<PAGE>
As filed with the Securities and Exchange Commission on August 11, 2000
Registration No. 333-40046
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
HARRIS FINANCIAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<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]
<PAGE>
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. [_]
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. [_]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
==================================================================================================================
Proposed Proposed
maximum maximum Amount of
Title of each class of Amount to be offering price aggregate registration
securities to be registered registered per share offering price fee
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 30,417,500 $10.00 $304,175,000 $80,302(2)
per share shares -- -- --
Participation Interests(3) 1,000,000
interests
==================================================================================================================
</TABLE>
________________________________
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Previously submitted
(3) 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
WAYPOINT FINANCIAL CORP.
HARRIS RETIREMENT SAVINGS INCENTIVE PLAN
Waypoint Financial Corp. 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 Waypoint Financial
Corp. 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 Waypoint
Financial Corp. 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 Waypoint
Financial Corp. 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
Waypoint Financial Corp. fund after the offering is completed.
The prospectus of Waypoint Financial Corp. 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 Waypoint Bank (formerly, 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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<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............................... 9
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
Waypoint Financial Corp. is offering participation interests in the Harris
Retirement Savings Incentive Plan (the "401(k) plan"). The participation
interests represent indirect ownership of Waypoint Financial Corp.'s common
stock through the 401(k) plan. The 401(k) plan may acquire up to 770,000 shares
of Waypoint Financial Corp. common stock. Only employees of Waypoint Bank
(formerly, Harris Savings Bank) may become participants in the 401(k) plan. Your
investment in the Waypoint Financial Corp. 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 Waypoint Bank is contained in
the attached prospectus. The address of the principal executive office of
Waypoint Bank is 235 North Second Street, Harrisburg, PA 17101. Waypoint Bank's
telephone number is (717) 236-4041.
Election to Purchase Common Stock in the Offering; Priorities
In connection with the offering, Waypoint 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 Waypoint Financial Corp. stock fund, to be used to purchase common
stock issued in the offering. The trustee of the Waypoint Financial Corp. 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 Waypoint Bank (formerly, Harris Savings Bank) with
aggregate account balances of $50 or more as of December 31,
1998;
(2) Waypoint Bank's (formerly, Harris Savings Bank's) employee stock
ownership plan;
(3) depositors of Waypoint Bank with aggregate account balances of $50 or
more as of June 30, 2000;
(4) other depositors of Waypoint Bank at August 7, 2000, 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 Waypoint Value of
401(k) Plan Assets
As of June 30, 2000, the market value of the assets of the 401(k) plan was
approximately $______________. The plan administrator informed each participant
of the value of his or her account balance under the 401(k) plan as of June 30,
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 Waypoint Financial Corp. 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, Waypoint
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 Waypoint Financial Corp. 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 Waypoint Financial
Corp. 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
Waypoint Financial Corp. 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 Waypoint Financial Corp.
Purchase Price of Common Stock
The trustee will use the funds transferred to the Waypoint Financial Corp.
stock fund to purchase common stock in the offering, subject to your ability to
purchase shares in accordance with the priorities listed on the first page of
this prospectus supplement and 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 Waypoint Financial Corp. 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
<PAGE>
DESCRIPTION OF THE 401(k) PLAN
Introduction
Waypoint Bank (formerly, Harris Savings Bank) adopted the Harris Retirement
Savings Incentive Plan ("401(k) Plan") initially effective October 1, 1988. The
401(k) Plan was amended and restated effective January 1, 1997. The most recent
amendment to the Plan was adopted in 2000. The 401(k) plan is a tax-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 revised to permit investment by
participants in stock of Waypoint Financial Corp. As a result, up to 100% of the
assets of the 401(k) Plan can be invested in Waypoint Financial Corp. common
stock. In addition, the 401(k) Plan has been revised so that matching
contributions contributed after __________, 2000 will be invested by the trustee
in Waypoint Financial Corp. stock.
Waypoint Bank (formerly, 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. Waypoint 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 Waypoint 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 Waypoint 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 Waypoint 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
<PAGE>
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 matching 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, Waypoint 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, Waypoint 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
-----------------------------------------
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
<PAGE>
Limitations on annual additions and benefits. The contributions and
--------------------------------------------
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 as a result of a reasonable error in
estimating participant's compensation or the amount of elective deferrals that
may be made with respect to a participant, or for other reasons permitted under
the Code and treasury regulations, 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 Waypoint Bank's (formerly, 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
-----------------------------------------------------------------
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:
6
<PAGE>
(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
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 Waypoint Financial Corp., or stock
possessing more than 5% of the total combined voting power of all stock of
Waypoint Financial Corp.; or
7
<PAGE>
(2) an employee who, for the preceding plan year, received compensation
from Waypoint Bank (formerly, Harris Savings Bank) in excess of $80,000, and, if
Waypoint 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.
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, Waypoint 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 2-2 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
Waypoint Bank with respect to these contributions, unless such contributions,
plus any income allocable thereto, are distributed within 2-2 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:
<TABLE>
<CAPTION>
Years of Service Vesting Percentage
---------------- ------------------
<S> <C>
Less than 2 0%
2 20%
3 40%
4 60%
5 80%
6 or more 100%
</TABLE>
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.
8
<PAGE>
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 Waypoint Bank's
(formerly, 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)
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
Waypoint Financial Corp. stock fund.
You may elect to have both past contributions and earnings, as well as
future contributions to your account invested either in the Waypoint Financial
Corp. 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 Waypoint Financial Corp. 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 Waypoint
Financial Corp. by Invesmart of Eastern Pennsylvania, Inc. (formerly Alliance
Benefit Group).
9
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
Fund Investment YTD % 1999 1998 1997
Objective Fund Total Total % Total % Total Total % Total % Total %
Return Return Return % Return Return Return
(7/31/00) Return 3 Yrs Yrs 10 Yrs
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stable Value Stable Value Fund w/ CGU Life 5.25* 5.22 5.46 5.55 5.41 5.54 N/A
---------------------------------------------------------------------------------------------------------------------------------
Money Market Fidelity Daily US Treasury 5.87* 4.46 4.93 5.00 4.80 4.93 4.76
Money Market
---------------------------------------------------------------------------------------------------------------------------------
Long-Term Bond Loomis Sayles Bond Instl 3.60 4.50 4.70 12.70 7.23 12.41 N/A
(Corp Bond - General)
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Balanced Fidelity Puritan 0.90 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 - 2.10 20.70 28.48 33.04 27.29 28.27 17.90
(Value & Growth) Index
---------------------------------------------------------------------------------------------------------------------------------
Mid-Cap Stocks Putnam Vista A 9.40 53.20 9.53 23.23 31.17 30.94 20.66
(Growth)
---------------------------------------------------------------------------------------------------------------------------------
Small Cap Stocks Franklin Small Cap Growth A 4.50 97.10 -0.02 15.79 31.64 32.75 N/A
(Growth)
---------------------------------------------------------------------------------------------------------------------------------
Small Cap Stocks Heartland Value Plus 4.50 97.10 -0.02 15.79 31.64 32.75 N/A
(Growth)
---------------------------------------------------------------------------------------------------------------------------------
Foreign Stock Ivy International A - 2.50 21.00 7.34 10.38 12.77 14.10 11.75
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Current annualized return is shown in the year to date column.
** The seven-day yield is shown in the year to date column.
--------------------------------------------------------------------------------
-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.
--------------------------------------------------------------------------------
-The mutual fund rates of return do not reflect the quarterly custodial /
asset management charge of 10/100 of one percent or less.
--------------------------------------------------------------------------------
-References: Morningstar, Inc., The Wall Street Journal and CGU Life
Insurance Company of America
--------------------------------------------------------------------------------
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 Waypoint Financial Corp. Stock Fund
The Waypoint Financial Corp. 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 Waypoint Financial Corp. stock fund, including cash dividends paid on
common stock held in the Waypoint Financial Corp. stock fund, to purchase shares
of common stock of Waypoint Financial Corp. Only whole shares of Waypoint
Financial Corp. 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 Waypoint Financial Corp. 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
administrator will use such cash to purchase stock. Any earnings that result
therefrom will remain in the Waypoint Financial Corp. stock fund in the event of
an oversubscription and
11
<PAGE>
will not be reinvested among the other five funds. It is expected that all
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 Waypoint Financial Corp. stock fund. Performance will be dependent upon a
number of factors, including the financial condition and profitability of
Waypoint Financial Corp. and Waypoint Bank and market conditions for the common
stock generally.
For a discussion of risks that you should consider, see ARisk 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 Waypoint 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 Waypoint 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
12
<PAGE>
remaining portion of such interests will continue to be distributed as rapidly
as under the method of distribution being used prior to your death.
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 elective deferral contribution account, 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 Waypoint 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. Waypoint Bank is
the 401(k) plan administrator. Waypoint Bank has appointed James J. Durrell to
perform the duties of the 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 Waypoint Bank to continue the 401(k) plan
indefinitely. Nevertheless, Waypoint 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. Waypoint 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 Waypoint
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) Waypoint 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 Waypoint 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. Waypoint 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 59-2; and
(3) consists of your balance under this 401(k) plan and all other profit
sharing plans, if any, maintained by Waypoint 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 Waypoint 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 Waypoint Bank, referred to as the ordinary income portion, will be
taxable generally as ordinary income for Federal income tax purposes.
For years beginning after December 31, 1999, five-year income averaging is
repealed. 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%.
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 taxable
disposition of the common stock in excess of the amount of net unrealized
appreciation at
16
<PAGE>
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 59-2 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;
18
<PAGE>
(4) made to you after separation from service on account of early
retirement under the 401(k) plan after attainment of age 55;
(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 Waypoint Financial Corp. 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.
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 Waypoint Financial Corp. 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 Waypoint Financial Corp., a
Form 3 reporting initial beneficial ownership must be filed with the Securities
and Exchange Commission. Changes in beneficial ownership, such as purchases,
sales
19
<PAGE>
and gifts generally must be reported periodically, either on a Form 4 within 10
days after the end of the month in which a change occurs, or annually on a Form
5 within 45 days after the close of Waypoint Financial Corp.'s fiscal year.
Discretionary transactions in and beneficial ownership of the common stock
through the Waypoint Financial Corp. stock fund of the 401(k) plan by officers,
directors and persons beneficially owning more than 10% of the common stock of
Waypoint Financial Corp. 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 Waypoint
Financial Corp. of profits realized by an officer, director or any person
beneficially owning more than 10% of Waypoint Financial Corp.'s common stock
resulting from non-exempt purchases and sales of Waypoint Financial Corp. 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
Waypoint Financial Corp. 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 Waypoint Financial Corp. in
connection with Waypoint Financial Corp.'s stock offering.
20
<PAGE>
PROSPECTUS
[Harris Financial Logo]
Waypoint Financial Corp.
(Successor to Harris Financial, Inc.)
Up to 26,450,000 Shares of Common Stock
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Waypoint Financial Corp., a Pennsylvania corporation and the successor to
Harris Financial, Inc., is offering shares of its common stock in connection
with the mutual-to-stock conversion of Harris Financial, MHC. Harris
Financial, MHC is the mutual holding company of Harris Savings Bank.
Immediately after the stock offering is completed, Waypoint Financial Corp.
will acquire by merger York Financial Corp., the holding company of York
Federal Savings and Loan Association, Harris Savings Bank will change its name
to Waypoint Bank, and York Federal will merge into Waypoint Bank. After the
stock offering, Waypoint Financial will be the holding company of Waypoint
Bank.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
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 Waypoint Financial... $136,859,000 $186,859,000 $255,097,000
. Net proceeds per share to Waypoint
Financial............................ $ 9.41 $ 9.55 $ 9.64
</TABLE>
Waypoint 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 .
Waypoint Financial has applied to have its common stock quoted on the
Nasdaq National Market under the symbol "WYPT."
Waypoint Financial is offering the common stock on a best efforts basis,
subject to certain conditions. Waypoint 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.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, 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 and will bear interest at our passbook savings
rate. This offering is expected to terminate on September 25, 2000.
[Logo of Ryan, Beck & Co.]
August 14, 2000
<PAGE>
[INSERT MAP HERE]
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Questions and Answers Relating to the Transactions........................ 4
Questions and Answers Relating to the Stock Offering...................... 5
Summary................................................................... 10
Risk Factors.............................................................. 21
Selected Consolidated Financial and Other Data of Harris Financial and
Subsidiaries............................................................. 24
Selected Consolidated Financial and Other Data of York Financial Corp. and
Subsidiaries............................................................. 26
Harris Financial Recent Developments...................................... 28
York Financial Corp. Recent Developments.................................. 34
Selected Unaudited Pro Forma Consolidated Financial Data of Waypoint
Financial................................................................ 36
WaypointFinancial......................................................... 38
Harris Financial.......................................................... 38
Harris Savings Bank and Waypoint Bank..................................... 39
Use of Proceeds........................................................... 40
Dividend Policy........................................................... 42
Market for the Common Stock............................................... 43
Historical and Pro Forma Capitalization................................... 45
Historical and Pro Forma Capital Compliance............................... 47
Pro Forma Data............................................................ 48
Certain Effects of the Merger of Harris Financial and York Financial...... 58
Harris Financial and Subsidiaries Consolidated Statements of Operations... 63
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 64
Business of Waypoint Financial............................................ 83
Business of Harris Financial and Harris Savings Bank...................... 83
Regulation................................................................ 111
Federal and State Taxation................................................ 121
Management of Harris Financial............................................ 123
Beneficial Ownership of Common Stock...................................... 141
Subscriptions by Executive Officers and Directors......................... 146
The Conversion and Stock Offering......................................... 147
Merger With York Financial................................................ 162
Restrictions on Acquisition of Waypoint Financial......................... 163
Description of Capital Stock of Waypoint Financial........................ 166
Experts................................................................... 167
Legal Opinions............................................................ 167
Additional Information.................................................... 167
Harris Financial, Inc. and Subsidiaries Index to Consolidated Financial
Statements and Other Information......................................... F-1
Harris Financial, Inc. and Subsidiaries Consolidated Financial
Statements............................................................... F-2
Harris Financial, Inc. and Subsidiaries Quarterly Report on Form 10-Q for
the Fiscal Quarter Ended June 30, 2000................................... Q-1
York Financial Corp. and Subsidiaries Index to Consolidated Financial
Statements and Other Information......................................... G-1
Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations For the Fiscal Year Ended June 30, 2000........ G-2
Excerpts from York Financial's Annual Report on Form 10-K for the Year
Ended June 30, 1999...................................................... G-2
Excerpts from York Financial's Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 2000............................................. G-2
</TABLE>
3
<PAGE>
QUESTIONS AND ANSWERS RELATING TO THE TRANSACTIONS
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 BACKGROUND OF HARRIS FINANCIAL, MHC?
A: In 1994, Harris Savings Bank reorganized into the mutual holding company
form of organization. Harris Financial, MHC, is a mutual (meaning no stock
outstanding) holding company and Harris Financial, Inc., is a stock holding
company. Harris Financial owns all of the stock of Harris Savings Bank. A
majority of Harris Financial's stock is owned by Harris Financial, MHC,
while public stockholders own the remaining 24.1% of Harris Financial's
outstanding shares.
Q: WHAT TRANSACTIONS ARE BEING UNDERTAKEN AS PART OF THE CONVERSION?
A: We are currently undertaking three related transactions that will affect our
corporate structure. Each is briefly described below:
The Conversion: Pursuant to the terms of a plan of conversion, Harris
Financial will convert from the partially-public to the fully-public form of
corporate structure.
The Stock Offering: To facilitate the conversion, we have formed Waypoint
Financial, Inc., a stock company, which is offering its common stock for
sale to the public.
The Merger: We have entered into an agreement to acquire by merger York
Financial Corp. and its subsidiary, York Federal Savings and Loan
Association.
Upon the completion of the conversion and stock offering, both Harris
Financial, MHC and Harris Financial will cease to exist, and our
organization will complete the transition from partial to full public
ownership. Waypoint Financial will succeed Harris Financial as the holding
company of Harris Savings Bank, and Harris Savings Bank will change its name
to "Waypoint Bank". Harris Financial's outstanding stock will be canceled,
and its public stockholders will receive shares of Waypoint Financial stock.
Additional shares of Waypoint Financial stock will be issued to investors in
the stock offering. As part of the merger, York Federal will be merged into
Waypoint Bank.
The conversion, stock offering and merger are interdependent. Each
transaction will not occur unless the others occur.
Q. WHAT ARE REASONS FOR THE MUTUAL-TO-STOCK CONVERSION AND FOR THE STOCK
OFFERING?
A: The primary reason for the conversion is to take advantage of the
opportunity to acquire by merger York Financial. Waypoint Financial will
issue shares of its common stock to York Financial's stockholders as
consideration for the merger. The additional capital raised in the stock
offering will allow us to better serve existing and new customers. We will
be able to increase lending activities, especially business lending, and
continue to expand Harris Savings Bank's branch network, products and
service delivery systems. The additional capital also will help support
dividend payments and, possibly, future acquisitions of financial
institutions or banking-related businesses.
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Q: WHAT ARE SOME EXPECTED BENEFITS OF THE MERGER?
A: Our Board of Directors believes that benefits include:
. Combining and expanding two financial institutions with complementary
business focuses;
. Improving our competitive position by significantly expanding our market
presence, including an increased visibility in growing York County; and
. Accelerating Harris Savings Bank's progress toward becoming a full-
service community financial services company.
Q: WHAT IS WAYPOINT FINANCIAL, INC.?
A: Waypoint Financial, headquartered in Harrisburg, Pennsylvania, is the
successor to Harris Financial and was formed recently to become the holding
company for Waypoint Bank after the conversion and merger. Harris Financial
is the holding company of Harris Savings Bank, which conducts its banking
business through 37 full-service branches located in south central
Pennsylvania and northern Maryland.
Q: WHAT IS YORK FINANCIAL CORP.?
A: York Financial, headquartered in York, Pennsylvania, is the holding company
for York Federal. York Federal conducts its banking business through 26
full-service branches located in south central Pennsylvania and northern
Maryland.
Q: WILL THE STOCKHOLDERS OF YORK FINANCIAL AUTOMATICALLY BECOME STOCKHOLDERS OF
WAYPOINT FINANCIAL?
A: Yes. If the merger is approved by stockholders, York Financial's
stockholders will exchange their shares of York Financial common stock for
common stock of Waypoint Financial, based on an exchange ratio established
pursuant to the terms of the merger agreement between Harris Financial and
York Financial.
QUESTIONS AND ANSWERS RELATING TO THE STOCK OFFERING
Q: WHAT IS THE NATURE OF WAYPOINT FINANCIAL'S STOCK OFFERING?
A: Waypoint 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 and Harris
Savings Bank's employee stock ownership plan have subscribed for common
stock in the subscription offering, Waypoint Financial will offer its common
stock to others in a community offering with preference given to persons who
reside in Harris Savings Bank's local community, then to current
stockholders of Harris Financial and York Financial and then to depositors
of York Federal. If Waypoint Financial does not receive orders for at least
19,550,000 shares in the subscription and community offering, then, in
Waypoint 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. Waypoint Financial may also offer shares of common stock not
purchased in the subscription offering or the community offering in an
underwritten public offering.
Q: HOW MANY SHARES OF STOCK ARE BEING OFFERED, AND AT WHAT PRICE PER SHARE?
A: Waypoint Financial is offering between 19,550,000 and 26,450,000 shares of
common stock for a subscription price of $10.00 per share. Waypoint
Financial may increase or decrease this amount under certain circumstances.
These circumstances are described in this document.
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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 7, 2000.
If any shares remain unsubscribed in the subscription offering, Waypoint
Financial may sell shares to the public in a community offering, with a
preference to residents of the counties where Harris Savings Bank maintains
branches and to stockholders of Harris Financial and York Financial as of
August 7, 2000 and to current depositors of York Federal. Harris Savings
Bank maintains branches in Dauphin, Cumberland, York, Lancaster and Lebanon
counties in Pennsylvania and Washington County, in Maryland.
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" beginning on page .
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 9:00 a.m.
and 4:00 p.m., local time, or by mail in the enclosed envelope marked STOCK
ORDER RETURN. You may submit stock order forms in three ways: you may send
the stock order form by regular mail, using the order reply envelope
provided; you may send the stock order form by overnight delivery to the
address indicated on the back of the stock order form; or you may hand-
deliver the stock order form to our Stock Information Center, located at our
operations center, 449 Eisenhower Boulevard, Harrisburg. Stock order forms
may not be delivered to our branches.
Q: HOW CAN I PAY FOR THE STOCK?
A: Full payment for shares must accompany your stock order form at the time it
is submitted. You may pay for your shares by check or money order payable to
Harris Savings Bank, or by authorizing a withdrawal from your deposit
account at Harris Savings Bank (without any penalty for early withdrawal).
Authorized withdrawals would not be made until the completion of the
offering, but the designated funds will not be available to you in the
interim. If you wish to use IRA funds, see the discussion below. Please do
not send cash in the mail. Please note, however, that regulations do not
allow Harris Savings Bank to loan funds to purchase stock in the stock
offering. However, other financial institutions may be able to make such a
loan. Funds authorized to be withdrawn from Harris Savings Bank deposit
account(s) must be available in your account at the time you submit your
stock order form. Personal checks and money orders will be cashed upon
receipt.
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 Waypoint Financial
extends the offering beyond November 9, 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.
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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.
An interest check will be mailed to you after the completion of the
offering. 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, the common stock must be held in a self-directed retirement
account. By regulation, Harris Savings Bank's IRAs are not self-directed, so
they cannot be invested in stock. If you wish to use funds in your Harris
Savings Bank IRA, the funds must be transferred to a self-directed account
maintained by an independent trustee, such as a brokerage firm. If you do
not have such an account, you will need to establish one before placing your
stock order. Because individual situations vary and processing takes time,
we recommend that you contact the Stock Information Center as soon as
possible for assistance with purchases using your Harris Savings Bank IRA or
another retirement account that you may have. Whether you may use such funds
for the purchase of shares in the offering may depend on timing constraints
and, possibly, the institution where the funds are currently held.
Q: HOW MANY SHARES MAY I BUY?
A: The minimum order is 25 shares, or $250. There are maximum purchase
limitations, and there is a stock ownership limitation, which applies to
current Harris Financial stockholders. These limitations are described on
the stock order form and in the section of the Prospectus entitled "The
Conversion and Stock Offering--Limitations on Common Stock Purchases and
Ownership."
Q: WHAT IS THE DEADLINE FOR PLACING AN ORDER?
A: Orders in the subscription offering and community offering must be received
(not postmarked) by no later than 10:00 am local time, on September 25,
2000.
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: Waypoint Financial intends initially to pay quarterly dividends following
the offering, reflecting an annual amount of between $.26 and $.34 per
share, depending on how many shares are sold in the offering. At the
midpoint of the offering range, the annual dividend is expected to be $.305
per share. Waypoint Financial intends to pay a prorated dividend after the
end of the quarter during which the offering is completed. However, there
can be no assurance that dividends will be paid or that they will not be
subsequently reduced or eliminated.
Q: WILL I BE ABLE TO SELL MY WAYPOINT FINANCIAL STOCK AFTER I PURCHASE IT?
A: Yes. Waypoint Financial has applied to have its common stock trade on the
Nasdaq National Market under the symbol "WYPT."
Q: CAN THE OFFERING BE EXTENDED?
A: Yes. Waypoint Financial can extend the offering beyond September 25, 2000.
Waypoint Financial must complete any offering to members of the general
public within 45 days after the close of the subscription offering, unless
it receives regulatory approval to further extend the offering.
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Q: AS A DEPOSITOR OF HARRIS SAVINGS BANK PLACING AN ORDER IN THE SUBSCRIPTION
OFFERING, MAY I REGISTER THE SHARES IN SOMEONE ELSE'S NAME?
A: No. To preserve your purchase priority, you must register the shares only in
the name or names of deposit account holders at the applicable date of
eligibility. You may not add the names of non-depositors or depositors who
were eligible only at a later date.
Q: I AM ELIGIBLE TO PURCHASE SHARES IN THE SUBSCRIPTION OFFERING, BUT DO NOT
WANT TO BECOME A STOCKHOLDER. MAY I ALLOW SOMEONE ELSE TO USE MY STOCK ORDER
FORM TO TAKE ADVANTAGE OF MY PRIORITY?
A: No. Attempting to transfer your subscription rights to someone who does not
have subscription rights is illegal. Waypoint Financial intends to prosecute
any attempt to transfer subscription rights. If anyone offers to give you
money to buy stock in your name in exchange for later transferring the
stock, or requests to share in cash proceeds upon your future sale of
Waypoint Financial stock, please inform our Stock Information Center at the
number below.
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: WILL THE COMMON STOCK BE INSURED BY THE FDIC?
A: No. Unlike deposit accounts at Harris Savings Bank and York Federal, common
stock cannot be insured or guaranteed by the FDIC or any other government
agency. The trading price of common stock may fluctuate, so common stock is
subject to investment risk, including loss of principal invested. There can
be no assurance that you will be able to sell your Waypoint Financial shares
at or above the $10.00 per share purchase price in the offering.
Q: BY PLACING AN ORDER, AM I GUARANTEED TO RECEIVE ALL THE SHARES I REQUESTED?
A: No. If there is an oversubscription, shares will be allocated as described
in the Prospectus section entitled "The Conversion and Stock Offering". If
we do not fill an order (either wholly or in part), funds submitted but not
used will be refunded, with interest, and withdrawal authorizations will be
cancelled to the extent not used.
Q: CAN MY HARRIS SAVINGS BANK LOCAL BRANCH ASSIST ME WITH PURCHASING SHARES OR
COMPLETING THE STOCK ORDER FORM?
A: No. Our branch personnel may not, by law, assist with investment-related
questions about the offering. We have established a Stock Information Center
staffed by registered representatives who can assist you. You may call the
Stock Information Center at the number below.
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,
toll free, at (877) 902-7756, Monday through Friday, between the hours of
9:00 a.m. and 4:00 p.m., local time.
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TO ENSURE THAT EACH PERSON RECEIVES A PROSPECTUS AT LEAST 48 HOURS PRIOR TO
THE EXPIRATION DATE OF SEPTEMBER 25, 2000 IN ACCORDANCE WITH FEDERAL LAW, NO
PROSPECTUS WILL BE MAILED ANY LATER THAN FIVE DAYS PRIOR TO SEPTEMBER 25, 2000
OR HAND DELIVERED ANY LATER THAN TWO DAYS PRIOR TO SEPTEMBER 25, 2000.
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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
Waypoint Financial Corp. is offering shares of its common stock in a stock
offering. Waypoint Financial's stock offering is one of three principal
transactions that are being conducted by six corporate entities. The three
transactions are the mutual-to-stock conversion of Harris Financial, MHC, the
stock offering by Waypoint Financial, and Waypoint Financial's acquisition by
merger of York Financial. The six corporate entities that are participants in
these transactions are: Harris Financial MHC, Harris Financial, Inc., Waypoint
Financial Corp., 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.; Waypoint Financial Corp.; 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 mutual-to-stock 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 mutual-to-stock
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 exchange its charter for a federal mid-tier
stock holding company charter immediately before its corporate existence ends
as part of the mutual-to-stock 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.
Waypoint Financial Corp. Waypoint Financial Corp. is a Pennsylvania
corporation that will own 100% of the common stock of Waypoint Bank, formerly
Harris Savings Bank, upon completion of the mutual-to-stock conversion and
stock offering. Waypoint Financial will acquire York Financial in a merger.
Waypoint Financial was formed in March 2000 to facilitate the conversion and
stock offering. Waypoint Financial is the successor to Harris Financial and
will conduct its primary business activities through Waypoint Bank. Waypoint
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 completion of the mutual-to-stock conversion and stock
offering. At the conclusion of the stock offering, Harris Savings Bank will
change its name to Waypoint Bank. Harris Savings Bank currently 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
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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 also originates certain types of
consumer loans throughout most of the eastern United States. Harris Savings
Bank's executive offices are, and Waypoint Bank's executive offices will be,
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
Venture Partners. 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 that
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.
[LOGO]
Diagram of Current Corporate Structure of York Financial. The following
diagram shows the current corporate structure of York Financial and York
Federal.
[LOGO]
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The Transactions
The three principal transactions that the six corporate entities described
above will conduct are;
. a mutual-to-stock conversion of Harris MHC;
. a stock offering by Waypoint Financial; and
. a merger of York Financial with and 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 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, renamed Waypoint Bank, as the resulting institution.
Harris MHC and Harris Financial will no longer exist after the conversion. Upon
the closing of the conversion and merger, Waypoint Financial will become the
holding company of Waypoint Bank.
Waypoint Financial's Stock Offering. Waypoint 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. If any shares of Waypoint Financial common stock remain unsold
after depositors and the Harris Savings Bank employee stock ownership plan
exercise their subscription rights, the shares will be offered for sale to the
community and the public.
The Merger of York Financial Corp. into Waypoint Financial. Concurrently
with the conversion and stock offering, Waypoint 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 Waypoint Financial, York Financial will
merge into Waypoint Financial, Harris Savings Bank will change its name to
Waypoint Bank, and York Federal will merge into Waypoint 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.
[LOGO]
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Reasons for the Conversion, Stock Offering and Merger
The conversion of Harris MHC from the mutual holding company form of
organization and Waypoint Financial's stock offering are necessary to complete
the merger with York Financial. The stock offering and merger will allow
Waypoint 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, Waypoint
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 Waypoint Financial to:
. finance acquisitions of other financial institutions or other businesses
related to banking; and
. pay dividends to stockholders.
After the stock offering, Waypoint Financial will be able to issue
additional shares of common stock to raise capital or to finance acquisitions.
At the present time, Waypoint Financial is not planning any additional stock
offerings, mergers, or material acquisitions. Waypoint Financial believes that
the stock offering will give customers and the local community the opportunity
to become equity owners of Waypoint Financial, and to participate in any stock
price appreciation and cash dividends. Waypoint Financial believes that
through expanded local stock ownership, existing customers and others who
purchase common stock will try to support Waypoint Financial by consolidating
their banking business with, and increasing their referrals to, Waypoint Bank.
Business of Waypoint Financial
Waypoint Financial was recently formed and has no operating history.
Following the transactions, the business of Waypoint Financial will be the
combined businesses of Harris Financial and York Financial. Waypoint 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, Waypoint Financial will raise additional capital through the stock
offering. Following the stock offering and merger, Waypoint Financial will be
the second largest thrift holding company headquartered in Pennsylvania based
on combined assets and deposits as of March 31, 2000. In considering the
business and operations that will be conducted by Waypoint 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 Waypoint Financial Following the Transactions
At the completion of the merger, the Board of Directors of Waypoint
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 Waypoint 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
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President and Chief Executive Officer of York Financial, will be appointed Co-
Chairman of the Board of Directors of Waypoint Financial through 2002, and
thereafter will serve as Vice Chairman of the Board of Directors and Vice
Chairman of the Executive Committee of Waypoint Financial. The remainder of
Waypoint Financial's management team will include members of both Harris
Financial's and York Financial's current management teams.
Operating Strategies after the Merger
Waypoint Financial has recently been formed and currently has no business
and operations. Waypoint Financial's business after the transactions will be
the combined businesses of Harris Financial and York Financial. Harris
Financial, York Financial and Waypoint Financial believe that these business
strategies can be summarized as follows:
. Expanding business banking activities
. Increasing sources of non-interest income
. Leveraging the current branch network of Harris Savings Bank and York
Federal
. Growth and increasing market share
. Improving the competitive position of Waypoint Financial
. 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
Waypoint 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 mutual-to-stock conversion, Harris MHC's existence will end, Harris
MHC's 75.9% ownership interest in Harris Financial is being offered for sale to
Harris Savings Bank's depositors and the public in the stock offering, and
Harris Savings Bank is changing its name to Waypoint Bank. Waypoint Financial
will be the successor to Harris Financial. Waypoint Financial will own 100% of
the common stock of Waypoint Bank, formerly Harris Savings Bank.
The Stock Offering. Waypoint 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
and Harris Savings Bank's employee stock ownership plan have subscribed for
common stock in the subscription offering, Waypoint 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, then to current stockholders
of Harris Financial and York Financial and then to depositors of York Federal.
If Waypoint Financial does not receive orders for at least 19,550,000 shares in
the subscription and community offering, then, in Waypoint 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. Waypoint Financial may
also offer shares of common stock not purchased in the subscription offering or
the community offering in an underwritten public offering. When this document
refers to the stock
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offering, it means the issuance in the subscription offering, the community
offering and any 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 Waypoint Financial. The number
of shares of Waypoint Financial that Harris Financial stockholders will receive
will be based on the Harris Financial conversion exchange ratio which will be
determined based on the independent appraisal of the pro forma market value of
Waypoint Financial. Former Harris Financial stockholders will receive
approximately 15.0% to 17.0% of the Waypoint Financial shares outstanding after
the conversion, stock offering and merger. The decrease in the ownership
percentage to between 15.0% to 17.0% from 24.1% is a result of Waypoint
Financial's issuance of additional shares in the acquisition by merger of York
Financial. The number of shares and the percentage of Waypoint Financial's
total shares outstanding after the transactions owned by former Harris
Financial stockholders is identified in the table included in the "Ownership of
Waypoint Financial After the Transactions" section of this summary.
Description of the Merger of York Financial into Waypoint Financial
Concurrently with the conversion and stock offering, Waypoint 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 Waypoint Financial, York Financial will
merge into Waypoint Financial, and York Federal will merge into Waypoint 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 Waypoint Financial common stock based on the York
Financial merger exchange ratio. Options to purchase York Financial common
stock will be converted into options to purchase Waypoint 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, which was amended on June 23, 2000. The
merger agreement sets forth the terms of the merger. The merger agreement was
unanimously approved by the Board of Trustees of Harris MHC, and the Boards of
Directors of Harris Financial, Waypoint 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
Waypoint Financial and Harris MHC have obtained an independent appraisal of
the pro forma market value of Waypoint 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.
15
<PAGE>
RP Financial has advised Waypoint Financial and Harris MHC that, in its
opinion, dated July 28, 2000, the midpoint of the estimated range of the market
value of the common stock of Waypoint 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,
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
Waypoint Financial was $477.2 million, and ranged from $414.1 million to $526.1
million. If Waypoint Financial does not receive orders for 19,550,000 shares in
the subscription and community offering, then, in Waypoint 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 applied, then the pro forma market capitalization of Waypoint Financial
may 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 Waypoint Financial After the Transactions
The following table shows information regarding the shares that Waypoint
Financial will issue in the stock offering. The table also shows the number of
shares of Waypoint Financial that will be owned by:
. purchasers in the stock offering;
. Harris Financial minority stockholders who will receive shares of
Waypoint Financial in exchange for their shares of Harris Financial; and
. York Financial stockholders who will receive shares of Waypoint
Financial in exchange for their shares of York Financial.
Information is presented at the adjusted minimum for the discretionary issuance
of unsubscribed shares to York Financial stockholders, and at the minimum,
midpoint, maximum and adjusted maximum of the offering range. The number of
shares issued is based, in part, on the independent appraisal of Waypoint
Financial.
