<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to__________________________
Commission File Number: 0-22399
WAYPOINT FINANCIAL CORP.
------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1872581
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
235 North Second Street, P.O. Box 1711, Harrisburg, Pennsylvania 17105
---------------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
717-236-4041
------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate the number of shares outstanding of each of the Bank's classes of
common stock, as of the latest practicable date. 34,063,375 shares of stock, par
value of $.01 per share, outstanding at October 16, 2000.
<PAGE>
Part I. Financial Information.
Part 1, Item 1 Financial Statements.
The following are financial statements and financial information of Harris
Financial, Inc. On October 17, 2000, Waypoint Financial Corp. succeeded to the
business of Harris Financial. In addition, on October 17, 2000, Waypoint
Financial completed a stock offering that is described herein, and acquired by
merger York Financial Corp., the holding Company of York Federal Savings and
Loan Association.
(Balance of this page is intentionally left blank)
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(in thousands, except for share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- ---------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 34,681 $ 73,613
Marketable securities available-for-sale 1,362,052 1,257,603
Loans receivable, net 1,427,679 1,267,983
Loans held for sale, net 10,508 1,646
Loan servicing rights 1,861 7,616
Premises and equipment, net of accumulated
depreciation of $18,571 and $15,484 30,090 23,228
Accrued interest receivable 18,648 18,302
Intangible assets 15,458 17,617
Deferred tax asset, net 18,934 17,402
Other assets 15,202 6,390
--------------- ---------------
Total assets $ 2,935,113 $ 2,691,400
=============== ===============
Liabilities and Stockholders' Equity
Deposits $ 1,501,530 $ 1,373,870
Escrow 35,734 3,511
Accrued interest payable 23,040 10,292
Postretirement benefit obligation 2,681 2,538
Other borrowings (Note 3) 1,179,658 1,118,000
Income taxes payable 442 2,302
Other liabilities 11,025 11,563
--------------- ---------------
Total liabilities $ 2,754,110 $ 2,522,076
--------------- ---------------
Common stock, $ .01 par value, authorized 100,000,000 shares,
34,063,375 shares issued and 33,614,075 outstanding
at September 30, 2000, 34,023,625 shares issued
and 33,574,325 shares outstanding at December 31, 1999 $ 341 $ 340
Paid in capital 30,440 30,323
Retained earnings 187,361 175,158
Accumulated other comprehensive income (30,071) (29,347)
Employee stock ownership plan (221) (296)
Recognition and retention plans (449) (456)
Treasury stock, 449,300 shares at September 30, 2000
and 449,300 shares at December 31, 1999 (6,398) (6,398)
--------------- ---------------
Total stockholders' equity 181,003 169,324
--------------- ---------------
Total liabilities and stockholders' equity $ 2,935,113 $ 2,691,400
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
-------------------------------- ---------------------------------
Interest Income: 2000 1999 2000 1999
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Loans receivable:
First mortgage loans $ 29,301 $ 35,385 $ 9,761 $ 11,660
Commercial loans 25,732 15,573 9,572 6,127
Consumer and other loans 24,808 19,343 8,735 7,284
Taxable investments 22,071 22,093 7,479 6,878
Taxfree investments 2,661 4,454 904 1,310
Dividends 5,542 6,093 1,929 1,819
Mortgage-backed securities 40,720 26,108 14,385 9,894
Money market investments 110 76 46 17
-------------- -------------- --------------- --------------
Total interest income 150,945 129,125 52,811 44,989
-------------- -------------- --------------- --------------
Interest Expense:
Deposits 50,827 38,507 18,534 13,481
Borrowed funds 53,175 44,652 19,167 15,916
Escrow 34 76 7 24
-------------- -------------- --------------- --------------
Total interest expense 104,036 83,235 37,708 29,421
-------------- -------------- --------------- --------------
Net interest income 46,909 45,890 15,103 15,568
Provision for loan losses 2,613 2,385 947 795
-------------- -------------- --------------- --------------
Net interest income after provision for loan losses 44,296 43,505 14,156 14,773
-------------- -------------- --------------- --------------
Noninterest Income:
Service charges on deposits 5,213 4,272 1,878 1,532
Other service charges/commissions/fees 1,041 1,026 421 338
Net servicing income 447 430 109 310
Gain on sale of securities, net 1,356 963 1,342 (402)
Gain on sale of loans, net 1,025 2,517 206 603
Other 2,220 801 2,019 96
-------------- -------------- --------------- --------------
Total noninterest income 11,302 10,009 5,975 2,477
-------------- -------------- --------------- --------------
Noninterest Expense:
Salaries and benefits 17,881 16,565 6,150 5,644
Equipment expense 3,736 2,992 1,686 992
Occupancy expense 3,252 2,369 1,133 810
Advertising and public relations 1,537 1,337 684 469
FDIC insurance 213 525 74 179
Director fees 229 222 67 43
Expense (income) from real estate operations 102 (498) 3 (151)
Amortization and write-off of intangibles 2,159 1,920 720 720
Consulting and other fees 2,011 1,777 751 757
Supplies, telephone and postage 2,521 2,620 841 876
Other 3,039 4,660 905 1,225
-------------- -------------- --------------- --------------
Total noninterest expense 36,680 34,489 13,014 11,564
-------------- -------------- --------------- --------------
Income before income taxes 18,918 19,025 7,117 5,686
Income tax expense 5,274 5,225 2,132 1,556
-------------- -------------- --------------- --------------
Net Income $ 13,644 $ 13,800 $ 4,985 $ 4,130
============== ============== =============== ==============
Basic earnings per share (Note 5) $ 0.41 $ 0.41 $ 0.15 $ 0.12
============== ============== =============== ==============
Diluted earnings per share (Note 5) $ 0.41 $ 0.41 $ 0.15 $ 0.12
============== ============== =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(in thousands, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
Other Employee Recognition
Compre- Stock And
Common Paid in Retained hensive Ownership Retention
Stock Capital Earnings Income (Loss) Plan Plan
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 $ 340 $ 29,960 $ 158,386 $ 8,106 $ (396) $ (456)
Net income 13,800
Dividends paid at $.18 per share (1,433)
Exercised stock options 83
Unrealized losses on securities (24,202)
Comprehensive income (loss)
ESOP stock committed for release 75
Excess of fair value above cost of
ESOP stock committed for release 194
Treasury stock purchased - 40,000 shares
-----------------------------------------------------------------------------
Balance at September 30, 1999 $ 340 $ 30,237 $ 170,753 $ (16,096) $ (321) $ (456)
=============================================================================
Balance at January 1, 2000 340 30,323 175,158 (29,347) (296) (456)
Net income 13,644
Dividends paid at $.18 per share (1,441)
Exercised stock options 1 132
Unrealized losses on securities (724)
Comprehensive income (loss)
Deferred stock committed for release (96)
ESOP stock committed for release 75
Earned portion of RRP plan 7
Excess of fair value above cost of
ESOP stock committed for release 70
Excess of fair value above cost of
earned portion of RRP plan 11
-----------------------------------------------------------------------------
Balance at September 30, 2000 $ 341 $ 30,440 $ 187,361 $ (30,071) $ (221) $ (449)
=============================================================================
<CAPTION>
Compre-
hensive
Treasury Income
Stock Total (Loss)
------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1999 $ (5,970) $ 189,970
Net income 13,800 $ 13,800
Dividends paid at $.18 per share (1,433)
Exercised stock options 83
Unrealized losses on securities (24,202) (24,202)
------------
Comprehensive income (loss) $ (10,402)
============
ESOP stock committed for release 75
Excess of fair value above cost of
ESOP stock committed for release 194
Treasury stock purchased - 40,000 shares (428) (428)
------------------------
Balance at September 30, 1999 $ (6,398) $ 178,059
========================
Balance at January 1, 2000 (6,398) 169,324
Net income 13,644 $ 13,644
Dividends paid at $.18 per share (1,441)
Exercised stock options 133
Unrealized losses on securities (724) (724)
------------
Comprehensive income (loss) $ 12,920
============
Deferred stock committed for release (96)
ESOP stock committed for release 75
Earned portion of RRP plan 7
Excess of fair value above cost of
ESOP stock committed for release 70
Excess of fair value above cost of
earned portion of RRP plan 11
----------------------
Balance at September 30, 2000 $ (6,398) $ 181,003
======================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------
2000 1999
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 13,644 $ 13,800
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 2,613 2,385
Net depreciation, amortization, and accretion 1,159 3,626
(Increase) decrease in loans held for sale (8,862) 14,445
Net gain on sales of interest-earning assets (2,381) (3,480)
Gain (loss) on sale of foreclosed real estate 84 (174)
Equity losses from joint ventures 3 8
Increase in accrued interest receivable (346) (1,312)
Increase in accrued interest payable 12,748 6,716
Amortization of intangibles 2,159 1,920
Earned ESOP shares 145 269
Earned RRP shares 18 -
Provision for deferred income taxes (1,128) 404
(Increase) decrease in current income taxes (1,860) 2,727
Other, net (10,000) 24,830
------------ -------------
Net cash provided by operating activities 7,996 66,164
------------ -------------
Cash flows from investing activities:
Proceeds from maturities and principal reductions of marketable
securities:
Available-for-sale 20,279 178,359
Proceeds from sales of marketable securities; available-for-sale 106,906 328,250
Purchase of marketable securities; available-for-sale (227,127) (516,140)
Loans sold 43,794 168,082
Net increase in loan originations less principal payments on
loans (207,627) (358,805)
Loan servicing rights sold 7,643 2,119
Origination of loan servicing rights (552) (847)
Investments in real estate held for investment and other joint ventures (416) (197)
Proceeds from payments on real estate held for investment 109 504
Purchases of premises and equipment, net (10,820) (3,953)
Cash proceeds received from the sale of foreclosed real
estate and premises and equipment 651 1,860
Branch purchase - 22,051
------------ -------------
Net cash used in investing activities (267,160) (178,717)
------------ -------------
</TABLE>
See accompanying notes to the consolidated financial statements.
