of $84.6 million from
$25.8 million in fiscal 1998. For additional details of FHLB advances and other
borrowings, refer to Note 11 of the Notes to Consolidated Financial Statements.
The decrease in the interest-earning overnight cash position to $9.0 million
at June 30, 1999, as compared to $126.6 million at June 30, 1998 provided $117.6
million as a source of funds.
G-40
<PAGE>
Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations of York Financial Corp. (continued)
-------------------------------------------------------------------------------
Amortization and prepayments of loans and proceeds from loan and securities
sales represent a substantial source of funds to York Federal. These sources
amounted to $549.7 million, $475.3 million and $317.0 million in fiscal 1999,
1998 and 1997, respectively. During fiscal 1999, the loan portfolio decreased
$42.4 million to $909.2 million from $951.6 million in fiscal 1998. The primary
factors contributing to the decrease in the loan portfolio and an increase in
sources of funds are the interest rate environment that resulted in increased
originations of fixed rate loans subsequently sold into the secondary market as
well as an increased level of refinance activity resulting in higher than
expected loan payoffs, a loan sale initiated to reduce certain credit risks
identified within the residential mortgage loan portfolio and certain loan and
security sales to manage interest rate risk levels within acceptable limits.
Generally, the principal use of funds is the origination of mortgage and other
loans. In addition, during fiscal 1999, the initiation of leverage strategies to
effectively utilize available capital, resulted in expansion of the investment
portfolio through the purchase of available for sale securities and held to
maturity securities. The carrying value of securities available for sale and
securities held to maturity increased $264.6 million to $318.3 million in fiscal
1999 from $53.7 million in fiscal 1998.
Loan demand resulted in total originations of $577.8 million in fiscal 1999.
Loan originations were obtained through various channels including the retail
branch system, commissioned mortgage origination staff, tele-mortgage activity,
expanded mortgage correspondent relationships, and Business Banking relationship
managers. The volume of originations was favorably effected by a relatively
stable and low-rate interest rate environment and included traditional long-term
fixed rate loans originated primarily for sale as well as adjustable rate and
residential construction loan products. In addition, in response to changing
customer preferences, intermediate term mortgage products, i.e. seven year
balloon loans and 5/1 CMT adjustable rate loans (fixed rate for the first five
years with annual adjustments thereafter), continue to represent a significant
component of loan origination volume.
Under current regulations, York Federal is required to maintain liquid assets
at 4.0% or more of its net withdrawable deposits plus short-term borrowings.
Effective November 24, 1997, the Office of Thrift Supervision lowered liquidity
requirements from 5.0% to 4.0%. Additionally, the OTS streamlined the
calculations used to measure compliance with liquidity requirements, expanded
the types of investments considered to be liquid assets, and reduced the
liquidity base by modifying the definition of net withdrawable accounts to
exclude accounts with maturities exceeding one year. The result of these changes
to the liquidity requirements is to significantly increase the reported
liquidity position of the Association. At June 30, 1999, the Association's
liquidity level was 8.7%.
The sources of liquidity previously discussed are deemed by management to be
sufficient to fund outstanding loan commitments and meet other obligations. See
Notes 17 and 18 of the Notes to Consolidated Financial Statements for
information on commitments and fair value of financial instruments at June 30,
1999.
Capital
The management of capital provides the foundation for future asset and
profitability growth and is a major strategy in the management of York Financial
Corp. Stockholders' equity at June 30, 1999, totaled $110.4 million compared to
$109.2 million at June 30, 1998, an increase of $1.2 million or 1.1%. This
growth was a result of a combination of
G-41
<PAGE>
Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations of York Financial Corp. (continued)
-------------------------------------------------------------------------------
factors including current earnings, cash dividends paid (representing a payout
ratio of 50.6%), issuance of shares in connection with various benefit and
dividend reinvestment plans, retirement of stock through a stock repurchase
program and the impact of unrealized gains or losses on "available for sale"
securities.
OTS regulated thrifts must comply with various capital standards:
Tangible Capital. Generally, common stock plus retained earnings must equal
at least 1.5% of adjusted total assets.
Tier 1 (Core) Capital to Total Assets. Tangible capital plus qualifying
supervisory goodwill (arising from the purchase of a troubled savings
association) and other qualifying intangible assets must equal at least 3.0% of
adjusted total assets; 5.0% to be deemed well capitalized.
Risk-Based Capital. Risk-based capital must equal at least 8.0% of risk-
weighted assets, as defined in the regulations; 10% to be deemed well
capitalized. The tier 1 (core) capital component of risk-based capital, as
defined above, must equal at least 6.0% of risk-weighted assets to be deemed
well capitalized.
At June 30, 1999, York Federal's tangible and core capital both equaled 7.1%
($96.5 million), substantially in excess of the minimum regulatory requirements
of 1.5% and 3.0%/5.0%, respectively. York Federal's total assets do not include
any goodwill. York Federal's core capital to risk-weighted assets equaled 11.7%
($96.5 million) at June 30, 1999, which exceeds the required level of 6.0%.
Finally, York Federal's risk-based capital ratio equaled 12.8% ($105.6 million)
at June 30, 1999, which exceeds the required level of 8.0% by $39.7 million, and
exceeds the required level to be deemed well capitalized of 10.0% by $23.2
million. For a more comprehensive analysis of capital, refer to Note 14 of the
Notes to Consolidated Financial Statements.
Transactions with Affiliates
Transactions with affiliates are limited to 10% of capital and surplus per
affiliate with an aggregate limit on all such transactions with affiliates to
20% of capital and surplus. At June 30, 1999, such transactions are within these
regulatory limits.
Results of Operations
Fiscal 1999 Compared to Fiscal 1998
Net Interest Income
York Financial's earnings are affected by the level of York Federal's net
interest income, which is the difference between the income it receives on its
loan portfolio and other investments and its cost of funds, consisting primarily
of interest paid on deposits and borrowings. Net interest income is affected by
the average yield on interest-earning assets, the average rate paid on interest-
bearing liabilities, and the ratio of interest-earning assets to interest-
bearing liabilities.
Net interest income for fiscal 1999 was $34.5 million, as compared to $36.7
million for fiscal 1998, which represents a 6.0% decrease. The margin on
interest-earning assets for fiscal 1999 decreased to 2.90% from 3.28% for fiscal
1998. The following table provides information regarding the dollar amount of
interest income earned on interest-earning assets and the resulting yields, as
well as the dollar amount of interest expense on interest-bearing liabilities
and the resulting rates paid for the three years ending June 30, 1999.
G-42
<PAGE>
Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations of York Financial Corp. (continued)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30
1999 1998
------------------------------------- ---------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- ---------- ------ ---------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(1)(2)(3) $ 900,213 $ 69,880 7.76% $ 997,078 $ 80,893 8.11%
Securities held for trading 9,478 601 6.34 10,314 688 6.67
Securities available for sale 132,478 8,120 6.13 56,858 3,770 6.63
Securities held to maturity 21,347 1,308 6.13 15,015 930 6.19
Other interest-earning assets 129,118 6,456 5.00 41,721 2,285 5.48
------------ ---------- ----- ------------ --------- ----
Total interest-earning assets 1,192,634 86,365 7.24 1,120,986 88,566 7.90
Noninterest-earning assets 74,497 65,773
------------ ------------
Total $ 1,267,131 $ 1,186,759
============ ============
Interest-bearing liabilities:
Deposits:
NOW accounts $ 106,543 2,079 1.95 $ 94,847 2,167 2.28
Savings accounts 58,492 1,463 2.50 66,052 1,676 2.54
Money market accounts 293,084 12,762 4.35 233,500 10,794 4.62
Certificate accounts 612,710 33,693 5.50 608,126 35,107 5.77
Borrowings 36,435 1,829 5.02 38,871 2,100 5.40
------------ ---------- ----- ------------ --------- ----
Total interest-bearing liabilities 1,107,264 51,826 4.68 1,041,396 51,844 4.98
---------- ---- --------- ----
Noninterest-bearing deposits 22,245 23,097
Noninterest-bearing liabilities 25,659 18,070
------------ ---------
1,155,168 1,082,563
Stockholders' equity 111,963 104,196
------------ ------------
Total $ 1,267,131 $ 1,186,759
============ ============
Ratio of interest-earning assets
to interest-bearing liabilities 1.08x 1.08x
============ ============
Net interest income/interest rate
spread $ 34,539 2.56% $ 36,722 2.92%
========== ===== ========= ====
Net interest-earning
assets/margin on
interest-earning assets $ 85,370 2.90% $ 79,590 3.28%
============ ==== ============ ====
<CAPTION>
1997
-------------------------------------
Average Yield/
Balance Interest Rate
---------- ---------- ------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans(1)(2)(3) $ 989,670 $ 80,820 8.17%
Securities held for trading 18,935 1,329 7.02
Securities available for sale 56,256 3,711 6.60
Securities held to maturity 16,141 951 5.89
Other interest-earning assets 15,747 830 5.27
------------ ---------- ----
Total interest-earning assets 1,096,749 87,641 7.99
Noninterest-earning assets 64,144
------------
Total $ 1,160,893
============
Interest-bearing liabilities:
Deposits:
NOW accounts $ 87,720 1,944 2.22
Savings accounts 73,764 2,040 2.77
Money market accounts 205,168 9,017 4.39
Certificate accounts 571,825 33,364 5.83
Borrowings 100,826 5,423 5.38
------------ ---------- ----
Total interest-bearing liabilities 1,039,303 51,788 4.98
---------- ----
Noninterest-bearing deposits 11,426
Noninterest-bearing liabilities 15,141
------------
1,065,870
Stockholders' equity 95,023
------------
Total $ 1,160,893
============
Ratio of interest-earning assets to
interest-bearing liabilities 1.06x
=====
Net interest income/interest rate
spread $ 35,853 3.01%
========== ====
Net interest-earning
assets/margin on
interest-earning assets $ 57,446 3.27%
============ ====
</TABLE>
_________________
(1) Average balances include loans on nonaccrual status.
(2) Average balances include amounts held for sale.
(3) Interest includes amortization of loan fees of $0.2 million, $0.2 million
and $0.6 million in 1999, 1998 and 1997, respectively.
During fiscal 1999, York Federal originated $577.8 million of loans
including loans refinanced from the Association's portfolio totaling $62.8
million. The result of these originations, when combined with mortgage loan
securitizations or sales totaling $241.3 million and loan repayment
activity, was a decrease of 9.7% or $96.8 million in average loans
outstanding during fiscal 1999. The average balance of securities and other
interest-earning assets increased $168.5 million over the prior fiscal year
and results primarily from a decrease in loans and an increase in average
deposits of $68.3 million or 6.8% partially offset by lower average
borrowings of $2.4 million or 6.3%. The resulting shift in composition of
the Association's assets coupled with the lower interest rate environment
had a negative effect on interest income and contributed to the yield on
earning assets decreasing 66 basis points to 7.24%. Even though in total,
interest-earning assets increased 6.4% in fiscal 1999 compared to fiscal
1998, the
G-43
<PAGE>
Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations of York Financial Corp.
(continued)
-------------------------------------------------------------
decrease in yield on interest-earning assets resulted in a
decrease in interest income. This combination of volume and rate
changes resulted in a net decrease in interest income of $2.2
million, or 2.5%.
Interest expense was virtually unchanged in fiscal 1999 from
the prior fiscal year. There was an increase of $65.9 million or
6.3% in the average level of interest-bearing liabilities but
this was offset by a decrease in the cost of funds. In order to
maintain and attract new deposits during fiscal 1999, the
Association continued to successfully market a Guaranteed Money
Fund Account (which is priced based on nationally reported money
fund rates) as well as provide competitive interest rates through
special promotional offerings on selected certificate of deposit
account programs. This response to the increased competitive
pressures for deposits resulted in deposit growth in higher cost
money market and certificate accounts. The increase in average
deposits of $68.3 million was partially offset by a decrease in
average overnight borrowings to $36.4 million from the previous
year's level of $38.9 million. The average rate on interest-
bearing liabilities decreased 30 basis points to 4.68% as
compared to 4.98% in the prior period.
The volume/rate analysis shown in the following table presents
a comparative analysis of reported interest income and expense in
relation to changes in specific asset and liability account
balances (volume) and corresponding interest rates (rate). This
analysis illustrates the net impact of previously discussed
volume and rate changes on net interest income for fiscal 1999
compared to fiscal 1998, and fiscal 1998 compared to fiscal 1997.
For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to
(1) changes in volume and (2) changes in rates. The change in
interest income/expense due to both volume and rate has been
allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the change in
each.
<TABLE>
<CAPTION>
Year Ended June 30
1999 Compared to 1998 1998 compared to 1997
Increase (Decrease) Due to: Increase (Decrease) Due to:
------------------------------------ -----------------------------
Volume Rate Net Volume Rate Net
--------- -------- --------- ---------- ------ --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $ (7,758) $ (3,255) $ (11,013) $ 601 $ (528) $ 73
Securities held for trading (55) (32) (87) (603) (38) (641)
Securities available for sale 4,425 (75) 4,350 40 19 59
Securities held to maturity 367 11 378 (66) 45 (21)
Other interest-earning assets 4,370 (199) 4,171 1,421 34 1,455
--------- -------- ------ ---------- ------ --------
Total 1,349 (3,550) (2,201) 1,393 (468) 925
Interest expense:
Deposits:
NOW accounts 228 (316) (88) 161 62 223
Savings accounts (192) (21) (213) (206) (158) (364)
Money market accounts 2,595 (627) 1,968 1,292 485 1,777
Certificate accounts 252 (1,666) (1,414) 2,096 (353) 1,743
Borrowings (127) (144) (271) (3,332) 9 (3,323)
--------- -------- ------ ---------- ------ --------
Total 2,756 (2,774) (18) 11 45 56
--------- -------- ------ ---------- ------ --------
Net interest income $ (1,407) $ (776) $ (2,183) $ 1,382 $ (513) $ 869
========= ======== ========= ========== ====== ========
</TABLE>
G-44
<PAGE>
Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations of York Financial Corp. (continued)
-------------------------------------------------------------------------------
Provision for Loan Losses
In fiscal 1999, additions were made to the allowance for loan losses in the
amount of $3.6 million resulting in an allowance (net of charge-offs and
recoveries of $1.6 million) of $10.8 million, or 1.17% of the loan portfolio,
compared to an allowance of $8.8 million, or .92% at fiscal year end 1998. See
"Asset Quality" for further discussion of the allowance for loan losses.
Other Income
Other income was $12.0 million for fiscal 1999, an increase of $1.9 million
or 18.6% over 1998. Mortgage banking income for fiscal 1999 decreased $501,000
or 13.3% as compared to the same period in 1998 and included gain on sales of
loans and trading securities of $2.3 million. Mortgage-backed securities created
in conjunction with the Association's mortgage banking activities are deemed
trading securities and are carried at fair value with unrealized gains and
losses reported in the income statement. At June 30, 1999, there were no
securities held for trading.
The portfolio of loans serviced for others totaled $494.7 million at June 30,
1999, with a net average servicing rate of approximately 9.2 basis points, as
compared to $487.1 million at June 30, 1998 with an average net servicing rate
of approximately 13.6 basis points. A portion of the change in the balance of
loans serviced for others was the sale of servicing on approximately $84.2
million of loans consummated in May 1999 with a net gain of $475,000. Such
transaction is in addition to normal securitization and repayments within the
portfolio both of which increased over prior year levels due to the stable and
low-rate interest rate environment. In consideration of the timing of these
transactions, the average balance of outstanding loans serviced for others
increased $42.6 million in fiscal 1999. The decrease in net servicing rate of
4.4 basis points is primarily due to the capitalization of mortgage servicing
rights with expected future decreases in servicing fee income. Amortization of
capitalized mortgage servicing rights was $735,000 in fiscal 1999 compared to
$442,000 in fiscal 1998 and is recognized as a reduction of gross servicing fee
income. In addition, interest costs incurred by the Association in connection
with the increased level of repayments resulted in downward pressure on the net
servicing rate. The combination of these volume and rate changes caused net loan
servicing fees for fiscal 1999 to decrease to $496,000 as compared to the fiscal
1998 level of $677,000. For additional information on loan servicing fees and
mortgage banking activity, refer to Notes 1 and 6 of the Notes to Consolidated
Financial Statements.
Gain on the sale of securities available for sale totaled $794,000 at June
30, 1999 as compared to $174,000 at June 30, 1998. During the current year,
Fannie Mae (FNMA) introduced a program which provides for the securitization of
high loan-to-value seven year balloon loans. Management, recognizing the default
risk associated with this loan type, securitized $58.0 million of loans within
the portfolio qualifying under the FNMA program. Furthermore, in consideration
of the interest rate risk associated with this asset, $40.6 million of these
securities were sold resulting in the aforementioned gain during fiscal 1999.
The balance of such securities are held in the Association's securities
available for sale portfolio at June 30, 1999.
Gain on sales of real estate during fiscal 1999 totaled $1.6 million as
compared to $193,000 during fiscal 1998 and is the result of dispositions of
real estate acquired in the normal course of business. The increase in gain on
sale of real estate during fiscal 1999 was primarily due to the disposition of a
commercial real estate property and the recognition of the gain on sale of a
property previously deferred in accordance with Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real Estate."
G-45
<PAGE>
Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations of York Financial Corp. (continued)
-------------------------------------------------------------------------------
Fees and service charges for fiscal 1999 increased $385,000 or 12.0% to $3.6
million as compared to $3.2 million in fiscal 1998. The increase in fees and
service charges is primarily a result of growth in loan and deposit volume. Loan
volume was higher due to increased originations of $138.6 million to $577.8
million during fiscal 1999. The increase in deposit account servicing fees is
related to increased volume of electronic transactions initiated by deposit
customers including inter-account sweeps, ATM transactions and VISA debit card
utilization. In addition, increased commercial checking account relationships
initiated through expanded Business Banking activities and related fee structure
associated with such accounts contributed to the increase in fees and service
charges.
The Corporation is a partner in various joint ventures. In the year ended
June 30, 1999, income from joint ventures totaled $1.2 million as compared to
$1.4 million in 1998. The income is primarily related to the Corporation's share
in the net income of a venture capital partnership resulting from the increased
market value of underlying portfolio investments. For additional information on
investments in joint ventures refer to Note 9 of the Notes to Consolidated
Financial Statements.