16
<PAGE>
<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 of Percent of Percent of Percent of Percent of
Number Total Number Total Number Total Number Total Number 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% 19,550,000 100.0% 23,000,000 100.0% 26,450,000 100.0% 30,417,500 100.0%
York Financial
stockholders(1)... 5,000,000 25.6 -- -- -- -- -- -- -- --
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total shares
issued in stock
offering........ 19,550,000 100.0% 19,550,000 100.0% 23,000,000 100.0% 26,450,000 100.0% 30,417,500 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
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 Waypoint Financial does not receive orders for 19,550,000 shares in the
subscription and community offering, then, in Waypoint 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.
Information regarding outstanding options to purchase common stock of
Harris Financial and York Financial is set forth in "Management."
17
<PAGE>
Use of Proceeds from the Sale of Common Stock
Waypoint 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 Waypoint Bank;
. 42%, or $92.1 million, will be retained by Waypoint 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 Waypoint Financial common stock in the
stock offering.
Waypoint Financial intends to use the net offering proceeds that it retains
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. Waypoint
Bank intends to use the offering proceeds it receives from Waypoint Financial
to increase its lending activities, especially business banking; to expand its
branch office network in selected markets; to expand products and services and
delivery systems; for other general corporate purposes such as the repayment of
borrowings; and to 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
Waypoint 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 7,
2000.
Shares of common stock not purchased in the subscription offering will be
offered to the general public in a community offering that is expected to be
conducted during the subscription offering. Waypoint Financial intends to give
a preference in the community offering to orders submitted by persons residing
in the counties where Harris Savings Bank or York Federal have a branch office,
stockholders of Harris Financial and York Financial and depositors of York
Federal. If Waypoint Financial does not receive orders for at least 19,550,000
shares in the subscription and community offerings, then, in Waypoint
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. Five
million shares represents 25.6% of the 19,550,000 shares that would be issued
at the minimum of the offering range. Shares of Waypoint Financial common stock
not purchased in the subscription offering or in the community offering may be
offered for sale in an underwritten public offering. In its sole discretion,
Waypoint Financial has the right to accept or reject orders, in whole or in
part, received in the community and any underwritten public offering.
Ryan, Beck and Co., Inc. has agreed to use its best efforts to assist in the
sale of common stock in the subscription offering and the 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 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. If a public
offering is conducted, it will be managed by Ryan, Beck and Legg Mason Wood
Walker, Inc. Waypoint Financial intends to reserve 7,500,000 shares for sale in
the public offering if subscriptions for such shares are not received in the
18
<PAGE>
subscription offering. Waypoint Financial intends to reserve 7,500,000 shares
for sale in the subscription offering at the minimum, midpoint, maximum and
adjusted maximum of the offering range, but will not reserve shares that would
result in the issuance of more than 30,417,500 shares in the offering. In
addition, for a period of 30 days following the public offering, Waypoint
Financial expects to grant to 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. Waypoint 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 number of shares of common stock that an individual may
purchase in any category of the stock offering is 500,000 shares, or
$5,000,000. Waypoint Financial may increase or decrease this maximum
purchase limitation at any time without notifying you.
. The maximum number of shares of common stock that an individual,
together with associates and persons acting in concert with such
individual, may purchase in all categories of the stock offering
combined is 5.0% of the shares issued in the stock offering. Waypoint
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. For example, this
means that if we issue 19,550,000 shares in the stock offering and issue
6,191,274 Waypoint Financial 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 or fewer shares.
If Waypoint Financial issues 26,450,000 shares in the stock offering,
this limitation would be 1,741,322 shares. This limitation does not
apply to shares of Waypoint Financial received by York Financial
stockholders in connection with the acquisition by merger of York
Financial. Waypoint Financial may increase or decrease this maximum
purchase limitation at any time without notifying you.
. If Waypoint Financial receives orders for a greater number of shares
than it is offering, then Waypoint 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 of Harris Savings Bank. The employee stock ownership plan is
authorized to purchase up to 8% of the shares issued in the stock offering or
between 1,564,000 and 2,433,400 shares. For additional information on these
purchase limitations see "The Conversion and Stock Offering--Limitations on
Common Stock Purchases." York Financial's employee stock ownership plan will be
terminated or continued for the exclusive benefit of York Financial's employees
who continue as Waypoint Financial employees, and the York Federal employee
stock ownership plan will not purchase shares in the stock offering.
19
<PAGE>
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 sells or gives 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 Waypoint Financial no later than 10:00 a.m., local
time, on September 25, 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 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 10:00 a.m., local time, on
September 25, 2000. We may extend the expiration date for the subscription
offering without notice to you, until November 9, 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 within 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 Waypoint Financial's Common Stock
Waypoint Financial has applied to have its common stock traded on the Nasdaq
National Market under the symbol "WYPT." Ryan, Beck intends to make a market in
the common stock but it is under no obligation to do so. See "Market for the
Common Stock."
Waypoint Financial's Policy Regarding Dividends
Waypoint Financial intends initially to pay quarterly dividends after the
completion of the stock offering and acquisition by merger of York Financial.
The exact amount of the dividend will depend on the number of shares sold in
the stock offering. Waypoint Financial intends to pay an annual dividend of
$.34 per share if the minimum number of shares are sold in the stock 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. Waypoint 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. Waypoint 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 Waypoint 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 Waypoint 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 conversion or stock offering, please
call the Stock Information Center, toll free, at (877) 902-7756, Monday through
Friday between 9:00 a.m. and 4:00 p.m., local time.
20
<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 the interest we earn 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 may 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 also may 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 interest 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. Waypoint 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, the stock offering and the merger.
Harris Saving Bank will change its charter to that of a federal savings bank
and will change its name to Waypoint Bank concurrently with such charter
conversion. As a federal savings bank, Waypoint Bank will be regulated by the
Office of Thrift Supervision. The OTS has indicated that it will focus
considerable attention, both during upcoming examinations and in financial
monitoring between examinations, on interest rate risk management. Institutions
with troubling interest rate risk levels or trends can expect heightened
regulatory scrutiny of capital management by the OTS. The OTS has reviewed the
interest rate risk profile of York Federal, but not Harris Savings Bank or
Waypoint Bank. If the OTS determines that the interest rate risk level or
trends of the combined operations of Harris Savings Bank and York Federal were
of concern, then it may impose operating restrictions on Waypoint Bank's
activities following the conversion and merger.
Waypoint Financial's success depends on the success of the merger.
Waypoint Financial's future growth and profitability depend, in part, on its
ability to successfully complete its merger with York Financial and manage the
combined operations. For the merger to be successful, Waypoint Financial will
have to succeed in combining the corporate cultures, personnel and operations
of Waypoint Financial and York Financial, and in achieving expense savings by
eliminating selected redundant operations. Waypoint 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.
21
<PAGE>
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 of economic changes on various industry sectors. Volatility, therefore,
may be unrelated to the current operating performance of a particular company.
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 Waypoint 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, Waypoint Financial's operating
performance and investor perceptions of the outlook for the banking industry in
general. We cannot assure you that, if you choose 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.
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 Waypoint Financial.
Provisions of our articles of organization and bylaws and applicable
provisions of Pennsylvania and Federal law and regulations may delay, inhibit
or prevent anyone from acquiring control of Waypoint 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 expanding commercial lending, downturns in the real
estate market or economy may adversely impact our profits.
Commercial real estate loans and commercial business loans generally 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 emphasis on expanding 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 Waypoint Bank, which will use the proceeds to support increased
lending,
22
<PAGE>
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 reduce 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 25, 2000,
Waypoint Financial may extend the subscription offering for an additional 45
days, or until November 9, 2000. If Waypoint Financial conducts a community
offering, the offering period may likewise be extended until as late as
November 9, 2000. If the offering period is extended, subscribers will not have
an opportunity to decrease their orders, or have their subscriptions refunded.
Waypoint Financial cannot extend the offering period beyond November 9, 2000
unless it obtains regulatory approval and gives subscribers the opportunity to
cancel their orders and obtain a refund of their subscriptions.
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
OF HARRIS FINANCIAL AND SUBSIDIARIES
Since Waypoint Financial was formed only recently to effect the conversion
and merger, it has no historical business or results of operations. However,
since Waypoint Financial will be the successor to Harris Financial, we are
presenting the consolidated 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 At December 31,
March 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
</TABLE>
<TABLE>
<CAPTION>
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 FDIC. In 1996, a one-time special
assessment was made on all depository institutions with deposits insured by
the Savings Association Insurance Fund of the FDIC.
(2) Noninterest expense for 1996 includes a $4.3 million pre-tax charge ($2.7
million net of taxes) for a fraud loss incurred in connection with the
acquisition of First Harrisburg Bancorp, Inc. (See "Harris Savings Bank"
for a discussion of this acquisition.)
24
<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
--------- --------- ------- ------- ------- ------- -------
<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(2)......... 2.27 2.45 2.35 2.38 2.38 2.45 2.39
Net interest margin(5).. 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(4)..... 67.93 63.18 61.88 62.02 57.88 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.. .91 .84 .93 .86 .96 1.01 .94
Allowance for loan
losses to non-
performing loans....... 75.68 138.17 73.59 118.78 124.16 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(5)............... 11.94 9.69 10.13 9.81 8.67 141.90 13.70
Per Share Data (6):
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
outstanting............ 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) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
(3) Represents annualized tax-effected net interest income before the provision
for loan losses divided by average interest-earning assets.
(4) Efficiency ratio is noninterest expense divided by the sum of net interest
income after provision for loan losses and noninterest income.
(5) Represents cash dividends paid divided by net income.
(6) All per share values have been adjusted to reflect the 1997 three for one
stock split.
25
<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 $1,364,626 $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
FDIC. In 1996, a one-time special assessment was made on all depository
institutions with deposits insured by the Savings Association Insurance
Fund of the FDIC.
26
<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(2)......... 2.30 2.53 2.56 2.92 3.01 3.24 3.49
Net interest margin(3).. 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(4)..... 69.42 63.05 65.71 63.34 73.98 59.19 64.40
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 1.85 2.57 2.44 2.30 3.03
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........ 7.39 7.66 7.11 7.67 7.48 7.49 7.50
Core capital............ 7.39 7.66 7.11 7.67 7.48 7.49 7.50
Risk-based capital...... 13.57 13.54 12.82 13.11 11.95 12.30 11.90
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(5)............... 54.52 59.74 50.62 44.13 55.30 32.69 39.94
Per Share Data (6):
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) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
(3) Represents annualized tax-effected net interest income before the provision
for loan losses divided by average interest-earning assets.
(4) Efficiency ratio is noninterest expense divided by the sum of net interest
income after provision for loan losses and noninterest income.
(5) Represents cash dividends paid divided by net income.
(6) All per share values have been adjusted for stock dividends effected
through March 31, 2000.
27
<PAGE>
HARRIS FINANCIAL RECENT DEVELOPMENTS
Selected Consolidated Financial and Other Data of Harris Financial and
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 selected consolidated financial condition and
operating data at, and for the six months ended, June 30, 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
six months ended June 30, 2000 are not necessarily indicative of the results of
Harris Financial that may be expected for the entire year.
<TABLE>
<CAPTION>
At June 30, At March 31, At June 30,
2000 2000 2000
----------- ------------ -----------
(unaudited)
<S> <C> <C> <C>
Selected Financial Condition Data:
Total assets............................... $2,851,401 $2,767,050 $2,691,400
Loans receivable, net...................... 1,382,896 1,313,645 1,267,983
Loans held for sale, net................... 6,433 1,761 1,646
Marketable securities...................... 1,315,328 1,303,825 1,257,603
Deposits................................... 1,452,738 1,439,688 1,373,870
Borrowings................................. 1,198,375 1,123,375 1,118,000
Stockholders' equity....................... 168,670 167,198 169,324
</TABLE>
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------- ---------------
2000 1999 2000 1999
------- ------- ------- -------
(unaudited) (In Thousands)
<S> <C> <C> <C> <C>
Selected Operating Data:
Interest income............................... $50,898 $42,428 $98,134 $84,136
Interest expense.............................. 34,610 27,227 66,328 53,814
Net interest income........................... 16,288 15,201 31,806 30,322
Provision for loan losses..................... 831 795 1,666 1,590
Net interest income after provision for loan
losses....................................... 15,457 14,406 30,140 28,732
Noninterest income............................ 2,593 3,511 5,327 7,532
Noninterest expense........................... 11,834 11,333 23,666 22,925
Income before taxes........................... 6,216 6,584 11,801 13,339
Provision for income taxes.................... 1,577 1,847 3,142 3,669
Net income.................................... $ 4,639 $ 4,737 $ 8,659 $ 9,670
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Three Months Six Months Ended
Ended June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Selected Operating Ratios and Other
Data
Performance Ratios:
Return on average assets (net income
divided by average total assets)..... 0.66% 0.74% 0.63% 0.77%
Return on average equity (net income
divided by average equity)........... 11.13 9.90 10.39 10.13
Average net interest rate spread(2)... 2.33 2.39 2.31 2.43
Net interest margin(5)................ 2.51 2.62 2.50 2.66
Net interest income after provision
for loan
losses to total noninterest expenses.. 130.62 127.12 127.36 125.33
Efficiency ratio(4)................... 65.56 63.25 66.73 63.22
Noninterest expense to average
assets............................... 1.69 1.77 1.72 1.81
Noninterest income to average assets.. 0.37 0.55 0.39 0.60
Average interest-earning assets to
average
interest-bearing liabilities......... 103.51 105.41 103.68 105.21
Asset Quality Ratios:
Nonperforming loans to total loans.... 0.71 0.54 0.71 0.54
Nonperforming loans to total assets... 0.34 0.25 0.34 0.25
Nonperforming assets as a percentage
of total assets...................... 0.38 0.53 0.38 0.53
Nonperforming loans and real estate
owned to total net
loans and real estate owned.......... 0.72 1.05 0.72 1.05
Allowance for loan losses to total
loans................................ 0.90 0.81 0.90 0.81
Allowance for loan losses to non-
performing loans..................... 126.59 150.02 126.59 150.02
Equity and Dividend Ratios:
Tangible capital...................... 6.74 6.87 6.74 6.87
Core capital.......................... 6.74 6.87 6.74 6.87
Risk-based capital.................... 11.26 11.74 11.26 11.74
Average equity to average assets...... 5.96 7.47 6.07 7.56
Period end equity to assets........... 5.92 6.98 5.92 6.98
Dividend payout ratio(5).............. 10.35 10.09 11.09 9.89
Per Share Data (6):
Basic earnings per share.............. $ 0.14 $ 0.14 $ 0.26 $ 0.29
Diluted earnings per share............ 0.14 0.14 0.26 0.29
Dividends per share................... 0.06 0.06 0.12 0.12
Book value per share.................. 5.02 5.54 5.02 5.54
Other Data:
Number of:
Real estate loans outstanding......... 6,946 9,620 6,946 9,620
Loans serviced for others............. 3,137 13,269 3,137 13,269
Deposit accounts...................... 158,573 156,813 158,573 156,813
Full-service offices.................. 38 36 38 36
</TABLE>
--------
(1) Annualized where appropriate.
(2) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
(3) Represents annualized tax-effected net interest income before the provision
for loan losses divided by average interest-earning assets.
(4) Efficiency ratio is noninterest expense divided by the sum of net interest
income after provision for loan losses and noninterest income.
(5) Represents cash dividends paid divided by net income.
(6) All per share values have been adjusted to reflect the 1997 three for one
stock split.
29
<PAGE>
Comparison of Financial Condition at June 30, 2000 and December 31, 1999
Total assets increased by $160.0 million, or 5.9%, to $2.851 billion at June
30, 2000 from $2.691 billion at December 31, 1999. Loans receivable increased
by $114.9 million, or 9.1%, to $1.383 billion at June 30, 2000 from $1.268
billion at December 31, 1999, as Harris Financial's commercial loan portfolio
increased by $89.2 million, and Harris Financial's automobile, consumer and
other loans portfolio increased $28.5 million. The growth in Harris Financial's
loans receivable generally and in its commercial and automobile, consumer and
other loans specifically, reflected Harris Financial's continued focus on
expanding these portfolios in comparison to its residential mortgage loan
portfolio.
Cash and interest-bearing deposits decreased by $23.5 million, or 31.9%, and
securities available-for-sale increased by $57.7 million, or 4.6%, from
December 31, 1999 to June 30, 2000. These trends reflected the deployment of
lower-yielding assets into higher-yielding wholesale assets. The increase in
securities available-for-sale was primarily due to an increase of $54.0
million, or 7.8%, in mortgage-backed securities and, within that portfolio, an
increase of $66.0 million, or 14.6%, in private issue CMOs.
Deposits increased by $78.9 million, or 5.7%, to $1,452.7 billion at June
30, 2000 from $1,373.9 billion at December 31, 1999. Other borrowings increased
by $80.4 million, or 7.2%, to $1,198.4 billion at June 30, 2000 from $1,118.0
billion at December 31, 1999. The increase in other borrowings reflected an
increase in Federal Home Loan Bank advances of $235.0 million, or 29.2%, and a
decrease of repurchase agreements by $154.6 million, or 49.4%. Borrowings
increased primarily to support asset growth not funded by deposit growth and to
manage interest rate risk.
Total stockholders' equity decreased by $.7 million, or 0.4%, to $168.7
million at June 30, 2000 from $169.3 million at December 31, 1999, primarily
due to a $8.6 million decline in the market value, net of tax effect, of the
available-for-sale securities and $1.0 million in dividends paid. The drop in
the market value of the available-for-sale portfolio reflects the impact of
recent market rate increases on the market value of fixed rate issues in Harris
Financial's investment portfolio. Offsetting these decreases was an $8.7
million increase from net income.
Non-performing Assets and Delinquencies
Loans accounted for on a non-accrual basis decreased by $5.8 million from
$10.0 million at December 31, 1999 to $4.2 million at June 30, 2000. In
addition, loans 90 days past due, but still accruing, decreased by $.5 million,
to $5.6 million at June 30, 2000 from $6.1 million at December 31, 1999. Non-
performing loans decreased $6.3 million from $16.1 million at December 31, 1999
to $9.8 million at June 30, 2000. Non-performing assets were $10.8 million at
June 30, 2000, which is a decrease of $6.9 million from $17.7 million at
December 31, 1999.
Comparison of the Results of Operations for the Three Months Ended June 30,
2000 and June 30, 1999
General. Net income decreased $98,000, or 2.1%, to $4.6 million for the
three months ended June 30, 2000 compared to $4.7 million for the comparable
period in 1999. The decrease was primarily due to a reduction of $918,000 in
non-interest income during the three months ended June 30, 2000. Partially
offsetting the decrease in non-interest income was an increase of $1.1 million,
or 7.2%, in net interest income for the three months ended June 30, 2000, as
compared to the same period in the prior year.
Interest income. Interest income increased by $8.1 million, or 18.7%, to
$51.5 million for the three months ended June 30, 2000 from $43.4 million for
the three months ended June 30, 1999. The increase in interest income was due
to an increase of $226.7 million, or 9.2%, in interest-earning assets as well
as an improvement of 61 basis points in the average yield on such assets for
the three months ended June 30, 2000 compared to the earlier year period. The
increase in the average balance of interest-earning assets was attributable in
part to increases in the average balance of commercial loans (up 47.2%), direct
consumer loans
30
<PAGE>
(up 25.1%), and indirect consumer loans (up 34.3%), reflecting a continuation
of Harris Financial's emphasis on higher-yielding business and consumer
lending. The increase in interest income also reflected higher market interest
rates generally and, specifically, an increase of 132 basis points in the
average yield on commercial loans, and 10 basis points in the average yield on
direct consumer loans. Finally, the increase in interest income was also
attributable to an increase in taxable marketable securities, the average
balance of which increased by 12.5% and the average yield of which increased by
105 basis points for the three months ended June 30, 2000 as compared to the
earlier year period.
Interest expense increased by $7.4 million, or 27.1%, to $34.6 million for
the three months ended June 30, 2000 from $27.2 million for the three months
ended June 30, 1999. The increase was due to an 11.2% increase in the average
balance of interest-bearing liabilities as well as a 67 basis point increase in
the average cost of such liabilities for the three months ended June 30, 2000
compared to the earlier year period, reflecting higher average balances of
borrowed funds and time deposits as well as higher market interest rates which
led to higher average costs on such liabilities for the three months ended June
30, 2000.
Net interest income. Net interest income increased by $742,000, or 4.6%, to
$16.9 million for the three months ended June 30, 2000 from $16.2 million for
the three months ended June 30, 1999. The increase reflected a favorable volume
variance of $876,000, which more than offset an unfavorable rate variance of
$134,000. Harris Financial's interest rate spread decreased to 2.33% for the
three months ended June 30, 2000 from 2.39% for the three months ended June 30,
1999.
Provision for loan losses. For the three months ended June 30, 2000, Harris
Financial recognized a provision for loan losses of $831,000, a $36,000, or
4.5% increase over the provision for the three months ended June 30, 1999.
Non-interest income. Non-interest income decreased 26.1% for the three
months ended June 30, 2000 compared to the three months ended June 30, 1999.
The decrease resulted primarily from a $700,000 fraud recovery related to the
1996 acquisition of First Harrisburg Bancorp, which was recognized in the three
months ended June 30, 1999 and was not replicated in the same period in 2000.
In addition, the decrease in non-interest income reflected a decrease of
$455,000 in mortgage loan sales for the three months ended June 30, 2000 as
compared to the earlier year period, due to rising interest rates and
diminished lending activity due to the winding up of Harris Financial's
mortgage banking operations. Finally, gain on sale of loans, net decreased to
$311,000 for the three months ended June 30, 2000 from $742,000 for the three
months ended June 30, 1999, again reflecting the winding up of mortgage banking
operations.
Non-interest expense. Non-interest expense increased 4.4% for the three
months ended June 30, 2000 compared to the three months ended June 30, 1999,
due to the expansion of branch networks and the expansion of traditional and
non-traditional business lines in 2000.
Net income and income tax expense. Net income before income taxes decreased
$98,000, or 2.1%, to $4.6 million for the three months ended June 30, 2000 from
$4.7 million for the three months ended June 30, 1999. Income tax expense
decreased by $270,000, or 14.6%, to $1.6 million for the three months ended
June 30, 2000 from $1.8 million for the three months ended June 30, 1999. The
combined federal and state tax rate on earnings was 25.4% for the three months
ended June 30, 2000 and 28.1% for the three months ended June 30, 1999.
Comparison of the Results of Operations for the Six Months Ended June 30, 2000
and June 30, 1999
General. Net income decreased by $1.0 million, or 10.3%, to $8.7 million for
the six months ended June 30, 2000 from $9.7 million for the six months ended
June 30, 1999. Diluted earnings per share totaled $.26 and $.29, respectively,
for the six months ended June 30, 2000 and June 30, 1999. The decrease in net
income was primarily due to a reduction of $2.2 million, or 29.3%, in non-
interest income during the six month period ended June 30, 2000 as compared to
the sane period in the prior year.
31
<PAGE>
Interest income. Interest income increased by $13.3 million, or 15.4%, to
$99.4 million for the six months ended June 30, 2000 from $86.1 million for the
six months ended June 30, 1999, as the average balance of interest-earning
assets increased by $216.3 million, or 8.9%, to $2,645.0 billion for the six
months ended June 30, 2000 from $2,428.7 billion for the six months ended June
30, 1999, primarily due to an increase in the origination of commercial loans
and indirect and direct consumer loans. The average balance of commercial loans
increased by $130.4 million, or 52.2%, and the average yield on such loans
increased to 8.64% from 7.75% for the six months ended June 30, 2000 as
compared to the earlier year period. The average balance of direct and indirect
consumer loans increased by $104.0 million, or 35.2% for the six months ended
June 30, 2000 as compared to the earlier year period. To a lesser extent, the
increase in interest income was also attributable to an increase in taxable
marketable securities, the average balance of which increased $111.8 million,
or 10.0%, and the average yield of which increased to 7.15% from 6.26% for the
six months ended June 30, 2000 as compared to the earlier year period.
Interest expense. Interest expense increased by $12.5 million, or 23.3%, to
$66.3 million for the six months ended June 30, 2000 from $53.8 for the six
months ended June 30, 1999. The average balance of interest-bearing liabilities
increased $242.8 million, or 10.5%, to $2,551.2 billion for the six months
ended June 30, 2000 from $2,308.4 billion for the six months ended June 30,
1999, which was primarily due to an increase in the average balances of time
deposits and the amount of borrowed funds. In addition, the increased in
interest expense reflected an increase generally in market interest rates,
which resulted in an increase in the average cost of Harris Financial's
interest-bearing liabilities to 5.20% for the six months ended June 30, 2000
compared to 4.66% for the six months ended June 30, 1999.
Net interest income. Net interest income increased by $.7 million, or 2.2%,
to $33.0 million for the six months ended June 30, 2000 from $32.3 million for
the six months ended June 30, 1999. The increase reflected a favorable volume
variance of $1.8 million, due to a $216.3 million increase in total average
earning assets to $2.645 billion during the six months ended June 30, 2000 as
compared to $2.429 billion for the same period in 1999. Also reflected in this
volume variance was a $242.8 million increase in average interest-bearing
liabilities. At the same time, general market interest rate trends created an
unfavorable rate variance of $1.0 million for the six months ended June 30,
2000. For the six months ended June 30, 2000, the yield on interest-earning
assets was 7.51%, an improvement from 7.09% for the six months ended June 30,
1999. However, at the same time, the cost of funds increased 54 basis points to
5.20% from 4.66%. As a result, the interest rate spread decreased by 12 basis
points to 2.31% for the six months ended June 30, 2000 from 2.43% for the same
period in 1999.
Provision for loan losses. Harris Financial provided $1.7 million for loan
losses for the six months ended June 30, 2000 and $1.6 million for loan losses
for the six months ended June 30, 1999.
Noninterest income. Noninterest income decreased $2.2 million, or 29.3%, to
$5.3 million for the six months ended June 30, 2000 from $7.5 million for the
six months ended June 30, 1999. The decrease in noninterest income was
primarily the result of reduced reliance on gains from sales in the securities
portfolio, which was partially offset by growth in fee income on core banking
products. The gain on sale of loans decreased primarily due to rising interest
rates and diminished loan activity due to winding up of mortgage banking
operations. Service charges increased due to growth in deposit accounts and the
addition of two new branches during the twelve months ended June 30, 2000.
Noninterest expense. Noninterest expense increased by $.7 million, or 3.2%,
to $23.7 million for the six months ended June 30, 2000 from $22.9 million for
the six months ended June 30, 1999. Increases in noninterest expense were
commensurate with the expansion of branch networks and the expansion of
traditional and non-traditional business lines. The decrease in other
noninterest expense resulted primarily from the winding up of the AVSTAR
operations in the second quarter of 1999.
Net income and income tax expense. Net income before income taxes decreased
$1.5 million, or 11.3%, to $11.8 million for the six months ended June 30, 2000
from $13.3 million for the six months ended June 30,
32
<PAGE>
1999. Income tax expense decreased by $.6 million, or 16.2%, to $3.1 million
for the six months ended June 30, 2000 from $3.7 million for the six months
ended June 30, 1999. The combined federal and state tax rate on earnings was
26.6% for the six months ended June 30, 2000 and 27.5% for the six months ended
June 30, 1999.
Liquidity and Capital Resources
At June 30, 2000, Harris Financial had $1.198 billion of borrowings,
including $1.040 billion of Federal Home Loan Bank borrowings. Harris
Financial's maximum borrowing capacity with the Federal Home Loan Bank totaled
$1.149 billion at June 30, 2000. Harris Financial anticipates that it will have
sufficient funds available from normal operations to meet its current
commitments. At June 30, 2000, Harris Financial had tangible, core and risk-
based capital ratios of 6.74%, 6.74% and 11.26%, respectively, which exceeded
the banking regulators minimum requirements for capital adequacy of 4.00%,
4.00% and 8.00%, respectively.
Harris Financial Quarterly Report on Form 10-Q
Additional information, and management's discussion and analysis of Harris
Financial's financial condition as of June 30, 2000, and results of operations
for the three and six months ended June 30, 2000 is set forth in Harris
Financial's June 30, 2000 Form 10-Q that is included in this document beginning
on page Q-1.
33
<PAGE>
YORK FINANCIAL CORP. RECENT DEVELOPMENTS
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 three months and fiscal year ended, June 30,
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.
<TABLE>
<CAPTION>
At June 30, At March 31, At June 30,
2000 2000 2000
----------- ------------ -----------
(unaudited)
<S> <C> <C> <C>
Selected Financial Condition Data:
Total assets............................... $1,673,645 $2,767,050 $1,364,636
Loans receivable, net...................... 1,171,211 1,313,645 909,193
Loans held for sale, net................... 4,415 1,761 30,631
Marketable securities...................... 390,484 1,303,825 326,285
Deposits................................... 1,170,728 1,439,688 1,115,253
Borrowings................................. 370,390 1,123,375 113,962
Stockholders' equity....................... 109,878 167,198 110,410
</TABLE>
<TABLE>
<CAPTION>
Three Months Fiscal Year
Ended June 30, Ended June 30,
--------------- ----------------
2000 1999 2000 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
Selected Operating Data:
Interest income.............................. $28,539 $22,015 $108,538 $86,365
Interest expense............................. 19,740 12,950 71,317 51,826
Net interest income.......................... 8,799 9,055 37,221 34,539
Provision for loan losses.................... 110 860 1,650 3,632
Net interest income after provision for loan
losses...................................... 8,689 8,205 35,561 30,907
Noninterest income........................... 2,157 4,846 7,261 12,038
Noninterest expense.......................... 8,078 7,639 31,353 28,234
Income before income taxes................... 2,768 5,412 11,469 14,711
Provision for income taxes................... 427 1,840 2,180 5,041
Net income................................... $ 2,341 $ 3,572 $ 9,289 $ 9,670
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
At or for the
Three Months At or for the
Ended Fiscal Year Ended
June 30, June 30,
----------------- -----------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Selected Operating Ratios and Other Data
Performance Ratios:
Return on average assets (net income
divided by average total assets)......... 0.57 1.09 0.58 0.76
Return on average equity (net income
divided by average equity)............... 8.66 12.84 8.58 8.64
Average net interest rate spread(2)....... 1.94 2.57 2.21 2.66
Net interest margin(3).................... 2.22 2.88 2.47 2.90
Net interest income after provision for
loan losses to total noninterest
expenses................................. 107.58 107.41 113.42 109.47
Efficiency ratio(4)....................... 74.49 58.53 73.22 65.74
Noninterest expense to average assets..... 1.96 2.33 1.97 2.23
Noninterest income to average assets...... 0.52 1.47 0.46 0.96
Average interest-earning assets to average
interest-bearing liabilities............. 105.59 107.23 105.45 107.71
Asset Quality Ratios:
Nonperforming loans to total loans........ 0.63 1.07 0.63 1.07
Nonperforming loans to total assets....... 0.44 0.74 0.44 0.74
Nonperforming assets as a percentage of
total assets............................. 0.64 1.24 0.64 1.24
Nonperforming loans and real estate owned
to total net
loans and real estate owned.............. 0.92 1.85 0.92 1.85
Allowance for loan losses to total loans.. 0.95 1.17 0.95 1.17
Allowance for loan losses to non-
performing loans......................... 151.79 107.46 151.79 107.46
Equity and Dividend Ratios:
Tangible capital.......................... 7.26 7.11 7.26 7.11
Core capital.............................. 7.26 7.11 7.26 7.11
Risk-based capital........................ 13.22 12.82 13.22 12.82
Average equity to average assets.......... 6.56 8.46 6.52 8.84
Period end equity to assets............... 6.57 8.09 6.57 8.09
Dividend payout ratio(5).................. 55.63 35.05 54.80 50.62
Per Share Data (6):
Basic earnings per share.................. $ 0.23 $ 0.36 $ 0.93 $ 3.96
Diluted earnings per share................ 0.23 0.35 0.91 0.93
Cash dividends paid....................... 0.13 0.12 0.51 0.49
Book value per share...................... 10.91 10.99 10.91 10.99
Other Data:
Number of:
Real estate loans outstanding............. 7,689 7,401 7,689 7,401
Loans serviced for others................. 6,978 7,823 6,978 7,823
Deposit accounts.......................... 137,404 133,107 137,404 133,107
Full-service offices...................... 25 25 25 25
</TABLE>
--------
(1) Annualized where appropriate.
(2) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
(3) Represents annualized tax-effected net interest income before the provision
for loan losses divided by average interest-earning assets.
(4) Efficiency ratio is noninterest expense divided by the sum of net interest
income after provision for loan losses and noninterest income.
(5) Represents cash dividends paid divided by net income.
(6) All per share values have been adjusted for stock dividends effected
through March 31, 2000.
35
<PAGE>
York Financial Management's Discussion of Financial Condition and Results of
Operations
York Financial's managements discussion of financial condition at June 30,
2000, and results of operations for the fiscal year ended June 30, 2000, is
included in this document beginning at page .
SELECTED UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL DATA OF WAYPOINT FINANCIAL
The following tables present selected unaudited pro forma consolidated
financial data with respect to Waypoint Financial and its subsidiaries. For
each period presented below, the "Pro Forma for Acquisition" information
reflects the merger with 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, and
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." Waypoint 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>
36
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended For the Year Ended December 31,
March 31, 2000 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 20,462 72,182 73,408
------- ------- ------- --------
Income before taxes..... 8,204 11,078 40,508 51,396
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 operations 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 merger with 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.
37
<PAGE>
WAYPOINT FINANCIAL
Waypoint Financial Corp. was organized in March 2000 to effect the mutual-
to-stock conversion of Harris MHC and the merger with York Financial. Waypoint
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 Waypoint
Financial after the conversion and merger.
Waypoint Financial's assets will consist primarily of 100% of the
outstanding shares of Waypoint Bank and investment securities. Following the
stock offering and conversion, Waypoint Financial's assets also will include
the portion of the net proceeds of the offering that are not contributed to
Waypoint Bank and the loan to the employee stock ownership plan. Following the
merger with York Financial, Waypoint 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 Meridian Venture Partners, a joint venture.
Waypoint Financial does not, and does not intend to, own or lease any
property, but instead will use the premises, equipment and furniture of
Waypoint Bank. Waypoint 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 Waypoint Bank from time to time. Additional employees will be hired as
appropriate to the extent Waypoint Financial expands its business.
The offering will provide Waypoint Financial with additional capital to
support future growth. Management believes that the offering will provide
Waypoint 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
service 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, Waypoint 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 Waypoint Financial
are anticipated to be funded primarily by the offering proceeds retained by
Waypoint Financial or, alternatively, through dividends received from Waypoint
Bank.
Waypoint 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 was organized in September 1997 as a Pennsylvania
corporation and the mid-tier stock holding company of Harris Savings Bank.
Harris Financial's shares are owned by Harris MHC and other stockholders.
Harris Financial owns 100% of the outstanding shares of common stock of Harris
Savings Bank. 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 exchange its charter for a
federal stock holding company charter regulated by the OTS. Waypoint Financial
will be the successor to Harris Financial which will no longer exist upon
completion of the conversion.
Harris Financial's executive offices are located at 235 North Second Street,
Harrisburg, Pennsylvania 17101, and its principal telephone number is (717)
236-4041.