(Continued)
Page 6
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
(continued)
<TABLE>
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 127,660 $ 53,499
Net increase in other borrowings 61,658 66,746
Net increase (decrease) in escrow 32,223 (5,822)
Payments to acquire treasury stock - (428)
Cash dividends (1,441) (1,433)
Proceeds from the exercise of stock options 132 83
------------- ------------
Net cash provided by financing operations 220,232 112,645
------------- ------------
Net (decrease) increase in cash and cash equivalents (38,932) 92
Cash and cash equivalents at beginning of period 73,613 56,741
------------- ------------
Cash and cash equivalents at end of period $ 34,681 $ 56,833
============= ============
Supplemental disclosures:
Cash paid during the periods for:
Interest on deposits, advances and other borrowings
(includes interest credited to deposit accounts) $ 91,268 $ 76,600
Income taxes 8,477 1,618
Non-cash investing activities:
Transfer from loans to foreclosed real estate $ 523 $ 922
Branch acquisition:
Fair value of assets acquired $ - $ 11,870
Deposit premium paid - 3,352
Fair value of liabilities assumed - 37,273
</TABLE>
See accompanying notes to consolidated financial statements.
Page 7
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands,
except per share data)
(Unaudited)
(1) Accounting Policies
-------------------
The Consolidated Financial Statements include the accounts of Harris Financial,
Inc. (the "Registrant" or "HFI") and its wholly-owned subsidiary Harris Savings
Bank (the "Bank"). In turn, the Bank holds the following subsidiaries: AVSTAR
Mortgage Corporation, Harris Delaware Corporation, H. S. Service Corporation,
First Harrisburg Service Corporation and C.B.L. Service Corporation. Both AVSTAR
Mortgage Corporation and C.B.L. Service Corporation are inactive and both of the
subsidiaries have immaterial assets and liabilities. All intercompany balances
have been eliminated in consolidation.
The accompanying interim financial statements have been prepared in accordance
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments, consisting of normal recurring
accruals necessary for a fair presentation of the results of interim periods,
have been made. Operating results for the nine month period ended September 30,
2000 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000 or any other interim period.
The accounting policies followed in the presentation of interim financial
results are consistent with those followed on an annual basis. These policies
are presented on pages 34 through 36 of the 1999 Annual Report to Stockholders.
(2) New Accounting Standards
------------------------
During June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting treatment.
SFAS 133 is effective for fiscal years beginning after June 15, 2000. A company
may also implement the Statement as of the beginning of any fiscal quarter after
issuance. The Statement cannot be applied retroactively.
Management plans to adopt the Statement as of January 1, 2001. The impact of
adopting SFAS 133 on the financial statements would be immaterial if adopted
today, given the Company's current derivative positions and the current interest
rate environment. However, the impact of the ultimate adoption of SFAS 133 could
be material depending on changes in the Company's derivative positions or the
rise or fall in interest rates.
Page 8
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables
are in thousands, except per share data)
(Unaudited)
(3) Other Borrowings
----------------
The following table presents the composition of HFI's other borrowings as of the
dates indicated.
September 30, December 31,
2000 1999
------------------ -------------------
FHLB advances $ 1,005,000 $ 805,000
Repurchase agreements 174,658 313,000
------------------ -------------------
Total other borrowings $ 1,179,658 $ 1,118,000
================== ===================
(4) Commitments to Extend Credit
----------------------------
In the ordinary course of business, HFI makes commitments to extend letters of
credit to its customers. Standby letters of credit issued and outstanding
amounted to $15,274,000 at September 30, 2000 and $7,372,000 at December 31,
1999. These letters of credit are not reflected in the accompanying financial
statements. Management does not anticipate any significant losses as a result of
these transactions.
At September 30, 2000, HFI had $59,072,000 in unused line of credit commitments
extended to its customers, $44,656,000 of undistributed funds on construction
loans and $153,400,000 of loan origination commitments.
(5) Earnings Per Share
------------------
The following table shows the calculation of basic earnings per share and
diluted earnings per share.
<TABLE>
<CAPTION>
Per Share
Income Shares Amount
---------------------------------------
<S> <C> <C> <C>
For the nine months ended September 30, 2000
Basic earnings per share:
Income available to common shareholders $ 13,644 33,606,137 $ 0.41
---------------------------------------
Dilutive effect of management and director stock options 30,865
---------------------------------------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions $ 13,644 33,637,002 $ 0.41
=======================================
For the nine months ended September 30, 1999
Basic earnings per share:
Income available to common shareholders $ 13,800 33,600,827 $ 0.41
--------------------------------------
Dilutive effect of management and director stock options 82,906
--------------------------------------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions $ 13,800 33,683,733 $ 0.41
======================================
</TABLE>
Page 9
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables
are in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Per Share
Income Shares Amount
---------------------------------------------------
<S> <C> <C> <C>
For the three months ended September 30, 2000
Basic earnings per share:
Income available to common shareholders $ 4,985 33,632,673 $ 0.15
---------------------------------------------------
Dilutive effect of management and director stock options 34,335
---------------------------------------------------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions $ 4,985 33,667,008 $ 0.15
===================================================
For the three months ended September 30, 1999
Basic earnings per share:
Income available to common shareholders $ 4,130 33,605,871 $ 0.12
---------------------------------------------------
Dilutive effect of management and director stock options 75,495
---------------------------------------------------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions $ 4,130 33,681,366 $ 0.12
===================================================
</TABLE>
(6) Dividend Waivers by Harris Financial, MHC
-----------------------------------------
Harris Financial, MHC, a Pennsylvania mutual holding company that owns
approximately 76% of the outstanding shares of HFI's common stock, has generally
waived the receipt of dividends declared by the Bank, or, subsequent to its
formation in the two-tier reorganization, dividends paid by HFI. Harris
Financial, MHC's decision as whether or not to waive a particular dividend has
depended on a number of factors, including Harris Financial, MHC's capital needs
and investment alternatives available as compared to those available to HFI, and
the receipt of required regulatory approvals. As of September 30, 2000, the
Mutual Company had waived a cumulative total of $33.0 million of dividends paid
by the Bank and HFI.
Also see Note (7) "Completion of Stock Conversion, Stock Offering, and
Acquisition by Merger."
(7) Completion of Stock Conversion, Stock Offering, and Acquisition by Merger
-------------------------------------------------------------------------
On October 17, 2000, Harris Financial, MHC, the parent mutual holding company
for Harris Financial, Inc. and owner of 76% of its common stock, completed its
mutual-to-stock conversion. As part of this conversion, Harris Financial, MHC
ceased to exist. Immediately following the conversion, Waypoint Financial Corp.
became the successor to Harris Financial, Inc. and Harris Savings Bank. As a
result of these transactions, Waypoint Bank is the wholly owned subsidiary of
Waypoint Financial Corp. and 100% of Waypoint Financial Corp. publicly owned.
Also on October 17, 2000, Waypoint Financial Corp. completed a stock offering
and an acquisition by merger of York Financial Corp., the parent holding company
of York Federal Savings and Loan Association. As a result of its subscription,
community offering, and public offering, Waypoint Financial Corp. sold
16,550,000 shares at $10.00 per share with net proceeds totaling $154.3 million
(including approximately $15.6 million of proceeds from the sale of shares to
Waypoint Bank's Employee Stock Ownership Plan). Waypoint Financial Corp. issued
6,191,274 shares to former stockholders of Harris Financial, Inc. as part of the
conversion. Waypoint Financial Corp. also issued 15,666,264 shares to former
stockholders of York Financial Corp. to complete its acquisition by merger,
which will be accounted for as a pooling of interests. York Financial Corp. held
total Assets of $1.7 billion as of September 30, 2000. A total of 38,407,538
shares of common stock were issued in the conversion, offering, and merger
transactions. On October 30, 2000, York Federal Savings and Loan Association was
merged into Waypoint Bank.
Page 10
<PAGE>
As a result of the conversion, offering, and merger transactions, Waypoint
Financial Corp. survives as a federally chartered unitary savings and loan
holding company regulated by the Office of Thrift Supervision ("OTS"). Waypoint
Bank survives as a federally chartered savings bank and is also regulated by the
OTS. Waypoint Financial Corp. has been notified that the underwritters in the
public offering intend to exercise a portion of their overallotment option and
purchase an additional 300,000 Shares of Common Stock.