Other operating income was $1.5 million in fiscal 1999 as compared to $1.4
million in fiscal 1998. As products and services become more fully integrated
within the retail branch system, related income delivered through discount
brokerage and insurance units was the primary reason for the increase in other
operating income. Other effects on other operating income were income on
corporate-owned life insurance policies related to a supplemental executive
retirement plan which was partially offset by a reduction in appraisal and
inspection fees performed for third parties. Lenders Support Group, an affiliate
of the Association, performed appraisal and inspection activities for the
Association and the general public. Effective September 30, 1998, the activities
of Lenders Support Group were absorbed into the mortgage banking activity of the
Association with appraisal and inspection activities for third parties
discontinued.
Other Expenses
Other expenses of $28.2 million increased $911,000 or 3.3% in fiscal 1999 as
compared to $27.3 million in fiscal 1998 primarily due to an increase in
salaries and benefits.
Salaries and employee benefits increased $986,000 or 7.5% in fiscal 1999 over
fiscal 1998 and is attributable to a combination of the following factors:
annual adjustments through the salary administration program, increased staffing
within the Retail Banking Group in connection with new branches, increased
commissions related to an affiliate brokerage and insurance units, commissions
and overtime due to increased loan volume and decreases in incentive and profit
sharing compensation due to lower operating results. Full time equivalent
personnel increased from 389 at June 30, 1998, to 422 at June 30, 1999.
Occupancy expense increased $205,000 or 5.7% in fiscal 1999 over fiscal 1998
as a result of normal inflationary pressure on facilities management activities.
Real estate expenses decreased $531,000 or 37.8% in fiscal 1999 as compared to
fiscal 1998 and is primarily attributable to a decrease in the provision for
possible real estate losses. Data processing increased $255,000 or 23.0% in
fiscal 1999 compared to fiscal 1998 due to costs related to technology purchases
to enhance efficiency. Advertising cost increased $76,000 or 7.0% in fiscal 1999
as compared to fiscal 1998 and is primarily attributable to ongoing efforts to
enhance customer and product awareness through various media campaigns. Other
expenses decreased $98,000 or 1.5% in fiscal 1999 as compared to fiscal 1998 as
a result of increased cost of services and the effects of increased loan and
deposit volume offset by elimination of costs incurred in 1998 with third
parties to examine the Association's operating efficiencies.
G-46
<PAGE>
Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations of York Financial Corp. (continued)
-------------------------------------------------------------------------------
Other operating expenses as a percentage of net interest income and other
operating income represents the efficiency ratio. The Corporation's efficiency
ratio for fiscal 1999 was 60.6% compared to 58.3% for fiscal 1998.
Provision for Income Taxes
The provision for income taxes of $5.0 million for fiscal 1999 represents an
effective tax rate of 34.2% as compared to 36.7% for fiscal 1998. The decrease
in the effective tax rate is primarily attributable to the favorable results of
a Delaware investment holding company activity and an increase in tax credits
recognized on tax favored community redevelopment projects from year to year.
For a more comprehensive analysis of income tax expense, refer to Note 12 of the
Notes to Consolidated Financial Statements.
Results of Operations
Fiscal 1998 Compared to Fiscal 1997
Net Interest Income
Net interest income for fiscal 1998 was $36.7 million, as compared to $35.9
million for fiscal 1997, which represents a 2.2% increase. The margin on
interest-earning assets for fiscal 1998 increased to 3.28% from 3.27% for fiscal
1997. For further information, see "Average Balances and Interest Yield/ Rate
Analysis" and "Volume/Rate Analysis" tables included in this document.
During fiscal 1998, York Federal originated $439.2 million of loans including
loans refinanced from the Association's portfolio totaling $24.5 million and
mortgage loans securitized or sold of $179.3 million. The result of these
activities, when combined with loan repayments including refinance activity, was
a 0.7% increase in average loans outstanding during fiscal 1998. The average
balance of securities and other interest-earning assets increased $16.8 million
over the prior fiscal year and results from an increase in deposits partially
offset by repayment of short-term borrowing positions. The resulting composition
shift of the Association's assets has a negative effect on interest income and
contributed to the yield on earning assets decreasing 9 basis points to 7.90%.
In total, interest-earning assets averaged 2.2% more in fiscal 1998 than in
fiscal 1997, resulting in an increase in interest income. This combination of
volume and rate changes resulted in a net increase in interest income of $0.9
million, or 1.1%.
Interest expense was virtually unchanged from the prior fiscal year as a
result of changes in composition of interest-bearing liabilities providing for a
stable cost of funds and a 0.2% increase in the average level of interest-
bearing liabilities. In order to maintain and attract new deposits during fiscal
1998, the Association continued to successfully market a Guaranteed Money Fund
Account (which is priced based on nationally reported money fund rates) as well
as provided competitive interest rates through special promotional offerings on
selected certificate of deposit account programs. This response to the increased
competitive pressures for deposits resulted in deposit growth in higher cost
money market and certificate accounts. A decrease in average overnight
borrowings to $38.9 million from the previous year's level of $100.8 million
offset this shift in deposit composition. The result was a 4.98% cost of funds,
unchanged from the prior fiscal year.
Provision for Loan Losses
In fiscal 1998, additions were made to the allowance for loan losses in the
amount of $3.7 million resulting in an allowance (net of charge-offs and
recoveries of $1.3 million) of $8.8 million, or .92% of the loan portfolio,
compared to an allowance of $6.4 million, or .64% at fiscal year end 1997. See
"Asset Quality" for further discussion of the allowance for loan losses.
G-47
<PAGE>
Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations of York Financial Corp. (continued)
-------------------------------------------------------------------------------
Other Income
Other income was $10.2 million for fiscal 1998 an increase of $1.4 million
over 1997. Mortgage banking income for fiscal 1998 increased $147,000 or 4.1% as
compared to the same period in 1997 and included gain on sales of loans and
trading securities of $2.3 million. Mortgage-backed securities created in
conjunction with the Association's mortgage banking activities are deemed
trading securities and are carried at fair value with unrealized gains and
losses reported in the income statement. At June 30, 1998, there were no
securities held for trading.
The portfolio of loans serviced for others totaled $487.1 million at June 30,
1998, with an average net servicing rate of approximately 13.6 basis points, as
compared to $548.2 million at June 30, 1997, with an average net servicing rate
of approximately 22.0 basis points. A portion of the change in the balance of
loans serviced for others was the sale of servicing rights on approximately
$95.5 million of loans consummated in November 1997 at a net gain of $740,000.
Such transaction is in addition to normal securitization and repayments within
the portfolio both of which increased over prior year levels due to the stable
and low-rate interest rate environment. The average balance outstanding of loans
serviced for others decreased $57.2 million in fiscal 1998. The decrease in net
servicing rate of 8.4 basis points is primarily attributable to the
implementation of Statement of Financial Accounting Standards (SFAS) No. 122
which was superceded by SFAS No. 125 and the related capitalization of mortgage
servicing rights. Amortization of capitalized mortgage servicing rights was
$442,000 in fiscal 1998 compared to $301,000 in fiscal 1997, and is recognized
as a reduction of gross servicing fee income. In addition, interest costs
incurred by the Association in connection with the increased level of repayments
resulted in downward pressure on the net servicing rate. The combination of
these volume and rate changes caused loan servicing fees for fiscal 1998 to
decrease $677,000 as compared to the fiscal 1997 level of $1.2 million. For
additional information on loan servicing fees and mortgage banking activity
refer to Notes 1 and 6 of the Notes to Consolidated Financial Statements.
Gain on sales of real estate during fiscal 1998 totaled $193,000 as compared
to $91,000 during fiscal 1997, and is the result of dispositions of real estate
acquired in the normal course of business. Fees and service charges for fiscal
year 1998 increased $374,000 or 13.2% to $3.2 million as compared to $2.8
million in fiscal 1997. While fee income on the loan portfolio and related
activity remained relatively stable, the increase in fees and service charges is
primarily a result of deposit account servicing fees related to increased volume
of electronic transactions initiated by deposit customers, including inter-
account sweeps, ATM transactions and VISA debit card utilization. In addition,
increased commercial checking account relationships initiated through expanded
Business Banking activities and related fee structure associated with such
accounts contributed to the increase in fees and service charges.
The Corporation is a partner in various joint ventures. In the year ended
June 30, 1998, income from joint ventures totaled $1.4 million as compared to a
loss of $118,000 in fiscal 1997. The income is related to the Corporation's
share in the net income of a venture capital partnership resulting from the
increased market value of underlying portfolio investments. For additional
information on investments in joint ventures refer to Note 9 of the Notes to
Consolidated Financial Statements.
Other operating income was $1.4 million in fiscal 1998 as compared to $1.1
million in fiscal 1997. Products and services delivered through discount
brokerage and insurance units is the primary reason for the increase in other
operating income and is
G-48
<PAGE>
Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations of York Financial Corp. (continued)
-------------------------------------------------------------------------------
expected to continue to have a favorable impact on other fee income as the
delivery of such products and services are more fully integrated within the
retail branch system.
Other Expenses
Other expenses of $27.3 million decreased $3.8 million or 12.3% in fiscal
1998 as compared to $31.2 million in fiscal 1997 which was primarily
attributable to the one time SAIF special assessment which amounted to an
additional expense to the Association of approximately $5.3 million for the year
ended June 30, 1997. York Federal paid $628,000 in deposit insurance premiums to
the SAIF in fiscal 1998, a decrease of $622,000 or 49.8% compared to fiscal
1997. As a result of the one time special assessment, the Association's
insurance premium rate decreased from a blended rate experienced in fiscal 1997
ranging from quarterly premiums at the annual rate of 23.0 basis points to 6.4
basis points, to 6.4 basis points for the entire year in fiscal 1998. The 6.4
basis points rate is more consistent with the deposit insurance premiums paid by
Bank Insurance Fund (BIF) insured institutions and may vary according to the
Association's capital levels and management ratings.
Salaries and employee benefits increased $1.6 million or 13.7% in fiscal 1998
over fiscal 1997 and is attributable to a combination of the following factors:
annual adjustments to the salary administration program, compensation
investments related to the Business Banking Group formed in the Spring of fiscal
1997 and to Retail Banking Group in connection with new branches in the process
of development at the end of the fiscal year, and increases in incentive and
profit sharing compensation as a result of improved operating performance. Full
time equivalent personnel increased from 380 at June 30, 1997, to 389 at June
30, 1998. Occupancy expense increased $113,000 or 3.2% in fiscal 1998 over
fiscal 1997 as a result of normal inflationary pressure on facilities management
activities. Real estate expenses decreased $190,000 as compared to fiscal 1997
and is primarily attributable to a decrease in the provision for possible real
estate losses. Advertising cost increased $103,000 or 10.5% in fiscal 1998 as
compared to fiscal 1997 and is primarily attributable to ongoing efforts to
enhance customer and product awareness campaigns. Other expenses increased
$462,000 or 7.8% in fiscal 1998 as compared to fiscal 1997 and include costs
incurred with third parties to examine the Association's operating efficiencies.
Provision for Income Taxes
The provision for income taxes of $5.8 million for fiscal 1998 represents an
effective tax rate of 36.7% as compared to 35.4% for fiscal 1997. The increase
in the effective tax rate is primarily attributable to a reduction in tax
credits recognized on tax favored community redevelopment projects. For a more
comprehensive analysis of income tax expense, refer to Note 12 of the Notes to
Consolidated Financial Statements.
Impact of Year 2000
We are less than six months from the turn of the century. This milestone has
generated widespread concern over its potential impact on business continuity.
Historically, most computer programs were written using two digits rather than
four to designate the applicable year. As a result, it is anticipated that
computer systems may recognize a date using "00" as the year 1900 rather than
the year 2000. This situation along with certain other date issues is commonly
referred to as the "Year 2000 Issue" and could cause a system failure or
miscalculations causing disruption of operations, including, among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
G-49
<PAGE>
Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations of York Financial Corp. (continued)
-------------------------------------------------------------------------------
The Year 2000 Issue is recognized by the Corporation as a significant
business issue and is receiving intense management focus. The majority of the
Corporation's transaction processing is provided by a third party processor. A
Year 2000 project team has been organized and a comprehensive action plan
designed to achieve Year 2000 readiness. The project is addressing not only
computer and technology areas but all areas of the Corporation's business. Many
non-computer systems include embedded technology and may be affected by the Year
2000 Issue if not appropriately addressed. The action plan has five key project
phases: awareness, assessment, remediation, validation, and implementation
addressing systems for both the Corporation and its third party processor. The
five phases of the project are substantially complete and we are currently in
the process of completing the interface/integration testing between all key
vendors and systems to ensure application compatibility. This timeline provides
an opportunity to resolve any issues that may arise prior to the turn of the
century.
As part of the Year 2000 action plan, the Corporation has initiated formal
communications with all of its significant vendors and large customers to
determine the extent to which its systems will need to be modified or replaced
or are vulnerable to those third parties' failure to remediate their own Year
2000 issues. While the Corporation has taken and will continue to take
appropriate actions to mitigate the risk of adverse consequences associated with
the failure of a third party to address these issues, there can be no guarantee
that the systems of third parties will be timely converted and will not have an
adverse effect on York Financial. As a precaution, the Corporation has developed
a comprehensive Year 2000 contingency plan and is currently in the process of
testing the plan for all mission critical applications and systems. The testing
of the plan should be substantially completed no later than September 30, 1999.
To assist customers in understanding Year 2000 issues and to inform them of
the Corporation's actions to prepare, brochures regarding Year 2000 preparedness
have been distributed to all customers. Additional mailings and other
communications are anticipated prior to the turn of the century.
It is difficult to isolate the incremental cost of this Year 2000 effort
given that it impacts technical personnel already in place in operational areas
across our business as well as possibly accelerating already planned technology
investments. However, such costs and related investments are presently estimated
to total $320,000 and the timing of recognizing such costs is not considered to
be material to any one fiscal period.
The costs of the project and the date on which the Corporation believes it
will complete the Year 2000 project are based on management's best estimates.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated.
Effects of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in relative
purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities
of a financial institution are monetary in nature. As a result, interest rates
generally have a more significant impact on a financial institution's
performance than does the effect of inflation. Interest rates do not necessarily
move in the same direction or in the same magnitude as the price of goods and
services since such prices are affected by inflation. In the current interest
rate environment, the liquidity and maturity structures of York Federal's assets
and liabilities are critical to the maintenance of acceptable performance
levels.
G-50
<PAGE>
PART I
Item 1. Business
-----------------
York Financial Corp. ("York Financial" or the "Corporation") was
incorporated in Pennsylvania in September 1985 and in August 1986 became a
unitary savings and loan holding company and the sole shareholder of York
Federal Savings and Loan Association ("York Federal" or the "Association"). At
June 30, 1999, the Corporation had assets of $1.4 billion, total deposits of
$1.1 billion and stockholders' equity of $110.4 million.
Presently, the primary business of York Financial is the business of York
Federal. York Federal received its federal charter in 1955. At June 30, 1999,
York Federal's stockholder's equity was $93.6 million. York Federal is a member
of the Federal Home Loan Bank ("FHLB") of Pittsburgh and is subject to
supervision, examination, and regulation by the Office of Thrift Supervision
("OTS") and the Federal Deposit Insurance Corporation ("FDIC"). The executive
offices of York Federal and the Corporation are located at 101 South George
Street, York, Pennsylvania 17401 (telephone number: (717) 846-8777).
The primary business of York Federal is attracting deposits from the
general public, commercial and governmental entities and investing these
deposits into loans secured by residential and commercial real property,
commercial business loans, consumer loans and investment securities. York
Federal's principal source of income is interest and dividends received on loans
and securities, fees received from servicing loans sold to government sponsored
agencies and other investors and service charges assessed on loan and deposit
transactions. York Federal's principal expense is interest paid on deposits and
borrowings. Primary sources of funds to support lending and other general
business activities are operations, net deposits, loan repayments including
monthly amortization and prepayments, the sale of loans, securities held for
trading, and securities available for sale, short and long-term advances from
the FHLB of Pittsburgh and Federal Reserve Bank of Philadelphia and other
short-term borrowings. The Association does not rely on brokered deposits as a
source of funds.
York Federal conducts its business through twenty-five offices located in
south central Pennsylvania and Maryland. Effective August 1, 1999, the two
Shrewsbury offices were combined into one office resulting in twenty-four office
locations. York Federal maintains a commissioned mortgage origination staff as
well as mortgage correspondent relationships which originate residential
mortgage loans for the Association primarily in Pennsylvania, Maryland and
Virginia, although loans are originated in eleven states within the Mid-Atlantic
region.
Earnings depend to a large extent on the ability of the institution to
maintain a positive spread between the yield on earning assets and the cost of
funds. The spread is affected by general economic conditions, monetary and
fiscal policies of the federal government and the policies of regulatory
authorities supervising the operations of thrift institutions. York Federal has
maintained a positive spread between the yield on its earning assets and its
cost of funds and, as a result, has experienced net income from its operations.
No assurances, however, can be given that this experience will continue.
York Financial, in addition to its ownership of York Federal, has several
wholly-owned subsidiaries. For information regarding these subsidiaries and
their activities, see "Business -- Subsidiaries of York Federal" and "Business
-- Subsidiaries and Joint Ventures of the Corporation" contained herein.
Selected Financial Data and Other Items
The information contained in the Corporation's Annual Report to
Stockholders, attached hereto as Exhibit 13 ("Annual Report"), for the fiscal
year ended June 30, 1999, is incorporated herein by reference.
G-51
<PAGE>
Interest Rate Sensitivity Management and Market Risk
The information contained on pages 7 through 8 of the Corporation's Annual
Report is incorporated herein by reference.
Lending Activities
General. On a consolidated basis, the Corporation's net loan portfolio
totaled $909.2 million at June 30, 1999, representing 66.6% of its total assets.
On that date, the portfolio consisted of loans secured by mortgages on
residential properties, commercial real estate loans, including loans secured by
undeveloped real estate, commercial business loans, and consumer loans.