38
<PAGE>
HARRIS SAVINGS BANK AND WAYPOINT BANK
Harris Savings Bank was formed in 1886. Prior to the completion of the
conversion and merger, Harris Savings Bank will change its name to Waypoint
Bank and will convert from a Pennsylvania savings bank regulated by the
Pennsylvania Department of Banking, to a federal savings bank regulated by the
OTS. Harris Savings Bank currently 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 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, with $126 million in deposits and no loans, located
in Hagerstown, Maryland. 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. 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.
In the acquisition of the Lebanon County branches, Harris Savings Bank acquired
$11.4 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, Harris Savings Bank will change its name to Waypoint
Bank, York Federal will merge into Waypoint Bank, and Waypoint Bank's business
and operations will include the business and operations formerly conducted by
Harris Savings Bank and 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, and Waypoint Bank's executive
offices will be, located at 235 North Second Street, Harrisburg, Pennsylvania
17101, and its telephone number is (717) 236-4041.
39
<PAGE>
USE OF PROCEEDS
Shares will be sold in the stock offering for a purchase price of $10.00 per
share. The net proceeds from the stock offering will depend on the total number
of shares of common stock sold in the offering. The total number of shares sold
in the stock 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 $293.4 million if the offering is increased
by15%.
Waypoint Financial intends to distribute the net proceeds from the stock
offering as follows:
<TABLE>
<CAPTION>
Adjusted
Minimum Minimum Maximum
19,550,000 19,550,000 26,450,000
Shares Shares 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 Waypoint 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 $ 77,789 $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 Waypoint
Financial. Payments for shares made through withdrawals from existing deposit
accounts will not result in the receipt of new funds for investment by Waypoint
Bank, but will result in a reduction of Waypoint Bank's deposits and interest
expense as funds are transferred from interest bearing certificates of deposit
or other deposit accounts.
Waypoint 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.
Waypoint 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;
40
<PAGE>
. to expand and increase delivery systems;
. to invest in securities;
. to pay dividends to Waypoint Financial; and
. for general corporate purposes.
41
<PAGE>
DIVIDEND POLICY
Waypoint 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. Waypoint
Financial intends to pay an annual dividend of $.34 per share if 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 annual dividend is expected to be
$.305 per share. The amount of the dividend is intended to 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. Waypoint 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 Waypoint Financial's Board of Directors will
depend upon a number of factors, including the amount of the net proceeds from
the offering retained by Waypoint Financial, investment opportunities available
to Waypoint Financial and Waypoint Bank, capital requirements, regulatory
limitations, Waypoint Financial's and Waypoint 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 Waypoint
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 Waypoint Financial in determining the amount of
proceeds which may be retained by Waypoint 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 Waypoint Financial is able to receive from Waypoint Bank will
be regulated by the OTS, although Waypoint Financial will not be restricted by
OTS regulations on the payment of dividends to its stockholders. Waypoint
Financial, however, is subject to the requirements of Pennsylvania law.
Additionally, in connection with the conversion, Waypoint Financial and
Harris Savings Bank have committed to the OTS that during the one-year period
following the consummation of the offering, Waypoint 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 OTS.
42
<PAGE>
MARKET FOR COMMON STOCK
Waypoint Financial Common Stock. Although Waypoint Financial is the
successor to Harris Financial, Waypoint Financial has never issued common
stock. Accordingly, there is currently no established market for the common
stock. Waypoint 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 Waypoint Financial that it intends to make
a market in the common stock following the transactions, but is under no
obligation to do so. Waypoint 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 Waypoint
Financial's control. 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. Waypoint 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 you that
if you purchase shares you will be able to sell them at or above the $10.00 per
share offering price.
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 be converted automatically into and
become a right to receive a number of shares of Waypoint 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 Waypoint Financial based on the Harris Financial conversion exchange ratio.
The Harris Financial 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
Bid Bid Declared
---- --- -------------
<S> <C> <C> <C>
Year ending December 31, 2000
Quarter ending September 30, 2000
(through August 14, 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>
43
<PAGE>
At March 24, 2000, the business day immediately preceding the public
announcement of the conversion and merger, and at August 14, 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. At the
completion of the stock offering, 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 be converted
automatically into and become the right to receive a number of shares of Harris
Financial common stock determined pursuant to the Harris Financial 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 Waypoint
Financial common stock determined pursuant to the exchange ratio. See
"Beneficial Ownership of Common Stock."
44
<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 Waypoint 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 York
Financial Financial
Historical Historical
at at
March 31, March 31, Acquisition
2000 2000 Adjustments(1)(2)
---------- ---------- -----------------
<S> <C> <C> <C>
Deposits(5)......... $1,439,688 $1,153,293 $ --
Borrowings.......... 1,123,375 348,005 --
---------- ---------- -------
Total deposits and
borrowings.......... $2,563,063 $1,501,298 $ --
========== ========== =======
Stockholders'
equity:
Preferred
stock(6).......... $ -- $ -- $ --
Common stock,
$0.01 par
value(7).......... 340 -- 101
Common stock, $1.00
par value(2)........ -- 10,107 (10,107)
Paid-in capital..... 30,348 97,105 10,006
Retained
earnings(8)......... 172,300 11,389 (7,309)
Accumulated other
comprehensive
income.............. (35,065) (8,133) --
Employee stock
ownership plan(9)... (271) (530) --
Existing restricted
stock plans......... (454) -- --
---------- ---------- -------
Total
stockholders'
equity.......... $ 167,198 $ 109,938 $(7,309)
========== ========== =======
Assets.............. $2,767,050 $1,630,290 $(7,309)
========== ========== =======
Total
stockholders'
equity to total
assets.......... 6.04% 6.74% --
========== ========== =======
<CAPTION>
Pro Forma Waypoint Financial at March 31, 2000 Based upon
the sale for $10.00 per share, or Other Issuance
---------------------------------------------------------------
19,550,000 30,417,000
Shares at 23,000,000 Shares at
the Shares at 26,450,000 the
Adjusted 19,550,000 the Shares at Adjusted
Minimum of Shares at the Midpoint the Maximum Maximum of
Pro Forma the Minimum of of the of the the
Consolidated Offering the Offering Offering Offering Offering
Historical Range(3) Range Range Range Range(4)
------------ ----------- ------------- ----------- ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Deposits(5)......... $2,592,981 $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 1,471,380
------------ ----------- ------------- ----------- ------------ ------------
Total deposits and
borrowings.......... $4,064,361 $4,064,361 $4,064,361 $4,064,361 $ 4,064,361 $ 4,064,361
============ =========== ============= =========== ============ ============
Stockholders'
equity:
Preferred
stock(6).......... $ -- $ -- $ -- $ -- $ -- $ --
Common stock,
$0.01 par
value(7).......... 441 364 414 477 526 605
Common stock, $1.00
par value(2)........ -- -- -- -- -- --
Paid-in capital..... 137,459 274,395 324,345 358,403 392,475 431,629
Retained
earnings(8)......... 176,380 176,380 176,380 176,380 176,380 176,380
Accumulated other
comprehensive
income.............. (43,198) (43,198) (43,198) (43,198) (43,198) (43,198)
Employee stock
ownership plan(9)... (801) (16,441) (16,441) (19,201) (21,961) (25,135)
Existing restricted
stock plans......... (454) (454) (454) (454) (454) (454)
------------ ----------- ------------- ----------- ------------ ------------
Total
stockholders'
equity.......... $ 269,827 $ 391,046 $ 441,046 $ 472,407 $ 503,768 $ 539,827
============ =========== ============= =========== ============ ============
Assets.............. $4,390,031 $4,511,250 $4,561,250 $4,592,609 $4, 623,968 $ 4,660,031
============ =========== ============= =========== ============ ============
Total
stockholders'
equity to total
assets.......... 6.15% 8.57% 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) York Financial has 20,000,000 authorized shares of 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
Waypoint Financial common stock.
(3) If Waypoint Financial does not receive orders for at least 19,550,000
shares in the subscription and community offering, then, in Waypoint
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.
(4) 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.
45
<PAGE>
(5) 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.
(6) Harris Financial has 10,000,000 authorized shares of preferred stock, York
Financial has 10,000,000 authorized shares of preferred stock, and
Waypoint Financial has 10,000,000 authorized shares of preferred stock. No
shares of preferred stock have been or are assumed to be issued and
outstanding.
(7) Harris Financial has 100,000,000 authorized shares of common stock, par
value $.01 per share, and Waypoint Financial has 100,000,000 authorized
shares of common stock, par value $.01 per share.
(8) The retained earnings of Waypoint Financial will be substantially
restricted after the conversion. See "The Conversion and Stock Offering--
Liquidation Rights" and "Regulation--Limitation on Capital Distributions."
(9) Assumes that 8% of the shares issued in the stock offering will be
acquired by the employee stock ownership plan financed by a loan from
Waypoint Financial. The loan will be repaid principally from Waypoint
Bank's contributions to the employee stock ownership plan. Since Waypoint
Financial will finance the employee stock ownership plan debt, this debt
will be eliminated through consolidation and no liability will be
reflected on Waypoint 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.
46
<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
OTS 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 Waypoint Bank after giving effect to the sale at $10.00
per share, or issuance of up to 5,000,000 of such shares in the acquisition by
merger of York Financial, of the number of shares shown in the table, and the
merger of York Federal with and into Waypoint Bank. The pro forma regulatory
capital amounts reflect the receipt by Waypoint 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>
Pro Forma
Harris Savings Bank York Federal Consolidated
Historical at March Historical at Historical at
31, 2000 March 31, 2000 March 31, 2000(1)
------------------- ------------------- -------------------
Percent of Percent of Percent 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 12.26%
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 for $10.00 per shares or Other Issuance of
---------------------------------------------------------------------------------------------------
19,550,000 Shares 19,550,000 Shares 23,000,000 Shares 26,450,000 Shares 30,417,500 Shares
at the Adjusted at the Minimum at the Midpoint at the Maximum at the Adjusted
Minimum of the of the of the of the Maximum of the
Offering Range(2) Offering Range Offering Range Offering Range Offering Range(3)
------------------- ------------------- ------------------- ------------------- -------------------
Percent of Percent of Percent of Percent of Percent of
Amount Assets(4) Amount Assets(4) Amount Assets(4) Amount Assets(4) Amount Assets(4)
-------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <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% $392,781 8.70%
Tier 1 Leverage
Capital:
Capital level..... 361,528 8.10 386,528 8.61 400,827 8.90 415,127 9.19 431,571 9.52
Requirement....... 178,607 4.00 179,607 4.00 180,179 4.00 180,751 4.00 181,409 4.00
-------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
Excess.......... $182,921 4.10 $206,920 4.61 $220,648 4.90 $234,376 5.19 $250,162 5.52
======== ========== ======== ========== ======== ========== ======== ========== ======== ==========
Tier 1 Risk-Based
Capital:
Capital level..... $361,528 13.51% $386,528 14.41% $400,827 14.93% $415,127 15.45% $431,571 16.04%
Requirement(5).... 107,062 4.00 107,262 4.00 107,377 4.00 107,491 4.00 107,623 4.00
-------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
Excess.......... $254,466 9.51 $279,265 10.41 $293,450 10.93 $307,636 11.45 $323,948 12.04
======== ========== ======== ========== ======== ========== ======== ========== ======== ==========
Total Risk-Based
Capital:
Capital
level(6).......... $379,637 14.18% $404,637 15.09% $418,936 15.61% $433,236 16.12% $449,680 16.71%
Requirement(6).... 214,125 8.00 214,525 8.00 214,754 8.00 214,982 8.00 215,246 8.00
-------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
Excess........... $165,512 6.18 $190,112 7.09 $204,182 7.61 $218,254 8.12 $234,434 8.71
======== ========== ======== ========== ======== ========== ======== ========== ======== ==========
</TABLE>
----
(1) Includes the capital of Harris MHC.
(2) If Waypoint Financial does not receive orders for at least 19,550,000
shares in the subscription and community offering, then, in Waypoint
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 stock 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 stock
offering.
(5) The current OTS core capital requirement for savings banks is 3% of total
adjusted assets. The OTS 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.
47
<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 merger and the stock
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 estimated 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 Waypoint 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 Waypoint
Financial common stock or the actual or future results of operations of
Waypoint 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 stock offering and other factors. See "Use of
Proceeds."
48
<PAGE>
Unaudited Pro Forma Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
At March 31, 2000(1)
----------------------------------------------------------------------------
Pro Forma
Offering Pro forma
Adjustments Consolidated
Pro Forma At Midpoint at Midpoint
Harris York Acquisition Pro Forma Offering of Offering
Financial Financial Adjustments(3) Consolidated 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 (10,006) 441 36 477
Additional paid in
capital................ 30,348 97,105 10,006 137,459 220,942 358,401
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)
49
<PAGE>
Unaudited Pro Forma Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
At December 31, 1999(2)
----------------------------------------------------------------------------
Pro forma
Offering Pro forma
Adjustments Consolidated
Pro Forma At Midpoint At Midpoint
Harris York Acquisition Pro Forma of Offering of Offering
Financial Financial Adjustments(3) Consolidated 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 48,019 48,019
---------- ---------- ---------- ----------
Total liabilities..... 2,522,076 1,541,535 4,063,611 4,063,611
Stockholders' equity:
Common stock............ 340 10,048 (9,948) 440 36 476
Additional paid in
capital................ 30,323 96,518 9,948 136,789 220,942 357,731
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>
50
<PAGE>
--------
(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.
51
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000(1)
-------------------------------------------------------------------------------
Pro forma
Pro Forma Consolidated
Offering With
Harris York Acquisition Pro Forma Adjustments Offering At
Financial Financial Adjustments(3) Consolidated(4) At Midpoint 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(5) $ 0.14 nm(5) $ 0.18
Diluted............... 0.12 0.23 nm(5) 0.14 nm(5) 0.18
Shares used for
calculating EPS:
Basic................. 33,578,078 10,007,061 nm(5) 45,909,554 nm(5) 45,909,554
Diluted............... 33,620,210 10,161,308 nm(5) 45,947,556 nm(5) 45,947,556
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1999(2)
-------------------------------------------------------------------------------
Pro forma
Pro Forma Consolidated
Offering With
Harris York Acquisition Pro Forma Adjustments Offering At
Financial Financial Adjustments(3) Consolidated(4) At Midpoint Midpoint
----------- ----------- -------------- --------------- ----------- ------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <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(6):
Basic................. $ 0.56 $ 0.98 nm(5) $ 0.63 nm(5) $ 0.78
Diluted............... 0.55 0.96 nm(5) 0.63 nm(5) 0.78
Shares used for
calculating EPS:
Basic................. 33,595,772 10,319,359 nm(5) 46,001,554 nm(5) 46,001,554
Diluted............... 33,666,557 10,591,143 nm(5) 46,065,399 nm(5) 46,065,399
</TABLE>
52
<PAGE>
--------
(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 Waypoint
Financial, after giving effect to the conversion and merger.
(5) Not meaningful.
(6) Earnings per share have been calculated using Harris Financial's historical
shares--see Note 1 of Notes to Consolidated Financial Statements.
Pro Forma Conversion Data
The tables on the following pages provide unaudited pro forma data with
respect to Waypoint Financial's stockholders' equity, net income and related
per share amounts based upon the adjusted minimum, minimum, midpoint, maximum
and adjusted 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 common stock in the stock
offering cannot be determined until the conversion is completed. The pro forma
information is prepared based on the following assumptions:
(1) all shares of common stock 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 and stock offering 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 common stock 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 U.S. Treasury Bill rate was used on
the reinvestment of proceeds because it more appropriately reflects a market
rate of return than the arithmetic average of the average yield of Harris
Savings Bank's interest-earning assets and cost of deposits. The effect of
withdrawals from deposit accounts at Harris Savings Bank for the purchase of
common stock 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
Waypoint Financial common stock, less employee stock ownership plan shares
which have not been committed to be released.
Pro forma unaudited stockholders' equity of Waypoint 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 Waypoint Financial common stock
assuming employee stock ownership plan shares are issued and outstanding.
53
<PAGE>
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 merger 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 Waypoint Financial computed in accordance
with generally accepted accounting principles.
The pro forma stockholders' equity is not intended to represent the fair
market value of Waypoint Financial common stock and may be different than
amounts that would be available for distribution to stockholders in the event
of a liquidation of Waypoint Financial.
54
<PAGE>
The following table summarizes historical and pro forma data of Waypoint
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 and stock offering. 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 Waypoint Financial--Waypoint 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
---------------------------------------------------------------------
19,550,000 30,417,000
Shares at the 19,550,000 23,000,000 26,450,000 Shares at the
Adjusted Shares at the Shares at the Shares at the Adjusted
Minimum of Minimum of Midpoint of Maximum of Maximum of
the Offering the Offering the Offering the Offering the Offering
Range(3) Range Range Range Range(4)
------------- ------------- ------------- ------------- -------------
(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 $ 441,046 $ 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 $ 9.26 $ 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)
55
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended December 31, 1999
Based upon the Sale for $10.00 Per Share or Other Issuance of
---------------------------------------------------------------------
19,550,000 30,417,000
Shares at the 19,550,000 23,000,000 26,450,000 Shares at the
Adjusted Shares at the Shares at the Shares at the Adjusted
Minimum of Minimum of Midpoint of Maximum of Maximum of
the Offering the Offering the Offering the Offering the Offering
Range(3) Range Range Range Range(4)
------------- ------------- ------------- ------------- -------------
(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............ $ 121,215 $ 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(3)............... (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........... $ 10.30 $ 10.25 $ 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>
56
<PAGE>
--------
(1) If Waypoint Financial does not receive orders for at least 19,550,000
shares in the subscription and community offerings, then, in Waypoint
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 stock
offering.
(3) Assumes that 8% of shares of common stock sold in the stock 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 Waypoint Financial. Waypoint Financial intends to make
annual contributions to the employee stock ownership plan in an amount at
least equal to the principal of the debt. Waypoint 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 Waypoint 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 stock 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 merger. 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 Waypoint 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.
57
<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.
Waypoint 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,
Waypoint Financial will significantly expand its market presence in south-
central Pennsylvania, including the growing York County market. Waypoint
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, Waypoint
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 Waypoint
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.
Waypoint 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 merger and acquisition
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. Waypoint 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, in 1998 Harris Financial began offering trust and
investment services 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 fee income. The merger is expected to further
increase sources of noninterest income, as York Financial operates a
securities brokerage, an insurance agency, and a venture capital
investment partnership.
58
<PAGE>
. 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 its 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 Waypoint Financial expects to use its
increased size and market presence to further increase its customer base
and expand its products and services 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--Waypoint 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
Waypoint 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. Waypoint Financial will
continue to focus on credit quality after the merger with York
Financial.
. Investment Leveraging--Waypoint Financial will continue 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, Waypoint Financial will be the second largest
Pennsylvania thrift holding company, based on pro forma combined assets and
deposits as of March 31, 2000. On a pro forma basis, Waypoint Financial will be
second in market share, based on deposits, and will have approximately 13.3% of
all deposits insured by the FDIC that are maintained by branches located in the
five county south-central region of Pennsylvania including Dauphin, York,
Cumberland, Lancaster and Lebanon.
59
<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 Three Months Ended
March 31, 2000 March 31, 2000
---------------------------- ----------------------------
Percent Percent
of total Weighted of total Weighted
Average average average Average average average
balance deposits rate balance deposits rate
---------- -------- -------- ---------- -------- --------
(Dollars in Thousands)
<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 18.18 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>
60
<PAGE>
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 Percent
of Average of Average
Amount total yield Amount total yield
---------- ------- ------- ---------- ------- -------
(Dollars in Thousands)
<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 loan
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.................. 1.20% 0.70%
==========
Nonperforming assets as
a percent of total
assets................. 0.63% 0.74%
</TABLE>
--------
(1) Includes income producing real estate loans.
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, Waypoint Bank and Waypoint Financial. These forward looking
statements are generally identified by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project," or similar expressions. Waypoint
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 Waypoint 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,
61
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demand for financial services in Waypoint 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. Waypoint 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.
62
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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 Years Ended December
Ended March 31, 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
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULT 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. Waypoint
Financial will be the successor to Harris Financial after the stock offering
and merger. Harris Savings Bank will change its name to Waypoint Bank prior to
the completion of the stock offering and merger. Waypoint Financial will
operate as the holding company of Waypoint Bank following the stock offering
and merger. Harris Financial's business operations are conducted primarily
through Harris Savings Bank and Waypoint Financial's business operations will
be conducted primarily through Waypoint Bank. Waypoint Financial has had no
business activities or results of operations. Accordingly, 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.
As discussed above, this document, and particularly the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contains forward looking statements that are based on assumptions and describe
future plans, strategies, and expectations of Harris Financial, Waypoint
Financial and Harris Savings Bank. 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 Waypoint 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 Waypoint Financial's market area, and changes in relevant
accounting principles. These risks and uncertainties should be considered in
evaluating forward looking
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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 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 40.9% of Harris Financial's total
loan portfolio at March 31, 2000 compared to 42.1% 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. Harris increased the marketable
securities portfolio during the quarter ended March 31, 2000 to profitably
leverage excess capital not required to support loan assets, to improve asset
liquidity versus investing in additional long-term loans, and to manage
interest rate risk. 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. This increase resulted primarily from non-accrual
mortgage loans, which increased $.6 million during the quarter to $9.9 million
at March 31, 2000. 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.
This decrease occurred primarily in the mortgage loan portfolio, within which
loans 90 days past due but still accruing interest decreased $0.7 million
during the quarter to $3.7 million at March 31, 2000. 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 1.20% at March 31, 2000 compared to
1.26% at December 31, 1999. The improvement in this asset quality ratio during
the quarter ended March 31, 2000 occurred primarily because total loans
receivable grew during the period, and the combined total of non-accrual loans
and loans 90 days past due but still accruing decreased during the period.
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<PAGE>
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 $480,000 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 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 27.4% of Harris
Financial's loans receivable compared to 19.3% at December 31, 1998. In
contrast, one to-four-family residential mortgage loans comprised 42.1% of
Harris Financial's loan portfolio at December 31, 1999, compared to 53.7% 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.
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<PAGE>
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. This increase occurred primarily due to Harris Financial's
adoption during 1998 of non-accrual interest policies on loans that were more
consistent with established practices of commercial banks. Prior to this
change, Harris Financial generally did not record interest income on loans 90
days past due. 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. This
increase in 1999 occurred primarily because of the $5.4 million loan noted
above, which became non-accrual in 1999 but was subsequently repaid in the
quarter ended June 30, 2000.
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 $428,000 of Harris Financial's common
stock. This decrease in stockholders' equity was partly offset by $18.7 million
of net income during the year, $251,000 from earned employee stock ownership
plan and management and recognition plan shares, and $112,000 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 from $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
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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 increased the marketable securities portfolio balance during the
quarter ended March 31, 2000 versus the quarter ended March 31, 1999 to
profitably leverage excess capital not required to support loan assets, to
improve asset liquidity versus investing in additional long-term loans, and to
manage interest rate risk.
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 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
interest earning 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%
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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 for loan
losses, which are charged to operations, in order to maintain the allowance for
loan losses at a level that is deemed appropriate to absorb charge-offs of
loans deemed uncollectible. In determining the appropriate level of the
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 loans. The amount of the allowance is based on estimates and
the ultimate losses may vary from such estimates. In addition, various
regulatory agencies, as an 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 their judgment about information available to them at the time of
their examination. 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. Most of this $539,000 increase came in indirect
automobile loans, where charge-offs were up $415,000 to $439,000 during the
quarter ended March 31, 2000, up $415,000 from $24,000 recorded during the
quarter ended March 31, 1999. The increase in charge-offs in indirect
automobile loans primarily reflects seasoning of this portfolio, which was
initiated in 1998, and growth, as this portfolio increased $61.0 million to
$106.0 million at March 31, 2000 from $45.0 million at March 31, 1999. Charge-
offs on indirect automobile loans decreased to $320,000 during the quarter
ended June 30, 2000 and are expected to remain stable in the future. 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).
69
<PAGE>
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.
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
70
<PAGE>
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.
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>
With Without Difference in
Leveraging Leveraging Basis Points
---------- ---------- -------------
<S> <C> <C> <C>
For the year 1999
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 reflects an increase in management's estimate of the inherent losses
in Harris Financial's larger loan portfolio, particularly larger balances of
commercial and consumer loans.
71
<PAGE>
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.
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 $1.5 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 17.9%,
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.
72
<PAGE>
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
22.2%, 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.
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.
<TABLE>
<CAPTION>
With Without Difference in
Leveraging Leveraging Basis Points
---------- ---------- -------------
<S> <C> <C> <C>
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)
</TABLE>
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 an
increase in management's estimate of the inherent losses in Harris Financial's
larger loan portfolio, particularly larger balances of commercial loans, 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
73
<PAGE>
$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.
74
<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,
-------------------------------------------------------------------------
2000 1999
Rate at ------------------------------------ ------------------------------------
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(5)................ 7.08% $ 548,851 $ 9,744 7.10% $ 609,208 $11,970 7.86%
Commercial loans(5).... 8.10 355,772 7,136 8.02 224,465 4,255 7.58
Direct consumer
loans(5).............. 8.93 169,797 3,682 8.67 143,750 2,941 8.18
Indirect consumer
loans(5).............. 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.
(5) Includes non-accrual loans.
75
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------------ ------------------------------------ ------------------------------------
Average Average Average Average Average Average
Balance Interest(1)(2) Yield/Cost Balance Interest(1)(2) Yield/Cost Balance Interest(1)(2) Yield/Cost
---------- -------------- ---------- ---------- -------------- ---------- ---------- -------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning
assets:
Mortgage loans,
net(5)......... $ 608,137 $ 45,310 7.45% $ 580,303 $48,593 8.37% $ 556,995 $45,808 8.22%
Commercial
loans(5)....... 290,014 22,197 7.65 138,229 11,694 8.46 78,567 6,767 8.61
Direct consumer
loans(5)....... 151,519 13,267 8.76 144,158 11,995 8.32 141,785 11,471 8.09
Indirect
consumer
loans(5)....... 180,588 13,678 7.57 102,203 8,291 8.11 102,190 7,971 7.80
Marketable
securities -
taxable, net... 1,142,922 73,815 6.46 1,157,064 75,225 6.50 916,265 61,561 6.72
Marketable
securities--tax
free, net...... 99,096 8,300 8.38 113,106 9,588 8.48 103,708 8,839 8.52
Other interest-
earning
assets......... 26,767 1,167 4.36 28,871 1,982 6.87 20,524 1,744 8.49
-------- ---- ---------- ------- ---- ---------- ------- ----
Total interest
earning assets.. 2,499,043 177,734 7.11 2,263,934 167,368 7.39 1,920,034 144,161 7.51
-------- ---- ---------- ------- ---- ------- ----
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 4,072 2.76
Time deposits... 810,444 42,648 5.26 726,316 40,153 5.53 782,578 43,760 5.59
NOW and money
market
accounts....... 315,812 7,228 2.29 258,504 7,094 2.74 220,557 6,551 2.97
Escrow.......... 5,034 90 1.79 8,997 90 1.00 7,444 116 1.55
Borrowed funds.. 1,113,848 60,494 5.43 997,260 56,528 5.67 654,447 38,586 5.90
---------- -------- ---- ---------- ------- ---- ---------- ------- ----
Total interest-
bearing
liabilities..... 2,384,236 113,391 4.76 2,139,031 107,150 5.01 1,812,764 93,085 5.13
-------- ---- ------- ---- ------- ----
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 $51,076
======== ======= =======
Interest rate
spread(3)....... 2.35% 2.38% 2.38%
==== ==== ====
Net interest-
earning assets.. $ 114,807 $ 124,903 $ 107,270
========== ========== ==========
Net interest
margin(4)....... 2.57% 2.66% 2.66%
==== ==== ====
Ratio of
interest-earning
assets to
interest-bearing
liabilities..... 1.05 1.06 1.06
========== ========== ==========
</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.
(5) Includes non-accrual loans.
76
<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 Years Ended December Years Ended December
March 31, 2000 vs. 1999 31, 1999 vs. 1998 31, 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:(1)
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>
--------
(1) Interest income for all periods is presented on a tax-equivalent basis.
77
<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
----------------------------------------------------------------------------------------
More than One More than
One Year or Year to Three Three Years to More than
Less Years Five Years Five Years Total
----------------- ---------------- ---------------- -------------- -----------------
Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate
---------- ---- --------- ---- --------- ---- -------- ---- ----------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Cash and cash
equivalents............ $ 26,737 4.93% $ -- -- % $ -- -- % $ 27,795 -- % $ 54,532 2.42%
Marketable securities(1)
(3).................... 607,587 6.93 71,161 6.77 65,302 6.91 617,662 6.89 1,361,712 6.90
Commercial loans........ 188,054 8.31 92,054 8.05 74,640 7.81 22,878 7.45 377,625 8.10
Mortgage loans(2)....... 126,706 7.17 127,169 6.84 99,982 6.76 204,512 6.79 556,608 6.88
Consumer loans.......... 143,733 8.75 154,447 8.42 66,478 8.59 15,221 9.16 379,880 8.61
---------- ---- --------- ---- --------- ---- -------- ---- ----------- -----
Total interest-earning
assets................. $1,092,817 7.39% $ 444,831 7.63% $ 306,402 7.45% $888,068 6.71% $ 2,730,357 7 .21%
========== ==== ========= ==== ========= ==== ======== ==== =========== =====
INTEREST-BEARING
LIABILITIES:
Savings accounts........ $ 16,733 5.31% $ -- -- % $ -- -- % $128,960 2.18% $ 145,693 2.54%
Interest-bearing Demand
deposit accounts....... -- -- -- -- -- -- 102,463 1.10 102,463 1.10
Non-interest bearing
Demand deposit
accounts............... -- -- -- -- -- -- 48,780 -- 48,780 --
Money market accounts
(variable)............. 178,670 4.54 -- -- -- -- -- -- 178,670 4.54
Time deposits........... 480,803 5.20 304,831 5.79 88,392 6.46 3,406 5.87 964,282 5.45
Escrow.................. -- -- -- -- -- -- 3,354 1.53 3,354 1.53
Other borrowings........ 771,711 5.87 63,375 5.05 175,000 6.71 199,939 5.80 1,123,175 6.40
---------- ---- --------- ---- --------- ---- -------- ---- ----------- -----
Total interest-bearing
liabilities............ $1,447,917 5.48% $ 368,206 5.67% $ 263,392 6.63% $486,902 3.24% $2,566 ,417 5.20%
---------- ---- --------- ---- --------- ---- -------- ---- ----------- -----
Interest sensitivity gap
per period............. $ (355,100) $ 76,625 $ 43,010 $401,166 $ 163,940
========== ========= ========= ======== ===========
Cumulative interest
Sensitivity gap........ $ (355,100) $(278,475) $(235,465) $165,701
========== ========= ========= ========
Cumulative interest
sensitivity gap as a
percent of total
assets................. (12.83)% (10.06)% (8.51)% 5.99%
========== ========= ========= ========
Cumulative net interest-
earning assets as a
percentage of net
interest-bearing
liabilities............ 75.48% 84.67% 88.68% 106.46%
========== ========= ========= ========
</TABLE>
78
<PAGE>
--------
(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.
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>
-200 bp -100 bp 0 bp +100 bp +200 bp
------- ------- ---- ------- -------
<S> <C> <C> <C> <C> <C>
Interest Rate Scenarios
Absolute change in net interest income
(in millions)........................ $0.3 $1.1 $0.0 ($1.9) ($3.9)
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
interest rate swap contracts. The swap contracts 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.
79
<PAGE>
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 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 Interest Rate Swaps
<TABLE>
<CAPTION>
Contract Notional Fair Value
Date Category Amount Gain (loss)
-------- ---------------- -------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
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
======= ====
</TABLE>
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.
80
<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
<TABLE>
<CAPTION>
Fair Value
as of
Contract Notional March 31,
Date Maturity Date Amount 2000
---------- ---------------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
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)
======= =====
</TABLE>
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 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 relies significantly 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
81
<PAGE>
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 Federal Deposit
Insurance Corporation 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.
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.
82
<PAGE>
BUSINESS OF WAYPOINT FINANCIAL CORP.
General
Waypoint Financial Corp. was formed in March 2000 to facilitate the
conversion and merger and has no historical business activities or results of
operations. Waypoint Financial Corp will be the successor to Harris Financial
and York Financial after the conversion and merger. Harris Savings Bank will
change its name to Waypoint Bank in connection with the conversion and York
Federal will merge into Waypoint Bank as part of the merger. As a result,
please refer to the "Business of Harris Financial and Harris Savings Bank"
below and the description of financial information regarding York Financial
beginning on page G-1 of this document.
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,
Waypoint 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 Bank 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 banks and savings banks operating in its
primary market area, credit unions, and, to a lesser but increasing extent,
from other
83
<PAGE>
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.