Page 11
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is management's discussion and analysis of the significant changes
in the results of operations, capital resources and liquidity presented in the
accompanying interim consolidated financial statements for Harris Financial,
Inc. and subsidiaries. This discussion should be read in conjunction with the
1999 Annual Report. Current performance does not guarantee and may not be
indicative of similar performance in the future.
In addition to historical information, this Quarterly Report on Form 10-Q
contains forward-looking statements, as such term is defined in the Securities
Exchange Act of 1934 and the regulations thereunder. The forward-looking
statements contained herein are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected in the
forward-looking statements. Important factors that might cause such a difference
include, but are not limited to, those discussed in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the 1999 Annual Report. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. HFI undertakes no obligation to publicly
revise or update these forward-looking statements to reflect events or
circumstances that arise after the date hereof.
(a) Results of Operations
Net Income or Loss
Net income for the nine month period ended September 30, 2000 was $13,644,000,
representing a decrease of $156,000, or 1.1%, from the $13,800,000 net income
figure reported during the comparable nine month period ended September 30,
1999. The decrease was primarily due to an increase of $2,191,000 or 6.4%, in
noninterest expense during the nine month period ended September 30, 2000 versus
the comparable prior period. An analysis of the changes in noninterest expense
is presented in Table 5 that appears later in this report. Partially offsetting
the increase in noninterest expense was an increase of $791,000, or 1.8%, in net
interest income for the nine months ended September 30, 2000, compared to the
nine months ended September 30, 1999. Also offsetting increased expenses was an
increase in noninterest income of $1,293,000, or 12.9%, during the nine month
period ended September 30, 2000 versus the comparable prior period. An analysis
of the changes in noninterest income is presented in Table 4 that appears later
in this report.
For the three month period ended September 30, 2000, net income was $4,985,000
which was $855,000, or 20.7%, greater than the net income figure of $4,130,000
for the comparable period in 1999. The increase was primarily due to an increase
of $3,498,000 in noninterest income during the three month period ended
September 30, 2000 versus the comparable prior period. The increase in
noninterest income was due primarily to an increase in gains from sales of
securities and an increase in other income. An analysis of the changes in
noninterest income is presented in Table 4 that appears later in this report.
Partially offsetting the increase in noninterest income was a decrease of
$618,000, or 4.2%, in net interest income for the three months ended September
30, 2000, as compared to the three months ended September 30, 1999. Also
offsetting the increase in noninterest income was an increase in noninterest
expense of $1,449,000, or 12.5%, in the three month period ended September 30,
2000 versus the comparable prior period. An analysis of the changes in
noninterest expense is presented in Table 5 that appears later in this report.
Net Interest Income
HFI's principle source of revenue is net interest income, which represents the
difference between interest income generated by earning assets and the interest
expense of deposits and external sources of funds. Furthermore, net interest
income is significantly dependent on the volume and composition of earning
assets and interest-earning liabilities as well as the yield/cost of
interest-earning assets/liabilities. The following discussion of interest income
and yields is presented on a tax equivalent basis to reflect HFI's portfolio of
tax exempt securities.
Net interest income, on a tax equivalent basis, totaled $48,775,000 for the nine
months ended September 30, 2000, which represented an increase of $116,000 or
0.2%, from the $48,659,000 of net interest income recorded in the nine months
ended September 30, 1999. This increase reflected a favorable volume variance of
$2,662,000 due to a $209 million increase in total average earning assets to
$2.687 billion during the year to date period ended September 30, 2000 as
compared to $2.478 billion recorded during the comparable prior period. Also
reflected in this volume variance was a $235 million increase in average
interest-bearing liabilities. At the same time, general market interest rate
trends created an unfavorable rate variance of $2,546,000 for the nine months
ended September 30, 2000. The combination of
Page 12
<PAGE>
positive volume variances and negative rate variances generated the net positive
change of $116,000 noted above.
For the nine months ended September 30, 2000, the yield on interest-earning
assets was 7.58%. This figure was 48 basis points higher than the 7.10% yield
reported for the nine month period ended September 30, 1999. At same time, the
cost of funds increased 64 basis points to 5.34% for the period ended September
30, 2000, versus 4.70% for the nine months ended September 30, 1999. As a
result, the interest spread (the difference between the yield on assets minus
the cost of funds) decreased by 16 basis points to 2.24% for the nine month
period ended September 30, 2000, versus 2.40% for the nine month period ended
September 30, 1999.
Net interest income, on a tax equivalent basis, totaled $15,749,000 for the
three months ended September 30, 2000, which represented an increase of $660,000
or 4.0%, from the $16,409,000 of net interest income recorded in the three
months ended September 30, 1999. This increase reflected a favorable volume
variance of $958,000 due to a $201 million increase in total average earning
assets to $2.776 billion during the three month period ended September 30, 2000
as compared to $2.575 billion recorded during the comparable prior period. Also
reflected in this volume variance was a $222 million increase in average
interest-bearing liabilities. At the same time, general market interest rate
trends created an unfavorable rate variance of $1,618,000 for the three months
ended September 30, 2000. The combination of positive volume variances and
negative rate variances generated the net positive change of $660,000 noted
above.
For the three months ended September 30, 2000, the yield on interest-earning
assets was 7.70%. This figure was 58 basis points higher than the 7.12% yield
reported for the three month period ended September 30, 1999. At same time, the
cost of funds increased 84 basis points to 5.62% for the period ended September
30, 2000, versus 4.78% for the three months ended September 30, 1999. As a
result, the interest spread (the difference between the yield on assets minus
the cost of funds) decreased by 26 basis points to 2.08% for the three month
period ended September 30, 2000, versus 2.34% for the three month period ended
September 30, 1999.
HFI continued to rely on wholesale funding sources to support an investment
leveraging strategy and uses external borrowings to supplement funding provided
by savings and time deposits. During the nine month period ended September 30,
2000, total deposits (net of escrow deposits) increased $127.7 million, or 9.3%,
while other borrowings increased by $61.7 million, or 5.5%, from December 31,
1999. During the twelve month period ended September 30, 2000, total deposits
(net of escrow deposits) increased $205.4 million, or 15.8%, while other
borrowings increased by $43.7 million, or 3.8% from September 30, 1999. The
leveraging strategy relies on wholesale funding to support a redeployment of
capital generated from ongoing operations (leveraging) into an interest-earning
capacity, via the investment portfolio. The objective of this strategy was to
increase interest income and boost HFI's return on equity.
Table 1 presents HFI's average asset and liability balances, interest rates,
interest income and interest expense for each of the nine month periods ended
September 30, 2000 and September 30, 1999. Table 2 presents HFI's average asset
and liability balances, interest rates, interest income and interest expense for
each of the three month periods ended September 30, 2000 and September 30, 1999.
Table 3 presents a rate-volume analysis of changes in net interest income for
the nine month periods ended September 30, 2000 and September 30, 1999 and the
three month periods ended September 30, 2000 and September 30, 1999.
During the nine months ended September 30, 2000, HFI's commercial and direct
consumer loan yields and marketable securities yields increased relative to the
nine months ended September 30, 1999. This increase was primarily due to HFI
significantly increasing these portfolio balances at increasing rates during the
twelve months ended September 30, 2000. The increase in interest income from
this portfolio was attributable to an increase of $159.2 million, or 37.9%, in
the average balances of such loans as well as an improvement of 87 basis points
and 30 basis points in the average yield on the commercial loan portfolio and
the direct consumer loan portfolio, respectively, for the nine months ended
September 30, 2000, compared to the comparable prior period. Interest income was
also increased by HFI's indirect consumer loan portfolio. The average balance of
this portfolio grew $60.8 million to $230.0 million for the nine months ended
September 30, 2000 from $169.2 million for the comparable prior period. Indirect
consumer loan yields decreased 20 basis points to 7.49% for the nine month
period ended September 30, 2000 versus 7.69% for the comparable prior period.
Yields in this portfolio decreased due to increased dealer financing chargeback
volume versus the comparable prior period.
HFI decreased its holdings of mortgage loans and sold substantially all of its
conventional mortgage loan production during the nine months ended September 30,
2000, which resulted in an overall decrease in the yield on the mortgage
Page 13
<PAGE>
loan portfolio. For the nine months ended September 30, 2000, the average
balance of conventional mortgage loans, net, decreased to $549.2 million and the
average yield on such loans decreased to 7.11%, compared to an average balance
of $622.5 million and an average yield of 7.58% for the nine months ended
September 30, 1999.
During the quarter ended September 30, 2000, HFI's commercial and direct
consumer loan yields and marketable securities yields increased relative to the
quarter ended September 30, 1999. Again, this was primarily because HFI
significantly increased these portfolio balances at increasing rates during the
twelve months ended September 30, 2000. For the three months ended September 30,
2000, the average balance of commercial and direct consumer loans increased by
$155.6 million, or 32.8%, compared to the three months ended September 30, 1999.