York Federal originates for its own portfolio adjustable rate and
intermediate term real estate mortgage loans, consumer loans and certain
commercial real estate and commercial business loans. York Federal generally has
a policy of selling in the secondary market its originations of conforming
long-term (15 to 30 years), fixed rate real estate mortgage loans. Although
loans within the portfolio may have original maturities of 15 to 30 years,
experience has indicated that because of refinancing and prepayments, such loans
remain outstanding for significantly shorter periods than their contractual
terms.
Additional information concerning the loan portfolio is contained on pages
11 through 15 of the Corporation's Annual Report and is incorporated herein by
reference. For additional information about the Corporation's lending activities
and commitments, see Notes 1, 5 and 17 of the Notes to Consolidated Financial
Statements.
G-52
<PAGE>
Loan Portfolio Analysis. The following table sets forth the composition of
the Association's loan portfolio by type of loan as of the dates indicated:
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ---------------- ----------------- ------------------ -------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- ------ ------- ------- -------- -------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential first mortgage loans:
Conventional..................... $ 595,854 65.5% $ 680,779 71.5% $ 772,962 77.5% $718,755 76.6% $602,072 71.2%
Construction..................... 159,138 17.5 111,032 11.7 65,641 6.6 65,725 7.0 79,742 9.4
--------- ----- ---------- ----- ---------- ----- -------- ----- --------- -----
754,992 83.0 791,811 83.2 838,603 84.1 784,480 83.6 681,814 80.6
Commercial first mortgage loans:
Conventional..................... 82,485 9.1 56,047 5.9 48,443 4.9 62,006 6.6 82,544 9.8
Construction..................... 30,269 3.3 14,258 1.5 9,967 1.0 9,840 1.0 6,409 0.8
--------- ----- ---------- ----- ---------- ----- -------- ----- --------- -----
112,754 12.4 70,305 7.4 58,410 5.9 71,846 7.6 88,953 10.6
--------- ----- ---------- ----- ---------- ----- -------- ----- --------- -----
867,746 95.4 862,116 90.6 897,013 90.0 856,326 91.2 770,767 91.2
Commercial business loans......... 12,364 1.4 3,737 0.4 496 -- 1,714 0.2 2,751 0.3
Consumer loans:
Automobile loans................. 2,684 0.3 2,459 0.3 2,597 0.3 5,301 0.6 5,945 0.7
Mobile home loans................ 1,697 0.2 1,954 0.2 2,249 0.2 1,362 0.1 1,306 0.2
Education loans.................. 19,246 2.1 18,360 1.9 17,163 1.7 15,505 1.7 12,777 1.5
Savings account loans............ 2,186 0.3 2,479 0.3 2,334 0.2 2,001 0.2 1,916 0.2
Home improvement loans........... 3,041 0.4 4,582 0.5 3,987 0.4 3,901 0.4 3,360 0.4
Boat loans....................... 1,098 0.1 1,711 0.2 2,525 0.3 3,126 0.3 4,326 0.5
Home equity loans................ 49,390 5.4 50,659 5.3 53,827 5.4 49,217 5.2 49,900 5.9
Other............................ 65,216 7.2 56,836 6.0 49,805 5.0 34,401 3.7 27,220 3.2
--------- ----- ---------- ----- ---------- ----- -------- ----- --------- -----
144,558 16.0 139,040 14.7 134,487 13.5 114,814 12.2 106,750 12.6
--------- ----- ---------- ----- ---------- ----- -------- ----- --------- -----
Subtotals..................... 1,024,668 1,004,893 1,031,996 972,854 880,268
Less:
Loans in process................. 106,088 11.6 45,382 4.8 28,302 2.9 27,497 2.9 26,577 3.1
Unamortized loan fees
(expenses) and
unearned income................. (1,416) -- (940) -- (560) -- 178 -- 2,646 0.3
Allowance for loan losses........ 10,803 1.2 8,810 0.9 6,413 0.6 6,609 0.7 5,840 0.7
--------- ----- ---------- ----- ---------- ----- -------- ----- --------- -----
115,475 12.8 53,252 5.7 34,155 3.5 34,284 3.6 35,063 4.1
--------- ----- ---------- ----- ---------- ----- -------- ----- --------- -----
Total.......................... $ 909,193 100.0% $ 951,641 100.0% $ 997,841 100.0% $938,570 100.0% $845,205 100.0%
========= ===== ========== ===== ========== ===== ======== ===== ========= =====
</TABLE>
G-53
<PAGE>
Loan Maturity
The following table sets forth the dollar amount of total loans receivable
which have predetermined interest rates and those which have floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Due within one year Due one to five years Due more than five years
of June 30, 1999 (1) after June 30, 1999 (1) after June 30, 1999 (1)
------------------------------ ----------------------------- -------------------------------
Pre- Floating or Pre- Floating or Pre- Floating or
Determined Adjustable Determined Adjustable Determined Adjustable Grand
Rates Rates Total Rates Rates Total Rates Rates Total Total
--------- --------- -------- --------- --------- -------- --------- -------- --------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate
Conventional
Residential and commercial.. $ 103,844 $ 44,768 $ 148,612 $ 284,675 $ 104,826 $ 389,501 $ 86,517 $ 51,472 $ 137,989 $ 676,102
Construction
Residential and commercial.. 7,435 4,265 11,700 21,349 12,245 33,594 25,586 14,676 40,262 85,556
Commercial business loans..... 1,718 9,020 10,738 241 764 1,005 -- 621 621 12,364
Consumer...................... 26,645 52,390 79,035 42,882 19,561 62,443 3,080 -- 3,080 144,558
--------- --------- --------- --------- --------- --------- --------- -------- --------- ---------
Total....................... $ 139,642 $ 110,443 $ 250,085 $ 349,147 $ 137,396 $ 486,543 $ 115,183 $ 66,769 $ 181,952 $ 918,580
========= ========= ========= ========= ========= ========= ========= ======== ========= =========
</TABLE>
_______________
(1) Based on contractual terms to maturity and adjusted for market consensus
prepayment assumptions.
G-54
<PAGE>
Residential Real Estate Loans. At June 30, 1999 approximately 83.0% of York
Federal's loan portfolio was comprised of one-to-four family residential
mortgage loans. The loan-to-value ratio, maturity and other provisions of the
loans made by York Federal have generally reflected the policy of making the
maximum loan permissible consistent with applicable regulations, market
conditions, and lending practices and underwriting standards established by York
Federal. Loans in excess of the 90% loan-to-value ratio are insured for the
amount which the loan exceeds 80% of value. Interest rates and fees charged on
loans originated by York Federal are competitive with other lenders in the
general market area.
Generally, the permanent fixed rate residential loans currently originated
by York Federal are structured to conform with terms and conditions which would
enable these loans to be sold in the secondary market. At June 30, 1999, $30.6
million of conventional mortgages were held for sale in the secondary market.
The Association makes loans not conforming to these secondary marketing
requirements and retains these loans in portfolio. Such loans are generally
made with adjustable interest rates.
York Federal also presently offers adjustable rate and intermediate term
mortgages on one-to-four unit residential dwellings for its portfolio. The
interest rate on most adjustable mortgages is adjustable once a year and is tied
to either the contract interest rate on loans closed to facilitate the purchase
of previously occupied homes published by the Federal Housing Finance Board
("FHFB National Contract Rate") or the one-year constant maturity treasury (CMT)
yield. The Association also offers a 5/1 CMT adjustable rate mortgage loan
where the rate is fixed for the first five years with annual adjustments to the
one year CMT thereafter. In addition to the 5/1 CMT adjustable rate mortgage
loans, intermediate term loans include seven year balloon loans where the
interest rate is fixed and the loan is amortized based on a 30 year amortization
schedule with the remaining loan balance at the end of seven years being due and
payable.
Commercial Real Estate and Business Loans. York Federal has developed a
business banking group to more aggressively pursue commercial real estate and
business lending opportunities within its branch market area. These activities
are expected to provide higher yields and shorter terms and/or repricing
characteristics than other loan types within the portfolio. The Association's
existing commercial loan portfolio includes a mix of land development,
construction and permanent financing on commercial and multi-family real estate
as well as commercial business loans representing working capital, equipment and
some unsecured lending. Commercial loans are typically made for terms of up to
20 years either as adjustable interest rate loans with rate adjustment
provisions of one to five years, with monthly rate adjustment provisions, or as
"balloon" loans with abbreviated maturity dates.
The commercial real estate loan portfolio is secured by commercial and
single family condominiums, land for development, hotel/motel/restaurant, multi-
family residential, office, industrial, and retail buildings and other
properties. These loans are made in amounts generally limited to 80% of the
appraised value of the property securing the loan. Commercial real estate loans
are usually considered to be of higher risk than residential loans and represent
12.4% of York Federal's portfolio as of June 30, 1999.
Commercial business loans may be made for working capital or equipment
financing supported by appropriate collateral (i.e., accounts receivable,
inventory, equipment) or in some instances unsecured lending supported by the
creditworthiness of the borrower and appropriate guarantees. All loans are
subjected to a rigorous risk identification and loan grading process in
connection with extending the credit as well as ongoing credit analysis and
evaluation while the loan is outstanding. At June 30, 1999, commercial business
loans totaled $12.4 million or 1.4% of total loans. Such loans may have fixed
rates but generally have adjustable rates tied to prime, libor, treasury or
federal funds indices.
Commercial business lending generally involves greater risk than residential
mortgage lending and involves risks that are different from those associated
with residential, commercial and multi-family real estate lending. Real estate
lending is generally considered to be collateral based lending with loan amounts
based on predetermined loan to collateral values and liquidation of the
underlying real estate collateral is viewed as the primary source of repayment
G-55
<PAGE>
in the event of borrower default. Although commercial business loans are often
collateralized by equipment, inventory, accounts receivable or other business
assets, the liquidation of collateral in the event of a borrower default is
often not a sufficient source of repayment because accounts receivable may be
uncollectible and inventories and equipment may be obsolete or of limited use,
among other things. Accordingly, the repayment of a commercial business loan
depends primarily on the creditworthiness of the borrower (and any guarantors),
while liquidation of collateral is a secondary and often insufficient source of
repayment.
Consumer Loans. At June 30, 1999, consumer loans totaled $144.6 million or
approximately 16.0% of York Federal's total loan portfolio. The consumer loan
portfolio is composed of automobile loans, loans secured by savings accounts,
mobile home loans, home improvement loans, boat loans, education loans and other
consumer loans. In addition, York Federal offers to its customers a home equity
line of credit. Such loans are made in amounts generally not to exceed the
difference between 90% of the current property value less the balance of other
loans outstanding secured by the property. Loans typically adjust monthly at the
Citibank prime rate. At June 30, 1999, York Federal had approximately $49.4
million of home equity loans outstanding under total lines of credit available
of $107.0 million.
It is York Federal's intention to emphasize consumer lending consistent with
prudent underwriting practices in order to take advantage of the generally
higher yields on these loans as well as their shorter terms. Consumer loans may
entail greater risk than residential mortgage loans, particularly in the case of
consumer loans which are unsecured or secured by assets that depreciate rapidly.
In addition, consumer loan collections are dependent on the borrower's
continuing financial stability and, thus, are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy.
Construction Loans. York Federal provides loans to finance the construction
of and permanent financing for residential and commercial real estate
properties. Such construction/permanent financing is considered to have less
risk than construction financing. At June 30, 1999, the Association had $85.6
million net of loans in process or 9.3% of total loans outstanding in
construction loans. The Association considers this a niche product and continues
to be committed to this type of lending. York Federal's policy is to grant
single family construction loans up to 95% of the appraised value for an
individual's personal residence. Residential construction/permanent loans
generally are made for a six-month term. This period may be extended subject to
negotiation and the payment of an extension fee.
Commercial construction loans are made at adjustable rates of interest for
terms of six months, although York Federal periodically makes longer term
commercial construction loans on larger projects. Commercial construction
financing is considered to involve a higher degree of credit risk than long term
financing of residential properties. York Federal's risk of loss on a
construction loan is dependent largely upon the accuracy of the initial estimate
of the property's value at completion of construction or development and the
estimated cost (including interest) of construction. If the estimate of
construction cost and the salability of the property upon completion of the
project proves to be inaccurate, York Federal may advance funds beyond the
amount originally committed to permit completion of the project. If the estimate
of value proves to be inaccurate, York Federal may be confronted, at or prior to
the maturity of the loan, with a project that is under valued and which is
insufficient to assure full repayment.
Loan Sales. Generally, fixed rate long-term mortgage loans are sold in the
secondary mortgage market to FNMA, FHLMC and other investors. In addition, when
deemed prudent, York Federal has securitized adjustable rate, 7 year balloon and
5/1 CMT (i.e., five year fixed and converts to one year adjustable) adjustable
rate mortgages. At June 30, 1999, York Federal had outstanding commitments to
sell $25.3 million in loans. York Federal generally expects to satisfy these
commitments with loans originated within the respective commitment period.
In prior years, certain sales to FNMA included recourse provisions. For
additional information, see Note 17 of the Notes to Consolidated Financial
Statements.
G-56
<PAGE>
In connection with loan sales, York Federal generally retains the servicing
rights of the loans. See Notes 1 and 6 of the Notes to Consolidated Financial
Statements and pages 13 through 17 of the Annual Report.
Loan Commitments. York Federal makes commitments to grant conventional
mortgage loans on existing residential dwellings for periods of up to 60 days
from the date of rate lock-in. Such commitments are generally made at the market
rate of interest prevailing at the time the loan application is received. During
fiscal 1999, less than 5% of loan commitments expired without being funded. At
June 30, 1999, York Federal's outstanding residential and commercial mortgage
loan commitments amounted to $36.8 million. See Note 17 of the Notes to
Consolidated Financial Statements.
Asset Quality
The information contained on pages 9 through 11 of the Corporation's Annual
Report is incorporated herein by reference.
G-57
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any category.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ------------------ ------------------ ------------------ -------------------
% of loans % of loans % of loans % of loans % of loans
in each in each in each in each in each
category category category category category
to gross to gross to gross to gross to gross
Amount loans Amount loans Amount loans Amount loans Amount loans
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans:
Real Estate
Residential......... $ 4,696 72.4% $3,158 78.3% $2,485 81.2% $2,063 80.5% $1,500 77.0%
Commercial.......... 2,106 10.4 893 6.8 740 5.4 1,430 7.2 1,700 10.2
Commercial
business loans...... 607 1.4 263 0.4 35 -- 65 0.2 50 0.3
Consumer............. 878 15.8 656 14.5 514 13.4 406 12.1 350 12.5
Unallocated.......... 2,516 -- 3,840 -- 2,639 -- 2,645 -- 2,240 --
------- ------ ------ ------ ------ ----- ------ ----- ------ -----
Total allowance for
loan losses........ $10,803 100.0% $8,810 100.0% $6,413 100.0% $6,609 100.0% $5,840 100.0%
======= ====== ====== ====== ====== ===== ====== ===== ====== =====
</TABLE>
G-58
<PAGE>
Management recognizes the importance of an adequate allowance for loan
losses and makes provision for loan losses during each fiscal year in amounts
consistent with evaluated risks. Management of York Federal assesses risk known
and inherent in the portfolio by identification of specific problem assets,
consideration of past loss experience and other qualitative factors. OTS
regulations require a classification system that includes three classifications
for problem assets: substandard, doubtful and loss. Problem amounts are
identified through consideration of nonperforming loans. Substandard assets must
have one or more defined weaknesses and are characterized by the distinct
possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable and there is a high possibility of loss. An
asset classified as loss is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted. If an asset or
portion thereof is classified as loss, the insured institution must charge off
such amount. Assets that do not currently expose an insured institution to
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are designated "special mention" and are
monitored by the Association. The management of York Federal assigns a risk
factor to each asset classification and monitors such asset classifications on
an ongoing basis with the results representing a primary consideration in
determining the adequacy of the allowance for loan losses.
In addition, management considers the past loss experience on various
segments of the loan portfolio after adjusting for asset classifications and
assigns an appropriate risk factor to be applied to the balance in assessing the
adequacy of the allowances. Finally, other qualitative factors are considered
and risk factors assigned to represent the impact of indicators such as current
economic conditions, competition, trends in delinquencies, charge-offs and
nonperforming loans and volume/term of current loan production.
The resulting risk assessment and allocation of the allowance as indicated
in the table indicates the allowance for loan loss at June 30, 1999 of $10.8
million is adequate relative to the known and inherent risks in the portfolio.
Non-Performing Loans. The information contained on pages 8 through 11 of
the Corporation's Annual Report is incorporated herein by reference. See Notes 1
and 5 of the Notes to Consolidated Financial Statements. Effective June 30,
1999, the Association implemented the Uniform Retail Credit Classification
Policy. With the implementation of the policy, a one-time charge to the
allowance for loan losses of $408,000 was recognized representing the total
amount due on certain loans identified in accordance with the policy, in excess
of the net realizable value of the underlying collateral. Previously, the
Association had a nonaccrual policy which primarily effected commercial loans.
With the implementation of the Uniform Retail Credit Classification Policy, in
addition to commercial loans, nonaccrual loans include consumer and mortgage
loans. The Association had nonaccrual loans totaling $919,000 at June 30, 1999
compared to $0 at June 30, 1998.
Real Estate Owned. The information contained on pages 8 through 11 of the
Corporation's Annual Report is incorporated herein by reference. See Notes 1 and
7 of the Notes to Consolidated Financial Statements.
G-59
<PAGE>
Investment Activities
Investment decisions are made by the Asset/Liability Committee of York
Federal under the supervision of York Federal's Board of Directors. The
Association's policies generally limit investments to U.S. Government and agency
securities, mortgage-backed securities issued and guaranteed by Federal Home
Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association
("FNMA"), and Government National Mortgage Association ("GNMA"), and Bank
qualified municipal bonds and investment grade corporate debt obligations.
Investments are made based on various considerations, which include the interest
rate, yield, and anticipated cash needs and sources (which in turn include
outstanding commitments, upcoming maturities, estimated deposits and anticipated
loan amortization and repayments) and projected risk based capital positions.
The effect that the proposed investment would have on the Association's credit
and interest rate risk is also given consideration during the evaluation.