84
<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 December 31,
---------------------------------------------------------------------------
At March 31, 2000 1999 1998 1997 1996
------------------ ------------------ ------------------ ---------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- ------- -------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <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% $514,694 62.31%
Construction..... 19,383 1.48 23,270 1.83 29,032 2.76 35,209 3.94 25,647 3.11
Other............ -- 0.00 20 0.00 6,962 0.66 1,605 0.19 21,777 2.63
---------- ------ ---------- ------ ---------- ------ -------- ------ -------- ------
Total
residential
mortgage loans.. 556,608 42.36 556,895 43.89 602,432 57.07 576,062 64.47 $562,118 68.05
---------- ------ ---------- ------ ---------- ------ -------- ------ -------- ------
Business Banking:
Commercial real
estate loans..... 133,630 10.17 105,791 8.34 67,138 6.36 20,948 2.34 17,636 2.13
Commercial
business loans... 139,890 10.64 139,384 10.99 82,524 7.82 27,743 3.11 -- 0.00
Construction and
site development
loans............ 8,740 0.67 5,517 0.43 1,943 0.18 5,278 0.59 -- 0.00
Income-producing
real estate
loans............ 95,365 7.26 96,631 7.62 51,980 4.92 27,286 3.05 21,299 2.58
---------- ------ ---------- ------ ---------- ------ -------- ------ -------- ------
Total business
banking loans... 377,625 28.74 347,323 27.38 203,585 19.28 81,255 9.09 38,935 4.71
---------- ------ ---------- ------ ---------- ------ -------- ------ -------- ------
Consumer and other
loans:
Manufactured
housing.......... 80,333 6.11 78,801 6.21 63,758 6.04 71,356 7.98 65,794 7.97
Home equity and
second mortgage.. 184,104 14.01 179,180 14.12 155,310 14.71 155,861 17.44 153,464 18.58
Indirect
automobile and
other(1)......... 115,443 8.78 106,514 8.40 30,647 2.90 9,097 1.02 5,672 0.69
---------- ------ ---------- ------ ---------- ------ -------- ------ -------- ------
Total consumer
loans........... 379,880 28.90 364,495 28.73 249,715 23.65 236,314 26.44 224,930 27.24
---------- ------ ---------- ------ ---------- ------ -------- ------ -------- ------
Loans
receivable,
gross........... 1,314,113 100.00% 1,268,713 100.00% 1,055,732 100.00% 893,631 100.00% 825, 983 100.00%
---------- ====== ---------- ====== ---------- ====== -------- ====== -------- ======
Plus:
Dealer
reserves(2)...... 21,165 20,698 13,996 14,504 13,880
Less:
Unearned
premiums......... 274 296 471 855 (327)
Net deferred
loans origination
fees............. 9,327 9,259 8,527 8,182 7,952
Allowance for
loan losses...... 12,032 11,873 9,088 8,192 8,322
---------- ---------- ---------- -------- --------
Loans
receivable,
net............. $1,313,645 $1,267,983 $1,051,642 $890,906 $823,916
========== ========== ========== ======== ========
Residential
mortgage loans:
ARM.............. $ 58,444 10.50% $ 58,474 10.50% $ 65,725 10.91% $ 90,615 15.73% $133,544 22.89%
Fixed-rate....... 498,164 89.50 498,421 89.50 536,707 89.09 485,447 84.27 449,873 77.11
---------- ------ ---------- ------ ---------- ------ -------- ------ -------- ------
Total mortgage
loans........... $ 556,608 100.00% $ 556,895 100.00% $ 602,432 100.00% $576,062 100.00% $583,417 100.00%
========== ====== ========== ====== ========== ====== ======== ====== ======== ======
<CAPTION>
1995
------------------
Amount Percent
--------- --------
<S> <C> <C>
Residential
mortgage loans:
One-to four-
family........... $472,998 71.54%
Construction..... 23,415 3.54
Other............ 23,015 3.48
--------- --------
Total
residential
mortgage loans.. 519,428 78.56
--------- --------
Business Banking:
Commercial real
estate loans..... 2,240 0.34
Commercial
business loans... -- 0.00
Construction and
site development
loans............ -- 0.00
Income-producing
real estate
loans............ 27,171 4.11
--------- --------
Total business
banking loans... 29,411 4.45
--------- --------
Consumer and other
loans:
Manufactured
housing.......... 20,991 3.18
Home equity and
second mortgage.. 83,031 12.56
Indirect
automobile and
other(1)......... 8,289 1.25
--------- --------
Total consumer
loans........... 112,311 16.99
--------- --------
Loans
receivable,
gross........... 661,150 100.00%
--------- ========
Plus:
Dealer
reserves(2)...... 4,308
Less:
Unearned
premiums......... (220)
Net deferred
loans origination
fees............. 7,959
Allowance for
loan losses...... 6,114
---------
Loans
receivable,
net............. $651,605
=========
Residential
mortgage loans:
ARM.............. $114,185 20.89%
Fixed-rate....... 432,414 79.11
--------- --------
Total mortgage
loans........... $546,599 100.00%
========= ========
</TABLE>
----
(1) Includes credit card loans, education loans and unsecured personal loans.
(2) Represents reserves established for indirect auto and manufactured housing
loan portfolios.
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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
One Over Over Three Five 10 Total
Within Through Two Through Through Through Through After
One Year Two Years Three Years Five Years 10 Years 15 years 15 Years Total
-------- --------- ----------- ---------- -------- -------- -------- ----------
(In Thousands)
<S> <C> <C> <C> <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 $ 94,206 $322,360 $ 478,781
Construction........... 1,101 -- -- -- 102 2,027 16,153 19,383
-------- ------- ------- -------- -------- -------- -------- ----------
Total residential
mortgage loans...... 5,334 1,841 3,204 11,936 41,103 96,233 338,513 498,164
Commercial loans:
Commercial real estate
loans................. 1,467 75 4,851 10,386 2,069 -- 673 19,521
Commercial business
loans................. 17,757 2,905 3,813 15,799 8,781 12,793 -- 61,848
Construction and site
development loans..... 303 299 297 1,167 -- -- -- 2,066
Income-producing real
estate loans.......... 3,136 39 322 15,281 5,158 -- -- 23,936
-------- ------- ------- -------- -------- -------- -------- ----------
Total commercial
loans............... 22,663 3,318 9,283 42,633 16,008 12,793 673 107,371
Consumer and other
loans:
Home equity and second
mortgage.............. 677 2,396 5,313 23,854 46,139 60,523 3,441 142,343
Other.................. 3,129 1,739 5,737 80,406 27,146 13,558 63,929 195,644
-------- ------- ------- -------- -------- -------- -------- ----------
Total consumer and
other loans......... 3,806 4,135 11,050 104,260 73,285 74,081 67,370 337,987
-------- ------- ------- -------- -------- -------- -------- ----------
Total fixed-rate
loans............... 31,803 9,294 23,537 158,829 130,396 183,107 406,556 943,522
Adjustable-Rate Loans
Residential mortgage
loans:
One-to four-family..... 31,921 5,304 8,123 12,298 798 -- -- 58,444
Construction........... -- -- -- -- -- -- -- --
-------- ------- ------- -------- -------- -------- -------- ----------
Total residential
mortgage loans...... 31,921 5,304 8,123 12,298 798 -- -- 58,444
Commercial loans:
Commercial real estate
loans................. 37,962 3,129 9,105 48,792 15,121 -- -- 114,109
Commercial business
loans................. 57,049 8,116 111 5,929 6,836 -- -- 78,041
Construction and site
development loans..... 6,674 -- -- -- -- -- -- 6,674
Income-producing real
estate loans.......... 21,788 4,831 12,677 25,951 6,183 -- -- 71,430
-------- ------- ------- -------- -------- -------- -------- ----------
Total commercial
loans............... 123,473 16,076 21,893 80,672 28,140 -- -- 270,254
Consumer and other
loans:
Home equity and second
mortgage.............. 41,762 -- -- -- -- -- -- 41,762
Other.................. 131 -- -- -- -- -- -- 131
-------- ------- ------- -------- -------- -------- -------- ----------
Total consumer and
other loans......... 41,893 -- -- -- -- -- -- 41,893
-------- ------- ------- -------- -------- -------- -------- ----------
Total adjustable-rate
loans............... 197,287 21,380 30,016 92,970 28,938 -- -- 370,591
-------- ------- ------- -------- -------- -------- -------- ----------
Loans receivable,
gross.................. $229,090 $30,674 $53,553 $251,799 $159,334 $183,107 $406,556 $1,314,113
======== ======= ======= ======== ======== ======== ======== ==========
</TABLE>
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<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.
<TABLE>
<CAPTION>
Floating
or
Predetermined Adjustable
Rates Rates Total
------------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
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
======== ======== ==========
</TABLE>
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, 89% were fixed-rate mortgage loans with an average
yield of 7.0%, and 10.9% 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 75.39%,
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
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<PAGE>
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 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.
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<PAGE>
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 $161.0 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
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
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<PAGE>
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 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
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<PAGE>
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. 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
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<PAGE>
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.
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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.
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.
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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.
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.
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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.
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.
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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 52,160 230,200 103,300 61,400 111,700 56,700
-------- -------- -------- -------- -------- -------- --------
Total loans
originated......... $114,500 $184,960 $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>
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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.
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, which had specific
reserves of $0, $1.8 million and $0, respectively. At March 31, 2000 and
December 31, 1999, allowance for loan losses had a reserve of $1.8 million for
impaired loans.
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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 At December 31,
March 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.
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 the lower of the
carrying value or fair value less estimated costs to sell at the date of
foreclosure. At the time of foreclosure, any excess of carrying value over fair
value is charged to the allowance for loan losses. 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
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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 losses, 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 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
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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 At December 31, (1)
March 31, ---------------------------------------
2000(1) 1999 1998 1997 1996 1995
--------- ------- ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <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 re-
lated to unfunded com-
mitments............... -- 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.
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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 December 31,
At March 31, --------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995
---------------- ---------------- --------------- --------------- --------------- ---------------
% of % of % of % of % of % of
Loans in Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each Each
Category Category Category Category Category Category
to Total to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------- -------- ------- -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <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% $2,777 62.31% $1,627 71.54%
Commercial
loans............ 7,218 28.74 7,154 27.38 4,909 19.28 2,160 9.09 2,720 4.71 1,851 4.45
Consumer and
other loans...... 3,250 28.90 3,073 30.56 2,358 27.07 3,041 30.57 1,780 32.98 716 24.01
Unallocated 726 N/A 808 N/A 852 N/A 1,639 N/A 1,045 N/A 1,920 N/A
------- ------ ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total........... $12,032 100.00% $11,873 100.00% $9,088 100.00% $8,192 100.00% $8,322 100.00% $6,114 100.00%
======= ====== ======= ====== ====== ====== ====== ====== ====== ====== ====== ======
Reserve for
unfunded
commitments...... $ 308 $ 308 $ 925 $ 422
------- ------- ------ ------
</TABLE>
101
<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 "AARAU," 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. Harris Financial invests only in private-issue
collateralized mortgage obligations rated "AA" or better at the time of
purchase and management believes the higher yields associated with these
instruments have amply compensated Harris Financial for the incremental
increase in risks assumed relative to investments in U.S. Government-backed
collateralized mortgage obligations. 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
102
<PAGE>
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 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.
103
<PAGE>
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 Amortized Amortized Amortized
Cost Fair Value Cost Fair Value Cost Fair Value Cost Fair 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 $ 184,50 3
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 63,492 113,557 119,233 109,351 114,023
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 1,10 2,782
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>
104
<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>
At March 31, 2000
-----------------------------------------------------------------------------------------------------------
After One Through After Five Through
One Year or Less Five Years Ten Years Over 10 Years Total
------------------ ------------------ ------------------ ------------------ -------------------------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Market 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>
Available for sale:
U.S. government
and agency
obligations....... $ -- 0.00% $ 6,626 6.61% $252,198 6.49% $ 89,284 7.28% $ 348,108 $ 324,545 6. 69%
Corporate bonds... -- 0.00 -- 0.00 -- 0.00 63,429 7.01 63,429 60,433 7.01
Municipal
securities(2)..... -- 0.00 -- 0.00 482 5.74 62,182 5.73 62,644 62,301 5.73
Equity(1)(2)...... -- 0.00 -- 0.00 -- 0.00 116,232 6.07 116,232 119,382 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% 98,989 95,026 6.89%
FHLMC CMO's....... 8,072 6.81 39,199 6.87 33,789 6.88 42,354 6.88 123,414 116,651 6.87
GNMA CMO's........ 326 7.42 4,886 7.42 5,265 7.42 14,521 7.42 24,998 25,031 7.42
Private issue
CMO's............. 27,566 6.86 141,210 6.86 135,306 6.87 219,796 6.86 523,878 500,456 6.86
------- ---- -------- ---- -------- ---- -------- ---- ---------- ----------- -----
Total mortgage-
backed
securities...... 41,335 6.86 212,205 6.87 202,932 6.89 314,807 6.89 771,279 737,164 6.88
------- ---- -------- ---- -------- ---- -------- ---- ---------- ----------- -----
Total securities
available for
sale............ $41,335 6.86% $218,831 6.87% $455,612 6.67% $645,934 6.70% $1,361,712 $1,303 ,825 6.72%
======= ==== ======== ==== ======== ==== ======== ==== ========== =========== =====
<CAPTION>
<S> <C>
Available for sale:
U.S. government
and agency
obligations.......
Corporate bonds...
Municipal
securities(2).....
Equity(1)(2)......
Mortgage-backed
securities(3)(4)
FNMA CMO's........
FHLMC CMO's.......
GNMA CMO's........
Private issue
CMO's.............
Total mortgage-
backed
securities......
Total securities
available for
sale............
</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.
105
<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.
106
<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
--------------------------- ---------------------------
Average Average Average Average
Balance Interest Cost Balance Interest Cost
---------- -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Savings
deposits......... $ 124,200 $ 676 2.18% $ 143,872 686 1.91%
Time deposits.... 940,971 12,689 5.39 768,883 10,094 5.25
NOW and money
market accounts.. 334,029 2,217 2.65 292,092 1,690 2.31
---------- ------- ---- ---------- ------- ----
Total........... $1,399,200 $15,582 4.45% $1,204,847 $12,470 4.14%
========== ======= ==== ========== ======= ====
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------------------------------------
1999 1998 1997
--------------------------- --------------------------- ---------------------------
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......... $ 139,098 $ 2,931 2.11% $ 147,954 $ 3,285 2.22% $ 147,738 $ 4,072 2.76%
Time deposits.... 810,444 42,648 5.26 726,316 40,153 5.53 782,578 43,760 5.59
NOW and money
market accounts.. 315,812 7,228 2.29 258,504 7,094 2.74 220,557 6,551 2.97
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
Total........... $1,265,354 $52,807 4.17% $1,132,774 $50,532 4.46% $1,150,873 $54,383 4.73%
========== ======== ======= ========== ======== ======= ========== ======== =======
</TABLE>
107
<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 At December 31,
March 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
-------------------------------------------
Less
Than One 1-2 2-3 After 3
Weighted Average Rate Year Years Years 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 At December 31,
March 31, ------------------------
2000(1) 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>
--------
(1) Excludes brokered certificates of deposit.
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.
108
<PAGE>
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 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 At or for Years Ended December
31, 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>
109
<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, a former
officer and two former employees of Avstar, 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 a former officer and two 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.
The Mortgage Review Board of the U.S. Department of Housing and Urban
Development has notified Avstar Mortgage Corporation that the Mortgage Review
Board has determined that Avstar violated requirements of the HUD and the
Federal Housing Administration. Several of the violations alleged by the
Mortgage Review Board relate to transactions between Avstar and the plaintiffs
in the litigation described above. Based on these alleged violations, the
Mortgage Review Board has withdrawn the HUD/FHA approval of Avstar Mortgage
Corporation, and imposed a civil money penalty. As of the date of this
document, a complaint has not been filed with respect to the civil money
penalty.
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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REGULATION
Prior to the completion of the mutual-to-stock conversion, Harris Savings
Bank will change its name to Waypoint Bank and convert its charter to that of a
federal stock savings bank. As a result, Waypoint Bank will be subject to the
regulation and supervision of the OTS. As a result of the Harris Savings Bank
charter conversion, Waypoint 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 not regulate or supervise Waypoint Financial or Waypoint Bank, and the
Board of Governors of the Federal Reserve system will not regulate or supervise
Waypoint Financial. Set forth below is a brief description of certain laws and
regulations that relate to the regulation of Waypoint Financial and Waypoint
Bank after the conversion, including a comparison of the principal differences
between the regulation of Waypoint Bank and Waypoint 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 FDIC
under the Savings Association Insurance Fund. 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
Pennsylvania Department of Banking 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 mutual-to-stock conversion, Harris Savings
Bank will convert its charter to that of a federal stock savings bank and
change its name to Waypoint Bank. The OTS will become Waypoint Bank's
chartering authority and primary regulator. The FDIC will continue to insure
the deposits of Waypoint 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 Waypoint Bank.
As a result of the charter conversion, Waypoint 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 regulate or supervise Waypoint Financial. Before the
completion of the conversion, Harris Financial was 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. After the
completion of the conversion, Waypoint 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 Waypoint Financial or
Waypoint Bank could have a material adverse impact on operations and
stockholders.
Harris Savings Bank
General. As a federally chartered, FDIC-insured savings bank, Waypoint 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
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regulation and supervision is intended primarily for the protection of the
capital of a savings bank, the Savings Association Insurance Fund and a savings
bank's depositors. This regulatory structure gives the regulatory authorities
extensive discretion in connection with 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 Waypoint Bank not less frequently than once every two
years and will prepare a report of its examination findings for the Waypoint
Bank Board of Directors. Waypoint 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. Waypoint 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 Waypoint Bank as a federal savings bank following the
conversion will be comparable in many respects to the regulation of Waypoint
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 Waypoint 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,
Waypoint 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 Waypoint 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, Waypoint 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. Waypoint Bank's pro forma capital ratios are set
forth under "Regulatory Capital Compliance."
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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 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, and the
deposit accounts of Waypoint will be, insured by the Savings Association
Insurance Fund, 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
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bank is assigned by the FDIC. Any increase in insurance assessments could have
an adverse effect on the earnings of insured institutions, including Waypoint
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 any
applicable law, regulation, rule, order or condition imposed by the FDIC.
Management 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. Waypoint Bank, as a subsidiary of Waypoint
Financial, will be required to file a capital distribution notice with the OTS
before paying any dividend to Waypoint Financial. However, capital
distributions by Waypoint 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 federal 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
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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 may vary the liquidity requirements from time to time between 4%
and 10%. Monetary penalties may be imposed on institutions for liquidity
requirement violations.
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.
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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%;
. 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 and Waypoint Bank will
be 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.
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Community Reinvestment Act. Under the Community Reinvestment Act, 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 Community Reinvestment Act 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
Community Reinvestment Act 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 Community Reinvestment Act requires an institution's primary federal
banking regulator to provide a written evaluation of an institution's Community
Reinvestment Act performance utilizing a four-tiered descriptive rating system
and requires public disclosure of an institution's Community Reinvestment Act
rating. Harris Savings Bank received a "satisfactory" overall rating in its
most recent Community Reinvestment Act examination. The Community Reinvestment
Act applied to Harris Savings Bank as a FDIC-insured Pennsylvania Savings Bank,
and after the conversion will continue to apply to Waypoint 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." OTS
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
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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 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. 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.
Waypoint Financial
General. Prior to the conversion, Harris Financial (the predecessor of
Waypoint 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
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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, Waypoint 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
Waypoint Bank.
Regulatory Capital Requirements. Savings and loan holding companies do not
have any regulatory capital requirements, and after the charter conversion
Waypoint Financial will not 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,
Waypoint 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 that were permitted to Harris Financial as a bank holding
company. As a unitary savings and loan holding company formed or applied for
after May 4, 1999, Waypoint 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 Waypoint 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.
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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."
Each bank holding company is 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 its 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.
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), Waypoint Bank must qualify as a Qualified Thrift
Lender. To qualify as a Qualified Thrift Lender, Waypoint Bank must maintain
compliance with the test for a "domestic building and loan association," as
defined in the Internal Revenue Code, or with the 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. Waypoint Financial has filed with the Securities
and Exchange Commission a registration statement under the Securities Act of
1933, as amended, for the registration of the common stock to be issued in the
stock offering. Upon completion of the stock offering, Waypoint Financial's
common stock will be registered with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended. Waypoint Financial will,
as now, have to observe the information, proxy solicitation, insider trading
restrictions and other requirements under the Securities Exchange Act of 1934.
The registration under the Securities Act of 1933 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
Waypoint Financial may be resold without registration. The resale restrictions
of Rule 144 under the Securities Act of 1933 govern shares purchased by an
affiliate of Waypoint Financial. If Waypoint Financial meets the current public
information requirements of Rule 144 under the Securities Act of 1933, each
affiliate of Waypoint 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 Waypoint 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 Waypoint Financial
to permit affiliates to have their shares registered for sale under the
Securities Act of 1933 under specific circumstances.
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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.
The last tax year of Harris Financial examined by the Internal Revenue
Service was 1996. This examination did not result in any material adjustments
to Harris Financial financial statements.
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 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
Small Business Protection 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 Small Business Protection Act,
Harris Savings Bank was required to use the specific charge off method in
computing its bad debt deduction beginning with its 1996 Federal tax return. In
addition, the Small Business Protection Act requires the recapture (over a six
year period) of the excess of tax bad debt reserves at 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 Internal Revenue Code imposes an alternative minimum tax at
a rate of 20% on a base of regular taxable income plus certain tax preferences,
referred to as alternative minimum taxable income. The alternative minimum tax
is payable to the extent such alternative minimum taxable income is in excess
of an exemption amount. Net operating losses can offset no more than 90% of
alternative minimum taxable income. 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
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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 subject to the Pennsylvania Mutual Thrift
Institutions Tax Act, which taxes net earnings, determined in accordance with
generally accepted accounting principles, with some adjustments, at an annual
rate of 11.5%. The Mutual Thrift Institutions Tax Act 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. In
computing net earnings, the Mutual Thrift Institutions Tax Act 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 the
savings bank. Net operating losses, if any, thereafter can be carried forward
three years.
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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
Waypoint Financial following the merger.
<TABLE>
<CAPTION>
Current
Directors of Harris Director Term to
Financial(1) Age Position Since 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
Waypoint 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 Waypoint Financial, and Mr. Pullo
will be appointed the Co-Chairman of the Board of Directors of Waypoint
Financial.
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(3) Currently a director of York Financial who will become a director of
Waypoint 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 Waypoint 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 Waypoint
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 Waypoint
Financial
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Robert A. Angelo........ 52 Executive Vice President, Secretary and General Counsel of York Financial
James H. Moss .......... 46 Senior Vice President and Chief Financial Officer/Treasurer 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>
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 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.
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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 Bylaws 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 Waypoint 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 Waypoint 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 of the Board of Directors and Chairman of the
Board of the following 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 the York Foundation, and a member of the
Board of Anna Huber Community Health Initiatives. He is a member and
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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 the
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., which he has been affiliated with 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.
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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
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, positions he has held 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 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, all 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 was
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 of Waypoint Bank.
William M. Long has been Senior Vice President of Lending for Harris Savings
Bank since he 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 by Harris Savings Bank since 1996.
He was employed previously by Fulton Bank. He serves on various Community
Boards and Committees. Following the merger, Mr. Samuel will continue to serve
as Senior Vice President of the Business Banking Group.
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Executive Officers of York Financial who are not Directors, and who will Become
Executive Officers of Waypoint 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 Waypoint
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 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 Waypoint Financial following the merger.
James H. Moss of York, Pennsylvania, 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 Waypoint 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 Mortgage Banking Group. Mr. O'Hara joined York Federal 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
128
<PAGE>
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 Waypoint 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 whose total annual salary and bonus
for the last completed fiscal year exceeded $100,000 (together, Named Executive
Officers).
<TABLE>
<CAPTION>
Long-Term Compensation
-------------------------------
Annual Compensation Awards Payouts
--------------------------- ----------------------- -------
Other Options/ All Other
Annual Restricted Stock Compen-
Year Ended Compen- Stock appreciation LTIP sation(3)
Name and principal position December 31, Salary Bonus(1) sation(2) 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 1997 136,780 39,848 -- -- -- -- 11,558
Officer
Jane B. Tompkins.......... 1999(6) 150,174 36,013 -- -- 6,000 -- 13,202
Senior Vice President and 1998(7) 94,962 -- -- 6,000(6) -- 28,241
Chief Credit Officer
William M. Long........... 1999 148,223 31,240 -- -- 6,000 -- 17,425
Senior Vice President -- 1998 101,697 35,656 -- -- -- -- 18,367
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 of 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 to 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 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.
129
<PAGE>
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, as amended, "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.
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.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realized Value at
Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Terms(1)
--------------------------------- ---------------------------
Percent of
Total Options
Granted to Exercise
Options Employees or Base Expiration
Name Granted in FY 1999 Price Date(3) 5% 10%
---- ------- ------------- -------- ---------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Charles C. Pearson, 50,000(2) 24.4% $14.5000 01/05/09 $ 457,000 $ 1,160,000
Jr..................... 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.
130
<PAGE>
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Options at in-the-Money Options
December 31, 1999 at December 31, 1999
--------------------- --------------------
Number of
Shares
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable(1)
---- ----------- -------- --------------------- --------------------
<S> <C> <C> <C> <C>
Charles C. Pearson.
Jr.....................
President and
Chief Executive Officer -- -- 5,000/95,000 $0/$0
John W. Atkinson .......
Executive Vice
President
and Chief Operating
Officer -- -- 0/15,000(2) $0/$0
James L. Durrell........
Executive Vice
President and
Chief Financial Officer 4,500 $28,764 30,500/15,000 $111,935/$0
Jane B. Tompkins .......
Senior Vice President
Chief and
Credit Officer -- -- 0/6,000(3) $0/$0
William M. Long.........
Senior Vice President
Lending Division 7,500 $78,127 0/6,000 $0/$0
</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.
Employment Contracts. Harris MHC entered into a rolling three-year
Employment Agreement with Mr. Pearson effective January 5, 1998, 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, pursuant to the employment agreement, Mr. Pearson 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. The employment agreement also provides for 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 the
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 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 is also 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
Internal Revenue 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 agreement. 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.
131
<PAGE>
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 the 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 Internal
Revenue 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 Internal Revenue 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 (i) 2% of average monthly
compensation multiplied by years of service, up to 15 years, (ii) .5% of
average monthly compensation multiplied by years of service in excess of 15
years (maximum 20 years under this part) and (iii) .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.
132
<PAGE>
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.
<TABLE>
<CAPTION>
Years of Service
---------------------------------------------------------------------
Compensation 15 20 25 30 35
------------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
$ 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
</TABLE>
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 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 compensation limit effective January 1, 1994. The compensation
limit for 1999 was $160,000, and is increased to $170,000 for 2000. The plan
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.
<TABLE>
<CAPTION>
Years of Service(1)
---------------------------------------------------------------
Compensation 15 20 25 30 35
------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$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
</TABLE>
--------
(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 two years of credited service.
Neither the conversion nor the merger will have any effect on benefits
provided under the Supplemental Executive Retirement Plan.
133
<PAGE>
York Financial Executive Compensation
Summary Compensation Table. The following information is furnished for York
Financial's chief executive officer and the four most highly compensated
executive officers whose total annual salary and bonus for the last completed
fiscal year exceeded $100,00 (named executive officers) for the year ended June
30, 1999. All compensation is paid by York Federal but allocated between York
Financial and York Federal based on approximate time spent by the named
executive officer on York Financial business.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Year --------------------------------------- --------------------------------
Name and principal Ended Other Annual All Other
position June 30, Salary($) Bonus($) Compensation(1)($) Options(#)(2) Compensation($)(3)
------------------ -------- --------- -------- ------------------ ------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Robert W. Pullo,........ 1999 $375,011 $123,708 -- 3,970 $160,378
President and Chief 1998 360,490 167,197(4) -- 24,970 111,910
Executive Officer of 1997 330,502 105,884 -- 3,970 111,739
York Financial and
Chief Executive Officer
of York Federal
Robert A. Angelo,....... 1999 $192,400 $ 64,389 -- -- $ 27,982
Executive Vice 1998 185,000 87,530(4) -- 15,750 10,873
President, Secretary 1997 170,000 60,255 -- -- 11,129
and General Counsel of
York Financial;
President of York
Federal
James H. Moss,.......... 1999 $143,929 $ 43,662 -- -- $ 7,231
Senior Vice President, 1998 135,000 64,428(4) -- 10,500 7,817
and Chief Financial 1997 126,445 43,811 -- -- 8,422
Officer/Treasurer of
York Financial;
Executive
Vice President and
Chief Financial
Officer/Treasurer of
York Federal
Harry M. Zimmerman,..... 1999 $131,323 $ 35,798 -- -- $ 4,407
Executive Vice 1998 125,000 41,669 -- 10,500 3,793
President of York 1997 19,231 829 -- 13,125 --
Federal
Lynn D. Crenshaw,....... 1999 $118,448 $ 32,542 -- -- $ 3,766
Executive Vice 1998 112,000 38,282 -- 10,500 4,060
President of York 1997 109,444 5,884 -- -- 5,480
Federal
</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
$1,200, respectively, for Messrs. Pullo, Angelo and Moss for board meetings
of York Financial Investment Corp., a subsidiary of York Federal.
(4) Includes bonuses received in November 1997 under York Financial's Bonus
Plan for performance standards achieved in the 1996/1997 fiscal year.
134
<PAGE>
Option Grants Table. The following table sets forth, for the fiscal year
ended June 30, 1999 all option grants to York Financial's Chief Executive
Officer for the purchase of York Financial common stock. No options were
granted to the other York Financial named executive officers during the fiscal
year ended June 30, 1999.
<TABLE>
<CAPTION>
Individual Grants(1)
-------------------------------------------------------------
Potential Realizable
% of Total Value at Assumed
Options Annual Rates of Stock
Granted to Price Appreciation for
Options Employees Exercise Option Term(2)
Granted in Fiscal Price Expiration ----------------------
Name (#) Year ($/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 $105,455
</TABLE>
--------
(1) Only named executive officers receiving grants are listed.
(2) The amounts under the columns labeled "5%" and "10%" are included by York
Financial pursuant to rules of the Securities and Exchange Commission and
are not intended to forecast future appreciation, if any, in the price of
York Financial's common stock. Such amounts are based on the assumption
that the named persons hold the options granted for their full 10 year
term. The actual value of the options will vary in accordance with the
market price of York Financial's common stock. The column headed "0%" is
included to demonstrate that the options were granted at fair market value
and optionees will not recognize any gain without an increase in the stock
price, which increase benefits all stockholders commensurately. York
Financial did not use an alternative formula to attempt to value options at
the date of grant, as management is not aware of any formula which
determines with reasonable accuracy a present value of options of the type
granted to the optionees.
Option Exercise Table. The following table sets forth all exercises of
options to purchase York Financial common stock by York Financial's Chief
Executive Officer and York Financial named executive officers for the fiscal
year ended June 30, 1999.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-
Options at Fiscal Year the-Money Options at
Shares End(#)(1) Fiscal Year End($)
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 has been adjusted for a 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
Waypoint Financial. The number of shares of Waypoint 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
135
<PAGE>
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 of York Financial and York Federal, and
is increased or decreased each year by an amount determined by the aggregate
annual after-tax income 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 have been 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 is not 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 years 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
Waypoint Financial will incur no additional expense under the life insurance
split dollar agreements as a result of the merger.
136
<PAGE>
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 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. During the last fiscal year, compensation for the purposes of calculating
benefits for a Plan participant was limited by the Internal Revenue 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 between age 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 of the merger, 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
137
<PAGE>
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. Each directors emeritus receives $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 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, Messrs.
Isaacman, McClure, Springer and Poole each received 5,625 options.
Harris Financial's 1999 Stock Option Plan for Outside Directors is
administered by Harris Financial's board of directors. The plan authorizes
grants of 2,000 options yearly to each non-employee director (and 4,000 options
to the non-employee Chairman if applicable) exercisable at the fair market
value on the date of the grant. The options 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 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.
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<PAGE>
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
Waypoint Financial. The number of shares of Waypoint 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. As a result, Harris Financial and Waypoint
Financial will incur no additional expense under the 1979 Directors Deferred
Compensation Plan.
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.
Harris Savings Bank used the services of NAI/Commercial Industrial Realty
Company , 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/Commercial Industrial Realty
Company for brokerage commissions was $70,000.
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<PAGE>
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.
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<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
Beneficial Ownership of Harris Financial Common Stock
The following table includes, as of March 31, 2000, 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 information regarding any "group" as that term issued in
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, 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 Percent of
Owned and Shares of
Nature of Common
Beneficial Stock
Name and Address of 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>
141
<PAGE>
--------
(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.
(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.
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<PAGE>
(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.
(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 persons 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.
143
<PAGE>
<TABLE>
<CAPTION>
Percent of
Amount and Shares of York
Nature of Financial
Beneficial Common Stock
Name and Address of Beneficial Owner Ownership(1) 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,
as amended, 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 September 1, 1999. 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 September 1, 1999.
(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.
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<PAGE>
(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 Commission 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 Waypoint 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 Waypoint
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.
<TABLE>
<CAPTION>
Proposed
Subscriptions
-------------
Number
of
Name(1) Shares Amount
------- ------ ------
<S> <C> <C>
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.............................................
Lynn D. Crenshaw..........................................
All current and proposed directors and executive officers
as a group ( persons)..................................
</TABLE>
--------
(1) Purchases by each individual represent less than 1.0% of the
shares sold in the stock offering.
146
<PAGE>
THE CONVERSION AND STOCK OFFERING
The Board of Directors of Harris Financial and Waypoint Financial and the
Board of Trustees of Harris MHC have adopted the plan of conversion, and
submitted it to the OTS for approval. The plan of conversion has been approved
by the OTS subject to certain conditions. Approval of the plan of conversion by
the OTS does not constitute an endorsement of the offering by the OTS.
General
On March 27, 2000, Harris MHC's Board of Trustees and Waypoint 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.
Waypoint Financial will be a savings and loan holding company regulated by
the OTS, and the successor to Harris Financial. Harris MHC and Harris Financial
have each applied to the OTS 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 OTS. The plan of conversion has
been approved by the OTS, subject to certain conditions. 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 25, 2000.
The aggregate price of the shares of common stock to be issued in the stock
offering 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 Waypoint 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 Harris Financial 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.
Waypoint 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 Waypoint 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 be applied to the acquisition by merger of York
Financial. Waypoint Financial intends to reserve 7,500,000 shares for sale in
the public offering if subscriptions for such shares are not received in the
subscription offering. Harris Financial intends to reserve 7,500,000 shares for
sale in the public offering at the minimum, midpoint, maximum and adjusted
maximum of the offering range, but will not reserve shares that would result in
the issuance of more than 30,417,500 shares in the offering. The subscription
offering is expected to expire at 10:00 a.m., local time, on September 25,
2000. The community offering will be conducted concurrently with the
subscription offering. 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
OTS. 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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Reasons for the Conversion
The conversion of Harris MHC from the mutual holding company form of
organization and Waypoint Financial's stock offering are necessary to complete
the merger with York Financial. The stock offering and merger will allow
Waypoint 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 Waypoint Financial to:
. finance acquisitions of other financial institutions or other businesses
related to banking; and
. pay dividends to stockholders.
After the stock offering, Waypoint Financial will be able to issue
additional shares of common stock to raise capital or to finance acquisitions.
At the present time, Waypoint Financial is not planning any additional capital
issuances, mergers, or material acquisitions. Waypoint Financial believes that
the stock offering will give customers and the local community the opportunity
to become equity owners of Waypoint Financial, and to participate in any stock
price appreciation and cash dividends. Waypoint Financial believes that
through expanded local stock ownership, existing customers and others who
purchase common stock will try to support Waypoint Financial by consolidating
their banking business with, and increasing their referrals to, Waypoint Bank.
Waypoint 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 Waypoint 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.
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
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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 Waypoint 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 Waypoint 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 Waypoint 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 July 28, 2000, the midpoint of the
estimated range of the market value of the common stock of Waypoint Financial
that will be issued in the mutual-to-stock conversion of Harris MHC, including;
. shares sold in the offering,
. shares for which subscriptions 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 Waypoint Financial was $477.2 million, and
ranged from $414.1 million to $526.1 million. If Waypoint Financial does not
receive orders for at least 19,550,000 shares in the subscription and community
offering, then, in Waypoint 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 Waypoint 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.
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.
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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 Waypoint 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 Waypoint Financial as a going concern and should not be
considered as an indication of the liquidation value of Waypoint 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.
Waypoint Financial will not sell any shares of common stock unless RP
Financial confirms to Harris MHC, Harris Financial, Waypoint Financial and to
the OTS 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 Waypoint 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 OTS 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
returned promptly to the subscriber and account withdrawal authorizations
canceled as described above.
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
headquarters of Harris Financial and from the OTS.
Subscription Offering and Subscription Rights
Waypoint 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.
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. 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 7,
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 insufficient 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 will 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 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 insufficient 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 will 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.