The average yield on commercial loans and direct consumer loans improved to
8.70% and 9.25%, respectively, for the three months ended September 30, 2000,
from 7.86% and 8.95%, respectively, for the three months ended September 30,
1999. Partially offsetting these yield increases were decreases in portfolio
yields on mortgage and indirect consumer loans. Interest income was also
increased by HFI's indirect consumer loan portfolio. The average balance of this
portfolio grew $36.6 million to $238.0 million for the nine months ended
September 30, 2000 from $201.4 million for the comparable prior period. Indirect
consumer loan yields increased 4 basis points to 7.56% for the nine month period
ended September 30, 2000 versus 7.52% for the comparable prior period.
HFI decreased its holdings of mortgage loans and sold substantially all of its
conventional mortgage loan production during the three months ended September
30, 2000, which resulted in an overall decrease in the yield on the mortgage
loan portfolio. The average balance of residential mortgage loans, net,
decreased to $550.2 million for the three months ended September 30, 2000 from
$635.6 million for the three months ended September 30, 1999.
For information on qualitative and quantitative disclosures regarding market
risk, refer to Management's Discussion and Analysis included in the 1999 Annual
Report to Stockholders. There have been no significant changes noted in HFI's
market risk profile or HFI's risk management procedures in the current year.
Page 14
<PAGE>
Table 1 Average Balance Sheets, Rates and Interest Income and Expense Summary -
Year-to-Date (All dollar amounts presented in table are in 000's)
<TABLE>
<CAPTION>
For the nine months ended,
---------------------------------------------------------------------------------
September 30, 2000 September 30, 1999
---------------------------------------------------------------------------------
Average (1) (2) Average Average (1) (2) Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Mortgage loans, net $ 549,236 $ 29,301 7.11% $ 622,463 $ 35,385 7.58%
Commercial loans 402,806 26,165 8.66% 273,001 15,944 7.79%
Direct consumer loans 176,740 11,886 8.97% 147,298 9,579 8.67%
Indirect consumer loans 230,038 12,922 7.49% 169,209 9,764 7.69%
Marketable securities - taxable 1,245,829 67,632 7.24% 1,128,772 53,504 6.32%
Marketable securities - taxfree 61,597 4,094 8.86% 110,469 6,852 8.27%
Other interest-earning assets 20,669 811 5.23% 26,780 866 4.31%
--------------------------------------- ---------------------------------------
Total interest-earning assets 2,686,915 152,811 7.58% 2,477,992 131,894 7.10%
------------------------ -------------------------
Noninterest-earning assets 104,933 93,541
--------------- --------------
Total assets $ 2,791,848 $ 2,571,533
=============== ==============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings deposits $ 132,517 $ 2,806 2.82% $ 145,569 $ 2,169 1.99%
Time deposits 967,878 40,804 5.62% 792,858 31,109 5.23%
NOW and money market deposits 337,459 7,217 2.85% 308,275 5,229 2.26%
Escrow 4,526 34 1.00% 5,867 76 1.73%
Borrowed funds 1,153,019 53,175 6.15% 1,107,388 44,652 5.38%
--------------------------------------- ---------------------------------------
Total interest-bearing liabilities 2,595,399 104,036 5.34% 2,359,957 83,235 4.70%
------------------------ -------------------------
Noninterest-bearing liabilities 27,688 23,023
--------------- --------------
Total liabilities 2,623,087 2,382,980
Stockholders' equity 168,761 188,553
--------------- --------------
Total liabilities and stockholder equity $ 2,791,848 $ 2,571,533
=============== ==============
Net interest income
before provision for loan loss $ 48,775 $ 48,659
============ ============
Interest rate spread (3) 2.24% 2.40%
============ =============
Net interest-earning assets $ 91,516 $ 118,035
=============== ==============
Net interest margin (4) 2.42% 2.62%
============ =============
Ratio of interest-earning assets to
interest-bearing liabilities 1.04 1.05
=============== ==============
</TABLE>
(1) Includes income recognized on deferred loan fees of $714,000 for the nine
months ended September 30, 2000 and $1,385,000 for the nine months ended
September 30, 1999.
(2) Interest income and yields are shown on a tax equivalent basis.
(3) Represents the difference between the average yield on interest-earning
assets and the average cost on interest-bearing liabilities.
(4) Represents the annualized net interest income before the provision for loan
losses divided by average interest-earning assets.
Page 15
<PAGE>
Table 2 Average Balance Sheets, Rates and Interest Income and Expense Summary -
Quarter (All dollar amounts presented in table are in 000's)
<TABLE>
<CAPTION>
For the three months ended,
---------------------------------------------------------------------------------
September 30, 2000 September 30, 1999
---------------------------------------------------------------------------------
Average (1) (2) Average Average (1) (2) Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Mortgage loans, net $ 550,191 $ 9,761 7.10% $ 635,639 $ 11,660 7.34%
Commercial loans 447,451 9,732 8.70% 318,641 6,263 7.86%
Direct consumer loans 183,090 4,235 9.25% 156,257 3,498 8.95%
Indirect consumer loans 237,962 4,500 7.56% 201,408 3,786 7.52%
Marketable securities - taxable 1,272,089 23,535 7.40% 1,144,053 18,416 6.44%
Marketable securities - taxfree 63,451 1,391 8.77% 95,834 2,015 8.41%
Other interest-earning assets 21,784 304 5.58% 23,163 192 3.32%
--------------------------------------- ---------------------------------------
Total interest-earning assets 2,776,018 53,458 7.70% 2,574,995 45,830 7.12%
------------------------ -------------------------
Noninterest-earning assets 104,934 93,754
--------------- --------------
Total assets $ 2,880,952 $ 2,668,749
=============== ==============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings deposits $ 137,679 $ 1,114 3.24% $ 147,019 $ 761 2.07%
Time deposits 1,006,355 14,789 5.88% 831,760 10,887 5.24%
NOW and money market deposits 336,982 2,632 3.12% 318,839 1,833 2.30%
Escrow 6,075 7 0.46% 4,432 24 2.17%
Borrowed funds 1,195,816 19,167 6.41% 1,159,395 15,916 5.49%
--------------------------------------- ---------------------------------------
Total interest-bearing liabilities 2,682,907 37,709 5.62% 2,461,445 29,421 4.78%
------------------------ -------------------------
Noninterest-bearing liabilities 25,212 23,468
--------------- --------------
Total liabilities 2,708,119 2,484,913
Stockholders' equity 172,833 183,836
--------------- --------------
Total liabilities and stockholder equity $ 2,880,952 $ 2,668,749
=============== ==============
Net interest income
before provision for loan loss $ 15,749 $ 16,409
============ ============
Interest rate spread (3) 2.08% 2.34%
============ =============
Net interest-earning assets $ 93,111 $ 113,550
=============== ==============
Net interest margin (4) 2.27% 2.55%
============ =============
Ratio of interest-earning assets to
interest-bearing liabilities 1.03 1.05
=============== ==============
</TABLE>
(1) Includes income recognized on deferred loan fees of $216,000 for the three
months ended September 30, 2000 and $413,000 for the three months ended
September 30, 1999.
(2) Interest income and yields are shown on a tax equivalent basis.
(3) Represents the difference between the average yield on interest-earning
assets and the average cost on interest-bearing liabilities.
(4) Represents the annualized net interest income before the provision for loan
losses divided by average interest-earning assets.
Page 16
<PAGE>
Table 3 - Rate/Volume Analysis of Changes in Net Interest Income (All dollar
amounts presented in table are in 000's)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000 Three Months Ended September 30, 2000
Compared to Compared to
Nine Months Ended September 30, 1999 Three Months Ended September 30, 1999
Increase (Decrease) Increase (Decrease)
------------------------------------- -------------------------------------
Volume Rate Net Volume Rate Net
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans, net $ (3,984) $ (2,100) $ (6,084) $ (1,527) $ (372) $ (1,899)
Commercial loans 8,277 1,944 10,221 2,744 725 3,469
Direct consumer loans 1,967 340 2,307 617 120 737
Indirect consumer loans 3,418 (260) 3,158 694 20 714
Marketable securities - taxable 5,878 8,250 14,128 2,195 2,924 5,119
Marketable securities - taxfree (3,217) 459 (2,758) (707) 83 (624)
Other interest-earning assets (219) 164 (55) (12) 124 112
------------------------------------- -------------------------------------
Total interest-earning assets 12,120 8,797 20,917 4,004 3,624 7,628
------------------------------------- -------------------------------------
Interest-bearing liabilities:
Savings deposits (208) 845 637 (51) 404 353
Time deposits 7,247 2,448 9,695 2,467 1,435 3,902
NOW and money market deposits 529 1,459 1,988 110 689 799
Escrow (15) (27) (42) 7 (24) (17)
Borrowed funds 1,905 6,618 8,523 513 2,738 3,251
-----------------------------------------------------------------------------
Total interest-bearing liabilities 9,458 11,343 20,801 3,046 5,242 8,288
-----------------------------------------------------------------------------
Net change in net interest income $ 2,662 $ (2,546) $ 116 $ 958 $ (1,618) $ (660)
=============================================================================
</TABLE>
Note: Changes in interest income and interest expense arising from the
combination of rate and volume variances are prorated across rate and volume
variances.