The following table sets forth the carrying value of York Federal's short-
term investments, securities held for trading, securities available for sale,
securities held to maturity and FHLB stock at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------
1999 1998 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Short-term investments:
Interest bearing deposits........ $ 8,958 $126,613 $ 1,527
Securities:
Held for Trading:
Mortgage-backed............... -- -- 7,158
Available for Sale:
Equity Securities............. 1,335 338 --
U.S. Treasury and other U.S.
Government Agencies.......... 161,856 14,810 6,095
Mortgage-backed............... 132,500 32,792 53,595
-------- -------- -------
Total..................... 295,691 47,940 59,690
Held to maturity:
U.S. Treasury and other U.S.
Government Agencies.......... 3,498 5,500 8,590
Corporate debt................ 18,903 -- --
Mortgage-backed............... 217 284 363
-------- -------- -------
Total..................... 22,618 5,784 8,953
FHLB of Pittsburgh stock.......... 7,976 7,976 7,907
-------- -------- -------
Total.......................... $335,243 $188,313 $85,235
======== ======== =======
</TABLE>
During fiscal 1999, liquid assets were deployed primarily into available
for sale securities. Additionally, leverage strategies were initiated to
effectively utilize available capital which resulted in the expansion of the
investment portfolio through the purchase of available for sale securities and
held to maturity securities with a related increase to borrowings. Securities
purchased under these strategies include U.S. Treasury and other U.S. Government
agency securities which generally include call features which allow the issuing
agency the right to call the securities at various dates prior to final
maturity, mortgage-backed securities and investment grade corporate debt
securities primarily in the form of trust preferred securities issued by other
financial institutions. Mortgage-backed securities (which also are known as
mortgage participation certificates or pass-through certificates) typically
represent a participation interest in a pool of single-family or multi-family
mortgages. The principal and interest payments on these mortgages are passed
from the mortgage originators, through intermediaries (generally U.S. Government
agencies and government sponsored enterprises) that pool and resell the
participation interests in the form of securities, to investors such as the
Association. Such U.S. Government agencies and government sponsored enterprises,
which guarantee the payment of principal and interest to investors, primarily
include the FHLMC, FNMA and the GNMA.
G-60
<PAGE>
Mortgage-backed securities typically are issued with stated principal amounts,
and the securities are backed by pools of mortgages that have loans with
interest rates that fall within a specific range and have varying maturities.
Mortgage-backed securities generally yield less than the loans that underlie
such securities because of the cost of payment guarantees and credit
enhancements. In addition, mortgage-backed securities are usually more liquid
than individual mortgage loans and may be used to collateralize certain
liabilities and obligations of the Association. These types of securities also
permit the Association to optimize its regulatory capital because they have low
risk weighting.
For further discussion of changes in the investment portfolio as noted in
the preceding table and the related impact on interest rate sensitivity and
market risk, see pages 7, 8 and 11 through 15 of the Corporation's Annual Report
which is incorporated herein by reference. For additional information about the
Corporation's investment activities, see Notes 1 and 4 of the Notes to
Consolidated Financial Statements.
Federal Home Loan Bank (FHLB) Stock. The Association maintains its stock
position with the FHLB of Pittsburgh in an amount sufficient to satisfy its
membership requirement. See "Regulation -- Federal Regulation of Savings
Associations -- Federal Home Loan Bank System."
G-61
<PAGE>
The following table represents maturity distributions of various debt
securities based on contractual terms to maturity adjusted for market consensus
prepayment assumptions:
<TABLE>
<CAPTION>
At June 30, 1999
--------------------------------------------------------------------------------------------------------
One Year One to Five Five to Ten More Than
or Less Years Years Ten Years Total Securities
--------------- ---------------- ----------------- ---------------- -----------------------------
Amortized Amortized Amortized Amortized Amortized Fair Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Value Yield
-------- ----- --------- ----- --------- ----- --------- ----- --------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities:
Available for Sale:
U.S. Treasury and other
U.S. Government
agencies............. $ 1,048 5.67% $ 82,833 5.93% $ 79,187 6.36% $ 1,682 5.67% $164,750 $161,856 6.13%
Mortgage-backed........ 23,288 6.09 63,821 6.07 29,050 5.88 18,045 5.68 134,204 132,500 5.98
-------- ---- --------- ---- --------- ----- -------- ----- -------- -------- ----
$ 24,336 6.07% $ 146,654 5.99% $ 108,237 6.23% $ 19,727 5.68% $298,954 $294,356 6.06%
======== ==== ========= ==== ========= ===== ======== ===== ======== ======== ====
Held to Maturity:
U.S. Treasury and other
U.S. Government
agencies............. $ -- --% $ -- --% $ 3,498 6.88% $ -- --% $ 3,498 $ 3,484 6.88%
Corporate debt......... -- -- -- -- 4,882 5.94 14,021 6.61 18,903 18,920 6.44
Mortgage-backed........ 50 8.58 135 8.58 32 8.58 -- -- 217 231 8.58%
-------- ---- --------- ---- --------- ---- -------- ---- -------- -------- ----
$ 50 8.58% $ 135 8.58% $ 8,412 6.34% $ 14,021 6.61% $ 22,618 $ 22,635 6.53%
======== ==== ========= ==== ========= ==== ======== ==== ======== ======== ====
</TABLE>
G-62
<PAGE>
Savings Activities and Other Sources of Funds
General. Deposits are the major source of York Federal's funds for lending
and other investment purposes. In addition to deposits, York Federal obtains
funds from operations, loan repayments including monthly amortization and
prepayments, proceeds from sales of loans, loan participations, securities held
for trading, securities available for sale, advances from the FHLB of Pittsburgh
and other short-term borrowings. Fund inflows and outflows are significantly
influenced by general interest rates and money market conditions. Borrowings may
be used on a short-term basis to compensate for reductions in the availability
of other sources of funds. They also may be used on a longer term basis for
general business purposes. York Federal has borrowed primarily from the FHLB of
Pittsburgh.
Deposits. York Federal offers a number of deposit accounts, including
passbook and statement savings accounts, NOW accounts, money market type
accounts and certificate accounts, including Jumbo certificate accounts, ranging
in maturity from seven days to ten years. Deposit accounts vary as to terms,
with the principal differences being the minimum balance required, the time
period the funds must remain on deposit and the interest rate. Deposit accounts
are primarily held by customers within York Federal's primary market area. At
June 30, 1999 there were no broker-originated deposits. See Note 10 of the
Notes to Consolidated Financial Statements.
Changes in the composition of the Association's deposit portfolio were due
to customers reaction to the current rate environment in fiscal 1999. The
Association priced money market deposit accounts and certain certificate
accounts in order to maintain existing customers, extend maturities and attract
new customers searching for investment alternatives as other deposits matured.
This resulted in a shift in interest-bearing liabilities from low cost
transaction accounts to higher cost money market and certificate accounts.
The following table indicates the amount of York Federal's certificates of
deposit of $100,000 or more by terms remaining to maturity as of June 30, 1999.
Certificates
Maturity Period of Deposit
--------------- ----------
(In thousands)
Three months or less.................. $27,065
Three through six months.............. 19,038
Six through twelve months............. 15,310
Over twelve months.................... 29,586
-------
Total................................ $90,999
=======
Borrowings. As discussed within the Corporation's investment activities
section above, leverage activities were initiated during fiscal 1999, which is
the primary reason for the increase in short-term borrowings.
For further discussion of changes in short-term borrowings as noted in the
following table, see pages 11 through 15 of the Corporation's Annual Report,
which is incorporated herein by reference. For additional information about the
Corporation's borrowing activities, see Note 11 of the Notes to Consolidated
Financial Statements.
G-63
<PAGE>
The following is a summary of aggregate short-term borrowings for the years
ended June 30, 1999, 1998 and 1997, respectively:
Year Ended June 30,
-----------------------------
1999 1998 1997
-------- -------- ---------
(In thousands)
Amount outstanding at end of year............ $87,288 $ 1,252 $ 20,000
Average interest rate at end of year......... 5.14% 4.44% 5.87%
Maximum amount outstanding at any month-end.. $87,288 $29,000 $120,500
Average amount outstanding................... $ 9,771 $12,479 $ 86,523
Weighted average interest rate for the year.. 4.60% 5.70% 5.41%
Yields Earned and Rates Paid
See pages 13 through 15 of the Corporation's Annual Report incorporated by
reference herein.
Subsidiaries of York Federal
York Financial Investment Corp. York Financial Investment Corp. ("YFIC") is
an operating subsidiary of York Federal and is incorporated in the State of
Delaware for the purpose of engaging in investment management services including
the maintenance and management of investments and collection and distribution of
the income from such investments. Originally incorporated in 1997 as a wholly
owned subsidiary of New Service Corp., effective October 1, 1997, New Service
Corp. dividended its interest in YFIC to York Financial which in turn
contributed its interest in YFIC to York Federal. York Federal made capital
contributions to YFIC at various times during the year in the form of securities
held to maturity and securities available for sale. During fiscal 1999, YFIC
received contributed capital of $274.0 million, net income of $6.9 million and
unrealized losses on securities available for sale of $3.3 million net of
applicable income taxes resulting in YFIC's stockholders' equity of $345.9
million at June 30, 1999.
Subsidiaries and Joint Ventures of the Corporation
The directors of subsidiaries consist exclusively of persons who serve as
either officers or directors of the Corporation or York Federal.
Y-F Service Corp. ("Y-F Service/YFSC"). Y-F Service owns office facilities
which it leases to York Federal and affiliates and is engaged in land
acquisition, development and construction of future branch locations. During
fiscal 1999, YFSC completed development of two new branch locations and at June
30, 1999 had two branch development projects in progress with projected openings
by the end of 1999 and Spring 2000. During fiscal 1996, Y-F Service
substantially completed the construction of an office building in the City of
York consisting of approximately 45,000 square feet of retail office space. This
building is primarily occupied by the Association's administrative support staff
but also includes lease of certain space to an unrelated third party. This
construction project included the restoration of a historically significant
facade partially funded by state grant monies and is representative of the
Corporation's ongoing investment in its community. Y-F Service's net income was
$313,000 for the year ended June 30, 1999. Stockholders' equity was $3.4 million
at June 30, 1999.
First Capital Brokerage Services, Inc. ("First Capital"). First Capital is a
wholly owned discount securities brokerage subsidiary that provides services to
customers of York Federal and the general public. Operations commenced October
1987. First Capital's net worth at June 30, 1999 was $194,000 net of capital
distributions to York Financial during fiscal 1999 totaling $29,000 and its net
income for the year ended June 30, 1999 was $60,000.
G-64
<PAGE>
First Capital Insurance Services Inc. (Formerly YF Insurance Agency).
Incorporated in 1992, First Capital Insurance Services Inc. is a wholly-owned
subsidiary of the Corporation and is available to provide credit life and health
insurance products to certain of the insured institution's consumer loan
customers, employee group benefit plans, as well as a wide variety of life
insurance products to the retail market. First Capital Insurance Services Inc.'s
net income was $13,000 for the year ended June 30, 1999. Stockholders equity was
$11,000 at June 30, 1999.
New Service Corp. ("New Service"). New Service Corp. primarily engages in
land acquisition, development and construction projects for management or
resale. New Service, is engaged in a joint venture involving the acquisition and
development of residential real estate lots. The total number of developed lots
was 122 with 18 remaining to be sold. At June 30, 1999, New Service Corp.'s
investment of $333,000 represents a 50% equity interest in the venture with
total assets of $713,000. See Note 9 of the Notes to Consolidated Financial
Statements. In addition, New Service has investments in real estate, primarily
office buildings. Losses were realized from operations due to the level of
vacancies experienced in properties held for investment. New Service's net loss
for the year ended June 30, 1999 was $139,000. At June 30, 1999 stockholders'
equity was $665,000.
Lenders Support Group ("LSG"). LSG performs residential construction and
home inspection and residential appraisal services for York Federal and the
general public. During fiscal 1999, and as part of the company's ongoing
business planning process, it was determined to reassign the construction
inspection and appraisal activities within the consolidated group to York
Federal's mortgage banking group. LSG's operations were discontinued as of
September 30, 1998 and was inactive for the remainder of the year. Operations
during fiscal 1999 resulted in net income of $47,000. LSG's net worth was $1,000
at June 30, 1999.
Meridian Venture Partners ("MVP"). MVP is an equity oriented venture capital
partnership organized under the laws of Pennsylvania in February 1987, and
licensed as a small business investment company. The purpose of MVP is to make
equity investments, primarily in established companies (as opposed to start-up
companies). The Corporation originally invested $4.0 million in MVP. During
fiscal 1999, York Financial purchased the partnership interest of a limited
partner resulting in a net limited partner capital position of 25.6% (net of SBA
preferred limited partner interest discussed below). The net amount of the
investment at June 30, 1999 including the Corporation's share of reported gains
(losses) recognized using the equity method of accounting and partnership
distributions is $3.8 million.
York Financial's share of MVP income from operations for the year ended June
30, 1999 including market value adjustments of portfolio investments is $1.4
million. Such amount compares to income of $1.5 million for the year ended June
30, 1998. As of June 30, 1999, MVP had total assets of $32.6 million. As of
September 30, 1994, the Small Business Administration ("SBA") was admitted as a
Preferred Limited Partner to MVP. This admission enables MVP to draw down
additional capital from the SBA in the form of Participating Securities. These
securities share in distributions from MVP. As of June 30, 1999, MVP had $14.9
million of Participating Securities outstanding.
G-65
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31 June 30
2000 1999
---------- ----------
ASSETS (Unaudited)
(In thousands)
Cash and due from banks:
Noninterest-earning $ 24,433 $ 22,813
Interest-earning 10,829 8,958
---------- ----------
35,262 31,771
Loans held for sale, net 1,461 30,631
Securities available for sale 351,509 295,691
Securities held to maturity (fair value at
March 31, 2000 - $22,231
and June 30, 1999 - $22,635) 22,665 22,618
Loans receivable, net 1,127,976 909,193
Real estate, net 5,795 8,633
Premises and equipment, net 21,464 20,842
Federal Home Loan Bank stock, at cost 21,290 7,976
Accrued interest receivable 11,218 8,581
Other assets 21,855 20,952
Investments in joint ventures 9,795 7,738
---------- ----------
Total Assets $1,630,290 $1,364,626
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $1,153,293 $1,115,253
Federal Home Loan Bank loans and
other borrowings 348,005 113,962
Advances from borrowers for taxes
and insurance 4,021 4,281
Other liabilities 15,033 20,720
---------- ----------
Total Liabilities 1,520,352 1,254,216
Stockholders' Equity:
Preferred Stock: 10,000,000
shares authorized and unissued - -
Common Stock, $1.00 par value:
Authorized 20,000,000 shares; issued
March 31, 2000 - 10,107,267 shares;
June 30, 1999 - 9,565,467 shares 10,107 9,565
Additional capital 97,105 90,417
Retained earnings 11,389 15,028
Accumulated other comprehensive income (8,133) (3,938)
Unearned ESOP shares (530) (662)
---------- ----------
Total Stockholders' Equity 109,938 110,410
---------- ----------
Total Liabilities and Stockholders' Equity $1,630,290 $1,364,626
========== ==========
See notes to consolidated financial statements
G-66
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31
2000 1999 2000 1999
---------- --------- ----------- ------------
(Dollars in thousands, except per share data, unaudited)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 21,732 $ 17,139 $ 61,008 $ 52,468
Interest on securities held for trading 5 157 78 475
Interest and dividends on securities available for sale 6,039 1,655 16,564 4,753
Interest and dividends on securities held to maturity 771 397 2,044 835
Other interest income 109 1,801 305 5,819
------------ ----------- ----------- ------------
Total interest income 28,656 21,149 79,999 64,350
Interest expense:
Interest on deposits 13,272 12,224 38,306 37,789
Interest on borrowings 5,872 369 13,271 1,087
------------ ----------- ----------- ------------
Total interest expense 19,144 12,593 51,577 38,876
------------ ----------- ----------- ------------
Net interest income 9,512 8,556 28,422 25,474
Provision for loan losses 400 915 1,550 2,772
------------ ----------- ----------- ------------
Net interest income after provision for loan losses 9,112 7,641 26,872 22,702
Other income:
Mortgage banking 230 654 1,051 2,015
Gain on sale of securities available for sale 20 - 125 794
Gain on sales of real estate 10 56 104 191
Fees and service charges 1,115 807 3,305 2,632
(Loss) income from joint ventures and partnerships (184) (48) (1,043) 483
Other operating income 640 480 1,563 1,077
------------ ----------- ----------- ------------
Total other income 1,831 1,949 5,105 7,192
Other expenses:
Salaries and employee benefits 4,235 3,565 11,631 10,290
Occupancy 1,024 952 2,946 2,767
Federal deposit insurance 59 165 389 484
Real estate 281 274 619 672
Data processing 455 311 1,234 921
Advertising 387 195 1,245 770
Other 1,883 1,423 5,211 4,691
------------ ----------- ----------- ------------
Total other expenses 8,324 6,885 23,275 20,595
------------ ----------- ----------- ------------
Income before income taxes 2,619 2,705 8,702 9,299
Provision for income taxes 293 782 1,754 3,201
------------ ----------- ----------- ------------
Net income $ 2,326 $ 1,923 $ 6,948 $ 6,098
============ =========== =========== ============
Per share data:
Net income $ 0.23 $ 0.19 $ 0.70 $ 0.61
============ =========== =========== ============
Net income - assuming dilution $ 0.23 $ 0.18 $ 0.68 $ 0.58
============ =========== =========== ============
Cash dividends paid $ 0.13 $ 0.12 $ 0.38 $ 0.36
============ =========== =========== ============
Weighted average shares 10,007,061 10,169,307 9,982,897 10,047,202
============ =========== =========== ============
Weighted average shares - assuming dilution 10,161,308 10,458,958 10,197,648 10,451,464
============ =========== =========== ============
</TABLE>
See notes to consolidated financial statements
G-67
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
March 31
2000 1999
----------- -----------
(In thousands, unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,948 $ 6,098
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization and accretion on securities, net (162) (37)
Provision for loan losses 1,550 2,772
Provision for real estate losses 250 200
Depreciation and amortization 1,706 1,516
Loans originated for sale (2,792) (142,013)
Proceeds from sales of trading securities 30,563 132,802
Realized gains on trading securities (399) (1,713)
Realized gains on sales of securities available for sale (125) (794)
Decrease in other assets (2,313) (9,097)
Decrease in other liabilities (3,305) (1,509)
Other increase (decrease) 909 (967)
---------- ---------
Net cash provided by (used in) operating activities 32,830 (12,742)
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 82,743 61,582
Purchases of securities available for sale (72,765) (88,415)
Purchases of securities held to maturity - (14,371)
Proceeds from maturities of securities held to maturity - 2,000
Purchases of FHLB stock (13,313) -
Principal repayments on securities 10,791 17,019
Net increase in short-term investments - 77
Loans originated or acquired, net of change in
deferred loan fees (542,945) (209,169)
Principal collected on loans 237,876 214,588
Proceeds from sales of loans 717 -
Purchases of real estate (236) (330)
Proceeds from sales of real estate 4,081 4,741
Purchases of premises, equipment, and tenant improvements, net (1,983) (2,855)
Other (2,959) 1,658
---------- ---------
Net cash used in investing activities (297,993) (13,475)
FINANCING ACTIVITIES
Net increase in noninterest-bearing demand deposits, interest-
bearing transaction accounts and savings accounts 2,775 64,153
Net increase (decrease) in certificates of deposit 35,264 (5,526)
Net increase (decrease) in FHLB loans and other borrowings 234,043 (42)
Issuance of common stock:
Dividend reinvestment plan 1,671 1,716
Stock option plans 238 1,454
Cash dividends paid (3,788) (3,643)
Cash paid in lieu of fractional shares (16) (18)
Stock repurchased (1,666) (1,001)
Release of ESOP shares 133 133
---------- ---------
Net cash provided by financing activities 268,654 57,226
---------- ---------
Increase in cash and cash equivalents 3,491 31,009
Cash and cash equivalents at beginning of period 31,771 144,547
---------- ---------
Cash and cash equivalents at end of period $ 35,262 $ 175,556
========== =========
</TABLE>
See notes to consolidated financial statements
G-68
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2000
Note A -- Basis Of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. Such preparation requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Although the interim amounts are unaudited, they do reflect all adjustments
(consisting of normal recurring accruals) that, in the opinion of management,
are considered necessary for a fair presentation of the results of operations
for the interim periods. Operating results for the nine month period ended March
31, 2000 are not necessarily indicative of the results that may be expected for
the year ended June 30, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Corporation's annual
report on Form 10-K for the year ended June 30, 1999.