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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 insufficient shares available to satisfy all subscriptions by
other depositors, available shares will be allocated among subscribing other
depositors as described above. 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 7, 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 25,
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 OTS; however, we
will notify subscribers if we do so, and we will give subscribers the
opportunity to increase, decrease or rescind their subscriptions. If the stock
offering is not completed, all subscription funds 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, Waypoint Financial
may offer shares for sale pursuant to the plan of conversion in a community
offering to the public with preference given to persons residing in the
counties in which Harris Savings Bank or York Federal have a branch office,
stockholders of Harris Financial and York Financial as of the voting record
date and current depositors of York Federal. Harris Savings Bank and York
Federal maintain branch offices in the Pennsylvania counties of Dauphin,
Cumberland, York, Lancaster and Lebanon, and the Maryland counties of
Washington and Harford. 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. The term "residents" includes persons who occupy a dwelling within
these counties and who have established an ongoing physical presence in it,
together with an indication that such presence is not merely transitory in
nature. To the extent the person is a corporation or other business entity, the
principal place of business or headquarters must be in these counties. We may
utilize depositor or loan records or such other evidence to make a
determination as to whether a person is a resident. In all cases, the
determination of resident status will be made by us in our sole discretion.
If there are insufficient shares to fill all orders received in the
community offering, available shares will first be used to fill the accepted
orders of Harris Financial and York Financial stockholders, county residents
and York Federal depositors as described above. If there are insufficient
shares to satisfy these orders, we will satisfy each order to a maximum
percentage, to be determined by us, but not to exceed 2% of the shares sold in
the offering, subject to overall purchase limitations. Thereafter, remaining
shares will be allocated on an equal number of shares per order basis.
The community offering, if any, may begin 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
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unless extended by Harris Financial and Waypoint Financial, with the approval
of the OTS, if necessary. We may terminate the community offering at any time.
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., Inc. as financial and marketing agent in
connection with the subscription offering and community offering of the common
stock. Ryan, Beck has agreed to use its best efforts to assist us with the
solicitation of subscriptions for shares of common stock in the subscription
offering and the community offering. Ryan, Beck is also Harris Financial's
financial advisor in the merger with York Financial. Ryan, Beck also expects to
co-manage the public offering. The terms of that proposed engagement are
described below.
Ryan, Beck 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 offering and
the community offering to persons other than Harris Savings Bank's or Harris
Financial's officers, directors, employees, or immediate family members of such
persons, and the employee stock ownership plan. Ryan, Beck 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 Waypoint 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, Waypoint 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 Savings Bank (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 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.
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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 The Employee Retirement Income Security Act and Internal Revenue
Service regulations require that officers, trustees and 10% stockholders who
use self-directed individual retirement account 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.
Stock Information Center
If you have any questions regarding the offering, please call the Stock
Information Center, toll free, at (877) 902-7556, from 9:00 a.m. to 4:00 p.m.,
local time, Monday through Friday. The Stock Information
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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 in the subscription offering 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 begin 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 Waypoint 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 Waypoint 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 Waypoint
Financial intend to reserve 7,500,000 shares for sale in the public offering if
subscriptions for such shares are not received in the subscription offering and
community offering. Harris Financial intends to reserve 7,500,000 shares for
sale in the subscription offering at the minimum, midpoint, maximum and
adjusted maximum of the offering range, but will not reserve shares that would
result in the issuance of more than 30,417,500 shares in the offering. If an
agreement is entered into, the underwriters will purchase the shares from
Waypoint 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, Waypoint
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 Waypoint 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, Waypoint
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. The underwriters may
exercise the option to purchase additional shares solely to cover over-
allotments, if any, incurred in the public offering.
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Harris Financial and Waypoint Financial are expected to agree that, without
the prior consent of the underwriters, Waypoint 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 Waypoint Financial are expected to agree 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 Waypoint 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 either in the stock offering or in the open market
after the conclusion of the stock offering, a number of shares equal to 8%
of the shares of common stock issued in the offering;
(4) The officers, directors, and trustees of Harris MHC, Harris
Financial, Waypoint 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.
(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 combined 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. Shares issued in the stock
offering do not include shares of Waypoint Financial common stock issued to
existing stockholders of Harris Financial in exchange for Harris Financial
shares, or shares of Waypoint Financial common stock issued to York
Financial stockholders in the merger.
(7) Ownership Limitation. Harris Financial's stockholders are subject to
an additional restriction. Except for the tax-qualified employee benefit
plans, no Harris Financial stockholder acting alone or in concert with
other persons may purchase shares in the stock offering if, prior to the
issuance of Waypoint Financial shares to York Financial stockholders in the
merger, they will own more than 5.0% of the shares of Waypoint Financial
common stock that will be outstanding after the conversion and stock
offering. For example, this means that if we issue 19,550,000 Waypoint
Financial shares in the stock offering 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 or
fewer shares. If Waypoint Financial issues 26,450,000 shares in the stock
offering, this limitation would be
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1,741,322 shares. This limitation does not apply to shares of Waypoint
Financial received by York Financial stockholders in the merger. Waypoint
Financial may increase or decrease this ownership limitation at any time
without notifying you.
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, Waypoint 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
in the stock offering shall not in the aggregate exceed 10% of the shares
issued in the stock offering; (ii) the ownership limitation may be increased
from 5% to 9.99%, provided that orders exceeding 5% of the shares of Waypoint
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 Waypoint
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.
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, Waypoint 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, Waypoint 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.
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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,
Waypoint Financial or Harris MHC, or an officer or director of York Financial
who becomes an officer or director of Waypoint Financial or Waypoint 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 Waypoint 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 Waypoint 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 OTS. This restriction does not apply, however,
to negotiated transactions involving more than 1% of Waypoint 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 Waypoint Financial or Harris Savings Bank,
including any employee plans, recognition plans or restricted stock plans.
Waypoint Financial has no current intention to repurchase shares of its
common stock after completion of the conversion, stock offering and merger.
Moreover, OTS regulations applicable to Waypoint Financial as a result of the
conversion would restrict Waypoint Financial's ability to repurchase shares of
its common stock for up to a year after the conversion. The regulations as of
the date of this prospectus prohibit Waypoint Financial from repurchasing
shares for a period of one year, except pursuant to a repurchase plan approved
by the OTS and made to all stockholders on a pro rata basis, the repurchase of
qualifying shares of a Director, or the repurchase of up to 5% of Waypoint
Financial's outstanding shares where there are extraordinary circumstances and
a compelling and valid business purposes for the repurchase. Based on these
regulations, the OTS would not object to an application to repurchase up to 5%
of a converted institution's outstanding shares within one year of the
conversion if: (i) the repurchase does not adversely affect the converted
institution's financial condition; (ii) the converted institution submits
sufficient information to evaluate the repurchase program; (iii) the converted
institution demonstrates extraordinary circumstances and a compelling and valid
business purpose for the repurchase program consistent with the business plan
submitted in connection with the conversion; and (iv) the repurchase program
would not be contrary to other applicable regulations.
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 OTS. 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 OTS. Any
amendment to this plan of conversion made after approval by depositors and
stockholders with the approval of the OTS shall not necessitate further
approval by depositors unless otherwise required by the OTS. The plan of
conversion may be terminated by the
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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 OTS.
Approvals Required
The plan of conversion has been approved by the OTS, subject to certain
conditions. 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 Harris MHC into
Harris Savings Bank and the merger of an interim savings bank into Waypoint
Financial.
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 Waypoint Bank were to liquidate after the 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 Waypoint Financial as the holder of
Waypoint 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 Waypoint Bank after the conversion with a distribution upon
complete liquidation of Waypoint Financial after the conversion. Each eligible
account holder and supplemental eligible account holder, if he were to continue
to maintain his deposit account at Waypoint Bank, would be entitled, on a
complete liquidation of Waypoint Financial after the conversion to an interest
in the liquidation account prior to any payment to the stockholders of Waypoint
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.
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If, however, on any December 31 annual closing date of Waypoint 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 Waypoint
Financial as the sole shareholder of Waypoint Bank.
Tax Aspects
The conversion will be effected as follows:
. Harris Savings Bank has formed Waypoint Financial as a first-tier
Pennsylvania stock holding company;
. Waypoint 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;
. 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 Waypoint 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); and
. Contemporaneously with the mergers set forth above, Waypoint Financial
will offer its common stock for sale in the 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, Waypoint Financial, Harris Savings
Bank, Interim Savings Bank, eligible account holders, supplemental eligible
account holders, or members of Harris MHC.
Prior to the effective date of the conversion, Harris MHC, Harris Financial
and Harris Savings Bank will receive an opinion of counsel, Luse Lehman Gorman
Pomerenk & Schick, A Professional Corporation, regarding the Federal income tax
consequences of the conversion, which will include the following opinions.
(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
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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 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;
(7) 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;
(8) 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;
(9) 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;
(10) 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);
(11) 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);
(12) 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;
(13) Waypoint Financial will not recognize any gain or loss upon its
receipt of Harris Savings Bank stock solely in exchange for Waypoint
Financial common stock;
(14) Harris Savings Bank stockholders (formerly stockholders of Harris
Financial who constructively exchange 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 Waypoint
Financial common stock;
(15) 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 Waypoint Financial common stock will be treated as having
been received as a distribution in full payment in exchange for a
fractional share interest of Waypoint 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;
(16) each stockholder's aggregate basis in his or her Waypoint 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;
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(17) each stockholder's holding period in his or her Waypoint 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;
(18) 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 Waypoint Financial common
stock, provided that the amount paid for Waypoint Financial common stock
equals its fair market value.
The form of legal opinion has been filed with the Securities and Exchange
Commission as an exhibit to Waypoint 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 Arthur Andersen LLP, tax advisors to Harris MHC and Waypoint 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 Waypoint Financial could recognize gain on a distribution. 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, Waypoint 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, pursuant to which York
Financial will merge with and into Waypoint Financial and York Federal will
merge with and into Waypoint Bank. Waypoint Financial and Waypoint Bank will be
the resulting entities in the merger. 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 Waypoint 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, Waypoint Financial, Harris Savings Bank, York Financial and York
Federal.
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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 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 Financial merger exchange ratio at 1.550.
. If Waypoint Financial does not receive orders for 19,550,000 shares in
the subscription and community offering, then, in Waypoint 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.
RESTRICTIONS ON ACQUISITION OF WAYPOINT FINANCIAL
The following 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 laws 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 OTS.
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 OTS. Waypoint Financial will be a savings and loan holding company
regulated by the OTS. The following discussion assumes that these applications
have been approved, and that Harris Savings Bank and Harris Financial are
regulated by the OTS.
Conversion Regulations
OTS 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 OTS, 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 OTS has defined "person" to include any
individual, group acting in concert, corporation, partnership, association,
joint stock company, trust,
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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 OTS 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
OTS has been given 60 days' prior written notice and has not issued a notice
disapproving the proposed acquisition. In addition, OTS regulations provide
that no company may acquire control of a savings association without the prior
approval of the OTS. Any company that acquires such control becomes a "savings
and loan holding company" subject to registration, examination and regulation
by the OTS.
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 savings
association's directors, or a determination by the OTS 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 OTS, 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 OTS 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 OTS, 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 OTS 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.
164
<PAGE>
Restrictions in the Waypoint Financial Articles of Incorporation and Bylaws and
Pennsylvania Law
Certain provisions of Waypoint 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 Waypoint Financial's Articles and Bylaws provide,
among other things, (i) that the Board of Directors of Waypoint Financial shall
be divided into three classes; (ii) that special meetings of stockholders may
only be called by the Board of Directors of Waypoint Financial without the
prior approval of at least 80% of the Board of Directors; (iii) that
stockholders generally must provide Waypoint 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 Waypoint
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
Waypoint Financial provide, among other things, that (i) Waypoint 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 Waypoint 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 Waypoint Financial from the
disposition of any equity security of Waypoint Financial to any person shall
belong to and be recoverable by Waypoint Financial when the profit is realized
in a specific manner.
The foregoing provisions of the Articles of Incorporation and Bylaws of
Waypoint Financial and Pennsylvania law could have the effect of discouraging
an acquisition of Waypoint Financial or stock purchases in furtherance of a
merger, and accordingly, under certain circumstances, could discourage
transactions which might otherwise have a favorable effect on the price of
Waypoint Financial's common stock.
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 Waypoint Financial or
Harris Savings Bank. See "Management of Waypoint Financial--Benefits." In
addition, certain employment agreements to which Waypoint Financial will be
made a party provide for specified benefits in the event of a change in control
of Waypoint Financial or Harris Savings Bank. See "Management of Waypoint
Financial--Employment Agreements." The foregoing provisions and limitations may
make it more costly for companies or persons to acquire control of Waypoint
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 Waypoint Financial. The Board of Directors believes that these
provisions are in the best interests of Waypoint 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 Waypoint 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 Waypoint 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 Waypoint Financial and
where the transaction is in the best interests of all stockholders.
165
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF WAYPOINT FINANCIAL
General
Waypoint 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 Waypoint 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. Waypoint 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 FDIC or any other government agency. The common stock is
not guaranteed by Waypoint 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 Waypoint 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 for 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 Waypoint 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 Waypoint
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 accrued dividend claims. If Waypoint 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 Waypoint
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
Waypoint 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.
166
<PAGE>
EXPERTS
The consolidated audited financial statements of Harris Financial as of
December 31, 1999 and 1998 and for the three years ended December 31, 1999,
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 authority 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, Harris Financial and Harris
Savings Bank by Luse Lehman Gorman Pomerenk & Schick, A Professional
Corporation, Washington, D.C. 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.
ADDITIONAL INFORMATION
Harris Financial has filed with the Securities and Exchange Commission a
registration statement under the Securities Exchange Act of 1934 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 Waypoint Financial have filed an application for conversion
with the OTS. Pursuant to the rules and regulations of the OTS, this prospectus
omits certain information contained in that application. The application may be
examined at the principal office of the OTS, 1700 G Street, N.W., Washington,
D.C. 20552 and at the Office of the Regional Director of the OTS located at 10
Exchange Place, 18th Floor, Jersey City, New Jersey 07302.
Waypoint 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
167
<PAGE>
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, Waypoint
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 Waypoint
Financial and Harris Savings Bank are available without charge from Harris
Financial.
168
<PAGE>
HARRIS FINANCIAL, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report............................................. F-2
Consolidated Statements of Financial Condition as of March 31, 2000
(Unaudited) and December 31, 1999 and 1998.............................. F-3
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,
19987 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
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.
OTHER INFORMATION
Quarterly Report on Form 10-Q for the Fiscal Quarter Ended June 30,
2000.................................................................... Q-1
Consolidated Statements of Financial Condition as of June 30, 2000 and
December 31, 1999....................................................... Q-3
Consolidated Statements of Income for the three and six months ended June
30, 2000 and 1999....................................................... Q-4
Consolidated Statements of Shareholders' Equity for the six months ended
June 30, 2000 and 1999.................................................. Q-5
Consolidated Statements of Cash Flows for the six months ended June 30,
2000 and 1999........................................................... Q-6
Notes to Consolidated Financial Statements............................... Q-7
</TABLE>
F-1
<PAGE>
[LOGO]
[Arthur Andersen]
To the Board of Directors of
Harris Financial, Inc.
We have audited the accompanying consolidated statements of financial
condition of Harris Financial, Inc. and Subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 Harris
Financial, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Lancaster, PA
January 19, 2000
F-2
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except for share data)
<TABLE>
<CAPTION>
December 31,
March 31, ----------------------
2000 1999 1998
----------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
ASSETS
------
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) and
Contingencies.............................
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-3
<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-
hensive Stock And Compre-
Common Paid in Retained Income Ownership Retention Treasury hensive
Stock Capital Earnings (Loss) Plan Plan Stock Total Income
------ ------- -------- -------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... $336 $25,678 $124,812 $ 3,615 $(1,024) $(665) $ -- $152,752
Net income.............. 17,771 17,771 $ 17,771
Dividends paid at $.20
per share.............. (1,540) (1,540)
Exercised stock
options................ 2 480 482
Unrealized gains
(losses) on
securities (1)......... 7,117 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 1,139
Excess of fair value
above cost of earned
portion of RRP stock... 492 492
Tax benefit of RRP
shares awarded and
options exercised...... 227 227
---- ------- -------- -------- ------- ----- ------- --------
Balance at December 31,
1997................... 338 28,016 141,043 10,732 (529) (566) -- 179,034
Net income.............. 19,229 19,229 $ 19,229
Dividends paid at $.22
per share.............. (1,886) (1,886)
Exercised stock
options................ 2 731 733
Unrealized gains
(losses) on
securities (1)......... (2,626) (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................ 641 641
Excess of fair value
above cost of earned
portion of RRP stock... 306 306
Tax benefit of RRP
shares awarded and
options exercised...... 266 266
Treasury stock purchased
409,300 shares......... (5,970) (5,970)
---- ------- -------- -------- ------- ----- ------- --------
Balance at December 31,
1998................... 340 29,960 158,386 8,106 (396) (456) (5,970) 189,970
Net income.............. 18,683 18,683 $ 18,683
Dividends paid at $.24
per share.............. (1,911) (1,911)
Exercised stock
options................ 112 112
Unrealized gains
(losses) on
securities (1)......... (37,453) (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................ 238 238
Tax benefit of RRP
shares awarded and
options exercised...... 13 13
Treasury stock purchased
40,000 shares.......... (428) (428)
---- ------- -------- -------- ------- ----- ------- --------
Balance at December 31,
1999................... $340 $30,323 $175,158 $(29,347) $ (296) $(456) $(6,398) $169,324
Net income.............. 4,020 4,020 $ 4,020
Dividends paid at $.06
per share.............. (480) (480)
Exercised stock
options................ 4 4
Unrealized losses on
securities (1)......... (5,718) (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 18
Excess of fair value
above cost of earned
portion of RRP plan.... 3 3
---- ------- -------- -------- ------- ----- ------- --------
Balance at March 31,
2000 (unaudited)....... $340 $30,348 $178,698 $(35,065) $ (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.
All share and per share data have been restated to give effect for the 3 for
1 stock split on November 18, 1997.
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
-------------------- ---------------------------------
2000 1999 1999 1998 1997
--------- --------- --------- ----------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............. $ 4,020 $ 4,933 $ 18,683 $ 19,229 $ 17,771
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan
losses............... 835 795 3,180 2,540 610
Net depreciation,
amortization and
accretion............ (276) 1,286 4,669 7,534 4,131
(Increase) decrease in
loans held for sale
..................... (115) 3,526 14,099 3,630 (4,008)
Net gain on sales of
interest-earning
assets............... (492) (2,525) (1,938) (9,604) (6,529)
(Gain) loss on the
sale of foreclosed
real estate.......... -- (123) (2,844) 107 (112)
Equity (income) losses
from joint ventures.. (45) 57 65 (187) 43
Decrease (Increase) in
accrued interest
receivable........... 1,567 331 (2,779) (1,985) (1,486)
Increase in accrued
interest payable..... 6,575 5,373 3,327 2,668 1,285
Amortization.......... 720 600 2,640 2,487 2,393
Earned ESOP shares.... 43 101 338 774 1,634
Earned RRP shares..... 5 -- -- 416 591
Provision for deferred
income taxes......... (1,019) 559 1,234 (638) (76)
Decrease in income
taxes receivable..... 75 1,199 2,936 5,122 --
Other, net............ (4,123) 12,244 22,446 (20,497) 799
--------- --------- --------- ----------- ---------
Net cash provided by
operating
activities........... 7,770 28,356 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.... 7,517 136,651 182,150 497,828 118,079
Proceeds from sales of
marketable
securities;
available-for-sale... 59,192 133,841 353,809 491,903 499,633
Purchase of marketable
securities:
Held-to-maturity...... -- -- -- -- (500)
Available-for-sale.... (119,579) (227,766) (574,038) (1,062,717) (985,709)
Loans sold............ 13,215 33,629 199,595 132,093 83,980
Net increase in loan
originations less
principal payments of
loans................ (59,483) (118,027) (414,015) (300,973) (152,193)
Loan servicing rights
sold................. 7,643 -- 2,119
Acquisition of loan
servicing rights..... (424) (570) (908) (1,372) (943)
Investments in real
estate held for
investment and other
joint ventures....... -- 61 (148) (159) 45
Proceeds from payments
on real estate held
for investment....... 58 161 504 259 826
Purchases of premises
and equipment, net... (5,556) (1,114) (5,487) (5,246) (5,685)
Cash proceeds received
from the sale of
foreclosed real
estate............... 6 706 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........... $ (97,411) $ (42,428) $(222,539) $ (245,969) $(427,726)
--------- --------- --------- ----------- ---------
Cash flows from
financing activities:
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 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.
The Consolidated Financial Statements include the accounts of Harris
Financial, Inc. (the "Registrant" or "HFI") and its wholly-owned subsidiary
Harris Savings Bank (the "Bank"). In turn, the Bank holds the following
subsidiaries: AVSTAR Mortgage Corporation, Harris Delaware Corporation, H. S.
Service Corporation, First Harrisburg Service Corporation and C.B.L. Service
Corporation. All intercompany balances have been eliminated in consolidation.
The accompanying interim financial statements have been prepared in
accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments, consisting of normal recurring
accruals necessary for a fair presentation of the results of interim periods,
have been made. Operating results for the three month period ended March 31,
2000 are not necessarily indicative of the results that may be expected for the
year ended 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.
(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.
F-6
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
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 ^ 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.
(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
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 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.
F-7
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
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.
F-8
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
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.
(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. The Company measures the impairment of deposit premiums on a
periodic basis by reviewing the undiscounted future cash flows of the
facilities in the market area of the related deposits.
(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. The Company measures
goodwill for impairment on a periodic basis by reviewing the undiscounted cash
flows of the operations whose purchase generated the related goodwill.
(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.
F-9
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
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.
(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.
F-10
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
(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.
F-11
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
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".
HFI's and HSB's actual capital amounts and ratios are presented in the
following table:
<TABLE>
<CAPTION>
Actual For Capital Adequacy Purposes
-------------- --------------------------------------------------
<S> <C> <C> <C> <C>
HARRIS FINANCIAL,
INC. (HFI)
As of March 31,
2000 Amount Ratio Amount Ratio
-------- ----- --------------------------- ----------------------
Total
Capital/Risk
Weighted
Assets......... $198,816 11.7% (greater than or =)$136,404 (greater than or =)8.0%
Tier 1
Capital/Risk
Weighted
Assets......... 185,366 10.9% (greater than or =) 68,202 (greater than or =)4.0%
Tier 1
Capital/Average
Assets......... 185,366 6.8% (greater than or =) 108,370 (greater than or =)4.0%
As of December 31,
1999 Amount Ratio Amount Ratio
-------- ----- --------------------------- ----------------------
Total
Capital/Risk
Weighted
Assets......... $194,582 12.0% (greater than or =)$130,173 (greater than or =)8.0%
Tier 1
Capital/Risk
Weighted
Assets......... 181,053 11.1% (greater than or =) 65,086 (greater than or =)4.0%
Tier 1
Capital/Average
Assets......... 181,053 6.8% (greater than or =) 106,502 (greater than or =)4.0%
As of December 31,
1998 Amount Ratio Amount Ratio
-------- ----- --------------------------- ----------------------
Total
Capital/Risk
Weighted
Assets......... $179,157 12.0% (greater than or =)$119,160 (greater than or =)8.0%
Tier 1
Capital/Risk
Weighted
Assets......... 164,955 11.1% (greater than or =) 59,580 (greater than or =)4.0%
Tier 1
Capital/Average
Assets......... 164,955 6.8% (greater than or =) 97,553 (greater than or =)4.0%
HARRIS SAVINGS
BANK (HSB)
As of March 31,
2000 Amount Ratio Amount Ratio
-------- ----- --------------------------- ----------------------
Total
Capital/Risk
Weighted
Assets......... $194,379 11.4% (greater than or =)$136,131 (greater than or =)8.0%
Tier 1
Capital/Risk
Weighted
Assets......... 180,727 10.6% (greater than or =) 68,065 (greater than or =)4.0%
Tier 1
Capital/Average
Assets......... 180,727 6.7% (greater than or =) 108,238 (greater than or =)4.0%
As of December 31,
1999 Amount Ratio Amount Ratio
-------- ----- --------------------------- ----------------------
Total
Capital/Risk
Weighted
Assets......... $189,925 11.7% (greater than or =)$129,880 (greater than or =)8.0%
Tier 1
Capital/Risk
Weighted
Assets......... 176,262 10.9% (greater than or =) 64,940 (greater than or =)4.0%
Tier 1
Capital/Average
Assets......... 176,262 6.6% (greater than or =) 106,347 (greater than or =)4.0%
As of December 31,
1998 Amount Ratio Amount Ratio
-------- ----- --------------------------- ----------------------
Total
Capital/Risk
Weighted
Assets......... $174,663 11.8% (greater than or =)$118,879 (greater than or =)8.0%
Tier 1
Capital/Risk
Weighted
Assets......... 160,317 10.8% (greater than or =) 59,439 (greater than or =)4.0%
Tier 1
Capital/Average
Assets......... 160,317 6.6% (greater than or =) 97,395 (greater than or =)4.0%
<CAPTION>
To Be Well Capitalized Under Prompt Corrective
Action Purposes
----------------------------------------------------
<S> <C> <C>
HARRIS FINANCIAL,
INC. (HFI)
As of March 31,
2000 Amount Ratio
--------------------------- ------------------------
Total
Capital/Risk
Weighted
Assets......... (greater than or =)$170,506 (greater than or =)10.0%
Tier 1
Capital/Risk
Weighted
Assets......... (greater than or =) 102,303 (greater than or =) 6.0%
Tier 1
Capital/Average
Assets......... (greater than or =) 135,462 (greater than or =) 5.0%
As of December 31,
1999 Amount Ratio
--------------------------- ------------------------
Total
Capital/Risk
Weighted
Assets......... (greater than or =)$162,716 (greater than or =)10.0%
Tier 1
Capital/Risk
Weighted
Assets......... (greater than or =) 97,630 (greater than or =) 6.0%
Tier 1
Capital/Average
Assets......... (greater than or =) 133,127 (greater than or =) 5.0%
As of December 31,
1998 Amount Ratio
--------------------------- ------------------------
Total
Capital/Risk
Weighted
Assets......... (greater than or =)$148,949 (greater than or =)10.0%
Tier 1
Capital/Risk
Weighted
Assets......... (greater than or =) 89,370 (greater than or =) 6.0%
Tier 1
Capital/Average
Assets......... (greater than or =) 121,941 (greater than or =) 5.0%
HARRIS SAVINGS
BANK (HSB)
As of March 31,
2000 Amount Ratio
--------------------------- ------------------------
Total
Capital/Risk
Weighted
Assets......... (greater than or =)$170,163 (greater than or =)10.0%
Tier 1
Capital/Risk
Weighted
Assets......... (greater than or =) 102,098 (greater than or =) 6.0%
Tier 1
Capital/Average
Assets......... (greater than or =) 135,297 (greater than or =) 5.0%
As of December 31,
1999 Amount Ratio
--------------------------- ------------------------
Total
Capital/Risk
Weighted
Assets......... (greater than or =)$162,350 (greater than or =)10.0%
Tier 1
Capital/Risk
Weighted
Assets......... (greater than or =) 97,410 (greater than or =) 6.0%
Tier 1
Capital/Average
Assets......... (greater than or =) 132,934 (greater than or =) 5.0%
As of December 31,
1998 Amount Ratio
--------------------------- ------------------------
Total
Capital/Risk
Weighted
Assets......... (greater than or =)$148,598 (greater than or =)10.0%
Tier 1
Capital/Risk
Weighted
Assets......... (greater than or =) 89,159 (greater than or =) 6.0%
Tier 1
Capital/Average
Assets......... (greater than or =) 121,744 (greater than or =) 5.0%
</TABLE>
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.
F-12
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
A reconciliation of the HFI's and HSB's regulatory capital using generally
accepted accounting principles (GAAP) follows:
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
-------- -------- ----------
<S> <C> <C> <C>
HARRIS FINANCIAL, INC. (HFI)
As of March 31, 2000
GAAP Capital.................................... $167,198 $167,198 $167,198
Capital Adjustments:
Allowance for loan losses..................... -- -- 12,032
Pretax unrealized gains on equity securities
available for sale........................... -- -- 1,419
Goodwill and other intangible assets.......... (16,898) (16,898) (16,898)
Unrealized (Gain) Losses on securities
available for sale, net of taxes............. 35,065 35,065 35,065
-------- -------- --------
Regulatory Capital.......................... $185,366 $185,366 $198,816
======== ======== ========
As of December 31, 1999
GAAP Capital.................................... $169,324 $169,324 $169,324
Capital Adjustments:
Allowance for loan losses..................... -- -- 11,873
Pretax unrealized gains on equity securities
available for sale........................... -- -- 1,655
Goodwill and other intangible assets.......... (17,617) (17,617) (17,617)
Unrealized (Gain) Losses on securities
available for sale, net of taxes............. 29,347 29,347 29,347
-------- -------- --------
Regulatory Capital.......................... $181,053 $181,053 $194,582
======== ======== ========
As of December 31, 1998
GAAP Capital.................................... $189,970 $189,970 $189,970
Capital Adjustments:
Allowance for loan losses..................... -- -- 9,088
Pretax unrealized gains on equity securities
available for sale........................... -- -- 5,114
Goodwill and other intangible assets.......... (16,909) (16,909) (16,909)
Unrealized (Gain) Losses on securities
available for sale, net of taxes............. (8,106) (8,106) (8,106)
-------- -------- --------
Regulatory Capital.......................... $164,955 $164,955 $179,157
======== ======== ========
</TABLE>
F-13
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
<TABLE>
<CAPTION>
Risk-
Tangible Core based
Capital Capital Capital
-------- -------- --------
<S> <C> <C> <C>
HARRIS SAVINGS BANK (HSB)
As of March 31, 2000
GAAP Capital..................................... $162,822 $162,822 $162,822
Capital Adjustments:
Allowance for loan losses...................... -- -- 12,032
Pretax unrealized gains on equity securities
available for sale............................ -- -- 1,620
Goodwill and other intangible assets........... (16,898) (16,898) (16,898)
Unrealized (Gain) Losses on securities
available for sale, net of taxes.............. 34,803 34,803 34,803
-------- -------- --------
Regulatory Capital........................... $180,727 $180,727 $194,379
======== ======== ========
As of December 31, 1999
GAAP Capital..................................... $164,708 $164,708 $164,708
Capital Adjustments:
Allowance for loan losses...................... -- -- 11,873
Pretax unrealized gains on equity securities
available for sale............................ -- -- 1,790
Goodwill and other intangible assets........... (17,617) (17,617) (17,617)
Unrealized (Gain) Losses on securities
available for sale, net of taxes.............. 29,171 29,171 29,171
-------- -------- --------
Regulatory Capital........................... $176,262 $176,262 $189,925
======== ======== ========
As of December 31, 1998
GAAP Capital..................................... $185,520 $185,520 $185,520
Capital Adjustments:
Allowance for loan losses...................... -- -- 9,088
Pretax unrealized gains on equity securities
available for sale............................ -- -- 5,258
Goodwill and other intangible assets........... (16,909) (16,909) (16,909)
Unrealized (Gain) Losses on securities
available for sale, net of taxes.............. (8,294) (8,294) (8,294)
-------- -------- --------
Regulatory Capital........................... $160,317 $160,317 $174,663
======== ======== ========
</TABLE>
(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.
F-14
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
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.
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>
F-15
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
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>
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
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.
F-16
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
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-17
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
(5) Loans Receivable
Loans receivable at March 31, and December 31 are summarized as follows:
<TABLE>
<CAPTION>
December 31,
March 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, $595,831,000 and $558,726,000
were pledged as collateral for FHLB advances at March 31, 2000, December 31,
1999 and December 31,1998, 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.
F-18
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
Activity in the allowance for loan loss is summarized as follows for the
three months ended March 31, and the years ended December 31:
<TABLE>
<CAPTION>
Three Months
Ended March Years Ended December
31, 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........................ (757) (287) (1,273) (1,191) (368)
Recoveries......................... 81 59 261 50 50
------- ------ ------- ------- ------
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 $12,302,000 at March 31,2000, $10,007,000 in 1999,
$7,651,000 in 1998, and $6,938,000 in 1997. Interest income foregone on these
loans amounted to $237,000 at March 31,2000, $289,000 in 1999, $366,000 in
1998, and $360,000 in 1997.
At March 31, 2000 and December 31, 1999 the Bank had $10,774,000 and
$9,517,000, respectively, in impaired loans. The March 31, 2000 and December
31, 1999 allowance for loan losses has a reserve of $1,630,000 and $1,767,550,
respectively, 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 are summarized as follows:
<TABLE>
<CAPTION>
December 31,
March March 31, ------------------------------
31, 2000 1999 1999 1998 1997
-------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Mortgage loan portfolios
serviced for:
FHLMC.................... $154,432 $ 763,768 $560,074 $ 775,630 $ 670,426
FNMA..................... 43,373 313,972 232,520 330,065 328,086
Other investors.......... 25,687 919 26,023 977 68,389
-------- ---------- -------- ---------- ----------
$223,492 $1,078,659 $818,617 $1,106,672 $1,066,901
======== ========== ======== ========== ==========
</TABLE>
F-19
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
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>
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 March 31, 2000, the mortgage servicing rights
reflected a fair market value of $2,363,000. 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 March 31, 2000, to value
the servicing rights as well as the average value of each factor.
F-20
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
<TABLE>
<CAPTION>
Average
Factor Value
------ -------
<S> <C>
Foreclosure rate (first year)....................................... .5743%
Foreclosure costs (per loan)........................................ $838.32
Escrow reserve requirement.......................................... 95%
Future interest rate................................................ 5.50%
Future cost of funds................................................ 8.75%
Discount rate....................................................... 9.50%
Inflation rate--escrows............................................. 2.0%
Average prepayment rate............................................. 9.25%
</TABLE>
During 1999, HFI sold or committed to sell substantially all of its
purchased mortgage servicing rights. HFI recorded a net gain of $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>
December 31, Estimated
March ------------------ Useful
31, 2000 1999 1998 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.
(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
F-21
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
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. Deposits in excess of
$100,000 are not federally insured.
Deposits are summarized as follows:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------
March 31, 2000 1999 1998 1997
------------------ ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Demand and NOW
accounts............... $ 164,542 11.4% $ 156,118 11.4% $ 144,689 12.0% $ 100,703 8.8%
Money Market............ 178,670 12.4% 172,550 12.5% 152,057 12.6% 128,079 11.2%
Savings................. 132,393 9.2% 135,813 9.9% 143,462 11.9% 148,718 13.0%
---------- ----- ---------- ----- ---------- ----- ---------- -----
475,605 33.0% 464,481 33.8% 440,208 36.5% 377,500 33.0%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Time Deposits
4% or less.............. $ 4,545 0.3% $ 5,230 0.4% $ 6,042 0.5% $ 8,321 0.7%
4.01%--6.00%............ 642,799 44.7% 714,568 52.0% 653,261 54.2% 580,914 50.7%
6.01%--8.00%............ 316,373 22.0% 189,092 13.8% 102,588 8.5% 173,243 15.1%
8.01%--9.00%............ 366 0.0% 499 0.0% 3,280 0.3% 6,260 0.5%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total.................. 964,083 67.0% 909,389 66.2% 765,171 63.5% 768,738 67.0%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total Deposits.......... $1,439,688 100.0% $1,373,870 100.0% $1,205,379 100.0% $1,146,238 100.0%
========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Years Ended December
March 31, 31,
------------------- -----------------------
2000 1999 1999 1998 1997
--------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Demand and NOW accounts............ $ 257 $ 245 $ 1,023 $ 1,370 $ 1,242
Money Market....................... 1,960 1,445 6,205 5,724 5,309
Savings............................ 676 686 2,931 3,285 4,072
Time Deposits...................... 12,689 10,094 42,648 40,153 43,760
--------- --------- ------- ------- -------
$ 15,582 $ 12,470 $52,807 $50,532 $54,383
========= ========= ======= ======= =======
</TABLE>
(10) Other Borrowings
Borrowed funds at March 31 and December 31 are summarized as follows:
<TABLE>
<CAPTION>
December 31,
March 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>
F-22
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
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 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.