Provision for Loan Losses
HFI recognized a provision for loan loss of $2,613,000 for the nine months
ended September 30, 2000. This represents an increase of $228,000, or
9.6%, from the $2,385,000 provision recorded for the nine months ended
September 30, 1999. For the three months ended September 30, 2000, HFI
recognized a provision for loan loss of $947,000. This is a $152,000, or
19.1%, increase over the $795,000 provision for the three month period
ended September 30, 1999. The increase in HFI's provision reflects
management's assessment of the adequacy of the allowance for loan losses
in light of such factors as growth of the portfolio, portfolio
composition, and general economic conditions. Management's methodology for
assessing the adequacy of the allowance for loan losses is more fully
discussed in the Asset Quality section.
Noninterest Income
The table below presents an analysis of change in noninterest income for
the nine month periods ended September 30, 2000 and September 30, 1999 and
the three month periods ended September 30, 2000 and September 30, 1999.
Page 17
<PAGE>
Table 4 Changes in Noninterest Income (All dollar amounts presented in table are
in 000's)
<TABLE>
<CAPTION>
Nine months ended September 30, Three months ended September 30,
------------------------------------ -----------------------------------------
Noninterest Income: 2000 1999 % Change 2000 1999 % Change
----------- ----------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Service charges on deposits $ 5,213 $ 4,272 22.0% $ 1,878 $ 1,532 22.6%
Other service charges/commissions/fees 1,041 1,026 1.5% 421 338 24.6%
Net servicing income 447 430 4.0% 109 310 (64.8%)
Gain on sale of securities, net 1,356 963 40.8% 1,342 (402) (433.8%)
Gain on sale of loans, net 1,025 2,517 (59.3%) 206 603 (65.8%)
Other 2,220 801 177.2% 2,019 96 2003.1%
----------- ----------- ------------- -------------
Total noninterest income $ 11,302 $ 10,009 12.9% $ 5,975 $ 2,477 141.2%
=========== =========== ============= =============
</TABLE>
Total noninterest income increased $1,293,000, or 12.9%, for the nine months
ended September 30, 2000 compared to the nine months ended September 30, 1999.
Service charges increased $941,000, or 22.0%, due to growth in deposit accounts,
increased ATM charges, and increased commercial deposit fees. Noninterest income
was also increased by non-recurring items, including a $1,862,000 fraud recovery
related to the 1996 acquisition of First Harrisburg Bancor and an increase of
$393,000 in gains on sale of securities. Offsetting these increases, gains on
sale of loans decreased $1,492,000, or 59.3%, which reflects decreased mortgage
loan origination and sale activity due to rising mortgage interest rate during
most of the twelve month period ended September 30, 2000.
Total noninterest income increased $3,498,000, or 141.2%, for the three months
ended September 30, 2000 compared to the three months ended September 30, 1999.
Service charges increased $346,000, or 22.6%, due to growth in deposit accounts,
increased ATM charges, and increased commercial deposit fees. Noninterest income
was also increased by non-recurring items, including a $1,862,000 fraud recovery
related to the 1996 acquisition of First Harrisburg Bancor and an increase of
$1,744,000 in gains on sale of securities. Offsetting these increases, gains on
sale of loans decreased $397,000, or 65.8%, which reflects decreased mortgage
loan origination and sale activity due to rising mortgage interest rate during
most of the twelve month period ended September 30, 2000.
Noninterest Expense
An analysis of changes in noninterest expense for the nine month periods ended
September 30, 2000 and September 30, 1999 and the three month periods ended
September 30, 2000 and September 30, 1999 is presented in the table below.
Table 5 Changes in Noninterest Expense (All dollar amounts presented in table
are in 000's)
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
----------------------------------- -----------------------------------
2000 1999 % Change 2000 1999 % Change
---------- ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Noninterest Expense:
Salaries and benefits $ 17,881 $ 16,565 7.9% $ 6,150 $ 5,644 9.0%
Equipment expense 3,736 2,992 24.9% 1,686 992 70.0%
Occupancy expense 3,252 2,369 37.3% 1,133 810 39.9%
Advertising and public relations 1,537 1,337 15.0% 684 469 45.8%
FDIC insurance 213 525 (59.4%) 74 179 (58.7%)
Director fees 229 222 3.2% 67 43 55.8%
Expense (income) from real estate operations 102 (498) (120.5%) 3 (151) (102.0%)
Amortization of intangibles 2,159 1,920 12.4% 720 720 0.0%
Consulting and other fees 2,011 1,777 13.2% 751 757 (0.8%)
Supplies, telephone and postage 2,521 2,620 (3.8%) 841 876 (4.0%)
Other 3,039 4,660 (34.8%) 905 1,225 (26.1%)
---------- ---------- ---------- -----------
Total noninterest expense $ 36,680 $ 34,489 6.4% $ 13,014 $ 11,564 12.5%
========== ========== ========== ===========
</TABLE>
Page 18
<PAGE>
Total noninterest expense increased $2,191,000, or 6.4%, for the nine months
ended September 30, 2000 compared to the nine months ended September 30, 1999.
Salary and benefits expense increased $1,316,000, or 7.9%, during the nine
months ended September 30, 2000 versus the comparable prior period. This
resulted from increased reward programs related to expanding Harris' commercial,
retail, and trust business lines. Equipment and occupancy expenses increased
$1,627,000, or 30.3%, during this period, reflecting expansion of the branch
network and Harris' installation of a new operations center during June, 2000.
This operations center was acquired to prepare Harris for significant growth
through acquisition and business line expansion. Expenses from real estate
operations also increased $600,000, which primarily reflected the sale in
November, 1999 of an income-generating commercial real estate investment. Income
from this investment was recorded as an offset to noninterest expense prior to
this sale.
Total noninterest expense increased $1,450,000, or 12.5%, for the three months
ended September 30, 2000 compared to the three months ended September 30, 1999.
Salary and benefits expense increased $506,000, or 9.0%, during the three months
ended September 30, 2000 versus the comparable prior period. This resulted from
increased reward programs related to expanding Harris' commercial, retail, and
trust business lines. Equipment and occupancy expenses increased $1,017,000, or
56.4%, during this period, reflecting expansion of the branch network and
Harris' installation of the new operations center noted above. Expenses from
real estate operations also increased $154,000, which primarily reflected the
sale of an investment in income-generating commercial real estate as noted
above.
Income Tax Expense
Income tax expense totaled $5,274,000 for the nine month period ended September
30, 2000, which resulted in an effective tax rate of 27.9% on pretax income of
$18,918,000. This represented a decrease of $49,000 from the recorded corporate
tax expense of $5,225,000 on pretax income of $19,025,000 during the nine month
period ended September 30, 1999. The effective tax rate for the nine month
period ended September 30, 1999 was 27.5%. The effective tax rate is less than
the statutory rates due to HFI's continued focus on tax exempt sources of
income.
Income tax expense was $2,132,000 for the three months ended September 30, 2000,
which resulted in an effective tax rate of 30.0% on pretax income of $7,117,000.
This represented an increase of $576,000 from the $1,556,000 of corporate tax
expense on pretax income of $5,686,000 during the three month period ended
September 30, 1999. The effective tax rate for the three month period ended
September 30, 1999 was 27.4%. The effective tax rate is less than the statutory
rates due to HFI's continued focus on tax exempt sources of income and a one
time state tax benefit.
(b) Financial Condition
Stockholders' Equity
Stockholders' equity totaled $181.0 million at September 30, 2000 and $169.3
million at December 31, 1999. Stockholders' equity amounted to 6.2% of total
assets of $2.935 billion as of September 30, 2000, compared to 6.3% of total
assets of $2.691 billion at December 31, 1999.
The increase in stockholders' equity of $11.7 million, or 6.9%, for the nine
months ended September 30, 2000, resulted mainly from net income of $13.6
million, offset by dividends paid totaling $1.4 million. Stockholders' equity
was decreased by a decrease of $.7 million in the market value of the
available-for-sale portfolio, which reflected the impact of market interest rate
increases on the market value of fixed rate issues in HFI's investment
portfolio.
Regulatory Capital Compliance
Risk-based capital standards are issued by bank regulatory agencies in the
United States. These capital standards link a banking company's capital to the
risk profile of its assets and provide the basis by which all banking companies
and banks are evaluated in terms of capital adequacy. These risk-based capital
standards require all banks to have Tier 1 capital of at least 4.0% and total
capital, including Tier 1 capital, equal to at least 8.0% of risk-adjusted
assets. Tier 1 capital consists of common stockholders' equity and qualifying
perpetual preferred stock along with related surpluses and retained earnings.
Total capital is comprised of Tier 1 capital, limited life preferred stock,
qualifying debt instruments and the reserves for loan losses. Furthermore, the
banking regulators also issue leverage ratio requirements. The leverage ratio
equals the ratio of Tier 1 capital to adjusted average assets. The following
tables provide a comparison of HFI's and HSB's risk-based capital ratios and
leverage ratio to the minimum regulatory requirements for the period indicated.