Cash Flow Information: For purposes of the statements of cash flows, cash
equivalents include cash and amounts due from banks. During the nine months
ended March 31, 2000 and 1999, the Association exchanged loans for mortgage-
backed securities in the amounts of $114.2 million and $198.2 million,
respectively. During the nine months ended March 31, 2000 and 1999, the
Association transferred unpaid loan balances from loans to real estate acquired
due to foreclosures of $2.4 million and $4.0 million, respectively. During the
nine months ended March 31, 2000 and 1999, there was a noncash capital
distribution from an investment in joint venture of $0 and $2,205,000,
respectively.
Reclassifications: Certain reclassifications have been made to the fiscal
1999 consolidated financial statements to conform with the fiscal 2000
presentation.
Note B - Definitive Agreement and Plan of Reorganization
On March 28, 2000, York Financial Corp. and Harris Financial, Inc. jointly
announced that they would enter into a definitive agreement and plan of
reorganization pursuant to which York Financial Corp. and Harris Financial, Inc.
would merge.
G-69
<PAGE>
Note B - Definitive Agreement and Plan of Reorganization -continued
To accomplish the merger, the Board of Trustees of Harris Financial, MHC,
has adopted a plan of conversion pursuant to which it will convert from a mutual
to a capital stock form of organization. Approximately 76% of Harris Financial's
outstanding shares of common stock are owned by its mutual holding company,
Harris Financial, MHC. The plan provides that Harris Financial will conduct an
offering of common stock to certain Harris Savings Bank depositors.
The number and price of shares to be issued in the conversion offering will
be based on an independent appraisal. Under the terms of the agreement, the
merger consideration will be based, in part, on the independent appraisal. The
primary pricing provisions of the agreement include that if the independent
appraisal of the common stock issued in the conversion is between $289.5 million
and $341.5 million, each York Financial share will be exchanged for $17.25 of
Harris Financial common stock based on the price at which Harris Financial's
shares are sold in the conversion offering.
The merger is contemplated to be accounted for under the "pooling of
interests" method for business combinations. However, the agreement provides
that the parties may mutually elect to employ the "purchase" method of
accounting for the merger. In a "purchase", between 15% and 30% of the merger
consideration may be paid in cash. The merger is intended to be a tax-free
exchange for York Financial stockholders, except to the extent that cash is
received as consideration.
Harris Savings Bank is a community bank that operates 37 branches in five
counties of south-central Pennsylvania and Washington County, Maryland. As of
December 31, 1999, Harris Financial had assets of $2.7 billion, deposits of $1.4
billion and equity of $169.3 million. York Federal Savings and Loan Association
is a community savings association that operates 25 full-service offices in four
counties in south central Pennsylvania and Harford County, Maryland. As of March
31, 2000, York Financial had assets of $1.6 billion, deposits of $1.2 billion
and equity of $109.9 million.
As a result of the conversion and merger, York Federal Savings and Loan
will be merged with Harris Savings Bank. The resulting company will be wholly
owned by Harris Financial. Currently, Harris Savings is ranked fourth and York
Federal is ranked sixth in deposit market share, in the five county south
central region of Pennsylvania including Dauphin, York, Cumberland, Lancaster
and Lebanon. With 13.3% of deposits after the combination, Harris will rank
second in market share in the five county south central region. It will also
have six branches holding $164 million in deposits in two Maryland counties. Pro
forma for the merger and the expected second-step conversion indicate Harris
Financial will have assets of approximately $4.5 billion, deposits of $2.5
billion and equity of $480.0 million.
The merger is subject to the approval of York Financial's stockholders and
the conversion is subject to the approval of Harris Savings' depositors and
Harris Financial's minority stockholders. The transactions are also subject to
the approval of federal and state bank regulatory authorities, as well as
customary conditions. The conversion and merger are expected to be completed in
the fourth quarter of 2000. The agreement provides for breakup fees and grants
Harris Financial an option to acquire 19.9% of York Financial's common stock if
the agreement is terminated under certain circumstances.
G-70
<PAGE>
Note C -- Per Share Data
On October 20, 1999, the Corporation declared a 5% stock dividend, to
shareholders of record on November 5, 1999, to be distributed November 15, 1999.
Net income per share is computed based on the weighted average number of common
shares outstanding and dilutive common stock equivalents, adjusted for stock
splits/dividends. Cash dividends paid per share are based on the number of
common shares outstanding at each record date, adjusted for stock
splits/dividends.
The Corporation computes earnings per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". Earnings
per common share ("basic") is computed using net income applicable to common
stock and weighted average common shares outstanding during the period. Earnings
per common share - assuming dilution ("diluted") is computed using net income
applicable to common stock and weighted average common shares outstanding during
the period after consideration of the potential dilutive effect of common stock
equivalents based on the treasury stock method using an average market price for
the period. The Corporation's common stock equivalents are solely related to
stock options.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31
2000 1999 2000 1999
------- ------ ------ ------
(Dollars in thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Numerator:
Net Income $ 2,326 $ 1,923 $ 6,948 $ 6,098
----------- ----------- ----------- -----------
Numerator for basic and diluted earnings per share $ 2,326 $ 1,923 $ 6,948 $ 6,098
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per share-
weighted-average shares 10,007,061 10,169,307 9,982,897 10,047,202
Effect of dilutive securities:
Employee Stock Options 154,247 289,651 214,751 404,262
----------- ----------- ----------- -----------
Denominator for diluted earnings per share-
adjusted weighted-average shares and assumed
conversion 10,161,308 10,458,958 10,197,648 10,451,464
=========== =========== =========== ===========
Basic earnings per share $ 0.23 $ 0.19 $ 0.70 $ 0.61
=========== =========== =========== ===========
Diluted earning per share $ 0.23 $ 0.18 $ 0.68 $ 0.58
=========== =========== =========== ===========
</TABLE>
G-71
<PAGE>
Note D - Federal Home Loan Bank (FHLB) Loans and other borrowings
Borrowings consist of the following:
March 31 June 30
2000 1999
---------------------------
(In thousands)
FHLB loans payable to FHLB Pittsburgh,
secured by all FHLB stock and certain
first mortgage loans:
Short-term loans:
Due August 27, 1999, 5.12% $ - $ 70,000
Due July 1, 1999, 5.57% - 14,400
Due April 1, 2000, 6.61% 227,800 -
---------------------------
227,800 84,400
Convertible select loans:
Due 2002, conversion option date 1999,
5.46% - 25,000
Due 2004, conversion option date 2001,
5.75% 25,000 -
Due 2006, conversion option date 2000,
5.32% 25,000 -
Due 2008, conversion option date 2003
($25,000,000 face amount bearing 4.69%
stated rate less unamortized discount
based on imputed interest rate of
6.50%; March 31, 2000, $1,439) 23,561 -
Due 2009, conversion option date 2002,
5.75% 25,000 -
---------------------------
Other loans:
Due 2008, 2.00% 275 285
Due 2024, 4.25% 713 727
---------------------------
327,349 110,412
---------------------------
Other borrowings:
Due 2000, libor plus 2.00% 15,000 -
Due 2004, 0.90% 29 -
Advance to ESOP
Due 2004, prime plus .75% 530 662
Repurchase agreements:
Due July 1, 1999, 3.60% - 2,888
Due April 1, 2000, 5.15% 5,097 -
---------------------------
$ 348,005 $ 113,962
===========================
As of March 31, maturities of FHLB loans and other borrowings are as
follows: 2001-$272,690,000; 2002-$24,769,000; 2003-$24,742,000; 2004-
$24,938,000; 2005-$39,000; thereafter-$827,000. The FHLB has the option of
converting the fixed rate convertible select loans to a LIBOR adjustable rate
loan quarterly after the conversion date. Upon conversion, management has the
right to exercise a return option to the FHLB with no prepayment penalty.
Accordingly, amounts are included in maturities based on the next conversion
date.
The FHLB of Pittsburgh has an established credit policy, which permits the
Association to borrow amounts up to twenty times the amount of the Association's
holding of FHLB stock at
G-72
<PAGE>
Note D - Federal Home Loan Bank (FHLB) Loans and other borrowings - continued
negotiated interest rates. The Association may increase its borrowing over
amounts currently available by purchasing additional FHLB stock.
During 1994, the Corporation on behalf of the Employee Stock Ownership Plan
arranged for a loan in the amount of $1,325,000 payable in equal annual
installments of $132,500 plus interest at prime plus .75% for a period of 10
years. The final maturity will be March 31, 2004. The proceeds were used to
acquire shares of the Corporation's stock for the benefit of the corporate
sponsored employee stock ownership plan.
During the second quarter of fiscal 2000, the Corporation obtained a demand
line of credit with a commercial bank in the amount of $15.0 million at LIBOR
plus 2.00%, with a review of the commitment on a semi-annual basis.
Note E -- Comprehensive Income
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements that are displayed with
the same prominence as other financial statements, and also provides for
footnote disclosure of total comprehensive income in interim financial
statements. Total comprehensive income for the three months ended March 31, 2000
and 1999 was $1.3 and $1.4 million, respectively. Year to date total
comprehensive income was $2.8 million for 2000 compared to $4.9 million for
1999. Comprehensive income was lower for the nine months ended March 31, 2000 as
compared to the same period in 1999 due to increased unrealized holding losses
on securities available for sale.
Note F - Income Taxes
Income tax expense for the Corporation is different than the amounts
computed by applying the statutory federal income tax rate to income before
income taxes because of the following:
Percentage of Income
Before Income Taxes
------------------------------
Nine Months Fiscal Year
Ended Ended
March 31 June 30
2000 1999
------------------------------
Income tax expense at
federal statutory rate 35.0 % 35.0 %
Tax-exempt income (0.6) (0.3)
State income taxes, net
of federal benefit (1.6) 1.0
Federal tax credits (12.0) (1.3)
Other (0.7) (0.2)
-------------------------------
Effective tax rate 20.1 % 34.2 %
===============================
G-73
<PAGE>
Note G -- Recently Issued Accounting Guidance
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. The effective date of the Statement was
deferred in June 1999 under SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133". This Statement is effective for financial statements issued for all
quarters of all fiscal years beginning after June 15, 2000. The adoption of SFAS
No. 137 is not expected to have a material impact on the Corporation's
consolidated financial statements.
G-74
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
YORK FINANCIAL CORP.
Financial Review
The purpose of this discussion is to provide additional information about
York Financial Corp. ("York Financial" or "Corporation"), its financial
condition and results of operations. Readers of this report should refer to the
consolidated financial statements and other financial data presented throughout
this report to fully understand the following discussion and analysis.
York Financial is a unitary savings and loan holding company incorporated
in Pennsylvania in September 1985 and in August 1986 became the sole stockholder
of York Federal Savings and Loan Association ("York Federal" or "Association"),
a federally chartered stock savings and loan association. Presently, the primary
business of York Financial is the business of York Federal. At March 31, 2000,
the Corporation had consolidated assets of $1.6 billion, total deposits of $1.2
billion and stockholders' equity of $109.9 million. The Association is a member
of the Federal Home Loan Bank ("FHLB") of Pittsburgh and is subject to
supervision, examination and regulation by the Office of Thrift Supervision
("OTS") and the Federal Deposit Insurance Corporation ("FDIC"). The Association
is primarily engaged in the business of attracting deposits and investing these
deposits into loans secured by residential and commercial real property,
commercial business loans, consumer loans and investment securities. York
Federal conducts its business through twenty-five offices located in south
central Pennsylvania and Maryland. In addition, York Federal maintains a
commissioned mortgage origination staff as well as mortgage correspondent
relationships which originate residential mortgage loans for the Association
primarily in Pennsylvania, Maryland and Virginia, although loans are originated
in 11 states within the Mid- Atlantic region. The Association's deposits are
insured up to applicable limits by the Savings Association Insurance Fund
("SAIF") of the FDIC.
The Corporation's net income is highly dependent on the interest rate
spread between the average rate earned on loans and securities and the average
rate paid on deposits and borrowings as well as the amount of the respective
assets and liabilities outstanding. Other operating income is an important
supplement to York Federal's interest income and includes mortgage banking
activities with gains on sales of mortgage-backed securities and related value
attributed to mortgage servicing rights created from loan originations and
service fee income derived from the portfolio of loans serviced for others.
Other operating income also includes gains and losses on sales of securities
available for sale, gains and losses on sales of real estate, equity in earnings
(losses) of limited partnership interests, and fees and service charges assessed
on loan and deposit transactions.
Interest Rate Sensitivity Management
Market risk is the risk of loss from adverse changes in market prices and
rates. The Corporation's market risk arises principally from interest rate risk
within York Federal. In an effort to maintain control over such risks,
management of York Federal focuses its attention on managing the interest rate
sensitivity of assets and liabilities and controlling the volume of lending,
securities, deposit and borrowing activities. By managing the ratio of interest
sensitive assets to interest sensitive liabilities repricing in the same
periods, the Association seeks to
G-75
<PAGE>
control the adverse effect of interest rate fluctuations. The Corporation's
assets and liabilities are not directly exposed to foreign currency or commodity
price risk. At March 31, 2000 and June 30, 1999, the Corporation had no off-
balance sheet derivative financial instruments.
Management utilizes an Asset/Liability Committee (ALCO), which meets at
least once a month, to review the Association's interest sensitivity position on
an ongoing basis and prepare strategies regarding the acquisition and allocation
of funds to maximize earnings and maintain the interest rate sensitivity
position at acceptable levels. The Association originates for portfolio
principally short and intermediate term and adjustable rate loans and sells most
fixed rate loan originations. Additionally, investment securities categorized as
available for sale have been acquired for portfolio. The funding sources for
these portfolio loans and securities are deposits and borrowings with various
maturities. In addition to normal portfolio management activities, strategies
are evaluated on an ongoing basis, and implemented as necessary to manage
interest rate risk levels, including asset sales, equity infusions to York
Federal and extension of maturities of borrowings. As part of our risk
management, we utilized all of these strategies with the sale of intermediate
term loans totaling $82.6 million, equity infusions to York Federal from cash
available at York Financial and proceeds from a commercial bank borrowing
totaling $18 million and through extensions of maturities on certain borrowings,
refer to Note D of the Consolidated Financial Statements.
The ALCO monitors the Association's interest rate risk position utilizing
simulation analysis. Net interest income fluctuations and the net portfolio
value ratio are determined in various interest rate scenarios and monitored
against acceptable limitations established by management and approved by the
Board of Directors. Such rate scenarios include immediate rate shocks adjusting
rates in +/- 100 basis point (bp) increments resulting in projected changes to
net interest income over the next 12 months and projected net portfolio value
ratios as indicated in the following table.
G-76
<PAGE>
An analysis of hypothetical changes in interest rates as of March 31, 2000
compared to June 30, 1999 is as follows:
March 31, 2000 June 30, 1999
---------------------------- --------------------------------
Basis point Percentage Percentage
Change in change in change in
interest Net interest Net portfolio Net Interest Net portfolio
rates income (1) value ratio (2) income (1) value ratio (2)
------------ ---------------------------- --------------------------------
300 (29.00%) 4.46% (14.00%) 4.70%
200 (18.00%) 5.70% (9.00%) 5.75%
100 (9.00%) 6.89% (4.00%) 6.69%
0 0.00% 7.98% 0.00% 7.49%
(100) 5.00% 8.96% 4.00% 8.15%
(200) 8.00% 8.94% 6.00% 8.41%
(1) The percentage change in this column represents an
increase (decrease) in net interest income for 12
months in a stable interest rate environment versus net
interest income for 12 months in the various rate
scenarios.
(2) The net portfolio value ratio in this column represents
net portfolio value of the Association in various rate
scenarios, divided by the present value of expected net
cash flows from existing assets in those same
scenarios. Net portfolio value is defined as the
present value of expected net cash flows from existing
assets, minus the present value of expected net cash
flows from existing liabilities, plus or minus the
present value of expected net cash flows from existing
off-balance-sheet contracts.