F-23
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
At March 31, 2000, December 31, 1999 and 1998, HFI had the following off-
balance sheet commitments:
<TABLE>
<CAPTION>
December 31,
March ---------------
31, 2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
Commitments:
To extend credit:
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 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:
F-24
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
<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>
Assumptions used to develop the net pension expense were:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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%
</TABLE>
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.
F-25
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
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 $50,000 for the first quarter 2000, $45,000
for the first quarter 1999, $$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:
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
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)
===== =====
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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
=== === ===
</TABLE>
The accumulated benefit obligation for the supplemental retirement benefits
for executives was determined using a discount rate of 6.5%.
F-26
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
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.
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
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)
======= =======
</TABLE>
The components of net post-retirement benefit cost for the years ended
December 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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
==== ==== ====
</TABLE>
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,
$101,000 for the first quarter 1999, $338,000 for the year 1999, $773,000 for
the year 1998, and $1,633,000 for the year 1997.
F-27
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
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:
<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.
F-28
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
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, $69,000 for the first quarter 1999, $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 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.
F-29
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
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>
--------
(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.
F-30
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
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:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
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
</TABLE>
--------
(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:
<TABLE>
<CAPTION>
For the years ended
December 31,
---------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
F-31
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
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:
<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
======= ======= ======
Effective Tax Rate................................... 28.98% 27.54% 31.87%
======= ======= ======
</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 acquisition
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>
F-32
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
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.
The amount of tax bad debt 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.
(17) Leases
At March 31, 2000 and 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 aggregated $278,000
for the first quarter 2000, $271,000 for the first quarter of 1999, $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 March
31, 2000, net of projected sub-lease rentals, are as follows:
<TABLE>
<CAPTION>
Years ending
December 31, Amount
------------ ------
<S> <C>
2000.................................................................. $ 797
2001.................................................................. 1,025
2002.................................................................. 910
2003.................................................................. 760
2004.................................................................. 594
2005 and thereafter................................................... 1,269
------
$5,355
======
</TABLE>
(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.
F-33
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
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
------------------- -------------------
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
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.
<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.
F-34
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
<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 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.
F-35
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
(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)
<TABLE>
<CAPTION>
Notional Fair Value
Contract Date Category Amount Gain/(loss)
------------- -------- -------- -----------
<S> <C> <C> <C>
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)
03/2/2000.............................. 7.5% FNMA Pool 5,000 (20)
03/16/2000............................. 7.5% FNMA Pool 5,000 (12)
------- ----
Total................................ $32,500 $178
======= ====
</TABLE>
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
F-36
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
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.
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)
<TABLE>
<CAPTION>
Fair Value
Maturity Notional Notional
Contract Date Date Amount Amount
------------- -------- -------- ----------
<S> <C> <C> <C>
11/16/1999.................................. 11/16/2009 $12,500 $12,500
12/6/1999................................... 12/6/2006 13,500 13,500
02/08/2000.................................. 08/08/2003 15,000 15,000
------- -------
Total..................................... $41,000 $41,000
======= =======
</TABLE>
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.
F-37
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
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:
<TABLE>
<CAPTION>
Notional Fair Value
Contract Date Category Amount Gain/(loss)
------------- -------- -------- -----------
<S> <C> <C> <C>
06/4/1999.............................. 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
======= ====
</TABLE>
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.
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:
<TABLE>
<CAPTION>
Fair Value
Maturity Notional as of
Contract Date Date Amount 12/31/1999
------------- ---------- -------- ----------
<S> <C> <C> <C>
11/16/1999.................................. 11/16/2009 $12,500 $369
12/6/1999................................... 12/06/2009 13,500 374
------- ----
Total..................................... $26,000 $743
======= ====
</TABLE>
F-38
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
(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-39
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
(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
Income Shares Amount
------- ---------- ---------
<S> <C> <C> <C>
For the three months ended March 31, 2000
Basic earnings per share:
Income available to common shareholders......... $ 4,020 33,578,078 $0.12
Dilutive effect of management and director stock
options........................................ 42,132
------- ---------- -----
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 directors........ 70,785
------- ---------- -----
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 stock
options........................................ 90,049
------- ---------- -----
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 and directors........ 126,383
------- ---------- -----
Diluted darnings per share:
Income available to common shareholders plus
assumed conversions............................ $19,229 34,011,752 $0.57
======= ========== =====
</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
F-40
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
options, which expire at various dates through June 2, 2008, were still
outstanding as of December 31, 1998. 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)
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31,
March -----------------
31, 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>
Consolidated Statement of Income
<TABLE>
<CAPTION>
Three Months
Ended March Years Ended December
31, 31,
-------------- -------------------------
2000 1999 1999 1998 1997(1)
------ ------ ------- ------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Income:
Interest income................... $ 52 $ 43 $ 185 $ 411 $ 73
Loss on sale of securities........ -- -- -- (6) --
Harris/Wharton income............. (73) -- (127) -- --
Other income...................... -- 1 1 -- --
------ ------ ------- ------- ------
Total income.................... (21) 44 59 405 73
Expense:
Other expense..................... 165 126 777 609 89
------ ------ ------- ------- ------
Net loss before equity in
undistributed net income of
subsidiaries....................... (186) (82) (719) (204) (16)
Equity in undistributed net income
of subsidiaries.................... 4,206 5,015 19,402 19,433 2,755
------ ------ ------- ------- ------
Net income.......................... $4,020 $4,933 $18,683 $19,229 $2,739
====== ====== ======= ======= ======
</TABLE>
--------
(1) This statement reflects the activity of the parent company from the date of
formation on September 17, 1997 through December 31, 1997.
F-41
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Three Months
Ended March 31, Years Ended December 31,
---------------- ---------------------------
2000 1999 1999 1998 1997(2)
------- ------- -------- -------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income..................... $ 4,020 $ 4,933 $ 18,683 $ 19,229 $ 2,739
Adjustments to reconcile net
income to net cash provided by
operating activities:
Undistributed earnings of
subsidiary.................. (4,206) (5,015) (19,402) (19,433) (2,755)
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 (185)
------- ------- -------- -------- -------
Net cash used by operating
activities.................... 140 134 (355) (421) (201)
------- ------- -------- -------- -------
Cash flows from investing
activities:
Purchase of available-for-
sale securities, net........ -- -- -- (510) (9,713)
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 (9,713)
------- ------- -------- -------- -------
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) (456)
Dividends received........... 510 1,000 3,100 1,888 10,456
------- ------- -------- -------- -------
Net cash (used in) provided by
financing activities.......... 34 555 873 (5,235) 10,000
------- ------- -------- -------- -------
Net increase in cash........... 174 689 218 405 86
Cash at the beginning of the
period........................ 709 491 491 86 --
------- ------- -------- -------- -------
Cash at the end of the period.. $ 883 $ 1,180 $ 709 $ 491 $ 86
======= ======= ======== ======== =======
</TABLE>
--------
(2) This statement reflects the activity of the parent company from the date of
formation on September 17, 1997 through December 31, 1997.
(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
F-42
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
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.
(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>
F-43
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All dollar amounts presented in the tables are in thousands)
(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>
F-44
<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 June 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
HARRIS FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2889833
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
235 North Second Street, P.O. Box 1711, Harrisburg, 17105
Pennsylvania (Zip Code)
(Address of principal executive offices)
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. 34,062,875 shares of stock,
par value of $.01 per share, outstanding at July 14, 2000.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
Part I. Financial Information.
Part 1, Item 1 Financial Statements.
(Balance of this page is intentionally left blank)
Q-2
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ------------
(in thousands,
except for share data)
<S> <C> <C>
ASSETS
------
Cash and cash equivalents............................ $ 50,115 $ 73,613
Marketable securities available-for-sale............. 1,315,328 1,257,603
Loans receivable, net................................ 1,382,896 1,267,983
Loans held for sale, net............................. 6,433 1,646
Loan servicing rights................................ 1,867 7,616
Premises and equipment, net of accumulated
depreciation of $17,503 and $15,484................. 29,295 23,228
Accrued interest receivable.......................... 18,501 18,302
Intangible assets.................................... 16,178 17,617
Deferred tax asset, net.............................. 23,823 17,402
Other assets......................................... 6,965 6,390
---------- ----------
Total assets....................................... $2,851,401 $2,691,400
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits............................................. $1,452,738 $1,373,870
Escrow............................................... 4,644 3,511
Accrued interest payable............................. 11,827 10,292
Postretirement benefit obligation.................... 2,702 2,538
Other borrowings (Note 3)............................ 1,198,375 1,118,000
Income taxes payable................................. -- 2,302
Other liabilities.................................... 12,445 11,563
---------- ----------
Total liabilities.................................. $2,682,731 $2,522,076
Common stock, $.01 par value, authorized 100,000,000
shares, 34,062,875 shares issued and 33,613,575
outstanding at June 30, 2000, 34,023,625 shares
issued and 33,574,325 shares outstanding at December
31, 1999............................................ $ 341 $ 340
Paid in capital...................................... 30,499 30,323
Retained earnings.................................... 182,857 175,158
Accumulated other comprehensive income............... (37,932) (29,347)
Employee stock ownership plan........................ (246) (296)
Recognition and retention plans...................... (451) (456)
Treasury stock, 449,300 shares at June 30, 2000 and
449,300 shares at December 31, 1999 (Note 7)........ (6,398) (6,398)
---------- ----------
Total stockholders' equity......................... 168,670 169,324
---------- ----------
Total liabilities and stockholders' equity......... $2,851,401 $2,691,400
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
Q-3
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Six Months Three Months
Ended June 30, Ended June 30,
--------------- ---------------
2000 1999 2000 1999
------- ------- ------- -------
(in thousands, except for per
share data)
<S> <C> <C> <C> <C>
Interest Income:
Loans receivable:
First mortgage loans........................ $19,540 $23,726 $ 9,796 $11,756
Commercial loans............................ 16,160 9,447 9,024 5,192
Consumer and other loans.................... 16,073 12,057 8,282 6,377
Taxable investments.......................... 14,592 15,215 7,294 7,217
Taxfree investments.......................... 1,757 3,145 896 1,562
Dividends.................................... 3,613 4,273 1,861 2,047
Mortgage-backed securities................... 26,335 16,214 13,714 8,235
Money market investments..................... 64 59 31 42
------- ------- ------- -------
Total interest income....................... 98,134 84,136 50,898 42,428
------- ------- ------- -------
Interest Expense:
Deposits..................................... 32,293 25,026 16,711 12,555
Borrowed funds............................... 34,008 28,735 17,888 14,644
Escrow....................................... 27 53 11 28
------- ------- ------- -------
Total interest expense...................... 66,328 53,814 34,610 27,227
------- ------- ------- -------
Net interest income......................... 31,806 30,322 16,288 15,201
Provision for loan losses..................... 1,666 1,590 831 795
------- ------- ------- -------
Net interest income after provision for loan
losses..................................... 30,140 28,732 15,457 14,406
------- ------- ------- -------
Noninterest Income:
Service charges on deposits.................. 3,335 2,740 1,734 1,507
Other service charges/commissions/fees....... 620 688 327 364
Net servicing income......................... 338 120 96 120
Gain on sale of securities, net.............. 14 1,365 30 12
Gain on sale of loans, net................... 819 1,914 311 742
Other........................................ 201 705 95 766
------- ------- ------- -------
Total noninterest income.................... 5,327 7,532 2,593 3,511
------- ------- ------- -------
Noninterest Expense:
Salaries and benefits........................ 11,731 10,921 6,001 5,149
Equipment expense............................ 2,050 2,000 1,034 1,038
Occupancy expense............................ 2,119 1,559 1,118 757
Advertising and public relations............. 853 868 423 385
FDIC insurance............................... 139 346 71 177
Director fees................................ 162 179 68 96
Expense (income) from real estate
operations.................................. 99 (347) 94 (131)
Amortization and write-off of intangibles.... 1,439 1,200 719 600
Consulting and other fees.................... 1,260 1,020 520 555
Supplies, telephone and postage.............. 1,680 1,745 794 857
Other........................................ 2,134 3,434 992 1,850
------- ------- ------- -------
Total noninterest expense................... 23,666 22,925 11,834 11,333
------- ------- ------- -------
Income before income taxes................... 11,801 13,339 6,216 6,584
Income tax expense........................... 3,142 3,669 1,577 1,847
------- ------- ------- -------
Net Income.................................. $ 8,659 $ 9,670 $ 4,639 $ 4,737
======= ======= ======= =======
Basic earnings per share (Note 5)............ $ 0.26 $ 0.29 $ 0.14 $ 0.14
======= ======= ======= =======
Diluted earnings per share (Note 5).......... $ 0.26 $ 0.29 $ 0.14 $ 0.14
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
Q-4
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Other
Compre- Employee Recognition Compre-
hensive Stock And hensive
Common Paid in Retained Income Ownership Retention Treasury Income
Stock Capital Earnings (Loss) Plan Plan Stock Total (Loss)
------ ------- -------- -------- --------- ----------- -------- -------- --------
(in thousands, except for per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1999................... $340 $29,960 $158,386 $ 8,106 $(396) $(456) $(5,970) $189,970
Net income............. 9,670 9,670 $ 9,670
Dividends paid at $.12
per share............. (956) (956)
Exercised stock
options............... 43 43
Unrealized losses on
securities............ (12,648) (12,648) (12,648)
--------
Comprehensive income
(loss)............... $ (2,978)
========
ESOP stock committed
for release........... 50 50
Excess of fair value
above cost of ESOP
stock committed for
release............... 138 138
Treasury stock
purchased--10,000
shares................ (127) (127)
---- ------- -------- -------- ----- ----- ------- --------
Balance at June 30,
1999................... $340 $30,141 $167,100 $ (4,542) $(346) $(456) $(6,097) $186,140
==== ======= ======== ======== ===== ===== ======= ========
Balance at January 1,
2000................... 340 30,323 175,158 (29,347) (296) (456) (6,398) 169,324
Net income............. 8,659 8,659 $ 8,659
Dividends paid at $.12
per share............. (960) (960)
Exercised stock
options............... 1 130 131
Unrealized losses on
securities............ (8,585) (8,585) (8,585)
--------
Comprehensive income
(loss)............... $ 74
========
ESOP stock committed
for release........... 50 50
Earned portion of RRP
plan.................. 5 5
Excess of fair value
above cost of ESOP
stock committed for
release............... 41 41
Excess of fair value
above cost of earned
portion of RRP plan... 5 5
---- ------- -------- -------- ----- ----- ------- --------
Balance at June 30,
2000................... $341 $30,499 $182,857 $(37,932) $(246) $(451) $(6,398) $168,670
==== ======= ======== ======== ===== ===== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
Q-5
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net Income.............................................. $ 8,659 $ 9,670
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses............................... 1,666 1,590
Net depreciation, amortization, and accretion........... 33 2,767
(Increase) decrease in loans held for sale.............. (4,787) 13,656
Net gain on sales of interest-earning assets............ (833) (3,279)
Gain (loss) on sale of foreclosed real estate........... 84 (162)
Equity losses from joint ventures....................... 174 57
(Increase) decrease in accrued interest receivable...... (199) (2,151)
Increase in accrued interest payable.................... 1,535 672
Amortization of intangibles............................. 1,439 1,200
Earned ESOP shares...................................... 91 188
Earned RRP shares....................................... 10 --
Provision for deferred income taxes..................... (1,128) 981
(Increase) decrease in income taxes receivable.......... (4,127) 1,964
Other, net.............................................. 698 26,315
--------- ---------
Net cash provided by operating activities............. 3,315 53,468
--------- ---------
Cash flows from investing activities:
Proceeds from maturities and principal reductions of
marketable securities:
Available-for-sale...................................... 13,643 162,352
Proceeds from sales of marketable securities; available-
for-sale............................................... 80,355 225,730
Purchase of marketable securities; available-for-sale... (162,180) (370,263)
Loans sold.............................................. 29,179 57,249
Net increase in loan originations less principal
payments on loans...................................... (146,191) (261,054)
Loan servicing rights sold.............................. 7,643 --
Acquisition of loan servicing rights.................... (512) 153
Investments in real estate held for investment and other
joint ventures......................................... (533) (239)
Proceeds from payments on real estate held for
investment............................................. 109 419
Purchases of premises and equipment, net................ (8,164) (2,479)
Cash proceeds received from the sale of foreclosed real
estate................................................. 291 1,549
Branch purchase......................................... -- 22,134
--------- ---------
Net cash used in investing activities................. (186,360) (164,449)
--------- ---------
Cash flows from financing activities:
Net increase in deposits................................ $ 78,868 $ 34,082
Net increase in other borrowings........................ 80,375 68,746
Net increase in escrow.................................. 1,133 9,741
Payments to acquire treasury stock...................... -- (127)
Cash dividends.......................................... (960) (956)
Proceeds from the exercise of stock options............. 131 43
--------- ---------
Net cash provided by financing operations............... 159,547 111,529
--------- ---------
Net (decrease) increase in cash and cash equivalents.... (23,498) 548
Cash and cash equivalents at beginning of period......... 73,613 56,741
--------- ---------
Cash and cash equivalents at end of period............... $ 50,115 $ 57,289
========= =========
Supplemental disclosures:
Cash paid during the periods for:
Interest on deposits, advances and other borrowings
(includes interest credited to deposit accounts)....... $ 64,791 $ 53,218
Income taxes............................................ 8,479 636
Non-cash investing activities:
Transfer from loans to foreclosed real estate........... $ 213 $ 922
Branch acquisition:
Fair value of assets acquired........................... $ -- $ 11,870
Deposit premium paid.................................... -- 3,269
Fair value of liabilities assumed....................... -- 37,273
</TABLE>
See accompanying notes to consolidated financial statements.
Q-6
<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. 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 three month period ended June 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.
(3) Other Borrowings
The following table presents the composition of HFI's other borrowings as of
the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ------------
<S> <C> <C>
FHLB advances..................................... $1,040,000 $ 805,000
Repurchase agreements............................. 158,375 313,000
---------- ----------
Total other borrowings.......................... $1,198,375 $1,118,000
========== ==========
</TABLE>
Q-7
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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 $14,311,000 at June 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 June 30, 2000, HFI had $166,051,000 in unused line of credit commitments
extended to its customers, $28,652,000 of undistributed funds on construction
loans and $55,809,000 of loan origination commitments.
(5) Earnings Per Share
The following table shows the allocation of earnings per share to basic
earnings per share and diluted earnings per share.
<TABLE>
<CAPTION>
Per Share
Income Shares Amount
------ ---------- ---------
<S> <C> <C> <C>
For the six months ended June 30, 2000
Income available to common shareholders.......... $8,659 33,592,724 $0.26
Dilutive effect of management and director stock
options......................................... 33,856
------ ---------- -----
Diluted earnings per share:
Income available to common shareholders plus
assumed conversions............................. $8,659 33,626,580 $0.26
====== ========== =====
For the six months ended June 30, 1999
Basic earnings per share:
Income available to common shareholders.......... $9,670 33,804,463 $0.29
Dilutive effect of management and director stock
options......................................... 86,863
------ ---------- -----
Diluted earnings per share:
Income available to common shareholders plus
assumed conversions............................. $9,670 33,891,326 $0.29
====== ========== =====
For the three months ended June 30, 2000
Income available to common shareholders.......... $4,639 33,607,371 $0.14
Dilutive effect of management and director stock
options......................................... 26,632
------ ---------- -----
Diluted earnings per share:
Income available to common shareholders plus
assumed conversions............................. $4,639 33,634,003 $0.14
====== ========== =====
For the three months ended June 30, 1999
Basic earnings per share:
Income available to common shareholders.......... $4,737 33,809,603 $0.14
Dilutive effect of management and director stock
options......................................... 82,643
------ ---------- -----
Diluted earnings per share:
Income available to common shareholders plus
assumed conversions............................. $4,737 33,892,246 $0.14
====== ========== =====
</TABLE>
(6) Dividend Waivers by the Mutual Holding Company
Harris Financial, MHC, (the "Mutual Company"), 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. The Mutual Company has not been required to obtain approval of the Federal
Reserve Board (the "FRB" ) prior to any such waiver and through the date hereof
has not sought or received FRB approval of any
Q-8
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
such waiver. In connection with the FRB and Federal Deposit Insurance
Corporation (the "FDIC") approvals of the Bank's acquisition of First
Harrisburg Bancor, Inc. and its wholly owned subsidiary, First Federal Savings
and Loan Association of Harrisburg ("First Federal"), the Bank and the Mutual
Company made several commitments to the FDIC and the FRB regarding the waiver
of dividends by the Mutual Company. These commitments include the following:
. Any dividends waived by the Mutual Company shall be taken into account
in any valuation of the Bank and the Mutual Company and factored into
the calculation used in establishing a fair and reasonable basis for
exchanging Bank shares for holding company shares in any subsequent
conversion of the Mutual Company to stock form; (the Mutual Company is
expected to convert to stock form in connection with the York Financial
Corp. merger)
. Dividends waived by the Mutual Company shall not be available for
payment to or the value thereof transferred to stockholders other than
the Mutual Company ("Minority Stockholders") by any means including
through dividend payments or at liquidation;
. Beginning five years after April 19, 1996, the date of consummation of
the Bank's acquisition of First Federal, the Mutual Company will make
prior application to and shall receive the approval of the FRB prior to
waiving any dividends declared on the capital stock of the Bank and the
FRB shall have the authority to approve or deny any dividend waiver
request in its discretion and after such date such application may be
made on an annual basis with respect to any year in which the Mutual
Company intends to waive dividends paid by the Bank;
. After April 19, 1996, the date of consummation of the Bank's acquisition
of First Federal, the amount of waived dividends that are identified as
belonging to the Mutual Company shall not be available for payment to,
or the value transferred to, Minority Stockholders, either through
dividend payments, upon the conversion of the Mutual Company to stock
form, upon the redemption of shares of the Bank, upon the Bank's
issuance of additional shares, at liquidation, or by any other means;
. The Mutual Company shall notify the FRB of all such transactions and
will make available to the FRB such information as the FRB determines to
be appropriate;
. The Bank will take into account when setting its dividend rate the
declaration rate in relation to net income and the rate's effect on the
Bank's ability to issue capital;
. The dividend rate will be reasonable and sustainable upon a full
conversion to stock form of the Mutual Company; and,
. In the event that the FRB adopts regulations regarding dividend waivers
by mutual holding companies, the Mutual Company will comply with the
applicable requirements of such regulations.
After the completion of the two-tier reorganization, the commitments became
applicable to dividends paid by HFI that are waived by the Mutual Company. If
the Mutual Company decides that it is in its best interest to waive the right
to receive a particular dividend to be paid by HFI, and, if necessary, the FRB
approves such waiver, then HFI pays such dividend only to Minority Stockholders
and the amount of the dividend waived by the Mutual Company is treated in the
manner described above. The Mutual Company's decision as whether or not to
waive a particular dividend depends on a number of factors, including the
Mutual Company's capital needs, the investment alternatives available to the
Mutual Company as compared to those available to HFI and the receipt of
required regulatory approvals.
There can be no assurance that:
. the Mutual Company will waive dividends paid by HFI,
. the FRB will approve any dividend waivers by the Mutual Company after
April 2001, or
Q-9
<PAGE>
HARRIS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. the terms that may be imposed by the FRB on any dividend waiver will be
favorable to Minority Stockholders.
As of the date hereof, the Mutual Company has waived the right to receive
all dividends paid by the Bank and HFI.
As of April 19, 1996, the Mutual Company had waived $9.1 million of
dividends declared by the Bank and through June 30, 2000, had waived a total of
$31.5 million of dividends paid by the Bank and HFI.
Also see "Regulatory Environment related to the Plan of Conversion of Harris
Financial, MHC."
(7) Treasury Stock Repurchase Program
On February 27, 1998, HFI received authorization from the Pennsylvania
Department of Banking to repurchase 472,500 shares of its outstanding common
stock. On June 2, 1999, HFI received approval from the Department of Banking to
extend the period for repurchasing 472,500 shares of its outstanding common
stock until June 1, 2000. As of December 31, 1999, HFI's share repurchases
total 449,300. HFI did not repurchase any treasury stock during the six months
ended June 30, 2000.
(8) Merger Agreement and Stock Conversion of Mutual Company
On March 28, 2000 HFI and the Bank announced that they entered into an
agreement to merge with York Financial Corp., the parent of York Federal
Savings and Loan Association. To accomplish the merger, the Board of Trustees
of Harris Financial, MHC has adopted a plan of conversion pursuant to which it
would convert from a mutual to a capital stock form of organization. Harris
Financial, MHC is the mutual holding company parent of Harris Financial, Inc.
and owns approximately 76% of the Corporation's outstanding common shares. The
transactions are expected to be completed during the fourth quarter of 2000.
Q-10
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is management's discussion and analysis of the significant
changes in the results of operations, capital resources and liquidity presented
in its accompanying interim consolidated financial statements for Harris
Financial, Inc. and subsidiaries. This discussion should be read in conjunction
with the 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 six month period ended June 30, 2000 was $8,659,000,
representing a decrease of $1,011,000, or 10.5%, from the $9,670,000 net income
figure reported during the comparable six month period ended June 30, 1999. The
decrease was primarily due to a reduction of $2,205,000, or 29.3%, in
noninterest income during the six month period ended June 30, 2000 versus the
comparable prior period. The reduction in noninterest income was due primarily
to decreases in gains realized from the sale of loans and securities. Partially
offsetting the decrease in noninterest income was an increase of $1.5 million,
or 4.9%, in net interest income for the six months ended June 30, 2000,
compared to the six months ended June 30, 1999. An analysis of the changes in
noninterest income is presented in Table 5 which appears later in this report.
For the three month period ended June 30, 2000, net income was $4,639,000
which was $98,000, or 2.1%, lower than the net income figure of $4,737,000 for
the comparable period in 1999. The decrease was primarily due to a reduction of
$918,000 in noninterest income during the three month period ended June 30,
2000 versus the comparable prior period. The reduction in noninterest income
was due primarily to a decrease in gains from sales of loans and a decrease in
other income. Partially offsetting the decrease in noninterest income was an
increase of $1.1 million, or 7.2%, in net interest income for the three months
ended June 30, 2000, as compared to the three months ended June 30, 1999. An
analysis of the changes in noninterest income is presented in Table 5 which
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 $33,024,000 for the
six months ended June 30, 2000, which represented an increase of $774,000 or
2.4%, from the $32,250,000 of net interest income recorded in the six months
ended June 30, 1999. This increase reflected a favorable volume variance of
$1,777,000 due to a $216.3 million increase in total average earning assets to
$2.645 billion during the year to
Q-11
<PAGE>
date period ended June 30, 2000 as compared to $2.429 billion recorded during
the same period ended June 30, 1999. Also reflected in this volume variance was
a $242.8 million increase in average interest-bearing liabilities. At the same
time, general market interest rate trends created an unfavorable rate variance
of $1,003,000 for the six months ended June 30, 2000. The combination of
positive volume variances and negative rate variances generated the net
positive change of $774,000 mentioned above.
For the six months ended June 30, 2000, the yield on interest-earning assets
was 7.51%. This figure was 42 basis points higher than the 7.09% yield reported
for the six month period ended June 30, 1999. At same time, the cost of funds
increased 54 basis points to 5.20% for the period ended June 30, 2000, versus
4.66% for the six months ended June 30, 1999. As a result, the interest spread
(the difference between the yield on assets minus the cost of funds) decreased
by 12 basis points to 2.31% for the six month period ended June 30, 2000,
versus 2.43% for the six month period ended June 30, 1999.
Net interest income, on a tax equivalent basis, totaled $16,907,000 for the
three months ended June 30, 2000, which represented an increase of $742,000 or
4.6%, from the $16,165,000 of net interest income recorded in the three months
ended June 30, 1999. This increase reflected a favorable volume variance of
$876,000 due to a $226.7 million increase in total average earning assets to
$2.694 billion during the three month period ended June 30, 2000 as compared to
$2.467 billion recorded during the same period ended June 30, 1999. Also
reflected in this volume variance was a $262.0 million increase in average
interest-bearing liabilities. At the same time, general market interest rate
trends created an unfavorable rate variance of $134,000 for the three months
ended June 30, 2000. The combination of positive volume variances and negative
rate variances generated the net positive change of $742,000 mentioned above.
For the three months ended June 30, 2000, the yield on interest-earning
assets was 7.65%. This figure was 61 basis points higher than the 7.04% yield
reported for the three month period ended June 30, 1999. At same time, the cost
of funds increased 67 basis points to 5.32% for the period ended June 30, 2000,
versus 4.65% for the three months ended June 30, 1999. As a result, the
interest spread (the difference between the yield on assets minus the cost of
funds) decreased by 6 basis points to 2.33% for the three month period ended
June 30, 2000, versus 2.39% for the three month period ended June 30, 1999. On
a linked quarter basis, interest spread increased by 6 basis points for the
three month period ended June 30, 2000 versus the three month period ended
March 31, 2000.
HFI continues to rely on wholesale funding sources to support an investment
leveraging strategy and uses external borrowings to supplement funding provided
by savings and time deposits. During the six month period ended June 30, 2000,
total deposits (net of escrow deposits) increased $78.9 million, or 5.7%, while
other borrowings increased by $80.4 million, or 7.2%, from December 31, 1999.
During the twelve month period ended June 30, 2000, total deposits (net of
escrow deposits) increased $176.0 million, or 13.8%, while other borrowings
increased by $60.4 million, or 5.3% from June 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 is to increase interest
income and boost HFI's return on equity.
Q-12
<PAGE>
The following table summarizes the impact of the leveraging strategy on the
return on average assets (ROAA) and net interest margin (NIM) for the six month
periods ended June 30, 2000 and June 30, 1999 and for the three month periods
ended June 30, 2000 and June 30, 1999. During the six month and three month
periods ended June 30, 2000, as compared to the comparable periods in 1999, the
leverage strategy results have increased return on assets and have lessened the
relative decrease in net interest margins.
Table 1 Comparison of Financial Performance with and without a Capital
Leveraging Strategy
<TABLE>
<CAPTION>
Difference
With Without in Basis
Leveraging Leveraging Points
---------- ---------- ----------
<S> <C> <C> <C>
Six month period ended June 30, 2000
Return on Average Assets....................... 0.63% 0.43% 20
Net Interest Margin............................ 2.50% 3.06% (56)
Six month period ended June 30, 1999
Return on Average Assets....................... 0.77% 0.58% 19
Net Interest Margin............................ 2.66% 3.48% (82)
Three month period ended June 30, 2000
Return on Average Assets....................... 0.66% 0.47% 19
Net Interest Margin............................ 2.51% 3.06% (55)
Three month period ended June 30, 1999
Return on Average Assets....................... 0.74% 0.59% 15
Net Interest Margin............................ 2.62% 3.45% (83)
</TABLE>
Table 2 presents HFI's average asset and liability balances, interest rates,
interest income and interest expense for each of the six month periods ended
June 30, 2000 and June 30, 1999. Table 3 presents HFI's average asset and
liability balances, interest rates, interest income and interest expense for
each of the three month periods ended June 30, 2000 and June 30, 1999. Table 4
presents a rate-volume analysis of changes in net interest income for the six
month periods ended June 30, 2000 and June 30, 1999 and the three month periods
ended June 30, 2000 and June 30, 1999.
During the six months ended June 30, 2000, HFI's commercial and direct
consumer loan yields and marketable securities yields increased relative to the
six months ended June 30, 1999. This increase was primarily due to HFI
significantly increasing these portfolio balances at increasing rates during
the twelve months ended June 30, 2000. The increase in interest income from
this portfolio was attributable to an increase of $161.2 million, or 4.1%, in
the average balances of such loans as well as an improvement of 89 basis points
and 30 basis points in the average yield on the commercial loan portfolio and
the direct consumer loan portfolio, respectively, for the six months ended June
30, 2000, compared to the six months ended June 30, 1999. HFI decreased its
holdings of mortgage loans and sold substantially all of its conventional
mortgage loan production during the twelve months ended June 30, 2000, which
resulted in an overall decrease in the yield on the mortgage loan portfolio.
For the six months ended June 30, 2000, the average balance of conventional
mortgage loans, net, decreased to $548.8 million and the average yield on such
loans decerased to 7.12%, compared to an average balance of $615.8 million and
an average yiled of 7.71% for the six months ended June 30, 1999. Also, HFI
elected to constrict its growth in indirect consumer loans since September 30,
1999 due to reaching its internal asset allocation thresholds for this
portfolio. This constriction on growth occurred during a period of rising
interest rates and accordingly limited yield enhancement in these portfolios.
During the quarter ended June 30, 2000, HFI's commercial and direct consumer
loan yields and marketable securities yields increased relative to the quarter
ended June 30, 1999. Again, this was primarily because HFI significantly
increased these portfolio balances at increasing rates during the twelve months
ended June 30, 2000. For the three months ended June 30, 2000, the average
balance of such loans increased by $165.4 million, or 39.7%, compared to the
three months ended June 30, 1999. The average yield on commercial loans and
direct consumer loans improved to 9.05% and 8.96%, respectively, for the three
months ended June 30, 2000, from 7.73% and 8.86%, respectively, for the three
months ended June 30, 1999. Partially
Q-13
<PAGE>
offsetting these yield increases were decreases in portfolio yields on mortgage
and indirect consumer loans. HFI decreased its holdings of mortgage loans and
sold substantially all of its conventional mortgage loan production during the
twelve months ended June 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 $548.7 million for the three months ended
June 30, 2000 from $622.3 million for the three months ended June 30, 1999.
Also, HFI elected to constrict its growth in indirect consumer loans since
September 30, 1999 due to reaching its internal asset allocation thresholds for
this portfolio. This constriction on growth occurred during a period of rising
interest rates and accordingly limited yield enhancement in these portfolios.
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.