Table 6 Risk-based Capital Ratios and Leverage Ratios (All dollar amounts
presented in table are in 000's)
Page 19
<PAGE>
<TABLE>
<CAPTION>
HARRIS FINANCIAL, INC. Minimum Requirement for Minimum Requirement to be
Actual Capital Adequacy "Well Capitalized"
------ ---------------- ------------------
As of September 30, 2000 Amount Ratio Amount Ratio Amount Ratio
------------------------ ------ ----- ------- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $209,587 11.3% $148,831 8.0 % $186,039 10.0 %
Tier 1 Capital
(to Risk Weighted Assets) $195,616 10.5% $74,415 4.0 % $111,623 6.0 %
Tier 1 Capital
(to Avg. Assets) $195,616 7.0% $112,430 4.0 % $140,538 5.0 %
As of December 31, 1999
-----------------------
Total Capital
(to Risk Weighted Assets) $194,582 12.0% $130,173 8.0% $162,716 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 181,053 11.1% 65,086 4.0% 97,630 6.0%
Tier 1 Capital
(to Avg. Assets) 181,053 6.8% 106,502 4.0% 133,127 5.0%
<CAPTION>
HARRIS SAVINGS BANK Minimum Requirement for Minimum Requirement to be
Actual Capital Adequacy "Well Capitalized"
------ ---------------- ------------------
As of September 30, 2000 Amount Ratio Amount Ratio Amount Ratio
------------------------ ------ ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $205,502 11.1% $148,602 8.0% $185,753 10.0%
Tier 1 Capital
(to Risk Weighted Assets) $191,244 10.3% $74,301 4.0% $111,452 6.0%
Tier 1 Capital
(to Avg. Assets) $191,244 6.8% $112,295 4.0% $140,638 5.0%
As of December 31, 1999
-----------------------
Total Capital
(to Risk Weighted Assets) $189,925 11.7% $129,880 8.0% $162,350 10.0 %
Tier 1 Capital
(to Risk Weighted Assets) 176,262 10.9% 64,940 4.0% 97,410 6.0 %
Tier 1 Capital
(to Avg. Assets) 176,262 6.6% 106,347 4.0% 132,934 5.0 %
</TABLE>
Marketable Securities
Marketable securities, excluding the Federal Home Loan Bank cash account,
totaled $1.362 billion at September 30, 2000 and $1.258 billion at December 31,
1999. Total marketable securities increased $104.5 million, or 8.3%, during the
nine months ended September 30, 2000.
The following table sets forth certain information regarding the amortized cost
and fair values of HFI's marketable securities portfolio at September 30, 2000
and December 31, 1999.
Page 20
<PAGE>
Table 7 Composition of Marketable Securities Portfolios (All dollar amounts
presented in table are in 000's)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
-------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Government and agencies $ 350,755 $ 329,872 $ 348,705 $ 324,619
Corporate bonds 63,555 60,029 63,352 59,826
Municipal obligations 66,901 67,258 63,980 63,492
FHLB stock 55,250 55,250 45,400 45,400
Equities (Common and Preferred) 68,916 71,415 73,034 76,711
Mortgage-backed securities:
GNMA CMO's 52,435 51,838 - -
FNMA CMO's 95,593 90,944 99,032 98,267
FHLMC CMO's 101,465 96,212 139,328 136,584
Private Issue CMO's 556,618 539,234 473,170 452,704
-------------------------------------------------------------
Total mortgage-backed securities 806,111 778,228 711,530 687,555
-------------------------------------------------------------
Total securities available-for-sale $ 1,411,488 $ 1,362,052 $ 1,306,001 $ 1,257,603
-------------------------------------------------------------
Other interest-earning securities:
FHLB daily investment $ 9,555 $ 9,555 $ 36,860 $ 36,860
-------------------------------------------------------------
Total marketable securities and
interest-earning investments $ 1,421,043 $ 1,371,607 $ 1,342,861 $ 1,294,463
=============================================================
</TABLE>
Loans
Loans receivable, excluding loans held for sale, totaled $1.428 billion at
September 30, 2000 and $1.268 billion at December 31, 1999. The increase of
$159.7 million, or 12.6%, for the nine months ended September 30, 2000,
primarily reflects growth in commercial loans of $122.6 million, or 35.3%, and a
$44.4 million, or 12.2%, increase in automobile, consumer and other loans. The
loan growth trends in 2000 reflect HFI's continued focus on expanding its
commercial and consumer loan portfolios and its reduced reliance on investing in
residential mortgage loans.
Loan charge-offs, net of recoveries, totaled $1,947,000 for the nine month
period ended September 30, 2000 and $562,000 for the nine month period ended
September 30, 1999. The increase in net charge-offs came primarily in automobile
loans due to seasoning of this portfolio. Harris began originating automobile
loans in the third quarter of 1998. Based on management's continuing review of
the loan portfolio, HFI recorded provisions for loan losses of $2,613,000 for
the nine months ended September 30, 2000 compared to $2,385,000 for the nine
months ended September 30, 1999.
Non-accrual loans were $3,693,000 at September 30, 2000 and $10,007,000 at
December 31, 1999. The decrease of $6,314,000 in non-accrual loans during the
nine month period ended September 30, 2000 came primarily in commercial loans.
During the nine month period ended September 30, 2000, two commercial loans
totaling $7.1 million were refinanced with other lenders. In addition, loans 90
days past due, but still accruing were $5,209,000 at September 30, 2000 and
$6,128,000 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
gross loans receivable, excluding loans held for sale, equaled 0.62% at
September 30, 2000 and 1.27% at December 31, 1999.
The allowance for loan losses totaled $12,847,000 at September 30, 2000 and
$11,873,000 at December 31, 1999. Stated as a percentage of total gross loans
receivable, excluding loans held for sale, the allowance for loan losses
amounted to .89% at September 30, 2000 and .93% at December 31, 1999.
Table 8 depicts the trend of charge-offs, recoveries and provisions to the
allowance for loan losses for the nine months ended September 30, 2000, nine
months ended September 30, 1999, and the year ended December 31, 1999. In
addition, Table 9 highlights the allowance for loan losses as a percentage of
non-accrual loans, loans 90 days past due, but still accruing and specifically
designated problem loans for the nine months ended September 30, 2000 and the
year
Page 21
<PAGE>
ended December 31, 1999. Finally, Table 10 presents an allocation of the
allowance for loan losses by category of loans as of September 30, 2000 and
December 31, 1999.
Table 8 Analysis of the Allowance for Loan Losses (All dollar amounts presented
in table are in 000's)
<TABLE>
<CAPTION>
Allowance for Loan Loss September 30, 2000 September 30, 1999 December 31, 1999
---------------------------------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Balance at beginning of period $ 11,873 $ 9,088 $ 9,088
Provision for loan losses 2,613 2,385 3,180
Provision component related to unfunded
commitments 308 617 617
Charge offs:
Commercial loans (374) (50) (50)
One-to-four family loans (377) (197) (253)
Other mortgage loans - - -
Consumer and other loans (1,619) (501) (970)
---------------------- ---------------------- ----------------------
Total Charge offs (2,370) (748) (1,273)
---------------------- ---------------------- ----------------------
Recoveries:
Commercial loans 6 58 61
One-to-four family loans 39 46 73
Other mortgage loans - - -
Consumer and other loans 378 82 127
---------------------- ---------------------- ----------------------
Total Recoveries 423 186 261
---------------------- ---------------------- ----------------------
Net charge offs (1,947) (562) (1,012)
---------------------- ---------------------- ----------------------
Balance at end of period $ 12,847 $ 11,528 $ 11,873
====================== ====================== ======================
Net charge offs to average loans outstanding (1) 0.19% 0.06% 0.08%
====================== ====================== ======================
</TABLE>
(1) Year-to-date ratio is annualized
Page 22
<PAGE>
Table 9 Allowance for Loan Losses Coverage Ratios (All dollar amounts presented
in table are in 000's)
<TABLE>
<CAPTION>
As of September 30, 2000 As of December 31, 1999
------------------------- ------------------------
<S> <C> <C>
Allowance at the end of period $ 12,847 $ 11,873
Non-accrual loans $ 3,693 $ 10,007
90 days past due, but still accruing $ 5,209 $ 6,128
Potential problem loans $ 8,902 $ 16,263
Allowance/non-accrual loans 347.87% 118.65%
------------------------- ------------------------
Allowance/90 days past due, but still accruing 246.63% 193.75%
------------------------- ------------------------
Allowance/non-accrual loans and 90 days past due,
but still accruing 144.32% 73.59%
------------------------- ------------------------
Allowance/problem loans 144.32% 73.01%
------------------------- ------------------------
</TABLE>
Table 10 Allocation of the Allowance for Loan Losses (All dollar amounts
presented in table are in 000's)
<TABLE>
<CAPTION>
As of September 30, 2000 As of December 31, 1999
------------------------------ ------------------------------
% of Total % of Total
Amount Reserves Amount Reserves
-------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
One-to-four family mortgage loans $ 930 7.24% $ 838 7.06%
Commercial loans 8,021 62.43% 7,154 60.25%
Consumer and other loans 3,474 27.04% 3,073 25.88%
Unallocated 422 3.29% 808 6.81%
-------------- ------------- --------------- --------------
Total $ 12,847 100.00% $ 11,873 100.00%
============== ============= =============== ==============
</TABLE>
Asset Quality
Virtually all of HFI's credit risk lies with the Bank, which holds substantially
all of HFI's loan assets. As part of the conversion of its operations from those
of a traditional thrift institution, the Bank created a Business Banking Group
to offer commercial financial products and services to businesses in the Bank's
primary market area. This expansion beyond traditional thrift lending such as
residential mortgage lending and real estate secured consumer lending has had
the effect of increasing the Bank's credit risk exposure. To accommodate this
credit risk exposure, management has hired experienced commercial lending
professionals to manage its Business Banking Group. In addition, the Bank has
adopted commercial bank underwriting, credit management and loan loss
provisioning techniques under the direction of a Chief Credit Officer.