Simulation results are influenced by a number of estimates and assumptions
with regard to embedded options, prepayment behaviors, pricing strategies and
cashflows. The risk profile of the Association has increased as indicated in the
preceding table. The increase in net interest income variability in various rate
shock scenarios is due to the continuation of portfolio lending and investment
leverage strategies which were funded with convertible borrowings and overnight
borrowings resulting in inherently more interest rate risk than previous
periods, combined with an increase in market interest rates. Net portfolio value
had less variability due to strategies evaluated and implemented to manage risks
over the long term. Assumptions and estimates used in simulation analysis are
inherently subjective and, as a consequence, results will neither precisely
estimate net interest income or net portfolio value nor precisely measure the
impact of higher or lower interest rates on net interest income or net portfolio
value ratio. The results of these simulations are reported to the Association's
Board of Directors on a quarterly basis. Management has determined that the
level of interest rate risk is within established limits at March 31, 2000.
Asset Quality
Management is aware of the risks inherent in lending and continually
monitors risk characteristics of the loan portfolio. The Association's Business
Banking Group offers financial products and services to small and mid-sized
businesses in the Association's branch market area.
G-77
<PAGE>
The nature of these products and services and the financial characteristics of
the target client group may have the effect of increasing the Association's
credit risk exposure. The Association has employed management expertise and has
adopted credit management policies to control the credit risk exposure inherent
in this activity.
The Association's policy is to maintain the allowance for loan losses at a
level believed adequate by management to absorb losses in the existing loan
portfolio. The allowance for loan loss is an estimate. These estimates are
reviewed periodically and, any adjustments necessary, are recognized in
operations in the period adjustments become known. Management's determination of
the adequacy of the allowance is performed by an internal loan review committee
and is based on known and inherent risk characteristics in the portfolio, past
loss experience, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral, current economic
conditions, and such other relevant factors which in management's judgment
deserve recognition. The allowance for loan losses related to impaired loans was
determined in accordance with SFAS No. 114, as amended by SFAS No. 118. Actual
losses or recoveries are charged or credited directly to the allowance.
G-78
<PAGE>
An analysis of the allowance for loan losses, for the periods indicated is as
follows:
<TABLE>
<CAPTION>
Nine Months Fiscal Year
Ended Ended
March 31 June 30
2000 1999
-------------- --------------
(Dollars in thousands)
<S> <C> <C>
Total allowance for loan losses at beginning of period $ 10,803 $ 8,810
Loans charged-off:
Real estate - mortgage:
Residential 853 1,581
Commercial - 16
Consumer 400 397
-------------- --------------
Total charged-offs 1,253 1,994
Recoveries:
Real estate - mortgage:
Residential 129 325
Commercial 6 24
Consumer 16 6
-------------- --------------
Total recoveries 151 355
-------------- --------------
Net loans charged-off 1,102 1,639
Provision for loan losses 1,550 3,632
-------------- --------------
Total allowance for loan losses at end of period $ 11,251 $ 10,803
============== ==============
Percentage of net charge-offs to average loans outstanding
during the period 0.10% 0.18%
============== ==============
Percentage of allowance for loan losses to adjusted total loans 0.99% 1.17%
============== ==============
</TABLE>
The allowance for loan losses totaled $11.3 million or 0.99% of adjusted
total loans of $1.1 billion at March 31, 2000 compared to $10.8 million or 1.17%
of adjusted total loans of $920.0 million at June 30, 1999. Management believes
the allowance for loan loss is adequate relative to its assessment of existing
risk characteristics within the loan portfolio. While management uses available
information to recognize losses on loans, future additions to the allowance may
be necessary based on specific circumstances related to future problem loans,
increased risk due to a change in mix within the portfolio as well as changes in
economic conditions.
G-79
<PAGE>
An analysis of nonperforming assets is summarized as follows:
March 31 June 30
2000 1999
-------------- --------------
(Dollars in thousands)
Loans accounted for on a nonaccrual
basis:
Real Estate-mortgage:
Residential $ 502 $ 870
Consumer - 49
-------------- --------------
Total nonaccrual loans 502 919
Accruing loans which are
contractually past due 90 days
or more:
Real estate-mortgage:
Residential 6,615 8,311
Consumer 834 823
-------------- --------------
Total of 90 days past due loans 7,449 9,134
-------------- --------------
Total of nonaccrual and 90 days past
due loans $ 7,951 $ 10,053
============== ==============
As a percent of total loans 0.70% 1.07%
============== ==============
Real estate owned:
Real estate acquired through
foreclosure or repossession by
loan type:
Real estate:
Residential $ 2,689 $ 4,571
Commercial 401 1,055
Land 1,064 1,319
Allowance for real estate losses (55) (45)
-------------- --------------
Total real estate owned $ 4,099 $ 6,900
============== ==============
As a percent of total assets 0.25% 0.51%
============== ==============
Total nonperforming assets $ 12,050 $ 16,953
============== ==============
As a percent of total assets 0.74% 1.24%
============== ==============
The Association's nonaccrual policy generally covers loans, which are 90 or
more days past due, dependent upon type of loan and related collateral. All
commercial loans are placed on nonaccrual status when the collectibility of
interest is uncertain based on specific circumstances evaluated on a loan by
loan basis or when interest is more than 90 days past due. In the case of
residential real estate and consumer loans, the Association implemented the
Uniform Retail Credit Classification Policy effective June 30, 1999 and follows
this policy for placing loans on nonaccrual status.
G-80
<PAGE>
Management recognizes the risk of potential reduction in value of real
estate owned during the holding period and provides for such risk by maintaining
an allowance for real estate losses (such allowance is separate from and in
addition to the allowance for loan losses). For the nine months ended March 31,
2000, net charge-offs were $240,000 and additions to the allowance totaled
$250,000 resulting in an increase in the allowance to $55,000 at March 31, 2000.
Management continually monitors the risk profile of real estate owned and
maintains an allowance for real estate losses at a level believed adequate to
absorb potential losses within the real estate portfolio.
Liquidity
The primary purpose of asset/liability management is to maintain adequate
liquidity and a desired balance between interest- sensitive assets and
liabilities. Liquidity management focuses on the ability to meet the cash flow
requirements of customers wanting to withdraw or borrow funds for their personal
or business needs. Interest rate sensitivity management focuses on consistent
growth of net interest income in times of fluctuating interest rates. The
management of liquidity and interest rate sensitivity must be coordinated since
decisions involving one may influence the other.
Liquidity needs can be met by either reducing assets or increasing
liabilities. Sources of asset liquidity include short term investments,
securities available for sale, maturing and repaying loans and monthly cash
flows from mortgage-backed securities. The loan portfolio provides an additional
source of liquidity due to York Federal's participation in the secondary
mortgage market. Liquidity needs can be met by attracting deposits and utilizing
borrowing arrangements with the FHLB of Pittsburgh and the Federal Reserve Bank
of Philadelphia for short and long term loans as well as other short-term
borrowings.
Deposits represent the Association's primary source of funds. The
Association does not rely on brokered deposits as a source of funds. During the
nine months ended March 31, 2000, the Association's deposits increased $38.0
million. To supplement deposit-gathering efforts, York Federal borrows from the
FHLB of Pittsburgh.
At March 31, 2000, York Federal had $327.3 million in FHLB loans
outstanding at a weighted average interest rate of 6.36%, an increase of $216.9
million for the first nine months of fiscal 2000. The Association was required
to purchase additional FHLB stock due to increased borrowings. Other borrowings
also increased for the first nine months of fiscal 2000 to $20.7 million from
$3.6 million for the same period in the prior year. For additional details of
FHLB loans and other borrowings, refer to Note D of the Notes to Consolidated
Financial Statements.
Amortization and prepayments of loans and proceeds from loan and securities
sales represent a substantial source of funds to York Federal. These sources
amounted to $361.4 million for the first nine months of fiscal 2000. Such amount
includes a loan sale to manage the Association's risk position.
Generally, the principal use of funds is the origination of mortgage and
other loans. In addition, leverage strategies to effectively utilize available
capital were completed early in the first nine months of fiscal 2000. These
strategies resulted in expansion of the investment portfolio through the
purchase of available for sale securities as well as an increase in loan
balances. The carrying value of securities available for sale increased $55.8
million for the first
G-81
<PAGE>
nine months of fiscal 2000 from $295.7 million at June 30, 1999 to $351.5
million at March 31, 2000. Additionally, FHLB stock increased $13.3 million
during the first nine months of fiscal 2000 as a result of our increased
borrowings.
Loan demand resulted in total originations of $548.3 million for the period
ended March 31, 2000. Loan originations were obtained through various channels
including the retail branch system, commissioned mortgage origination staff,
tele-mortgage activity, expanded mortgage correspondent relationships and
Business Banking relationship managers. The volume of originations was favorably
impacted by the Association's pricing strategies and a relatively low-rate
interest rate environment in the earlier portion of the fiscal year. A
significant component of loan origination volume was intermediate term mortgage
products, primarily, 5/1 CMT adjustable rate loans (fixed rate for the first
five years with annual adjustments thereafter). During the nine months ended
March 31, 2000, the loan portfolio increased $218.8 million to $1.1 billion at
March 31, 2000.
Under current regulations, York Federal is required to maintain liquid
assets at 4.0% or more of its net withdrawable deposits plus short-term
borrowings. For the quarter ended March 31, 2000, the Association's liquidity
level was 6.5%.
Capital
The management of capital provides the foundation for future asset and
profitability growth and is a major strategy in the management of York Financial
Corp. Stockholders' equity at March 31, 2000, totaled $109.9 million compared to
$110.4 million at June 30, 1999, a decrease of $0.5 million or 0.4%. This
decrease was primarily a result of the impact of unrealized losses on "available
for sale" securities, retirement of shares related to a stock repurchase program
and cash dividends paid, partially offset by a combination of factors including
current earnings and the issuance of shares in connection with various benefit
and dividend reinvestment plans.
During August 1999, the Board of Directors authorized a second stock
repurchase program for up to 478,000 shares of the Corporation's common stock.
In February 2000, the second stock repurchase program expired. Under each
repurchase plan, share purchases were made from time to time depending on market
and business conditions. During the nine months ending March 31, 2000, 118,293
shares were repurchased and retired under the stock repurchase programs. To
date, the Corporation has repurchased and retired 395,957 shares under its stock
repurchase programs. At March 31, 2000, there were no open authorizations for
additional share repurchases.
OTS regulated thrifts must comply with various capital standards:
Tangible Capital. Generally, common stock plus retained earnings must equal
at least 1.5% of adjusted total assets.
Tier 1 (Core) Capital to total assets. Tangible capital plus qualifying
supervisory goodwill (arising from the purchase of a troubled savings
association) and other qualifying intangible assets must equal at least 3.0% of
adjusted total assets; 5.0% to be deemed well capitalized.
G-82
<PAGE>
Risk-Based Capital. Risk-based capital must equal at least 8.0% of risk-
weighted assets, as defined in the regulations; 10% to be deemed well
capitalized. The tier 1 (core) capital component of risk-based capital, as
defined above, must equal at least 6.0% of risk weighted assets to be deemed
well capitalized.
At March 31, 2000, York Federal's tangible and core capital both equaled
7.4% ($120.5 million), substantially in excess of the minimum regulatory
requirements of 1.5% and 3.0%/5.0%, respectively. York Federal's total assets do
not include any goodwill. York Federal's core capital to risk- weighted assets
equaled 12.5% ($120.5 million) at March 31, 2000, which exceeds the required
level of 6.0%. Finally, York Federal's risk-based capital ratio equaled 13.6%
($130.9 million) at March 31, 2000 which exceeds the required level of 8.0% by
$53.7 million, and exceeds the required level to be deemed well capitalized of
10.0% by $34.4 million.
Transactions with Affiliates
Transactions with affiliates are limited to 10% of capital and surplus per
affiliate with an aggregate limit on all such transactions with affiliates to
20% of capital and surplus. At March 31, 2000 such transactions are within these
regulatory limits.
Results of Operations
Nine months ended March 31, 2000 compared to March 31, 1999
Net Interest Income
York Financial's earnings are affected by the level of York Federal's net
interest income, the difference between the income it receives on its loan
portfolio and other investments, and its cost of funds, consisting primarily of
interest paid on deposits and borrowings. Net interest income is affected by the
average yield on interest-earning assets, the average rate paid on interest-
bearing liabilities, and the ratio of interest-earning assets to interest-
bearing liabilities.
Net interest income for the nine months ended March 31, 2000 was $28.4
million compared to $25.5 million for the same period last year, which
represents an 11.4% increase. The increase in net interest income was primarily
due to an increase in average balances in loan and securities portfolios, which
more than offset the lower earning asset yield and the higher cost of funds
rate. The margin on interest-earning assets decreased to 2.55% from 2.88% for
the nine months ended March 31, 2000 and 1999, respectively.
G-83
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended March 31
2000 1999
---------------------------------------------------------------------------
Average Yield Average Yield
Balance Interest Rate Balance Interest Rate
---------- ---------- ---- ---------- ---------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1)(2)(3) $1,086,738 $ 61,008 7.49% $ 894,211 $ 52,468 7.82%
Securities held for trading 1,482 77 7.08 10,071 475 6.29
Securities available for sale 353,579 16,545 6.22 101,461 4,753 6.25
Securities held to maturity 39,598 2,044 6.83 18,576 835 5.95
Other interest-earning assets 7,357 305 5.43 154,209 5,819 4.96
---------- ---------- ----- ---------- ---------- -----
Total interest-earning assets 1,488,754 79,979 7.16 1,178,528 64,350 7.27
Non interest-earning assets 84,037 72,921
---------- ----------
Total $1,572,791 $1,251,449
========== ==========
Interest-bearing liabilities:
Deposits
NOW accounts $ 109,004 1,368 1.67 $105,022 1,601 2.03
Savings accounts 48,251 907 2.50 59,587 1,120 2.50
Money market accounts 324,319 10,777 4.42 283,763 9,492 4.46
Certificate accounts 612,108 25,254 5.49 615,283 25,576 5.54
Borrowings 318,709 13,271 5.54 28,811 1,087 5.03
---------- ---------- ----- ---------- ---------- -----
Total interest bearing liabilities 1,412,391 51,577 4.86 1,092,466 38,876 4.74
---------- ----- ---------- -----
Noninterest-bearing deposits 25,088 59,870
Noninterest-bearing liabilities 26,562 16,908
---------- ----------
1,464,041 1,169,244
Stockholders' equity 108,750 112,205
---------- ----------
Total $1,572,791 $1,281,449
========== ==========
Ratio of interest-earning assets
to interest-bearing liabilities: 1.05x 1.08x
========== ==========
Net interest income/interest rate
spread $ 28,402 2.30% $ 25,474 2.53%
========== ===== ========== =====
Net interest-earning assets/
margin on interest-earning assets $ 76,363 2.55% $ 86,062 2.88%
========== ===== ========== =====
</TABLE>
(1) Average balances include loans on nonaccrual status.
(2) Average balances include loans held for sale.
(3) Interest includes amortization of loan fees.
During the nine months ended March 31, 2000, York Federal originated $548.3
million of loans including loans refinanced from the Association's loan
portfolio. The result of these originations, when combined with mortgage
securitizations and sales totaling $114.2 million and loan repayment activity,
was a 21.5% increase in average loans outstanding during the first nine months
of fiscal 2000 as compared to the same period in the prior year. The average
balance of securities and other interest earning assets increased $117.7 million
over the same period last year and results from the above mentioned secondary
market activity and the Corporation's leveraging strategy which was supported by
an increase in deposits of $30.0 million and increased borrowings of $289.9
million over the same period in the prior year. The resulting composition shift
of the Association's assets had a positive effect on interest income although
the
G-84
<PAGE>
yield on earning assets decreased 11 basis points to 7.16%. The average rate on
interest-bearing liabilities increased to 4.86% as compared to 4.74% in the same
period last year. The higher rate on interest-bearing liabilities was primarily
a result of the increase in the cost of funds for borrowings. The average rate
paid on borrowings increased to 5.54% as compared to 5.03% in the same period of
last year. The net effect caused the interest rate spread for the current period
to decrease to 2.30% from 2.53% in the same period last year.
The volume/rate analysis shown in the following table presents a
comparative analysis of reported interest income and expense in relation to
changes in specific asset and liability account balances (volume) and
corresponding interest rates (rate). This analysis illustrates the net impact of
previously discussed volume and rate changes on net interest income for the nine
months ended March 31, 2000 compared to the same period ended March 31, 1999.
Nine Months Ended March 31
2000 compared to 1999
Increase (Decrease) Due to:
-------------------------------
Volume Rate Net
------ ---- ---
(In thousands)
Interest income:
Loans $10,808 $(2,268) $ 8,540
Securities held for trading (405) 7 (398)
Securities available for sale 11,674 118 11,792
Securities held to maturity 1,056 153 1,209
Other interest-earning assets (5,540) 26 (5,514)
------- ------- -------
Total 17,593 (1,964) 15,629
Interest expense:
Deposits
NOW accounts 50 (283) (233)
Savings accounts (212) (1) (213)
Money market accounts 1,356 (71) 1,285
Certificate accounts (123) (199) (322)
Borrowings 12,061 123 12,184
------- ------- -------
Total 13,132 (431) 12,701
------- ------- -------
Net interest income $ 4,461 $(1,533) $ 2,928
======= ======= =======
Provision for Loan Losses
Management is aware of the risks inherent in lending and continually
monitors risk characteristics of the loan portfolio. See "Asset Quality".
Other Income
Other income was $5.1 million for the nine months ended March 31, 2000, a
decrease of $2.1 million from the nine months ended March 31, 1999.