Table 2 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 six months ended,
-------------------------------------------------------------
June 30, 2000 June 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.... $ 548,754 $19,540 7.12% $ 615,765 $23,726 7.71%
Commercial loans....... 380,239 16,432 8.64% 249,803 9,682 7.75%
Direct consumer loans.. 173,530 7,651 8.82% 142,743 6,080 8.52%
Indirect consumer
loans................. 226,032 8,422 7.45% 152,845 5,977 7.82%
Marketable securities--
taxable............... 1,232,814 44,097 7.15% 1,121,005 35,092 6.26%
Marketable securities--
taxfree............... 60,400 2,703 8.95% 117,907 4,838 8.21%
Other interest-earning
assets................ 23,238 507 4.36% 28,596 669 4.68%
---------- ------- ---- ---------- ------- ----
Total interest-earning
assets................. 2,645,007 99,352 7.51% 2,428,664 86,064 7.09%
------- ---- ------- ----
Noninterest-earning
assets................. 100,639 98,121
---------- ----------
Total assets............ $2,745,646 $2,526,785
========== ==========
Liabilities and
stockholders' equity:
Interest-bearing
liabilities:
Savings deposits....... $ 129,909 $ 1,692 2.60% $ 144,832 $ 1,408 1.94%
Time deposits.......... 948,428 26,016 5.49% 773,084 20,222 5.23%
NOW and money market
deposits.............. 337,700 4,585 2.72% 296,424 3,396 2.29%
Escrow................. 3,742 27 1.44% 13,078 53 0.81%
Borrowed funds......... 1,131,385 34,008 6.01% 1,080,955 28,735 5.32%
---------- ------- ---- ---------- ------- ----
Total interest-bearing
liabilities............ 2,551,164 66,328 5.20% 2,308,373 53,814 4.66%
------- ---- ------- ----
Noninterest-bearing
liabilities............ 27,781 27,486
---------- ----------
Total liabilities....... 2,578,945 2,335,859
Stockholders' equity.... 166,701 190,926
---------- ----------
Total liabilities and
stockholder equity..... $2,745,646 $2,526,785
========== ==========
Net interest income
before before provision
for loan loss.......... $33,024 $32,250
======= =======
Interest rate
spread(3).............. 2.31% 2.43%
==== ====
Net interest-earning
assets................. $ 93,843 $ 120,291
========== ==========
Net interest margin(4).. 2.50% 2.66%
==== ====
Ratio of interest-
earning assets to
interest-bearing
liabilities............ 1.04 1.05
========== ==========
</TABLE>
--------
(1) Includes income recognized on deferred loan fees of $498,000 for the six
months ended June 30, 2000 and $972,000 for the six months ended June 30,
1999.
Q-14
<PAGE>
(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.
Table 3 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,
-------------------------------------------------------------
June 30, 2000 June 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.... $ 548,657 $ 9,796 7.14% $ 622,250 $11,756 7.56%
Commercial loans....... 404,706 9,161 9.05% 274,863 5,315 7.73%
Direct consumer loans.. 177,263 3,969 8.96% 141,746 3,140 8.86%
Indirect consumer
loans................. 230,650 4,313 7.48% 171,719 3,237 7.54%
Marketable securities--
taxable............... 1,248,804 22,672 7.26% 1,110,389 17,238 6.21%
Marketable securities--
taxfree............... 61,399 1,378 8.98% 118,115 2,403 8.14%
Other interest-earning
assets................ 22,433 228 4.07% 28,120 303 4.31%
---------- ------- ---- ---------- ------- ----
Total interest-earning
assets................. 2,693,912 51,517 7.65% 2,467,202 43,392 7.04%
------- ---- ------- ----
Noninterest-earning
assets................. 106,053 94,989
---------- ----------
Total assets............ $2,799,965 $2,562,191
========== ==========
Liabilities and
stockholders' equity:
Interest-bearing
liabilities:
Savings deposits....... $ 135,618 $ 1,015 2.99% $ 145,782 $ 721 1.98%
Time deposits.......... 955,884 13,327 5.58% 777,289 10,128 5.21%
NOW and money market
deposits.............. 341,370 2,369 2.78% 300,709 1,706 2.27%
Escrow................. 3,821 11 1.15% 15,401 28 0.73%
Borrowed funds......... 1,165,815 17,888 6.14% 1,101,372 14,644 5.32%
---------- ------- ---- ---------- ------- ----
Total interest-bearing
liabilities............ 2,602,508 34,610 5.32% 2,340,553 27,227 4.65%
------- ---- ------- ----
Noninterest-bearing
liabilities............ 30,683 30,179
---------- ----------
Total liabilities....... 2,633,191 2,370,732
Stockholders' equity.... 166,774 191,459
---------- ----------
Total liabilities and
stockholder equity..... $2,799,965 $2,562,191
========== ==========
Net interest income
before before provision
for loan loss.......... $16,907 $16,165
======= =======
Interest rate
spread(3).............. 2.33% 2.39%
==== ====
Net interest-earning
assets................. $ 91,404 $ 126,649
========== ==========
Net interest margin(4).. 2.51% 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 $287,000 for the three
months ended June 30, 2000 and $528,000 for the three months ended June 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.
Q-15
<PAGE>
Table 4 Rate/Volume Analysis of Changes in Net Interest Income (All dollar
amounts presented in table are in 000's)
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000 Three Months Ended June 30, 2000
Compared to Compared to
Six Months Ended June 30, 1999 Three Months Ended June 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.... $ (2,458) $ (1,728) $ (4,186) $ (1,334) $ (626) $ (1,960)
Commercial loans....... 5,533 1,217 6,750 2,825 1,021 3,846
Direct consumer loans.. 1,351 220 1,571 793 36 829
Indirect consumer
loans................. 2,740 (295) 2,445 1,102 (26) 1,076
Marketable securities--
taxable............... 3,713 5,292 9,005 2,306 3,128 5,434
Marketable securities--
taxfree............... (2,538) 403 (2,135) (1,252) 227 (1,025)
Other interest-earning
assets................ (119) (43) (162) (59) (16) (75)
---------- ---------- ---------- ----------- --------- -----------
Total interest-earning
assets................. 8,222 5,066 13,288 4,381 3,744 8,125
---------- ---------- ---------- ----------- --------- -----------
Interest-bearing
liabilities:
Savings deposits....... (156) 440 284 (53) 347 294
Time deposits.......... 4,752 1,042 5,794 2,444 755 3,199
NOW and money market
deposits.............. 506 683 1,189 249 414 663
Escrow................. (52) 26 (26) (28) 11 (17)
Borrowed funds......... 1,395 3,878 5,273 893 2,351 3,244
---------- ---------- ---------- ----------- --------- -----------
Total interest-bearing
liabilities............ 6,445 6,069 12,514 3,505 3,878 7,383
---------- ---------- ---------- ----------- --------- -----------
Net change in net
interest income........ $ 1,777 $ (1,003) $ 774 $ 876 $ (134) $ 742
========== ========== ========== =========== ========= ===========
</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 $1,666,000 for the six months
ended June 30, 2000. This represents an increase of $76,000, or 4.8%, from the
$1,590,000 provision recorded for the six months ended June 30, 1999. For the
three months ended June 30, 2000, HFI recognized a provision for loan loss of
$831,000. This is a $36,000, or 4.5%, increase over the $795,000 provision for
the three month period ended June 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 that appears later in this report.
Q-16
<PAGE>
Noninterest Income
The table below presents an analysis of change in noninterest income for the
six month periods ended June 30, 2000 and June 30, 1999 and the three month
periods ended June 30, 2000 and June 30, 1999.
Table 5 Changes in Noninterest Income (All dollar amounts presented in table
are in 000's)
<TABLE>
<CAPTION>
Six months ended June Three months ended
30, June 30,
---------------------- ----------------------
2000 1999 % Change 2000 1999 % Change
------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Noninterest Income:
Service charges on deposits..... $3,335 $2,740 21.7 % $1,734 $1,507 15.1 %
Other service
charges/commissions/fees....... 620 688 (9.9)% 327 364 (10.2)%
Net servicing income............ 338 120 181.7 % 96 120 (20.0)%
Gain on sale of securities,
net............................ 14 1,365 (99.0)% 30 12 150.0 %
Gain on sale of loans, net...... 819 1,914 (57.2)% 311 742 (58.1)%
Other........................... 201 705 (71.5)% 95 766 (87.6)%
------ ------ ------ ------
Total noninterest income....... $5,327 $7,532 (29.3)% $2,593 $3,511 (26.1)%
====== ====== ====== ======
</TABLE>
Total noninterest income decreased 29.3% for the six months ended June 30,
2000 compared to the six months ended June 30, 1999. The decrease in
noninterest income was primarily the result of reduced reliance on gains from
sales in the securities portfolio which was partially offset by growth in fee
income on core banking products. The gain on sale of loans decreased primarily
due to rising interest rates and diminished loan activity due to winding up of
our AVSTAR mortgage operations. Service charges increased 21.7% due to growth
in deposit accounts and the addition of two new branches during the twelve
months ended June 30, 2000.
Total noninterest income decreased 26.1% for the three months ended June 30,
2000 compared to the three months ended June 30, 1999. This decrease came
primarily in other income which was enhanced in the quarter ended June 30, 1999
by a $700,000 fraud recovery related to the 1996 acquisition of First
Harrisburg Bancorp. Revenue from mortgage loan sales also declined $455,000 for
the reason cited in the preceding paragraph. Service charges on deposits
increased 15.1% due to growth in deposit accounts.
Noninterest Expense
An analysis of changes in noninterest expense for the six month periods
ended June 30, 2000 and June 30, 1999 and the three month periods ended June
30, 2000 and June 30, 1999 is presented in the table below.
Table 6 Changes in Noninterest Expense (All dollar amounts presented in table
are in 000's)
<TABLE>
<CAPTION>
Six Months Ended June Three Months Ended June
30, 30,
------------------------- -------------------------
2000 1999 % Change 2000 1999 % Change
------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Noninterest Expense:
Salaries and benefits..... $11,731 $10,921 7.4 % $ 6,001 $ 5,149 16.5 %
Equipment expense......... 2,050 2,000 2.5 % 1,034 1,038 (0.4)%
Occupancy expense......... 2,119 1,559 35.9 % 1,118 757 47.7 %
Advertising and public
relations................ 853 868 (1.7)% 423 385 9.9 %
FDIC insurance............ 139 346 (59.8)% 71 177 (59.9)%
Director fees............. 162 179 (9.5)% 68 96 (29.2)%
Expense (income) from real
estate operations........ 99 (347) NM 94 (131) NM
Amortization of
intangibles.............. 1,439 1,200 19.9 % 719 600 19.8 %
Consulting and other
fees..................... 1,260 1,020 23.5 % 520 555 (6.3)%
Supplies, telephone and
postage.................. 1,680 1,745 (3.7)% 794 857 (7.4)%
Other..................... 2,134 3,434 (37.9)% 992 1,850 (46.4)%
------- ------- ------- -------
Total noninterest
expense................. $23,666 $22,925 3.2 % $11,834 $11,333 4.4 %
======= ======= ======= =======
</TABLE>
Q-17
<PAGE>
Total noninterest expense increased 3.2% for the six months ended June 30,
2000 compared to the six months ended June 30, 1999. Increases in noninterest
expense were commensurate with the expansion of branch networks and the
expansion of traditional and non-traditional business lines. The decrease in
other noninterest expense resulted primarily from the winding up of the AVSTAR
operations in the second quarter of 1999.
Total noninterest expense increased 4.4% for the three months ended June 30,
2000 compared to the three months ended June 30, 1999. Increases in noninterest
expense were commensurate with the expansion of branch networks and the
expansion of traditional and non-traditional business lines. The decrease in
other noninterest expense resulted primarily from the winding up of the AVSTAR
operations in the second quarter of 1999.
Income Tax Expense
Income tax expense totaled $3,142,000 for the six month period ended June
30, 2000, which resulted in an effective tax rate of 26.6% on pretax income of
$11,801,000. This represented a decrease of $527,000 from the recorded
corporate tax expense of $3,669,000 on pretax income of $13,339,000 during the
six month period ended June 30, 1999. The effective tax rate for the six month
period ended June 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 $1,577,000 for the three months ended June 30, 2000,
which resulted in an effective tax rate of 25.4% on pretax income of
$6,216,000. This represented a decrease of $270,000 from the $1,847,000 of
corporate tax expense on pretax income of $6,584,000 during the three month
period ended June 30, 1999. The effective tax rate for the three month period
ended June 30, 1999 was 28.1%. 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 $168.7 million at June 30, 2000 and $169.3
million at December 31, 1999. Stockholders' equity amounted to 5.9% of total
assets equalling $2.851 billion as of June 30, 2000, compared to 6.3% of total
assets of $2.691 billion at December 31, 1999.
The decrease in stockholders' equity of $.7 million, or .4%, for the six
months ended June 30, 2000, resulted mainly from a $8.6 million decline in the
market value, net of tax effect, of the available-for-sale securities and $1.0
million in dividends paid. The drop in the market value of the available-for-
sale portfolio reflects the impact of recent market rate increases on the
market value of fixed rate issues in HFI's investment portfolio. Offsetting
these decreases was an $8.7 million increase from net income.
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.
Q-18
<PAGE>
Table 7 Risk-based Capital Ratios and Leverage Ratios (All dollar amounts
presented in table are in 000's)
HARRIS FINANCIAL, INC.
<TABLE>
<CAPTION>
As of June 30, 2000
------------------------------------------------------
Minimum Minimum
Requirement for Requirement to be
Actual Capital Adequacy "Well Capitalized"
-------------- ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ---------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted
Assets)................. 202,868 11.3% 144,185 8.0% 180,232 10.0%
Tier 1 Capital
(to Risk Weighted
Assets)................. 190,424 10.6% 72,093 4.0% 108,139 6.0%
Tier 1 Capital
(to Avg. Assets)......... 190,424 6.7% 112,865 4.0% 141,081 5.0%
<CAPTION>
As of December 31, 1999
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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%
HARRIS SAVINGS BANK
<CAPTION>
As of June 30, 2000
------------------------------------------------------
Minimum Minimum
Requirement for Requirement to be
Actual Capital Adequacy "Well Capitalized"
-------------- ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ---------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted
Assets)................. 198,549 11.0% 143,930 8.0% 179,912 10.0%
Tier 1 Capital
(to Risk Weighted
Assets)................. 185,784 10.3% 71,965 4.0% 107,947 6.0%
Tier 1 Capital
(to Avg. Assets)......... 185,784 6.6% 112,733 4.0% 140,916 5.0%
<CAPTION>
As of December 31, 1999
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 $1,315.3 million at June 30, 2000 and $1,257.6 million at December 31,
1999 Total marketable securities increased $57.7 million, or 4.6%, during the
first six months of 2000.
Q-19
<PAGE>
The following table sets forth certain information regarding the amortized
cost and fair values of HFI's marketable securities portfolio at June 30, 2000
and December 31, 1999.
Table 8 Composition of Marketable Securities Portfolios (All dollar amounts
presented in table are in 000's)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
--------------------- ---------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Government and agencies.... $ 349,401 $ 325,796 $ 348,705 $ 324,619
Corporate bonds................. 63,501 59,778 63,352 59,826
Municipal obligations........... 62,775 62,613 63,980 63,492
FHLB stock...................... 55,250 55,250 45,400 45,400
Equities (Common and
Preferred)..................... 70,354 70,371 73,034 76,711
Mortgage-backed securities:
GNMA CMO's...................... 34,070 33,676 -- --
FNMA CMO's...................... 97,734 92,362 99,032 98,267
FHLMC CMO's..................... 101,993 96,799 139,328 136,584
Private Issue CMO's............. 542,525 518,683 473,170 452,704
---------- ---------- ---------- ----------
Total mortgage-backed
securities..................... 776,322 741,520 711,530 687,555
---------- ---------- ---------- ----------
Total securities available-for-
sale............................. $1,377,603 $1,315,328 $1,306,001 $1,257,603
---------- ---------- ---------- ----------
Other interest-earning securities:
FHLB daily investment........... $ 18,917 $ 18,917 $ 36,860 $ 36,860
---------- ---------- ---------- ----------
Total marketable securities and
interest-earning investments..... $1,396,520 $1,334,245 $1,342,861 $1,294,463
========== ========== ========== ==========
</TABLE>
Loans
Gross loans receivable, excluding loans held for sale, totaled $1,383.3
million at June 30, 2000 and $1,268.7 million at December 31, 1999. The
increase of $114.6 million, or 9.0%, for the six months ended June 30, 2000,
primarily reflects growth in commercial loans of $89.2 million and a $28.5
million 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 $1,103,000 for the six month
period ended June 30, 2000 and $412,000 for the six month period ended June 30,
1999. Based on management's continuing review of the loan portfolio, HFI
recorded provisions for loan losses of $1,666,000 for the six months ended June
30, 2000 compared to $1,590,000 for the six months ended June 30, 1999.
Non-accrual loans were $4,218,000 at June 30, 2000 and $10,007,000 at
December 31, 1999. The decrease of $5,789,000 in non-accrual loans during the
six month period ended June 30, 2000 came primarily in commercial loans. In
addition, loans 90 days past due, but still accruing were $5,606,000 at June
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, equalled .71%
at June 30, 2000 and 1.27% at December 31, 1999.
The allowance for loan losses totaled $12,436,000 at June 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 .90% at June 30, 2000 and .94% at December 31, 1999.
Q-20
<PAGE>
Table 9 depicts the trend of charge-offs, recoveries and provisions to the
allowance for loan losses for the six months ended June 30, 2000, six months
ended June 30, 1999, and the year ended December 31, 1999. In addition, Table
10 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 six months ended June 30, 2000 and the year ended
December 31, 1999. Finally, Table 11 presents an allocation of the allowance
for loan losses by category of loans as of June 30, 2000 and December 31, 1999.
Table 9 Analysis of the Allowance for Loan Losses (All dollar amounts presented
in table are in 000's)
<TABLE>
<CAPTION>
As of or for the As of or for the As of or for the
six months ended six months ended twelve months ended
Allowance for Loan Loss June 30, 2000 June 30, 1999 December 31, 1999
----------------------- ---------------- ---------------- -------------------
<S> <C> <C> <C>
Balance at beginning of
period................. $11,873 $ 9,088 $ 9,088
Provision for loan
losses................. 1,666 1,590 3,180
Provision component
related to unfunded
commitments............ -- -- 617
Charge offs:
Commercial loans...... (22) (50) (50)
One-to-four family
loans................ (125) (349) (253)
Other mortgage loans.. -- -- --
Consumer and other
loans................ (1,208) (115) (970)
------- ------- -------
Total Charge offs... (1,355) (514) (1,273)
------- ------- -------
Recoveries:
Commercial loans...... 4 55 61
One-to-four family
loans................ 1 5 73
Other mortgage loans.. -- -- --
Consumer and other
loans................ 247 42 127
------- ------- -------
Total Recoveries.... 252 102 261
------- ------- -------
Net charge offs......... (1,103) (412) (1,012)
------- ------- -------
Balance at end of
period................. $12,436 $10,266 $11,873
======= ======= =======
Net charge offs to
average loans
outstanding(1)......... 0.17% 0.07% 0.08%
======= ======= =======
</TABLE>
--------
(1) Year-to-date ratio is annualized
The increase in charge offs for the six months ended June 30, 2000 is
primarily due to increased charge offs in automobile loans and, to a lesser
extent, other consumer loans.
Table 10 Allowance for Loan Losses Coverage Ratios (All dollar amounts
presented in table are in 000's)
<TABLE>
<CAPTION>
As of
June As of
30, December 31,
2000 1999
------- ------------
<S> <C> <C>
Allowance at the end of period........................... $12,436 $11,873
Non-accrual loans........................................ $ 4,218 $10,007
90 days past due, but still accruing..................... $ 5,606 $ 6,128
Potential problem loans.................................. $18,353 $16,263
Allowance/non-accrual loans............................ 294.83% 118.65%
------- -------
Allowance/90 days past due, but still accruing......... 221.83% 193.75%
------- -------
Allowance/non-accrual loans and 90 days past due, but
still accruing........................................ 126.59% 73.59%
------- -------
Allowance/problem loans................................ 67.76% 73.01%
------- -------
</TABLE>
Q-21
<PAGE>
Table 11 Allocation of the Allowance for Loan Losses (All dollar amounts
presented in table are in 000's)
<TABLE>
<CAPTION>
As of June 30,
2000 As of December 31, 1999
------------------ --------------------------
% of Total % of Total
Amount Reserves Amount Reservess
------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
One-to-four family mortgage
loans......................... $ 840 6.76% $ 838 7.06%
Commercial loans............... 7,232 58.15% 7,154 60.25%
Consumer and other loans....... 3,346 26.90% 3,073 25.88%
Unallocated.................... 1,018 8.19% 808 6.81%
------- ------ ------------ -----------
Total........................ $12,436 100.00% $ 11,873 100.00%
======= ====== ============ ===========
Reserve for unfunded
commitments................... $ 308 $ 308
======= ============
</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 on
commercial loans that are not specifically reviewed. This reserve is determined
using factors such as charge-off history, portfolio delinquencies and current
economic conditions. The mortgage and consumer portfolios are also analyzed in
pools of similar loans with similar risk characteristics. The reserve factor
applied to each pool is based on actual charge-off history, adjusted for other
factors such as credit concentrations and delinquency trends.
In addition to the allowance for loan loss, HFI maintains a reserve for
unfunded commitments. This reserve represents the Bank's estimation of loss
incurred relative to unfunded credit balances committed to customers. The
reserve assigned to this pool is developed using factors such as portfolio
trends, credit concentrations and economic conditions. The reserve established
for unfunded commitments is classified as a separate liability from the
allowance for loan losses, in accordance with generally accepted accounting
principles. The reserve for unfunded commitments totaled $308,000 at June 30,
2000 and at December 31, 1999.
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.
Q-22
<PAGE>
Other borrowings totaled $1,198.4 million at June 30, 2000 and $1,118.0
million at December 31, 1999. Borrowings from non-deposit funding sources
increased $235.0 million, or 7.2%, during the six months ended June 30, 2000.
Federal Home Loan Bank advances increased by $235.0 million, or 29.2%, to
$1,040.0 million, while repurchase agreements decreased by $154.6 million, or
49.4%, to $158.4 million during the six month period ended June 30, 2000.
As of June 30, 2000, HFI had maximum available FHLB lines of credit
totaling $1,148.5 million versus $1,059.5 million in available FHLB credit as
of December 31, 1999. This increase of $89.0 million, or 8.4%, is based on
increases in the amount of securities that qualify as security for FHLB
advances. HFI had borrowings outstanding to the FHLB totaling $1,040.0 million
as of June 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 June 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 June 30, 2000.
As of this date, the Bank's liability sensitive cumulative one-year GAP ratio
was -12.7% and liability sensitive three-year GAP ratio was -9.7%. Management
attributes this liability sensitivity to the effect of certain assumed
conversions on specific convertible borrowings and to assumed extensions on
mortgage loans and mortgage-backed securities. These assumptions reflect the
rising interest rates existing in the market at June 30, 2000.
Q-23
<PAGE>
Table 12 GAP Analysis (All dollar amounts presented in table are in 000's)
<TABLE>
<CAPTION>
At June 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>
INTEREST-EARNING ASSETS:
Cash and cash
equivalents............ $ 18,917 4.38% $ -- 0.00% $ -- 0.00% $ 31,198 0.00% $ 50,115 1.65%
Marketable
securities(1)(3)....... 622,416 7.50% 58,420 6.82% 58,194 6.75% 638,573 6.62% 1,377,603 7.03%
Commercial loans........ 228,003 8.62% 108,538 7.92% 69,977 7.83% 30,001 6.55% 436,519 8.18%
Mortgage loans(2)....... 128,059 7.12% 133,032 6.87% 103,761 6.79% 188,971 6.84% 553,823 6.90%
Consumer loans.......... 147,723 9.02% 159,173 8.54% 65,885 8.71% 20,205 8.49% 392,986 8.74%
---------- ---- --------- ---- --------- ---- -------- ---- ---------- ----
Total interest-earning
assets................ $1,145,118 7.82% $ 459,163 7.69% $ 297,817 7.45% $908,948 6.48% $2,811,046 7.33%
---------- ---- --------- ---- --------- ---- -------- ---- ---------- ----
INTEREST-BEARING
LIABILITIES:
Savings accounts........ $ 30,578 5.35% $ -- 0.00% $ -- 0.00% $125,044 2.25% $ 155,622 2.86%
Interest-bearing
DDA accounts........... -- 0.00% -- 0.00% -- 0.00% 97,910 1.10% 97,910 1.10%
Noninterest-bearing
DDA accounts........... -- 0.00% -- 0.00% -- 0.00% 51,943 0.00% 51,943 0.00%
Money market accounts... 177,151 4.94% -- 0.00% -- 0.00% -- 0.00% 177,151 4.94%
Time deposits........... 531,762 5.39% 333,916 5.98% 101,406 6.57% 3,028 5.83% 970,112 5.72%
Escrow.................. -- 0.00% -- 0.00% -- 0.00% 4,644 1.28% 4,644 1.28%
Other borrowings........ 758,375 6.36% 40,000 4.73% 250,000 6.63% 150,000 6.00% 1,198,375 6.31%
---------- ---- --------- ---- --------- ---- -------- ---- ---------- ----
Total interest-bearing
liabilities........... $1,497,866 5.83% $ 373,916 5.85% $ 351,406 6.61% $432,569 3.04% $2,655,757 5.48%
---------- ---- --------- ---- --------- ---- -------- ---- ---------- ----
Interest sensitivity gap
per period............. $ (352,748) $ 85,247 $ (53,589) $476,379 $ 155,289
---------- --------- --------- -------- ----------
Cumulative interest
sensitivity gap........ $ (352,748) $(267,501) $(321,090) $155,289
---------- --------- --------- --------
Cumulative interest
sensitivity gap as a
percent of total
assets................. (12.75)% (9.67)% (11.60)% 5.61%
---------- --------- --------- --------
Cumulative net interest-
earning assets as a
percentage of net
interest-bearing
liabilities............ 76.45% 85.71% 85.56% 105.85%
---------- --------- --------- --------
</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.
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 June 30, 2000,
management projects net interest income for the next twelve months to increase
$1.8 million, or 2.7% if market rates decrease 200 basis points over the next
twelve months and to decrease $5.9 million, or 8.8% 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)....................... $ 1.8 $ 1.5 $0.0 $ (2.7) $ (5.9)
Relative Change in NII........... 2.7% 2.3% 0.0% (4.0)% (8.8)%
Board of Directors Limit......... +/+10.0% +/-5.0% 0.0% +/-(5.0)% +/-(10.0)%
</TABLE>
Q-24
<PAGE>
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 June 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 significantly 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.
Merger Agreement
On March 28, 2000 Harris Financial announced that it entered into an
agreement to merge with York Financial Corporation, the parent of York Federal
Savings and Loan Association. To accomplish the merger, the Board of Trustees
of Harris Financial, MHC has adopted a plan of conversion pursuant to which it
would convert from a mutual to a capital stock form of organization. Harris
Financial, MHC is the mutual holding company parent of Harris Financial, Inc.
and owns approximately 76% of the Corporation's outstanding common shares. The
transactions are expected to be completed during the fourth quarter of 2000.
Merger Update
In preparation for the completion of merger-related transactions in the
fourth quarter of 2000, the management teams of Harris Financial, Inc. and York
Financial Corporation are working closely on business integration matters. The
executive team and board of directors of the new corporation have been
selected, with the selections communicated publicly in the related Harris
Financial, Inc. Form S-4 Registration Statement filed with the Securities and
Exchange Commission on June 23, 2000. The new executive team is currently
engaged
Q-25
<PAGE>
in managing the merger integration process and has already completed certain
key integration milestones such as:
.established executive, line of business and operational integration teams
.implemented a detailed integration schedule
.selected all core information technology systems
.confirmed the feasibility of achieving operational savings estimates
developed during due diligence
. completed preliminary strategic planning exercises for the purpose of
developing a strategic plan for the new corporation
As of the date of this report, the merger integration of Harris Financial,
Inc. and York Financial Corporation is proceeding in accordance with the
schedule established by executive management.
Regulatory Environment related to the Plan of Conversion of Harris Financial,
MHC
As part of Harris Financial, Inc.'s agreement to merge with York Financial
Corporation as announced on March 28, 2000, Harris Financial, MHC adopted a
plan of conversion pursuant to which it would convert from a mutual to a
capital stock form of organization. Should Harris receive approval of all
regulatory applications, 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, Inc. 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, Inc. or Harris
Savings Bank, and the Board of Governors of the Federal Reserve System will no
longer regulate or supervise Harris Financial, Inc.
Effective July 12, 2000, the OTS adopted interim final rules regarding
mutual holding companies. Specific provisions of relevance to Harris are as
follows:
. Recently converted thrifts would be permitted to repurchase stock without
limitation one year after going public. Previously, the amount of stock
that a converted thrift could repurchase was restricted for the first
three years after an offering.
. Mutual holding company parents of stock thrifts would be permitted to
waive all dividends due it without incurring a corresponding dilution to
minority shareholders interests in the event of a second-step conversion.
Previously, the OTS prohibited the waiver of excess dividends and
required that all waived dividends be accounted for in the calculation of
minority ownership interest in a second-step conversion.
The OTS also issued proposed rules, with the following specific provision of
relevance to Harris. The OTS notified the public that it expects to limit
acquisitions for most converting thrifts within three years after a conversion.
Previously, the OTS generally waived the three-year rule in cases where the
transaction was non-hostile and received shareholders approval.
Harris Financial, Inc. has also received written approval from the OTS that
the OTS would permit Harris, as part of its merger with York Financial, Inc. in
the fourth quarter of 2000, to issue up to 10,000,000 million authorized but
unissued shares to York Financial, Inc. shareholders as merger consideration in
the event that the related share offering fell below the minimum range as
established in the offering prospectus.
Q-26
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 Financial Data Schedule
Q-27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Harris Financial, Inc.
(Registrant)
/s/ Charles C. Pearson, Jr.
By: _________________________________
Charles C. Pearson, Jr.,
Chairman, President and
Chief Executive Officer
/s/ James L. Durrell
By: _________________________________
James L. Durrell,
Executive Vice President
and Chief Financial Officer
Dated: July 21, 2000
Q-28
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER INFORMATION
<TABLE>
<S> <C>
Financial Information for the Fiscal Year Ended June 30, 2000
Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations For the fiscal year ended June 30, 2000........ G-2
Financial Information for the Fiscal Year Ended June 30, 1999
Audited Consolidated Financial Statements of York Financial Corp. and
Subsidiaries and Report of Independent Auditors:
Report of Independent Auditors............................................ G-17
Consolidated Balance Sheets as of June 30, 1999 and 1998.................. G-18
Consolidated Statements of Income for the years ended June 30, 1999, 1998
and 1997................................................................. G-19
Consolidated Statements of Stockholder's Equity for the years ended June
30, 1999, 1998 and 1997.................................................. G-20
Consolidated Statements of Cash Flows for the years ended June 30, 1999,
1998 and 1997............................................................ G-21
Notes to Consolidated Financial Statements................................ G-22
Management's Discussion and Analysis of Consolidated Financial Condition
And Results of Operations of York Financial Corp......................... G-47
Description of Business .................................................. G-63
Financial Information for the Fiscal Quarter Ended March 31, 2000
Unaudited Consolidated Financial Statements of York Financial Corp. and
Subsidiaries:
Consolidated Balance Sheets as of March 31, 2000 and June 30, 1999........ G-76
Consolidated Statements of Income for the three and nine months ended
March 31, 2000 and 1999.................................................. G-77
Consolidated Statements of Cash Flows for the nine months ended March 31
2000 and 1999............................................................ G-78
Notes to Consolidated Financial Statements................................ G-79
Management's Discussion and Analysis of Financial Condition and Results of
Operations of York Financial Corp........................................ G-84
</TABLE>
G-1
<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, 2000,
the Corporation had consolidated assets of $1.7 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
which includes 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
(losses) earnings of limited partnership interests, and fees and service
charges assessed on loan and deposit transactions.
G-2
<PAGE>
Interest Rate Sensitivity Management and Market Risk
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 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 June 30, 2000, 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 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 during the third quarter, equity infusion
totaling $3.0 million to York Federal from cash available at York Financial
Corp., equity infusion totaling $15.0 million from the proceeds of a commercial
bank borrowing by York Financial Corp. and through extensions of maturities on
certain borrowings, refer to Note 12 of the Consolidated Financial Statements.
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 with the comparison of June 30, 2000 to June 30, 1999 in
the following table.
<TABLE>
<CAPTION>
June 30
-------------------------------------------------------
2000 1999
--------------------------- ---------------------------
Percentage Percentage
change in change in
Basis point Net interest Net portfolio Net interest Net portfolio
Change in interest rates income(1) value ratio(2) income(1) value ratio(2)
------------------------ ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
+300 (28.00)% 4.09% (14.00)% 4.70%
+200 (17.00)% 5.33% (9.00)% 5.75%
+100 (7.00)% 6.60% (4.00)% 6.69%
0 0.00 % 7.57% 0.00 % 7.49%
(100) 5.00 % 8.67% 4.00 % 8.15%
(200) 9.00 % 8.89% 6.00 % 8.41%
</TABLE>
--------
(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.
G-3
<PAGE>
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 from year to year
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
acceptable limits at June 30, 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. 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 loss 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.
G-4
<PAGE>
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Year Ended June 30
----------------------------------------
2000 1999 1998 1997 1996
------- ------- ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total allowance for loan losses at
beginning of period................ $10,803 $ 8,810 $6,413 $6,609 $5,840
Loans charged-off:
Real estate-mortgage:
Residential..................... 1,036 1,581 1,701 1,304 1,151
Commercial...................... -- 16 68 1,820 620
Consumer.......................... 394 397 89 226 100
------- ------- ------ ------ ------
Total charge-offs............. 1,430 1,994 1,858 3,350 1,871
Recoveries:
Real estate-mortgage:
Residential..................... 189 325 212 210 156
Commercial...................... 24 24 294 516 184
Consumer.......................... 8 6 12 4 --
------- ------- ------ ------ ------
Total recoveries.............. 221 355 518 730 340
------- ------- ------ ------ ------
Net loans charged-off......... 1,209 1,639 1,340 2,620 1,531
Provision for loan losses........... 1,660 3,632 3,737 2,424 2,300
------- ------- ------ ------ ------
Total allowance for loan losses at
end of period...................... $11,254 $10,803 $8,810 $6,413 $6,609
======= ======= ====== ====== ======
Percentage of net charge-offs to
average loans outstanding during
the period......................... 0.11% 0.18% 0.13% 0.26% 0.17%
======= ======= ====== ====== ======
Percentage of allowance for loan
losses to adjusted total loans..... 0.95% 1.17% 0.92% 0.64% 0.70%
======= ======= ====== ====== ======
</TABLE>
The allowance for loan losses totaled $11.3 million or 0.95% of adjusted
total loans of $1.2 billion at June 30, 2000 compared to $10.8 million or 1.17%
of adjusted total loans of $919.9 million at June 30, 1999. During fiscal 2000,
the Association followed the Uniform Retail Credit Classification Policy which
was implemented effective June 30, 1999. With the implementation of the policy
as of June 30, 1999, a one-time charge to the allowance for loan losses of
$408,000 was recognized representing the total amount due on certain loans in
excess of the net realizable value of the underlying collateral. Management
believes the allowance for loan loss is adequate relative to its assessment of
existing loss 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 of loss due to a change in mix within the
portfolio as well as changes in economic conditions.