As part of its credit risk management activities, the Bank follows a policy of
continuous credit loss monitoring, including assessment of the adequacy of the
allowance for loan losses. The assessment of the adequacy of the allowance for
loan losses is based on internal and external factors. The external factors
include the general economic condition of the Bank's market area and those
factors described in regulatory guidelines. The internal factors include the
current composition of the portfolio, portfolio growth trends, concentrations of
credit risk and the current emphasis on commercial lending.
Each quarter the commercial loan portfolio is analyzed on an individual loan
basis and a specific reserve is developed for each known loss, using a risk
rating system. In addition, the Bank assigns a reserve for existing losses
Page 23
<PAGE>
on commercial loans that are not specifically reviewed. This reserve is
determined using factors such as charge-off history, portfolio delinquencies and
current economic conditions. The mortgage and consumer portfolios are also
analyzed in pools of similar loans with similar risk characteristics. The
reserve factor applied to each pool is based on actual charge-off history,
adjusted for other factors such as credit concentrations and delinquency trends.
Other Borrowings
HFI engages in wholesale leveraging activities to deploy a portion of its
capital. This strategy relies on using external sources of funds to invest in
interest-earning assets at a positive spread between the yield on
interest-earning asset and the cost of the supporting borrowing.
Other borrowings totaled $1.180 billion at September 30, 2000 and $1.118 billion
at December 31, 1999. Borrowings from non-deposit funding sources increased
$61.7 million, or 5.5%, during the nine months ended September 30, 2000. Federal
Home Loan Bank advances increased by $200.0 million, or 24.8%, to $1.005
billion, while repurchase agreements decreased by $138.3 million, or 44.2%, to
$174.7 million during the nine month period ended September 30, 2000.
As of September 30, 2000, HFI had maximum available FHLB lines of credit
totaling $1.272 billion versus $1.060 billion in available FHLB credit as of
December 31, 1999. This increase of $212.0 million is based on increases in the
amount of securities that qualify as security for FHLB advances. HFI had
borrowings outstanding to the FHLB totaling $1.005 billion as of September 30,
2000 and $805.0 million as of December 31, 1999.
Liquidity
HFI's primary sources of funds are deposits and proceeds from principal and
interest payments on loans and mortgage-backed securities. While maturities and
scheduled amortization of loans and mortgage-backed securities are a predictable
source of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates, economic conditions and competition. HFI anticipates
that it will have sufficient funds available to meet its current commitments.
HFI exceeded all applicable regulatory standards for liquidity at September 30,
2000 and December 31, 1999.
Discussion of Market Risk
The financial condition and results of HFI are impacted by three primary market
risk factors: interest rate risk, credit risk and concentration risk. These risk
factors are discussed below based on management's belief as to the order of
potential impact to the Corporation's earnings and capital, from most critical
to least critical.
Interest Rate Risk
Currently, HFI's primary component of market risk is interest rate volatility.
Virtually all of HFI's interest rate risk exposure lies with the Bank because
all of HFI's interest-bearing liabilities and almost all of its interest-earning
assets are located at the Bank level. Fluctuations in market interest rates will
impact both the level of net interest income and the market value of virtually
all of HFI's assets and liabilities. In addition to interest rate risk
associated with loans and deposits, HFI manages interest rate risk associated
with the Bank's leverage portfolios. The Bank's leverage portfolios include
investments in marketable securities which are funded through wholesale
borrowings, most of which are matched funded. The Bank also sells a significant
portion of its conforming 30-year mortgage loan originations to mitigate its
interest rate risk exposure. In addition, the Bank's investments and borrowing
activities are managed to mitigate the Bank's overall interest rate risk
profile.
Management employs an Asset/Liability Committee ("ALCO") that meets at least
monthly to manage interest rate risk exposure. HFI primarily employs dynamic GAP
analysis and Net Interest Income Volatility ("NII") analysis to assist in the
management of interest rate risk. The ALCO 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 the Bank's refinement of
standard repricing analysis procedures to include anticipated prepayments,
option calls and other factors not normally employed in static GAP analysis.
HFI's standard ALCO procedures include a review of monthly GAP results. The
table below presents the Bank's GAP position as of September 30, 2000. As of
this date, the Bank's liability sensitive cumulative one-year GAP ratio was
-9.8% and liability sensitive three-year GAP ratio was -3.5%.
Page 24
<PAGE>
Table 11 GAP Analysis (All dollar amounts presented in table are in 000's)
<TABLE>
<CAPTION>
At September 30, 2000
------------------------------------------------------------------------------------------------
More Than More Than More Than
One Year One Year Three Years Five
or Less to Three Years to Five Years Years Total
------------------------------------------------------------------------------------------------
Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INEREST-EARNING ASSETS:
Cash and cash equivalents $ 9,555 6.67% $ - 0.00% $ - 0.00% $ 25,126 0.00% $ 34,681 1.84%
Marketable securities (1) (3) 692,906 7.61% 68,956 6.89% 61,855 6.73% 587,772 6.61% 1,411,489 7.12%
Commercial loans 253,504 8.64% 131,178 8.00% 79,217 7.90% 10,145 4.53% 474,044 8.25%
Mortgage loans (2) 128,579 7.23% 132,560 6.91% 104,529 6.80% 193,123 6.84% 558,791 6.94%
Consumer loans 151,252 9.07% 167,961 8.60% 69,255 8.82% 20,717 8.58% 409,185 8.81%
Total interest-earning
-----------------------------------------------------------------------------------------------
assets $ 1,235,796 7.95% $ 500,655 7.76% $ 314,856 7.51% $ 836,883 6.49% $ 2,888,190 7.45%
-----------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts $ 37,969 5.35% $ - 0.00% $ - 0.00% $ 101,274 1.99% $ 139,243 2.91%
Interest-bearing
DDA accounts - 0.00% - 0.00% - 0.00% 93,765 1.09% 93,765 1.09%
Noninterest-bearing
DDA accounts - 0.00% - 0.00% - 0.00% 57,289 0.00% 57,289 0.00%
Money market accounts 153,085 5.73% - 0.00% - 0.00% 23,721 2.27% 176,806 5.27%
Time deposits 611,672 5.66% 326,250 6.16% 99,879 6.63% 2,270 5.53% 1,040,071 5.91%
Escrow - 0.00% - 0.00% - 0.00% 35,734 1.04% 35,734 1.04%
Other borrowings 704,658 6.17% - 0.00% 300,000 6.58% 175,000 5.96% 1,179,658 6.24%
Total interest-bearing
-----------------------------------------------------------------------------------------------
liabilities $ 1,507,384 5.90% $ 326,250 6.16% $ 399,879 6.59% $ 489,053 2.97% $ 2,722,566 5.50%
-----------------------------------------------------------------------------------------------
Interest sensitivity gap
per period $ (271,588) $ 174,405 $ (85,023) $ 347,830 $ 165,624
-------------- ------------- ------------- ------------- -------------
Cumulative interest
sensitivity gap $ (271,588) $ (97,183) $ (182,206) $ 165,624
-------------- ------------- ------------- -------------
Cumulative interest sensitivity
gap as a percent of total
assets -9.82% -3.51% -6.58% 5.99%
-------------- ------------- ------------- -------------
Cumulative net interest-earning
assets as a percentage of net
interest-bearing liabilities 81.98% 94.70% 91.84% 106.08%
-------------- ------------- ------------- -------------
</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.
Page 25
<PAGE>
NII volatility analysis is employed to measure the probable effect of
significant changes in market interest rates upon HFI's projected net interest
income. Management considers one-year and two-year projections for NII
volatility to be most relevant for managing HFI's interest rate risk exposure.
HFI's standard ALCO procedures include a review of monthly analysis results for
NII volatility. Using HFI's asset and liability portfolios as of September 30,
2000, management projects net interest income for the next twelve months to
increase $.9 million, or 1.4%, if market rates decrease 200 basis points over
the next twelve months and to decrease $6.3 million, or 9.5%, if market rates
increase 200 basis points over the next twelve months. These NII volatility
values are within the thresholds established by the Board of Directors for
market rate shocks.