G-85
<PAGE>
The following table provides the components of mortgage banking income:
Nine Months Ended
March 31
2000 1999
---- ----
(Dollars in thousands,unaudited)
Gain on sales of loans and trading securities $ 399 $1,713
Unrealized gain on loans and trading securities - 44
Loan servicing fee income, net of amortization 637 257
Gain on sale of mortgage servicing rights 15 1
------ ------
$1,051 $2,015
====== ======
Mortgage banking income for the nine months ended March 31, 2000 decreased
$964,000 to $1,051,000 or 47.8% as compared to the same period in 1999. Included
in mortgage banking income are gain on sales of loans and unrealized gain on
trading securities of $399,000 for the nine months ended March 31, 2000 compared
to $1,757,000 for the same period in 1999. Due to a change in the rate
environment, the primary loan type originated has been a portfolio loan type
instead of mortgage banking loans. This reduced mortgage banking loan volume
resulted in lower mortgage banking income. Mortgage-backed securities created in
conjunction with the Association's mortgage banking activities are deemed
trading securities and are carried at fair value with unrealized gains and
losses reported in the income statement. At March 31, 2000, there were no
securities held for trading.
The portfolio of loans serviced for others totaled $561.3 million at March
31, 2000 with a net average servicing rate of approximately 16.8 basis points as
compared to $568.3 million at March 31, 1999 with a net average servicing rate
of approximately 6.3 basis points. The increase in net servicing rate is
primarily attributable to the change in impairment adjustments recorded as a
result of changes in prepayment speeds from year to year. Amortization of
capitalized mortgage servicing rights for the nine months ended March 31, 2000
was $420,000 compared to $552,000 in the prior year and is recognized as a
reduction of gross servicing fee income. The combination of these volume and
rate changes caused net loan servicing fees for the first nine months of fiscal
2000 to increase to $637,000 from $257,000 recognized in the same period for
fiscal 1999.
Gain on the sale of available for sale securities totaled $125,000 at March
31, 2000 as compared to $794,000 at March 31, 1999. During 2000, a FreddieMac
(FHLMC) Preferred Stock pairoff resulted in a gain of $105,000. The pairoff was
initiated by the broker and as a result of an inability to deliver the security.
Additionally, during the quarter ended March 31, 2000, there was a $20,000 gain
on the asset sale as part of interest rate management strategies. During fiscal
1999, FannieMae (FNMA) introduced a program, which provided for the
securitization of high loan-to-value seven year balloon loans. Management,
recognizing the default risk associated with this loan type, securitized $58.0
million of portfolio loans qualifying under the FNMA program. Furthermore, in
consideration of the interest rate risk associated with this asset, $40.6
million of these securities were sold resulting in the aforementioned gain for
the nine months ended March 31, 1999.
Fees and service charges for the nine months ended March 31, 2000 increased
$673,000 or 25.6% to $3,305,000 as compared to $2,632,000 in the same period in
1999. The increase in
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<PAGE>
fees and service charges is primarily a result of growth in loan and deposit
volume. The increase in deposit account servicing fees is related to increased
volume of electronic transactions initiated by deposit customers including
inter-account sweeps, ATM transactions and VISA debit card utilization. In
addition, increased commercial loan and checking account relationships initiated
through Business Banking activities and the related fee structure associated
with such accounts contributed to the increase in fees and service charges.
The Corporation is a partner in various joint ventures and partnerships.
For the first nine months of fiscal 2000, the loss from these investments
totaled $1,043,000 as compared to income of $483,000 for the same period in
fiscal 1999. The variance related to joint ventures and partnerships is due
primarily to the following factors: (1) For the first nine months of fiscal
2000, losses of $602,000 on a venture capital partnership resulted from the
decreased market value of underlying portfolio investments and operating losses
compared to gains of $566,000 in the same period of fiscal 1999; (2) The
Corporation is a limited partner in several partnerships for the purpose of
acquiring, renovating, operating and leasing qualified low-income housing and
historic properties. During the nine months ended March 31, 2000, losses related
to these partnerships amounted to $495,000 compared to losses of $88,000 for the
same period in the prior year. Benefits attributed to these partnerships include
low income housing and historic tax credits, refer to Note F of the Notes to
Consolidated Financial Statements.
Other operating income was $1,563,000 in the first nine months of fiscal
2000 as compared to $1,077,000 in the first nine months of fiscal 1999. As
products and services become more fully integrated within the retail branch
system, related income derived from discount brokerage and insurance units
resulted in an increase in other operating income. Other effects on other
operating income were income on corporate-owned life insurance policies related
to a supplemental executive retirement plan.
Other Expenses
Other expenses of $23.3 million increased $2,680,000 or 13.0% for the nine
months ended March 31, 2000 as compared to the same period in 1999.
Salaries and employee benefits for the nine months ended March 31, 2000
increased $1,341,000 or 13.0% over the same period in 1999 and is attributable
to a combination of the following factors: annual adjustments through the salary
administration program, increased commissions related to affiliate brokerage and
insurance units and expenses related to a supplemental executive retirement
plan. The number of full time equivalent personnel at March 31, 2000 was 405
compared to 399 at March 31, 1999. Federal deposit insurance decreased $95,000
or 19.6% for the nine months ended March 31, 2000 as compared to the same period
in 1999, and is due to the lower Financing Corporation (FICO) debt service
assessment by the FDIC. Data processing increased $313,000 or 34.0% in fiscal
2000 compared to fiscal 1999 due to costs related to technology purchases to
enhance efficiency. Advertising cost increased $475,000 or 61.7% for the nine
months ended March 31, 2000 as compared to the same period in 1999, and is
primarily attributable to ongoing efforts to enhance customer and product
awareness through various media campaigns. Other expenses for the nine months
ended March 31, 2000 increased $520,000 or 11.1% compared to the same period in
1999, as a result of increased cost of services and the effects of increased
loan and deposit volume.
G-87
<PAGE>
Provision for Income Taxes
The provision for income taxes of $1,754,000 for the nine months ended
March 31, 2000 represents an effective tax rate of 20.1% as compared to 34.4%
for the same period last year. For additional details of Income Taxes, refer to
Note F of the Notes to Consolidated Financial Statements.
Other Matters
Impact of Year 2000
We passed the turn of the century without any internal or third party
problems but will continue to monitor as we pass certain first events of the new
year. Various first events have already been tested and reviewed as part of the
Year 2000 action plan. We will have our contingency plans in effect on a
continual basis in the unlikely event that a Year 2000 disruption occurs.
The incremental cost and related investments of the Year 2000 effort has
been estimated to total $320,000. The timing and recognition of such costs has
not been considered to be material to any one fiscal period. Additional costs in
the current fiscal year related to Year 2000 are not expected.
Effects of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in relative
purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the price
of goods and services since such prices are affected by inflation. In the
current interest rate environment, the liquidity and maturity structures of York
Federal's assets and liabilities are critical to the maintenance of acceptable
performance levels.
G-88
<PAGE>
_______________________________________________________________________________
You should rely only on the information contained in this document or that
to which we have referred you. We have not authorized anyone to provide you with
information that is different. This document does not constitute an offer to
sell, or the solicitation of an offer to buy, any of the securities offered
hereby to any person in any jurisdiction in which such offer or solicitation
would be unlawful. The affairs of Harris Financial or Harris Savings Bank and
York Financial or York Federal may change after the date of this prospectus.
Delivery of this document and the sales of shares made hereunder does not mean
otherwise.
_______________________________________________________________________________
New Harris Financial, Inc.
(Successor to Harris Financial, Inc.)
Up to 26,450,000 Shares of Common Stock
Prospectus
______________
Ryan, Beck & Co.
______________
August ____, 2000
_______________________________________________________________________________
Until the later of _____________________, 2000 or 25 days after
commencement of the public offering, all dealers effecting transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
_______________________________________________________________________________
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Amount(1)
---------
Legal Fees and Expenses*..................................... $ 475,000
Accounting Fees and Expenses*................................ 250,000
Financial advisor fees and expenses*(2)...................... 300,000
Appraisal Fees and Expenses*................................. 180,000
Printing, Engraving, Postage and Mailing*.................... 560,000
OTS Filing Fee............................................... 14,400
SEC Filing Fee............................................... 80,000
NASD Filing Fee*............................................. 35,000
Data Processing*............................................. 49,600
Other Miscellaneous Expenses*................................ 195,000
----------
Total**...................................................... $2,139,000
==========
---------------
* Estimated.
(1) Excludes expenses related to the acquisition of York Financial Corp.
(2) Excludes underwriting discounts and commissions pursuant to Item 511 of
Regulation S-K.
Item 14. Indemnification of Directors and Officers
ARTICLE VI of the Bylaws of Harris Financial, Inc. (the "Corporation")
provides for indemnification of directors and officers of the Company as
follows:
6.1 Third Party Actions. The Corporation shall indemnify any person who
-------------------
was or is a party, or is threatened to be made a party, to any threatened,
pending or completed action or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
Corporation), by reason of the fact that he is or was a director or officer of
the Corporation, or is or was serving at the request of the Corporation as a
representative of another domestic or foreign corporation for profit or not-for-
profit, partnership, joint venture, trust or other enterprise, against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with the action or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the Corporation and, with
respect to any criminal proceeding, had no reasonable cause to believe his
conduct was unlawful, provided that the Corporation shall not be liable for any
amounts which may be due to any such person in connection with a settlement of
any action or proceeding effected without its prior written consent or any
action or proceeding initiated by any such person (other than an action or
proceeding to enforce rights to indemnification hereunder).
6.2 Derivative and Corporate Actions. The Corporation shall indemnify any
--------------------------------
person who was or is a party, or is threatened to be made a party, to any
threatened, pending or completed action by or in the right of the Corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director or officer of the Corporation or is or was serving at the request of
the Corporation as a representative of another domestic or foreign corporation
for profit or not-for-profit, partnership, joint venture, trust or other
enterprise, against expenses (including attorney's fees) actually and reasonably
incurred by him in connection with the defense or settlement of the action if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, provided that the Corporation
shall not be liable for any amounts which may be due to any such person in
connection with a settlement of any action or proceeding affected without its
prior written consent. Indemnification shall not be made under this Section 6.2
in respect of any claim, issue or matter as to which the person has been
adjudged to be liable to the Corporation unless and only to the extent that the
court of common pleas of the judicial district embracing the county in which the
registered office of the Corporation is located or the court in which the action
was brought determines upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, the person is fairly
and reasonably entitled to indemnity for the expenses that the court of common
pleas or other court deems proper.
<PAGE>
6.3 Mandatory Indemnification. To the extent that a representative of the
-------------------------
Corporation has been successful on the merits or otherwise in defense of any
action or proceeding referred to in Section 6.1 or Section 6.2 or in defense of
any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
6.4 Procedure for Effecting Indemnification. Unless ordered by a court,
---------------------------------------
any indemnification under Section 6.1 or Section 6.2 shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of the representative is proper in the circumstances because he
has met the applicable standard of conduct set forth in those sections. The
determination shall be made:
(1) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to the action or proceeding;
(2) if such a quorum is not obtainable, or if obtainable and a majority
vote of a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion; or
(3) by the stockholders.
6.5 Advancing Expenses. Expenses (including attorneys' fees) incurred in
------------------
defending any action or proceeding referred to in this Article VI shall be paid
by the Corporation in advance of the final disposition of the action or
proceeding upon receipt of an undertaking by or on behalf of the director or
officer to repay the amount if it is ultimately determined that he is not
entitled to be indemnified by the Corporation as authorized in this Article VI
or otherwise.
6.6 Insurance. The Corporation shall have the power to purchase and
---------
maintain insurance on behalf of any person who is or was a representative of the
Corporation or is or was serving at the request of the Corporation as a
representative of another domestic or foreign corporation for profit or not-for-
profit, partnership, joint venture, trust or other enterprise against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the Corporation would have the
power to indemnify him against that liability under the provisions of this
Article VI.
6.7 Modification. The duties of the Corporation to indemnify and to
------------
advance expenses to a director or officer provided in this Article VI shall be
in the nature of a contract between the Corporation and each such person, and no
amendment or repeal of any provision of this Article VI shall alter, to the
detriment of such person, the right of such person to the advance of expenses or
indemnification related to a claim based on an act or failure to act which took
place prior to such amendment or repeal.
ARTICLE VIII of the Corporation's Articles of Incorporation provides for
the limitation of liability of directors and officers of the Company as follows:
A. Personal Liability for Monetary Damages. The personal liabilities of
the directors and officers of the Corporation for monetary damages for conduct
in their capacities as such shall be eliminated to the fullest extent permitted
by the BCL as it exists on the effective date of these Articles of Incorporation
or as such law may be thereafter in effect, and in no event shall a director be
personally liable, as such, for monetary damages for any action taken unless the
director has breached or failed to perform the duties of his office under the
BCL and the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness. This section A of Article VIII shall not apply to
the responsibility or liability of a director pursuant to any criminal statute,
or the liability of a director for the payment of taxes pursuant to Federal,
State, or local law.
B. Amendments. No amendment, modification or repeal of this Article
VIII, nor the adoption of a provision of these Articles of Incorporation
inconsistent with this Article VIII, shall adversely affect the rights provided
hereby with respect to any claim, issue or matter in any proceeding that is
based in any respect on any alleged action or failure to act prior to such
amendment, modification, repeal or adoption.
<PAGE>
Item 15. Recent Sales of Unregistered Securities
None
Item 16. Exhibits and Financial Statement Schedules:
1.1 Letter Agreement with Ryan, Beck & Co., Inc. dated April 7, 2000, relating
to selling agent services.
1.2 Letter Agreement with Ryan, Beck & Co., Inc. and Legg Mason Wood Walker,
Inc. dated June 2, 2000 relating to services to be provided in the stock
offering.
1.3 Agency Agreement with Ryan, Beck & Co., Inc. and Legg Mason Wood Walker,
Inc.*
2.1 Agreement and Plan of Reorganization by and between Harris Financial, MHC,
Harris Financial, Inc. New Harris Financial, Inc. Harris Savings Bank and
York Financial Corp. and York Federal Savings and Loan Association.
(Incorporated by Reference to Exhibit 1 to the Current Report on Form 8-K
of Harris Financial, Inc. filed with the Commission on April 7, 2000 (File
No. 0-22399)).
2.2 Plan of Conversion and Reorganization of Harris Financial, MHC
3.1 Articles of Incorporation of Harris Financial, Inc. (Incorporated by
reference to Exhibit B to the Proxy Statement/Prospectus included in the
Registration Statement on Form S-4 of Harris Financial, Inc. filed with
the Commission on March 17, 1997 (File No.333-22415).
3.2 Bylaws of Harris Financial, Inc. (Incorporated by reference to Exhibit C
to the Proxy Statement/Prospectus included in the Registration Statement
on Form S-4 of Harris Financial, Inc. filed with the Commission on March
17, 1997 (File No.333-22415).
3.3 Articles of Incorporation of New Harris Financial, Inc. (Incorporated by
reference to Exhibit D to the Plan of Conversion and Reorganization of
Harris Financial, Inc. filed as Exhibit 2.2 to this Registration
Statement)
3.4 Articles of Incorporation of New Harris Financial, Inc. (Incorporated by
reference to Exhibit E to the Plan of Conversion and Reorganization of
Harris Financial, Inc. filed as Exhibit 2.2 to this Registration
Statement)
4.1 Form of Common Stock Certificate of Harris Financial, Inc. (Incorporated
by reference to Exhibit 4 to the Registration Statement on Form S-4 of
Harris Financial, Inc. filed with the Commission on March 17, 1997 (File
No.333-22415)).
4.2 Form of Common Stock Certificate of New Harris Financial, Inc.
5.1 Opinion of Luse Lehman Gorman Pomerenk & Schick, a Professional
Corporation as to the legality of the securities being issued.
8.1 Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, a
Professional Corporation
8.2 Letter of RP Financial, LC with respect to Subscription Rights
10.1 Harris Savings Bank 1994 Stock Option Plan for Outside Directors
(Incorporated by Reference to Exhibit 4.1 to the Registration Statement on
Form S-8 of Harris Financial, Inc. filed with the Commission on September
22, 1997 (File No. 333-36087)).
10.2 Harris Savings Bank 1994 Incentive Stock Option Plan (Incorporated by
Reference to Exhibit 4.2 to the Registration Statement on Form S-8 of
Harris Financial, Inc. filed with the Commission on September 22, 1997
(File No. 333-36087)).
<PAGE>
10.3 Harris Savings Bank 1996 Incentive Stock Option Plan (Incorporated by
Reference to Exhibit 4.3 to the Registration Statement on Form S-8 of
Harris Financial, Inc. filed with the Commission on September 22, 1997
(File No. 333-36087)).
10.4 Harris Savings Bank Recognition and Retention Plan for Officers and
Employees (Incorporated by Reference to Exhibit 10.4 to the Registration
Statement on Form S-4 of Harris Financial, Inc., filed with the
Commission on February 26, 1997, and amended on March 17, 1997 (File No.
333-22415)).
10.5 Harris Savings Bank Recognition and Retention Plan for Outside Directors
(Incorporated by Reference to Exhibit 10.5 to the Registration Statement
on Form S-4 of Harris Financial, Inc., filed with the Commission on
February 26, 1997, and amended on March 17, 1997 (File No. 333-22415)).
10.6 Form of Employment Contract between Harris Savings Bank and Lyle B.
Shughart, dated March 13, 1997 (Incorporated by Reference to Exhibit 10.6
to the Registration Statement on Form S-4 of Harris Financial, Inc.,
filed with the Commission on February 26, 1997, and amended on March 17,
1997 (File No. 333-22415)).
10.7 Form of Change in Control Agreements between Harris Savings Bank and
James L. Durrell, William M. Long and Lyle B. Shughart, all dated January
25, 1994 (Incorporated by Reference to Exhibit 10.7 to the Registration
Statement on Form S-4 of Harris Financial, Inc., filed with the
Commission on February 26, 1997, and amended on March 17, 1997 (File No.
333-22415)).
10.8 Harris Savings Bank Supplemental Executive Retirement Plan (Incorporated
by Reference to Exhibit 10.8 to the Registration Statement on Form S-4 of
Harris Financial, Inc., filed with the Commission on February 26, 1997,
and amended on March 17, 1997 (File No. 333-22415)).
10.9 Executive Employment Agreement between Harris Savings Bank and Richard C.
Ruben, dated August 11, 1997. (Incorporated by Reference to Exhibit 10.1
to the Current Report on Form 8-K of Harris Financial, Inc., filed with
the Commission on March 13, 1998 (File Number 000-22399)).