G-5
<PAGE>
An analysis of nonperforming assets is summarized as follows:
<TABLE>
<CAPTION>
June 30
------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans accounted for on a
nonaccrual basis:
Real estate-mortgage:
Residential.............. $ 263 $ 870 $ -- $ -- $ --
Commercial............... -- -- -- 950 1,481
Land..................... -- -- -- -- 200
Consumer................... -- 49 -- -- --
------- ------- ------- ------- -------
Total nonaccrual
loans................. 263 919 -- 950 1,681
Accruing loans which are
contractually past due 90
days or more:
Real estate-mortgage:
Residential.............. 6,428 8,311 14,487 12,735 10,029
Consumer................... 723 823 1,194 702 383
------- ------- ------- ------- -------
Total of 90 days past due
loans................... 7,151 9,134 15,681 13,437 10,412
------- ------- ------- ------- -------
Total of nonaccrual and 90
days past due loans......... $ 7,414 $10,053 $15,681 $14,387 $12,093
======= ======= ======= ======= =======
As a percent of total
loans..................... 0.63% 1.07% 1.63% 1.43% 1.28%
======= ======= ======= ======= =======
Real estate owned:
Real estate acquired through
foreclosure or repossession
by loan type:
Real estate:
Residential.............. $ 2,300 $ 4,571 $ 4,543 $ 4,978 $ 4,913
Commercial............... -- 1,055 2,687 2,714 2,370
Land..................... 1,113 1,319 1,863 2,895 3,349
Allowance for real estate
losses.................... (55) (45) (116) (365) (955)
------- ------- ------- ------- -------
Total real estate owned...... $ 3,358 $ 6,900 $ 8,977 $10,222 $ 9,677
======= ======= ======= ======= =======
As a percent of total
assets.................... 0.20% 0.51% 0.73% 0.88% 0.87%
======= ======= ======= ======= =======
Total nonperforming assets... $10,772 $16,953 $24,658 $24,609 $21,770
======= ======= ======= ======= =======
As a percent of total
assets.................... 0.64% 1.24% 2.01% 2.12% 1.96%
======= ======= ======= ======= =======
</TABLE>
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, ongoing,
aggressive collection efforts to reduce delinquencies and the impact of sales
of real estate owned.
Management recognizes the risk of 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 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. 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 inherent losses within the real estate
portfolio.
G-6
<PAGE>
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 may 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 and resulting ability to sell loans as necessary.
Liquidity needs may also 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
fiscal 2000, the Association's deposits increased $55.5 million. The deposit
growth resulted primarily from aggressive pricing of certificate accounts to
retain existing customers and attract new customers. To supplement deposit-
gathering efforts, York Federal borrows from the FHLB of Pittsburgh.
At June 30, 2000, York Federal had $346.3 million in FHLB loans outstanding
at a weighted average interest rate of 6.70%, an increase of $235.9 million
from $110.4 million in fiscal 1999. The Association was required to purchase
additional FHLB stock totaling $13.3 million due to increased FHLB loans
outstanding. Other borrowings also increased to $24.1 at June 30, 2000 from
$3.6 million at June 30, 1999. For additional details of FHLB loans and other
borrowings, refer to Note 12 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 $466.7 million, $551.4 million and $475.3 million in fiscal 2000,
1999 and 1998, respectively.
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 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. Various types of
securities were purchased during fiscal 2000 including $9.7 million of Federal
National Mortgage Association (FNMA) preferred stock. The carrying value of
securities available for sale increased $50.9 million to $369.2 million in
fiscal 2000 from $318.3 million in fiscal 1999.
Loan demand resulted in total originations of $686.0 million in fiscal 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) as well as an increase in the commercial loan
portfolio. During fiscal 2000, the loan portfolio increased $262.0 million to
$1.2 billion at June 30, 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. At June 30, 2000, the Association's liquidity level was 6.3%.
G-7
<PAGE>
The sources of liquidity previously discussed are deemed by management to be
sufficient to fund outstanding loan commitments and meet other obligations. See
Notes 18 and 19 of the Notes to Consolidated Financial Statements for
information on commitments and fair value of financial instruments at June 30,
2000.
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, 2000, totaled $109.9 million
compared to $110.4 million at June 30, 1999, a decrease of $0.5 million or
0.5%. This decrease was primarily a result of the impact of unrealized losses
on available for sale securities, acquisition of treasury stock for issuance in
connection with the dividend reinvestment plan, retirement of shares related to
a stock repurchase program and cash dividends paid (representing a payout ratio
of 54.8%), 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 first stock repurchase plan expired and 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
fiscal 2000, 118,293 shares were repurchased and retired under the stock
repurchase programs. Under its stock repurchase programs, the Corporation has
repurchased and retired a total of 395,957 shares. At June 30, 2000, there were
no open authorizations for additional share repurchases.
During the fourth quarter of fiscal 2000, the Corporation acquired 95,000
shares of treasury stock at a cost of $1.3 million. Of this amount, 49,937
shares were issued under the dividend reinvestment plan, with 45,063 shares at
a cost of $617.3 million remaining in treasury stock at June 30, 2000. These
shares are expected to be issued within the next year in connection with the
dividend reinvestment plan.
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 4.0% 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, 2000, York Federal's tangible and core capital both equaled 7.3%
($121.6 million), substantially in excess of the minimum regulatory
requirements of 1.5% and 4.0%/5.0%, respectively. York Federal's total assets
do not include any goodwill. York Federal's core capital to risk-weighted
assets equaled 12.2% ($121.6 million) at June 30, 2000, which exceeds the
required level of 6.0%. Finally, York Federal's risk-based capital ratio
equaled 13.2% ($132.0 million) at June 30, 2000, which exceeds the required
level of 8.0% by $52.1 million, and exceeds the required level to be deemed
well capitalized of 10.0% by $32.2 million. For a more comprehensive analysis
of capital, refer to Note 15 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, 2000, such transactions are within
these regulatory limits.
G-8
<PAGE>
Results of Operations
Fiscal 2000 Compared to Fiscal 1999
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 2000 was $37.2 million, as compared to $34.5
million for fiscal 1999, which represents a 7.8% 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 for
fiscal 2000 decreased to 2.47% from 2.90% for fiscal 1999. 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, 2000.
G-9
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30
--------------------------------------------------------------------------------
Yield/ 2000 1999 1998
Rate at -------------------------- -------------------------- --------------------------
June 30, Average Yield/ Average Yield/ Average Yield/
2000 Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- ---------- -------- ------ ---------- -------- ------ ---------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) (2) (3)...... 7.67% $1,102,319 $82,772 7.51% $ 900,213 $69,880 7.76% $ 997,078 $80,893 8.11%
Securities held for
trading............... -- 1,111 78 7.02 9,478 601 6.34 10,314 688 6.67
Securities available
for sale.............. 6.50 353,270 22,368 6.33 132,478 8,120 6.13 56,858 3,770 6.63
Securities held to
maturity.............. 7.12 43,237 2,839 6.57 21,347 1,308 6.13 15,015 930 6.19
Other interest-earning
assets................ 6.59 8,379 481 5.74 129,118 6,456 5.00 41,721 2,285 5.48
---- ---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total interest-earning
assets................. 7.39 1,508,316 108,538 7.20 1,192,634 86,365 7.24 1,120,986 88,566 7.90
Noninterest-earning
assets................. 83,711 74,497 65,773
---------- ---------- ----------
Total................. $1,592,027 $1,267,131 $1,186,759
========== ========== ==========
Interest-bearing
liabilities:
Deposits
NOW accounts........... 1.34 $ 111,181 1,924 1.73 $ 106,543 2,079 1.95 $ 94,847 2,167 2.28
Savings accounts....... 2.50 47,099 1,178 2.50 58,492 1,463 2.50 66,052 1,676 2.54
Money market accounts.. 5.02 324,463 14,750 4.55 293,084 12,762 4.35 233,500 10,794 4.62
Certificate accounts... 5.93 621,276 34,657 5.58 612,710 33,693 5.50 608,126 35,107 5.77
Borrowings............. 6.76 326,262 18,808 5.76 36,435 1,829 5.02 38,871 2,100 5.40
---- ---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total interest-bearing
liabilities............ 5.48 1,430,281 71,317 4.99 1,107,264 51,826 4.68 1,041,396 51,844 4.98
------- ---- ------- ---- ------- ----
Noninterest-bearing
deposits............... 26,055 22,245 23,097
Noninterest-bearing
liabilities............ 27,086 25,659 18,070
---------- ---------- ----------
1,483,422 1,155,168 1,082,563
Stockholders' equity.... 108,605 111,963 104,196
---------- ---------- ----------
Total................. $1,592,027 $1,267,131 $1,186,759
========== ========== ==========
Ratio of interest-
earning assets to
interest-bearing
liabilities............ 1.05x 1.08x 1.08x
========== ========== ==========
Net interest
income/interest rate
spread................. $37,221 2.21% $34,539 2.56% $36,722 2.92%
======= ==== ======= ==== ======= ====
Net interest-earning
assets/margin on
interest-earning
assets................. $ 78,035 2.47% $ 85,370 2.90% $ 79,590 3.28%
========== ==== ========== ==== ========== ====
</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 $0.3 million, $0.2 million
and $0.2 million in 2000, 1999 and 1998, respectively.
G-10
<PAGE>
During fiscal 2000, York Federal originated $686.0 million of loans
including loans refinanced from the Association's portfolio totaling $6.2
million. The result of these originations, when combined with mortgage loan
securitizations or sales totaling $114.2 million and loan repayment activity,
was an increase of 22.5% or $202.1 million in average loans outstanding during
fiscal 2000. The average balance of securities and other interest-earning
assets increased $113.6 million over the prior fiscal year and results
primarily from the above mentioned secondary market activity and the
Corporation's leveraging strategy. The increase in interest-earning assets was
funded by an increase in average deposits of $33.2 million or 3.1% and an
increase in average borrowings of $289.8 million or 795.5%. The primary factor
effecting the increase in interest income was the increased volume of interest-
earning assets and the composition shift from overnight investments to higher
yielding earning assets. Offsetting the favorable effect the shift in
composition had to yield on earning assets was downward repricing in the loan
portfolio resulting in the yield on interest-earning assets decreasing 4 basis
points to 7.20%. The average rate on interest-bearing liabilities increased to
4.99% as compared to 4.68% in the prior fiscal year. The higher rate on
interest-bearing liabilities was primarily a result of the increase in the cost
of funds for borrowings related to increasing market rates and repricing of
short term maturities of such borrowings. The average rate paid on borrowings
increased to 5.76% as compared to 5.02% in the prior fiscal year. The net
effect caused the interest rate spread for the current fiscal year to decrease
to 2.21% from 2.56% in fiscal 1999.
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 2000
compared to fiscal 1999, and fiscal 1999 compared to fiscal 1998. 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
-----------------------------------------------------
2000 compared to 1999 1999 compared to 1998
Increase (Decrease) Due Increase (Decrease) Due
to: to:
------------------------- --------------------------
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans................. $15,176 $(2,284) $12,892 $(7,758) $(3,255) $(11,013)
Securities held for
trading.............. (531) 8 (523) (55) (32) (87)
Securities available
for sale............. 13,807 441 14,248 4,425 (75) 4,350
Securities held to
maturity............. 1,374 157 1,531 367 11 378
Other interest-earning
assets............... (6,037) 62 (5,975) 4,370 (199) 4,171
------- ------- ------- ------- ------- --------
Total............. 23,789 (1,616) 22,173 1,349 (3,550) (2,201)
Interest expense:
Deposits
NOW accounts........ 81 (236) (155) 228 (316) (88)
Savings accounts.... (285) -- (285) (192) (21) (213)
Money market
accounts........... 1,409 579 1,988 2,595 (627) 1,968
Certificate
accounts........... 474 490 964 252 (1,666) (1,414)
Borrowings............ 16,668 311 16,979 (127) (144) (271)
------- ------- ------- ------- ------- --------
Total............. 18,347 1,144 19,491 2,756 (2,774) (18)
------- ------- ------- ------- ------- --------
Net interest income..... $ 5,442 $(2,760) $ 2,682 $(1,407) $ (776) $ (2,183)
======= ======= ======= ======= ======= ========
</TABLE>
Provision for Loan Losses
In fiscal 2000, additions were made to the allowance for loan losses in the
amount of $1.7 million resulting in an allowance (net of charge-offs and
recoveries of $1.2 million) of $11.3 million, or 0.95% of the
G-11
<PAGE>
loan portfolio, compared to an allowance of $10.8 million, or 1.17% at fiscal
year end 1999. See "Asset Quality" for further discussion of the allowance for
loan losses.
Other Income
Other income was $7.3 million for fiscal 2000, a decrease of $4.8 million or
39.7% compared to 1999. Mortgage banking income for fiscal 2000 decreased $2.0
million or 61.2% 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 $421,000 for fiscal 2000 compared to $2.2 million for fiscal
1999. Due to a change in the rate environment, the primary type of loan
originated by York Federal has been for portfolio. This reduced the volume of
loans originated for sale through the mortgage banking activity and the
resulting gain on sale of such loans. 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, 2000, there were no
securities held for trading.
The portfolio of loans serviced for others totaled $542.7 million at June
30, 2000, with a net average servicing rate of approximately 16.1 basis points,
as compared to $494.7 million at June 30, 1999 with a net average servicing
rate of approximately 9.2 basis points. The increase in the portfolio of loans
serviced for others was primarily attributable to the sale of intermediate term
loans totaling $82.6 million during the third quarter. Net servicing rate
increased 6.9 basis points primarily as a result of changes in prepayment
speeds from year to year, which lowered interest related expenses and favorably
impacted lower of cost or market adjustments. Additionally, amortization of
capitalized mortgage servicing rights was reduced to $610,000 in fiscal 2000
from $735,000 in fiscal 1999 as a result of slower prepayment speeds. This
amortization is recognized as a reduction of gross servicing fee income. The
combination of these volume and rate changes caused net loan servicing fees for
fiscal 2000 to increase to $829,000 as compared to the fiscal 1999 level of
$496,000.
During fiscal 2000, there were no sales of servicing unlike in fiscal 1999,
when there was a sale of servicing of approximately $84.2 million of loans,
which resulted in a gain of $475,000. For additional information on loan
servicing fees and mortgage banking activity, refer to Notes 1 and 7 of the
Notes to Consolidated Financial Statements.
Gain on the sale of securities available for sale totaled $286,000 at June
30, 2000 as compared to $794,000 at June 30, 1999. During the current fiscal
year, changes in the rate environment provided limited opportunity for
portfolio repositioning.
Gain on sales of real estate during fiscal 2000 totaled $214,000 as compared
to $1.6 million during fiscal 1999 and was the result of dispositions of real
estate acquired in the normal course of business. The decrease in gain on sale
of real estate during fiscal 2000 was primarily due to nonrecurring gain
transactions in fiscal 1999 with the disposition of a commercial real estate
property at a gain totaling $470,000 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" in the
amount of $844,000.
Fees and service charges for fiscal 2000 increased $1.1 million or 29.5% to
$4.7 million as compared to $3.6 million in fiscal 1999. The increase in 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
expanded 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. For the year ended
June 30, 2000, losses from joint ventures totaled $1.4 million as compared to
gains of $1.2 million in 1999. The variance related to joint
G-12
<PAGE>
ventures and partnerships is due primarily to the following factors: (1) For
fiscal 2000, losses of $956,000 on a venture capital partnership resulted from
the decreased market value of underlying portfolio investments and operating
losses compared to gains of $1.4 million in 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 fiscal 2000, losses related to these partnerships amounted
to $514,000 compared to losses of $209,000 for fiscal 1999. Benefits attributed
to these partnerships included low income housing and historic tax credits. For
additional information on investments in joint ventures refer to Note 10 and
Note 13 of the Notes to Consolidated Financial Statements.
Other operating income was $2.3 million in fiscal 2000 as compared to $1.5
million in fiscal 1999. As products and services become more fully integrated
within the retail branch system, related income derived from discount
brokerage, insurance and title insurance activities 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 and other retirement benefits.
Other Expenses
Other expenses of $31.3 million increased $3.1 million or 11.1% in fiscal
2000 as compared to $28.2 million in fiscal 1999.
Salaries and employee benefits increased $1.4 million or 9.6% in fiscal 2000
over fiscal 1999 and is attributable to a combination of the following factors:
annual adjustments through the salary administration program, increased
commissions related to an affiliate brokerage and insurance activities and
expenses related to a supplemental executive retirement plan. The number of
full time equivalent personnel at June 30, 2000 was 396 compared to 422 at June
30, 1999.
Occupancy expense increased $110,000 or 2.9% in fiscal 2000 over fiscal 1999
as a result of normal inflationary pressure on facilities management
activities. Federal deposit insurance decreased $199,000 or 30.8% as compared
to fiscal 1999 due to lower Financing Corporation (FICO) debt service
assessment by the FDIC. Real estate expenses decreased $92,000 or 10.6% in
fiscal 2000 as compared to fiscal 1999 and is primarily attributable to a
decrease in carrying costs related to the decreasing real estate owned
portfolio. Data processing increased $328,000 or 24.0% in fiscal 2000 compared
to fiscal 1999 due to costs related to technology purchases to enhance
efficiency. Advertising cost increased $503,000 or 43.5% in fiscal 2000 as
compared to fiscal 1999 and is primarily attributable to ongoing efforts to
enhance customer and product awareness through various media campaigns. Other
expenses increased $1.1 million or 17.7% in fiscal 2000 as compared to fiscal
1999 as a result of increased cost of services and the effects of increased
loan and deposit volume.
Provision for Income Taxes
The provision for income taxes of $2.2 million for fiscal 2000 represents an
effective tax rate of 19.0% as compared to 34.2% for fiscal 1999. The decrease
in the effective tax rate is primarily attributable to the increase in tax
credits recognized on tax favored community redevelopment projects from year to
year and favorable results of a Delaware investment holding company activity.
For a more comprehensive analysis of income tax expense, refer to Note 13 of
the Notes to Consolidated Financial Statements.
Results of Operations
Fiscal 1999 Compared to Fiscal 1998
Net Interest Income
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. For further information, see "Average Balances and Interest
Yield/Rate Analysis" and "Volume/Rate Analysis" tables included in this
document.
G-13
<PAGE>
During fiscal 1999, York Federal originated $577.8 million of loans
including loans refinanced from the Association's portfolio totaling $62.8
million and mortgage loans securitized or sold of $241.3 million. The result of
these activities, when combined with loan repayments including refinance
activity, was a 9.7% decrease 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
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 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 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. 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.
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 an average net 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 outstanding of 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. 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
G-14
<PAGE>
$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 7 of the Notes to Consolidated Financial Statements.
Gain on 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 fiscal year,
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 property 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."
Fees and service charges for fiscal year 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. For the year ended
June 30, 1999, income from joint ventures totaled $1.2 million as compared to
$1.4 million in fiscal 1998. 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 10 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 activities 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. Lender 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 affiliate brokerage and insurance activities,
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.
G-15
<PAGE>
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 cost
incurred in 1998 with third parties to examine the Association's operating
efficiencies.
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 13 of
the Notes to Consolidated Financial Statements.
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 a year 2000 disruption occurs.
The incremental cost and related investment 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 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-16
<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.
/s/ Ernst & Young LLP
Baltimore, Maryland
July 21, 1999
G-17
<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-18
<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-19
<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-20
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
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 (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)
Financing Activities
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-21
<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.
G-22
<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-23
<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-24
<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.
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
G-25
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
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.
G-26
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
======== ==== ======= ========
<CAPTION>
June 30, 1998
----------------------------------------
<S> <C> <C> <C> <C>
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-27
<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. collateralized 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-28
<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.
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%).
G-29
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
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:
<TABLE>
<CAPTION>
Year Ended June 30
--------------------
1999 1998
--------- ---------
(In Thousands)
<S> <C> <C>
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
========= =========
</TABLE>
G-30
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
The changes in the Corporation's valuation allowance for mortgage servicing
assets are as follows:
<TABLE>
<CAPTION>
Year Ended June
30
-------------------
1999 1998 1997
----- ----- -----
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year........................... $(218) $(145) $(227)
Provision for impairment............................... (42) (73) 54
Sales.................................................. -- -- 28
----- ----- -----
Balance at end of year................................. $(260) $(218) $(145)
===== ===== =====
</TABLE>
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-31
<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:
<TABLE>
<CAPTION>
June 30
------------------
1999 1998
-------- --------
(In Thousands)
<S> <C> <C>
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
======== ========
</TABLE>
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-32
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Deposits
Deposits are summarized as follows:
<TABLE>
<CAPTION>
June 30
---------------------
1999 1998
---------- ----------
(In Thousands)
<S> <C> <C>
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
========== ==========
</TABLE>
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.
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 --
-------- -------
84,000 --
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>
G-33
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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:
<TABLE>
<CAPTION>
Year Ended June 30
---------------------
1999 1998 1997
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
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.
G-34
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
<TABLE>
<CAPTION>
Percentage of Income
Before Income Taxes
----------------------
Year Ended June 30
----------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
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%
====== ====== ======
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998
------ ------
(In Thousands)
<S> <C> <C> <C>
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
====== ======
</TABLE>
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.
G-35
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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.
<TABLE>
<CAPTION>
June 30
--------------
1999 1998
------ ------
(In
Thousands)
<S> <C> <C>
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
====== ======
</TABLE>
G-36
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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:
<TABLE>
<CAPTION>
Year Ended June 30
---------------------
1999 1998 1997
----- ------- -----
(In Thousands)
<S> <C> <C> <C>
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
===== ======= =====
</TABLE>
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 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.
G-37
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
Adequacy Purposes Action Provisions
------------------- ------------------
Actual Minimum Required Minimum Required
------------- ------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ---------- -------- --------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1999:
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.
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.
G-38
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 1,427,459 $ 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
Range of Average Average Average
Exercise Number of Exercise Remaining Number of 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>
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>
G-39
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
16. York Financial Corp. (Parent Company Only) Financial Information
Balance Sheets
<TABLE>
<CAPTION>
June 30
------------------
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>
G-40
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Statements of Income
<TABLE>
<CAPTION>
Year Ended June 30
----------------------
1999 1998 1997
------- ------- ------
(In Thousands)
<S> <C> <C> <C>
Dividend income:
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-41
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Statements of Cash Flows
<TABLE>
<CAPTION>
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>
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.
G-42
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Financial instruments with off-balance sheet risk are summarized as follows:
<TABLE>
<CAPTION>
June 30
-----------------
1999 1998
--------- -------
(In Thousands)
<S> <C> <C>
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
========= =======
</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 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.
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.
G-43
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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
G-44
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
The Corporation's estimated fair values of financial instruments based on
assumptions disclosed above are as follows:
<TABLE>
<CAPTION>
June 30
--------------------------------------------
1999 1998
--------------------- ---------------------
Carrying Carrying
Amount Fair Value Amount Fair 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-45
<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:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------
September 30 December 31 March 31 June 30
------------ ----------- -------- -------
(Unaudited)
(Dollars in Thousands, Except Per Share
Data)
FISCAL YEAR 1999
----------------
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
<CAPTION>
FISCAL YEAR 1998
----------------
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
</TABLE>
All per share data is adjusted for stock dividends and splits effected
through June 30, 1999.
G-46
<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 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.
G-47
<PAGE>
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.
An analysis of hypothetical changes in interest rates as of June 30, 1999
compared to June 30, 1998 is as follows:
<TABLE>
<S> <C> <C> <C> <C>
June 30
------------------------------------------------------------------------------------------
1999 1998
-------------------------------------------- --------------------------------------------
Percentage change in
------------------------------------------------------------------------------------------
Change in interest rates
(In basis points) Net interest income(1) Net portfolio ratio(2) Net interest income(1) Net portfolio ratio(2)
------------------------ --------------------- --------------------- --------------------- ---------------------
+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
G-48
<PAGE>
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 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.
G-49
<PAGE>
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 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.
G-50
<PAGE>
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>
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 status. 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
G-51
<PAGE>
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.
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
G-52
<PAGE>
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 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.
G-53
<PAGE>
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-54
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30
--------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
---------- -------- ---------- ---------- -------- ---------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Loans(1)(2)(3)....... $ 900,213 $69,880 7.76% $ 997,078 $80,893 8.11% $ 989,670 $80,820 8.17%
Securities held for
trading............. 9,478 601 6.34 10,314 688 6.67 18,935 1,329 7.02
Securities available
for sale............ 132,478 8,120 6.13 56,858 3,770 6.63 56,256 3,711 6.60
Securities held to
maturity............ 21,347 1,308 6.13 15,015 930 6.19 16,141 951 5.89
Other interest-
earning assets...... 129,118 6,456 5.00 41,721 2,285 5.48 15,747 830 5.27
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total interest-earning
assets................ 1,192,634 86,365 7.24 1,120,986 88,566 7.90 1,096,749 87,641 7.99
Noninterest-earning
assets................ 74,497 65,773 64,144
---------- ---------- ----------
Total............... $1,267,131 $1,186,759 $1,160,893
========== ========== ==========
Interest-bearing
liabilities:
Deposits:
NOW accounts......... $ 106,543 2,079 1.95 $ 94,847 2,167 2.28 $ 87,720 1,944 2.22
Savings accounts..... 58,492 1,463 2.50 66,052 1,676 2.54 73,764 2,040 2.77
Money market
accounts............ 293,084 12,762 4.35 233,500 10,794 4.62 205,168 9,017 4.39
Certificate
accounts............ 612,710 33,693 5.50 608,126 35,107 5.77 571,825 33,364 5.83
Borrowings............ 36,435 1,829 5.02 38,871 2,100 5.40 100,826 5,423 5.38
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total interest-bearing
liabilities........... 1,107,264 51,826 4.68 1,041,396 51,844 4.98 1,039,303 51,788 4.98
------- ---- ------- ---- ------- ----
Noninterest-bearing
deposits.............. 22,245 23,097 11,426
Noninterest-bearing
liabilities........... 25,659 18,070 15,141
---------- ---------- ----------
1,155,168 1,082,563 1,065,870
Stockholders' equity... 111,963 104,196 95,023
---------- ---------- ----------
Total............... $1,267,131 $1,186,759 $1,160,893
========== ========== ==========
Ratio of interest-
earning assets to
interest-bearing
liabilities........... 1.08x 1.08x 1.06x
========== ========== ==========
Net interest
income/interest rate
spread................ $34,539 2.56% $36,722 2.92% $35,853 3.01%
======= ==== ======= ==== ======= ====
Net interest-earning
assets/margin on
interest-earning
assets................ $ 85,370 2.90% $ 79,590 3.28% $ 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.
G-55
<PAGE>
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 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.
G-56
<PAGE>
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 Increase (Decrease)
to 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>
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
G-57
<PAGE>
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."
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.
G-58
<PAGE>
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.
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
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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.
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
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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 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
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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.
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.
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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.
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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.
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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>
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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 of Due one to five years after Due more than five years after
June 30, 1999(1) June 30, 1999(1) 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 $818,952 $918,580
======== ======== ======== ======== ======== ======== ======== ======= ======== ========
</TABLE>
-------
(1) Based on contractual terms to maturity and adjusted for market consensus
prepayment assumptions.
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.
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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
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
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<PAGE>
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.
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-68
<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 % of % of % of % of
loans in loans in loans in loans in loans in
each each each each 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>
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
G-69
<PAGE>
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.
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>
G-70
<PAGE>
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. 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-71
<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 or One to Five Five to Ten More Than Ten
Less Years Years 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>
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.
G-72
<PAGE>
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.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
--------------- --------------
(In thousands)
<S> <C>
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
=======
</TABLE>
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.
The following is a summary of aggregate short-term borrowings for the years
ended June 30, 1999, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------
1999 1998 1997
------- ------- --------
(In thousands)
<S> <C> <C> <C>
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%
</TABLE>
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.
G-73
<PAGE>
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.
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.
G-74
<PAGE>
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-75
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 June 30
2000 1999
---------- ----------
(Unaudited)
(In thousands)
<S> <C> <C>
ASSETS
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
Commitments and contingencies.......................... -- --
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
========== ==========
</TABLE>
See notes to consolidated financial statements
G-76
<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-77
<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.............................................. 82,640 40,294
Proceeds from maturities of securities available
for sale.......................................... 103 21,288
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-78
<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.
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.
G-79
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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 New 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.
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.
G-80
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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-81
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Note D--Federal Home Loan Bank (FHLB) Loans and other borrowings
Borrowings consist of the following:
<TABLE>
<CAPTION>
March 31 June 30
2000 1999
--------- --------
(In thousands)
<S> <C> <C>
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
========= ========
</TABLE>
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 negotiated interest rates. The
Association may increase its borrowing over amounts currently available by
purchasing additional FHLB stock.
G-82
<PAGE>
YORK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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:
<TABLE>
<CAPTION>
Percentage of Income
Before Income Taxes
-----------------------
Nine Months Fiscal Year
Ended March Ended June
31 2000 30 1999
----------- -----------
<S> <C> <C>
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%
===== ====
</TABLE>
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 these statements is not expected to have a material impact on the
Corporation's consolidated financial statements.
G-83
<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 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
G-84
<PAGE>
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 during the third quarter, equity infusion totaling $3.0 million to York
Federal from cash available at York Financial Corp., equity infusion totaling
$15.0 million from proceeds of a commercial bank borrowing by York Financial
Corp. 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.
An analysis of hypothetical changes in interest rates as of March 31, 2000
compared to June 30, 1999 is as follows:
<TABLE>
<S> <C> <C> <C> <C>
March 31, 2000 June 30, 1999
--------------------------- ---------------------------
Percentage Percentage
Basis point change in change in
Change in Net interest Net portfolio Net Interest Net portfolio
interest 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%
</TABLE>
--------
(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.
G-85
<PAGE>
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. 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 loss 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-86
<PAGE>
An analysis of the allowance for loan losses, for the periods indicated is
as follows:
<TABLE>
<CAPTION>
Nine Months Fiscal Year
Ended March Ended June
31 2000 30 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 loss 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 of loss due to a change in mix within the
portfolio as well as changes in economic conditions.
G-87
<PAGE>
An analysis of nonperforming assets is summarized as follows:
<TABLE>
<CAPTION>
March 31 June 30
2000 1999
-------- -------
(Dollars in
thousands)
<S> <C> <C>
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%
======= =======
</TABLE>
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. 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, ongoing,
aggressive collection efforts 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). 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 inherent 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
G-88
<PAGE>
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 $4.6
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 $362.5 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 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
G-89
<PAGE>
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; 4.0% 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 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 4.0%/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-90
<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 78 7.02 10,071 475 6.29
Securities available
for sale............. 353,579 16,564 6.25 101,461 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 79,999 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 29,870
Noninterest-bearing
liabilities............ 26,562 16,908
---------- ----------
1,464,041 1,169,244
Stockholders' equity.... 108,750 112,205
---------- ----------
Total............... $1,572,791 $1,251,449
========== ==========
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 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
G-91
<PAGE>
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.
<TABLE>
<CAPTION>
Nine Months Ended March
31 2000 compared to
1999
Increase (Decrease) Due
to:
-------------------------
Volume Rate Net
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Interest income:
Loans.............................................. $10,808 $(2,268) $ 8,540
Securities held for trading........................ (405) 8 (397)
Securities available for sale...................... 11,690 121 11,811
Securities held to maturity........................ 1,056 153 1,209
Other interest-earning assets...................... (5,540) 26 (5,514)
------- ------- -------
Total............................................ 17,609 (1,960) 15,649
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.................................. $ 4,477 $(1,529) $ 2,948
======= ======= =======
</TABLE>
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.
The following table provides the components of mortgage banking income:
<TABLE>
<CAPTION>
Nine Months Ended
March 31
---------------------
2000 1999
---------- ----------
(Dollars in
thousands,unaudited)
<S> <C> <C>
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
========== ==========
</TABLE>
G-92
<PAGE>
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 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.
G-93
<PAGE>
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.
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-94
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
<TABLE>
<CAPTION>
Amount(1)
---------
<S> <C>
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
----------
</TABLE>
______________
* 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 Waypoint Financial, Corp. (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
<PAGE>
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.
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
<PAGE>
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.
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.
1.4 Underwriting 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. (Subsequently
renamed "Waypoint Financial Corp.") (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 Bylaws of New Harris Financial, Inc. (Subsequently renamed "Waypoint
Financial Corp.") (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.(Subsequently
renamed "Waypoint Financial Corp.")*
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*
<PAGE>
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)).
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)).
<PAGE>
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).
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.
10.24 Form of Employment Agreement with Robert W. Pullo
10.25 Form of Employment Agreement with Robert A. Angelo
10.26 Form of Employment Agreement with James H. Moss
10.27 Form of Employment Agreement with Lynn D. Kramer-Crenshaw, Robert P.
O'Hara and Harry M. Zimmerman
10.28 Form of Change-in-Control Agreement with Jane B. Tompkins
10.29 Agreement and General Release of John W. Atkinson
<PAGE>
10.30 Retirement Agreement and General Release of James L. Durrell
10.31 Separation Agreement and General Release of William M. Long
10.32 Separation Agreement and General Release of Lyle B. Shugart
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)
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.*
___________________________
* Previously filed
** 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;
<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 August
9, 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: August 9, 2000 Date: August 9, 2000
By: /s/ Ernest P. Davis By: /s/ Jimmie C. George
--------------------------------------------- ----------------------------------------
Ernest P. Davis, Director Jimmie C. George, Director
Date: August 9, 2000 Date: August 9, 2000
By: /s/ Robert A. Houck By: /s/ Bruce S. Isaacman
--------------------------------------------- ----------------------------------------
Robert A. Houck, Director Bruce S. Isaacman
Date: August 9, 2000 Date: August 9, 2000
By /s/ William E. McClure, Jr. By: /s/ Robert E. Poole
--------------------------------------------- ----------------------------------------
William E. McClure, Jr., Director Robert E. Poole, Director
Date: August 9, 2000 Date: August 9, 2000
By: /s/ William A. Siverling By: /s/ Frank R. Sourbeer
--------------------------------------------- ----------------------------------------
William A. Siverling, Director Frank R. Sourbeer, Director
Date: August 9, 2000 Date: August 9, 2000
By: /s/ Donald B. Springer
---------------------------------------------
Donald B. Springer, Director
Date: August 9, 2000
</TABLE>
<PAGE>
As filed with the Securities and Exchange Commission on August 11, 2000
Registration No. 333-40046
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
EXHIBITS
TO
PRE-EFFECTIVE AMENDMENT NO. 1
TO THE
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.
1.4 Underwriting 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. (subsequently
renamed "Waypoint Financial Corp.")(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 Bylaws of New Harris Financial, Inc. (subsequently renamed "Waypoint
Financial Corp.") (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.
(subsequently renamed "Waypoint Financial Corp.")*
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)).
<PAGE>
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)).
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)).
<PAGE>
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).
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.
10.24 Form of Employment Agreement with Robert W. Pullo
10.25 Form of Employment Agreement with Robert A. Angelo
10.26 Form of Employment Agreement with James H. Moss
10.27 Form of Employment Agreement with Lynn D. Kramer-Crenshaw, Robert P.
O'Hara and Harry M. Zimmerman
10.28 Form of Change-in-Control Agreement with Jane B. Tompkins
10.29 Agreement and General Release of John W. Atkinson
10.30 Retirement Agreement and General Release of James L. Durrell
10.31 Separation Agreement and General Release of William M. Long
<PAGE>
10.32 Separation Agreement and General Release of Lyle B. Shugart
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)
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.*
___________________________
* Previously filed
** Tabular information filed in paper format only.