<TABLE>
<CAPTION>
Rate Scenarios -200 bp -100 bp 0 bp +100 bp +200 bp
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Absolute Change in NII (in millions) $0.9 $1.2 $0.0 $(3.1) $(6.3)
Relative Change in NII 1.4% 1.8% 0.0% (4.6%) (9.5%)
Board of Directors Limit +/- 10.0% +/- 5.0% 0.0% +/- 5.0% +/- 10.0%
</TABLE>
Credit Risk
Virtually all of HFI's credit risk lies with the Bank, which holds all of HFI's
loan assets and virtually all of its marketable securities. Due to underwriting
standards and credit and collections management, the Bank's experience in credit
losses has been satisfactory. The Bank follows a comprehensive loan policy that
details credit underwriting, credit management and loan loss provisioning
techniques. With regard to its marketable securities portfolio, at September 30,
2000, over 89% of the marketable securities in HFI's portfolio were rated "AAA",
with the remainder rated "AA" or "A". At December 31, 1999, over 87% of the
marketable securities in HFI's portfolio were rated "AAA", with the remainder
rated "AA" or "A".
Concentration Risk - Geographic
HFI's primary market area includes the five central Pennsylvania counties of
Dauphin, Cumberland, York, Lancaster and Lebanon and the northern Maryland
county of Washington. Except for the Bank's manufactured home loan portfolio,
virtually all of the Bank's loans and deposits are dependent on this primary
market area. The southcentral Pennsylvania and northern Maryland area have
enjoyed a strong, well diversified and stable economy for many years relative to
the general economic conditions experienced in the Northeastern United States
and the nation as a whole. Currently, the Bank's primary market area does not
appear to be exhibiting signs of economic deterioration. Should such economic
stress become evident, however, the Bank's loan and deposit portfolios and
operations could be adversely impacted.
Concentration Risk - Major Creditor
The Bank relies heavily on wholesale borrowings to support its leveraged
investment strategies. As discussed in previous sections of this report, these
strategies have enhanced the Corporation's return to its shareholders. As
presented in detail in the "Borrowings" section of this report, a significant
portion of the Bank's wholesale borrowings are placed with the Federal Home Loan
Bank of Pittsburgh (the "FHLB"). If the Bank's maximum borrowing capacity with
the FHLB were to be encumbered in the future, through statutory restrictions
that do not exist at this time or through other means, the Bank's leveraged
investment strategies would be impacted to some degree. However, given the
quality of the Bank's assets pledged as collateral to support wholesale
borrowings, management believes the Bank would be able to expand its placement
of borrowings with other primary borrowing sources. Management anticipates that
such a shift in borrowing sources would result in, at worst, only modest
potential decreases in net interest income from wholesale leveraging activities.
Management is not aware of any contemplated regulatory actions that indicate the
Bank's borrowing capacity at the FHLB might become restricted to less than the
maximum capacity disclosed in the section titled "Borrowings" that appears later
in this report.
Page 26
<PAGE>
Subsequent Events.
On October 17, 2000, Harris Financial, MHC, the mutual holding company of Harris
Financial, Waypoint Financial's predecessor, completed its mutual-to-stock
conversion. The corporate existence of Harris Financial, MHC ceased at the time
of the conversion. As part of the conversion, Waypoint Financial conducted a
best-efforts subscription and community offering, and an underwritten public
offering that included an overallotment option. The underwriters in the public
offering have notified Waypoint Financial that the underwriters intend to
exercise a portion of the overallotment option granted to them, and purchase an
additional 300,000 shares of common stock. The subscription, community and
public offerings were completed on October 17, 2000, and the overallotment
shares are scheduled to be issued on November 15, 2000. Waypoint Financial
issued a total of 16,850,000 shares in the offerings, including the
overallotment shares, raised gross proceeds of $168.5 million, and incurred
expenses of approximately $11.2 million. Of the net proceeds, $15.6 million was
used to fund a loan to Waypoint Bank's employee stock ownership plan that was
used by the plan to purchase 1,564,000 shares in the stock offering, and
approximately $77.2 million was infused into Waypoint Bank. Also, in connection
with the conversion, Waypoint Financial issued an additional 6,191,274 shares to
current stockholders of Harris Financial, as each share of Harris Financial
common stock was converted into 0.7667 shares of Waypoint Financial common
stock.
In addition, on October 17, 2000, Waypoint Financial completed the
acquisition by merger of York Financial Corp. Waypoint Financial issued a total
of 15,666,264 shares of common stock in the merger, as each share of York
Financial common stock was converted into 1.550 shares of Waypoint Financial
common stock.
Page 27
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
Item 2. (a) On October 17, 2000, all of the outstanding shares of common
stock of Harris Financial, Waypoint Financial's predecessor,
were converted into and became the right to receive 0.7667
shares of common stock of Waypoint Financial. Cash was paid
in lieu of fractional shares. The rights evidenced by the
common stock of Harris Financial were not materially limited
or qualified by such conversion.
(b) Not applicable.
(c) Not applicable.
(d) Pursuant to a registration statement on form S-1,
declared effective on August 14, 2000, and a Post-Effective
Amendment No. 1, declared effective on October 12, 2000
(Commission File No. 333-40046), Waypoint Financial
registered 30,417,500 shares of common stock for a purchase
price of $10.00 per share. The stock offering conducted
pursuant to the registration statements included a best-
efforts subscription and community offering, and an
underwritten public offering that included an overallotment
option. The underwriters in the public offering were Ryan,
Beck & Co., Inc. and Legg Mason Wood Walker, Incorporated.
Waypoint Financial sold 16,550,000 shares in the offering,
and, in addition, has been notified by the underwriters that
the underwriters intend to exercise a portion of the
overallotment option granted to them, and purchase an
additional 300,000 shares of common stock. The subscription,
community and public offerings were completed on October 17,
2000, and the overallotment shares are scheduled to be
issued on November 15, 2000. Waypoint Financial raised gross
proceeds of $168.5 million in the offering (including the
overallotment shares), and incurred expenses of
approximately $11.2 million. Expenses included approximately
$8.6 million of underwriting discounts, commissions, and
expenses, $2.6 million of other expenses, and no finders
fees. Of the net proceeds, $15.6 million was used to fund a
loan to Waypoint Bank's employee stock ownership plan that
was used by the plan to purchase 1,564,000 shares in the
stock offering, and approximately $77.2 million was infused
into Waypoint Bank. All of the remaining $80.2 million that
is or will be retained by Waypoint Financial has been used
to temporarily repay indebtedness, and no portion of such
funds have yet been used for construction of plant, building
and facilities, purchase and installation of machinery and
equipment, purchases of real estate, or the acquisition of
other businesses. No direct or indirect payments were made
to Waypoint Financial's directors or officers or their
associates, or to persons owning more than 10% of Waypoint
Financial's common stock.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
On September 25, 2000, Harris Financial, Waypoint
Financial's predecessor, held a special meeting of
stockholders. At the meeting Harris Financial stockholders
voted on the following matters as follows:
1. Approval of the Plan of Re-Chartering of Harris
Financial, Inc. dated as of June 23, 2000, by which Harris
Financial, Inc. will convert from a Pennsylvania-chartered
corporation to a federally-chartered corporation. Votes in
favor 30,453,470; votes against 116,215; and abstentions
36,519.
2. Approval of the Plan of Conversion and Reorganization
of Harris Financial, MHC, dated as of March 27, 2000 and
amended as of June 22, 2000, by which Harris Financial, MHC
will convert from the mutual form of organization to the
capital stock form of organization and Waypoint Financial,
Inc. will issue stock in the stock offering. Votes in favor
30,450,991; votes against 122,362; and abstentions 32,851.
3. Approval of the Agreement and Plan of Reorganization
by and between Harris Financial, MHC, Harris Financial, Inc.
Waypoint Financial, Inc., Harris Savings Bank and York
Financial Corp. and York Federal Savings and Loan
Association, dated as of March 27, 2000 and amended as of
June 23, 2000, by which York Financial Corp. will merge with
and into Waypoint Financial, Inc., with Waypoint Financial,
Inc. as the surviving corporation. Votes in favor
30,445,096; votes against 127,591; and abstentions 33,517.
Item 5. Other information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
The Registrant filed the following Current Reports
on Form 8-K during the third quarter of 2000:
(i) Current Report on Form 8-K, dated August 17,
2000, re: Harris Financial, Inc. issued a
press release announcing that David E. Zuern,
Secretary of Banking of the Commonwealth of
Pennsylvania, Accepted the position of
President and Chief Operating Officer of
Harris Financial, Inc. and Harris Savings
Bank.
(ii) Current Report on Form 8-K, dated August 24,
2000, re: Harris Financial, Inc. issued a
press release announcing the commencement of
a stock offering in connection with the
mutual-to-stock conversion of Harris
Financial, MHC.
Page 28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARRIS FINANCIAL, INC.
(Registrant)
By /s/ Charles C. Pearson, Jr.
---------------------------
Charles C. Pearson, Jr.,
Chairman, President and
Chief Executive Officer
By /s/ James L. Durrell
--------------------
James L. Durrell,
Executive Vice President
and Chief Financial Officer
Dated: November 13, 2000
Page 29
<PAGE>
EXHIBIT INDEX
Exhibit Number
--------------
Exhibit 27 Financial Data Schedule
Page 31