10.10 Executive Agreement between Harris Financial MHC and Charles C. Pearson,
Jr., dated December 19, 1997. (Incorporated by Reference to Exhibit 10.2
to the Current Report on Form 8-K of Harris Financial, Inc., filed with
the Commission on March 13, 1998 (File No. 000-22399)).
10.11 Notification of the Naming of Executive Vice President/Chief Operating
Officer, John Atkinson, dated April 29, 1998. (Incorporated by Reference
to Current Report on Form 8-K of Harris Financial, Inc., filed with the
Commission on May 4, 1998 (File No. 000-22399)).
10.12 Harris Financial, Inc. 1999 Stock Option Plan for Outside Directors and
Harris Financial, Inc. 1999 Incentive Stock Option Plan (Incorporated by
Reference to Registration Statement on Form S-8 of Harris Financial,
Inc., filed with the Commission on May 27, 1999 (File No. 000-22399)).
10.13 Naming of Charles C. Pearson, Jr., as Chairman of the Board of Harris
Savings Bank. (Incorporated by Reference to Current Report on Form 8-K of
Harris Financial, Inc., filed with the Commission on May 18, 1999 (File
No. 000-22399)).
10.14 Press Release regarding rescission of 5% stock dividend declared January
20, 2000. (Incorporated by Reference to Current Report on Form 8-K of
Harris Financial, Inc., filed with the Commission on February 8, 2000
(File No. 000-22399)).
10.15 York Financial Corp. Incentive Stock Option Plan (Incorporated by
Reference to Registration Statement on Form S-4 of York Financial Corp.
under its former name of First Capital Group, Inc., filed with the
Commission on September 19, 1985).
<PAGE>
10.16 1984 York Financial Corp. Amended Incentive Stock Option Plan
(Incorporated by Reference to Registration Statement on Form S-8 of York
Financial Corp., filed with the Commission on December 13, 1994 (File No.
33-87300)).
10.17 1984 York Financial Corp. Non-Incentive Stock Option Plan for Outside
Directors (Incorporated by Reference to Registration Statement on Form S-
8 of York Financial Corp., filed with the Commission on December 13, 1994
(File No. 33-87300)).
10.18 1992 York Financial Corp. Non-Incentive Stock Option Plan for Directors
(Incorporated by Reference to Registration Statement on Form S-8 of York
Financial Corp. filed with the Commission on December 13, 1994 (File No.
33-87300) and to the 1992 Annual Meeting Proxy Statement of York
Financial Corp. filed with the Commission on September 24, 1992).
10.19 1992 York Financial Corp. Stock Option and Incentive Plan (Incorporated
by Reference to Registration Statement on Form S-8 of York Financial
Corp. filed with the Commission on December 13, 1994 (File No. 33-87300)
and to the 1992 Annual Meeting Proxy Statement of York Financial Corp.
filed with the Commission on September 24, 1992).
10.20 1995 York Financial Corp. Non-Qualified Stock Option Plan for Directors
(Incorporated by reference from the 1995 Annual Meeting Proxy Statement
of York Financial Corp. filed with the Commission on September 25, 1995
and to Registration Statement on Form S-8 of York Financial Corp. filed
with the Commission on November 21, 1995 (File No. 33-64505)).
10.21 1997 York Financial Corp. Stock Option and Incentive Plan (Incorporated
by reference to the 1997 Annual Meeting Proxy Statement of York Financial
Corp. with the Commission on September 25, 1997 and to Registration
Statement on Form S-8 of York Financial Corp. filed with the Commission
on November 24, 1997 (File No. 333-40887)).
10.22 Supplemental Executive Retirement Plan (Incorporated by Reference to
Annual Report on Form 10-K for the fiscal year ended June 30, 1999 of
York Financial Corp. filed with the Commission on September 24, 1999
(File No. 000-14995)).
10.23 Revised Employment Agreement of Charles C. Pearson, Jr.*
21 Subsidiaries of Harris Financial, Inc.
Subsidiary State of Organization
---------------------- --------------------------
Harris Savings Bank Pennsylvania
AVSTAR Mortgage Corporation Pennsylvania
Harris Delaware Corporation Delaware
H. S. Service Corporation Pennsylvania
First Harrisburg Service Corporation Pennsylvania
C.B.L. Service Corporation Pennsylvania
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Ernst & Young, LLP
23.3 Consent of Luse Lehman Gorman Pomerenk & Schick, a Professional
Corporation (set forth in Exhibit 5.1)
23.4 Consent of RP Financial, LC
24 Power of attorney (set forth on the signature pages to this Registration
Statement)
<PAGE>
27 Financial Data Schedules (Incorporated by Reference to Quarterly Report
on Form 10-Q of Harris Financial, Inc. for the Quarter Ended March 31,
2000, File Number 000-22399, filed with the Commission on May 11, 2000
and Quarterly Report on Form 10-Q of York Financial Corp. for the Quarter
Ended March 31, 2000, File Number 000-14995 filed with the Commission on
May 12, 2000).
99.1 Marketing Materials*
99.2 Appraisal Report**
99.3 Appraisal Agreement with RP Financial, LC.
99.4 Business Plan Agreement with RP Financial, LC.
___________________________
* To be filed supplementally or by amendment.
** Text to be filed supplementally or by amendment; Tabular information filed
in paper format only.
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) To provide to the underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the questions whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Harrisburg, Pennsylvania, on June 22,
2000
HARRIS FINANCIAL, INC.
By: /s/ Charles C. Pearson, Jr.
-----------------------------------------------
Charles C. Pearson, Jr.
Chairman, President and Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned Directors of Harris Financial, Inc. severally
constitute and appoint Charles C. Pearson, Jr. with full power of substitution,
our true and lawful attorney and agent, to do any and all things and acts in our
names in the capacities indicated below which said Charles C. Pearson, Jr. may
deem necessary or advisable to enable Harris Financial, Inc. to comply with the
Securities Act of 1933, and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with the Registration
Statement on Form S-4 relating to the offering of Harris Financial, Inc. Common
Stock, including specifically, but not limited to, power and authority to sign
for us or any of us in our names in the capacities indicated below the
Registration Statement and any and all amendments (including post-effective
amendments) thereto; and we hereby ratify and confirm all that said Charles C.
Pearson, Jr. shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C>
By: /s/ Charles C. Pearson, Jr. By: /s/ James L. Durrell
--------------------------------------------- ----------------------------------------
Charles C. Pearson, Jr., Chairman, President, James L. Durrell, Executive Vice
and Chief Executive Officer President and Chief Financial Officer
(Principal Executive Officer) (Principal Financial Officer)
Date: June 22, 2000 Date: June 22, 2000
By: /s/ Ernest P. Davis By: /s/ Jimmie C. George
--------------------------------------------- ----------------------------------------
Ernest P. Davis, Director Jimmie C. George, Director
Date: June 22, 2000 Date: June 22, 2000
By: /s/ Robert A. Houck By: /s/ Bruce S. Isaacman
--------------------------------------------- ----------------------------------------
Robert A. Houck, Director Bruce S. Isaacman
Date: June 22, 2000 Date: June 22, 2000
By /s/ William E. McClure, Jr. By: /s/ Robert E. Poole
--------------------------------------------- ----------------------------------------
William E. McClure, Jr., Director Robert E. Poole, Director
Date: June 22, 2000 Date: June 22, 2000
By: /s/ William A. Siverling By: /s/ Frank R. Sourbeer
--------------------------------------------- ----------------------------------------
William A. Siverling, Director Frank R. Sourbeer, Director
Date: June 22, 2000 Date: June 22, 2000
By: /s/ Donald B. Springer
---------------------------------------------
Donald B. Springer, Director
</TABLE>
<PAGE>
As filed with the Securities and Exchange Commission on June 23, 2000
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
EXHIBITS
TO
REGISTRATION STATEMENT
ON
FORM S-1
______________________
HARRIS FINANCIAL, INC.
Harrisburg, Pennsylvania
<PAGE>
EXHIBIT INDEX
1.1 Letter Agreement with Ryan, Beck & Co., Inc. dated April 7, 2000,
relating to selling agent services.
1.2 Letter Agreement with Ryan, Beck & Co., Inc. and Legg Mason Wood
Walker, Inc. dated June 2, 2000 relating to services to be provided in
the stock offering.
1.3 Agency Agreement with Ryan, Beck & Co., Inc. and Legg Mason Wood
Walker, Inc.*
2.1 Agreement and Plan of Reorganization by and between Harris Financial,
MHC, Harris Financial, Inc. New Harris Financial, Inc. Harris Savings
Bank and York Financial Corp. and York Federal Savings and Loan
Association. (Incorporated by Reference to Exhibit 1 to the Current
Report on Form 8-K of Harris Financial, Inc. filed with the Commission
on April 7, 2000 (File No. 0-22399)).
2.2 Plan of Conversion and Reorganization of Harris Financial, MHC
3.1 Articles of Incorporation of Harris Financial, Inc. (Incorporated by
reference to Exhibit B to the Proxy Statement/Prospectus included in
the Registration Statement on Form S-4 of Harris Financial, Inc. filed
with the Commission on March 17, 1997 (File No.333-22415).
3.2 Bylaws of Harris Financial, Inc. (Incorporated by reference to
Exhibit C to the Proxy Statement/Prospectus included in the
Registration Statement on Form S-4 of Harris Financial, Inc. filed
with the Commission on March 17, 1997 (File No.333-22415).
3.3 Articles of Incorporation of New Harris Financial, Inc. (Incorporated
by reference to Exhibit D to the Plan of Conversion and Reorganization
of Harris Financial, Inc. filed as Exhibit 2.2 to this Registration
Statement)
3.4 Articles of Incorporation of New Harris Financial, Inc. (Incorporated
by reference to Exhibit E to the Plan of Conversion and Reorganization
of Harris Financial, Inc. filed as Exhibit 2.2 to this Registration
Statement)
4.1 Form of Common Stock Certificate of Harris Financial, Inc.
(Incorporated by reference to Exhibit 4 to the Registration Statement
on Form S-4 of Harris Financial, Inc. filed with the Commission on
March 17, 1997 (File No.333-22415)).
4.2 Form of Common Stock Certificate of New Harris Financial, Inc.
5.1 Opinion of Luse Lehman Gorman Pomerenk & Schick, a Professional
Corporation as to the legality of the securities being issued.
8.1 Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, a
Professional Corporation
8.2 Letter of RP Financial, LC with respect to Subscription Rights
10.1 Harris Savings Bank 1994 Stock Option Plan for Outside Directors
(Incorporated by Reference to Exhibit 4.1 to the Registration Statement
on Form S-8 of Harris Financial, Inc. filed with the Commission on
September 22, 1997 (File No. 333-36087)).
10.2 Harris Savings Bank 1994 Incentive Stock Option Plan (Incorporated by
Reference to Exhibit 4.2 to the Registration Statement on Form S-8 of
Harris Financial, Inc. filed with the Commission on September 22, 1997
(File No. 333-36087)).
<PAGE>
10.3 Harris Savings Bank 1996 Incentive Stock Option Plan (Incorporated by
Reference to Exhibit 4.3 to the Registration Statement on Form S-8 of
Harris Financial, Inc. filed with the Commission on September 22, 1997
(File No. 333-36087)).
10.4 Harris Savings Bank Recognition and Retention Plan for Officers and
Employees (Incorporated by Reference to Exhibit 10.4 to the Registration
Statement on Form S-4 of Harris Financial, Inc., filed with the
Commission on February 26, 1997, and amended on March 17, 1997 (File No.
333-22415)).
10.5 Harris Savings Bank Recognition and Retention Plan for Outside Directors
(Incorporated by Reference to Exhibit 10.5 to the Registration Statement
on Form S-4 of Harris Financial, Inc., filed with the Commission on
February 26, 1997, and amended on March 17, 1997 (File No. 333-22415)).
10.6 Form of Employment Contract between Harris Savings Bank and Lyle B.
Shughart, dated March 13, 1997 (Incorporated by Reference to Exhibit 10.6
to the Registration Statement on Form S-4 of Harris Financial, Inc.,
filed with the Commission on February 26, 1997, and amended on March 17,
1997 (File No. 333-22415)).
10.7 Form of Change in Control Agreements between Harris Savings Bank and
James L. Durrell, William M. Long and Lyle B. Shughart, all dated January
25, 1994 (Incorporated by Reference to Exhibit 10.7 to the Registration
Statement on Form S-4 of Harris Financial, Inc., filed with the
Commission on February 26, 1997, and amended on March 17, 1997 (File No.
333-22415)).
10.8 Harris Savings Bank Supplemental Executive Retirement Plan (Incorporated
by Reference to Exhibit 10.8 to the Registration Statement on Form S-4 of
Harris Financial, Inc., filed with the Commission on February 26, 1997,
and amended on March 17, 1997 (File No. 333-22415)).
10.9 Executive Employment Agreement between Harris Savings Bank and Richard C.
Ruben, dated August 11, 1997. (Incorporated by Reference to Exhibit 10.1
to the Current Report on Form 8-K of Harris Financial, Inc., filed with
the Commission on March 13, 1998 (File Number 000-22399)).
10.10 Executive Agreement between Harris Financial MHC and Charles C. Pearson,
Jr., dated December 19, 1997. (Incorporated by Reference to Exhibit 10.2
to the Current Report on Form 8-K of Harris Financial, Inc., filed with
the Commission on March 13, 1998 (File No. 000-22399)).
10.11 Notification of the Naming of Executive Vice President/Chief Operating
Officer, John Atkinson, dated April 29, 1998. (Incorporated by Reference
to Current Report on Form 8-K of Harris Financial, Inc., filed with the
Commission on May 4, 1998 (File No. 000-22399)).
10.12 Harris Financial, Inc. 1999 Stock Option Plan for Outside Directors and
Harris Financial, Inc. 1999 Incentive Stock Option Plan (Incorporated by
Reference to Registration Statement on Form S-8 of Harris Financial,
Inc., filed with the Commission on May 27, 1999 (File No. 000-22399)).
10.13 Naming of Charles C. Pearson, Jr., as Chairman of the Board of Harris
Savings Bank. (Incorporated by Reference to Current Report on Form 8-K of
Harris Financial, Inc., filed with the Commission on May 18, 1999 (File
No. 000-22399)).
10.14 Press Release regarding rescission of 5% stock dividend declared January
20, 2000. (Incorporated by Reference to Current Report on Form 8-K of
Harris Financial, Inc., filed with the Commission on February 8, 2000
(File No. 000-22399)).
10.15 York Financial Corp. Incentive Stock Option Plan (Incorporated by
Reference to Registration Statement on Form S-4 of York Financial Corp.
under its former name of First Capital Group, Inc., filed with the
Commission on September 19, 1985).
<PAGE>
10.16 1984 York Financial Corp. Amended Incentive Stock Option Plan
(Incorporated by Reference to Registration Statement on Form S-8 of York
Financial Corp., filed with the Commission on December 13, 1994 (File No.
33-87300)).
10.17 1984 York Financial Corp. Non-Incentive Stock Option Plan for Outside
Directors (Incorporated by Reference to Registration Statement on Form S-
8 of York Financial Corp., filed with the Commission on December 13, 1994
(File No. 33-87300)).
10.18 1992 York Financial Corp. Non-Incentive Stock Option Plan for Directors
(Incorporated by Reference to Registration Statement on Form S-8 of York
Financial Corp. filed with the Commission on December 13, 1994 (File No.
33-87300) and to the 1992 Annual Meeting Proxy Statement of York
Financial Corp. filed with the Commission on September 24, 1992).
10.19 1992 York Financial Corp. Stock Option and Incentive Plan (Incorporated
by Reference to Registration Statement on Form S-8 of York Financial
Corp. filed with the Commission on December 13, 1994 (File No. 33-87300)
and to the 1992 Annual Meeting Proxy Statement of York Financial Corp.
filed with the Commission on September 24, 1992).
10.20 1995 York Financial Corp. Non-Qualified Stock Option Plan for Directors
(Incorporated by reference from the 1995 Annual Meeting Proxy Statement
of York Financial Corp. filed with the Commission on September 25, 1995
and to Registration Statement on Form S-8 of York Financial Corp. filed
with the Commission on November 21, 1995 (File No. 33-64505)).
10.21 1997 York Financial Corp. Stock Option and Incentive Plan (Incorporated
by reference to the 1997 Annual Meeting Proxy Statement of York Financial
Corp. with the Commission on September 25, 1997 and to Registration
Statement on Form S-8 of York Financial Corp. filed with the Commission
on November 24, 1997 (File No. 333-40887)).
10.22 Supplemental Executive Retirement Plan (Incorporated by Reference to
Annual Report on Form 10-K for the fiscal year ended June 30, 1999 of
York Financial Corp. filed with the Commission on September 24, 1999
(File No. 000-14995)).
10.23 Revised Employment Agreement of Charles C. Pearson, Jr.*
21 Subsidiaries of Harris Financial, Inc.
Subsidiary State of Organization
--------------------- ----------------------
Harris Savings Bank Pennsylvania
AVSTAR Mortgage Corporation Pennsylvania
Harris Delaware Corporation Delaware
H. S. Service Corporation Pennsylvania
First Harrisburg Service Corporation Pennsylvania
C.B.L. Service Corporation Pennsylvania
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Ernst & Young, LLP
23.3 Consent of Luse Lehman Gorman Pomerenk & Schick, a Professional
Corporation (set forth in Exhibit 5.1)
23.4 Consent of RP Financial, LC
24 Power of attorney (set forth on the signature pages to this Registration
Statement)
<PAGE>
27 Financial Data Schedules (Incorporated by Reference to Quarterly Report on
Form 10-Q of Harris Financial, Inc. for the Quarter Ended March 31, 2000,
File Number 000-22399, filed with the Commission on May 11, 2000 and
Quarterly Report on Form 10-Q of York Financial Corp. for the Quarter
Ended March 31, 2000, File Number 000-14995 filed with the Commission on
May 12, 2000).
99.1 Marketing Materials*
99.2 Appraisal Report**
99.3 Appraisal Agreement with RP Financial, LC.
99.4 Business Plan Agreement with RP Financial, LC.
___________________________
* To be filed supplementally or by amendment.
** Text to be filed supplementally or by amendment; Tabular information filed
in paper format only.
