<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. __________)
Filed by the registrant /X/
Filed by a party other than the registrant / /
Check the appropriate box:
/ / Preliminary proxy statement
/X/ Definitive proxy statement
/ / Definitive additional materials
/ / Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
First Harrisburg Bancor, Inc.
(Name of Registrant as Specified in Its Charter)
First Harrisburg Bancor, Inc.
(Name of Person(s) Filing Proxy Statement)
Payment of filing fee (Check the appropriate box): (previously paid)
/ / $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2).
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
common stock
(2) Aggregate number of securities to which transactions applies:
2,768,411
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: $14.77
(4) Proposed maximum aggregate value of transaction: $40,889,430.47
/X/ Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount previously paid: $8,177.89
(2) Form, schedule or registration statement no.:
Preliminary proxy statement
(3) Filing party: First Harrisburg Bancor, Inc.
(4) Date filed: January 5, 1996
<PAGE>
FIRST HARRISBURG BANCOR, INC.
234 North Second Street
Harrisburg, Pennsylvania 17101
(717) 232-6661
January 23, 1996
Dear Stockholder:
You are cordially invited to attend the Special Meeting of Stockholders
(the 'Special Meeting') of First Harrisburg Bancor, Inc. ('First Harrisburg'),
which will be held at The Ramada Inn on Market Square located at 23 South Second
Street, Harrisburg, Pennsylvania, on Friday, February 23, 1996 at 10:00 a.m.,
local time.
At the Special Meeting, stockholders will be asked to approve and adopt the
Agreement and Plan of Reorganization (the 'Reorganization Agreement') and a
related Agreement and Plan of Merger (the 'First Harrisburg Merger Agreement'),
both dated as of November 12, 1995, whereby Harris Acquisition Corporation will
be merged into First Harrisburg (the 'First Harrisburg Merger'), with First
Harrisburg as the surviving corporation. If the First Harrisburg Merger is
consummated, each share of common stock of First Harrisburg, par value $.01 per
share (the 'First Harrisburg Common Stock'), outstanding immediately prior to
consummation of the First Harrisburg Merger (other than shares in First
Harrisburg's treasury, shares as to which dissenters' rights have been asserted
and duly perfected in accordance with Pennsylvania law, and shares held by
Harris Savings Bank ('Harris') or its parent or subsidiaries in other than a
fiduciary capacity) shall be converted into and represent the right to receive
$14.77 in cash without any interest thereon (the 'First Harrisburg Merger
Consideration').
As a result of the First Harrisburg Merger, First Harrisburg will become a
wholly-owned subsidiary of Harris. Immediately thereafter, First Harrisburg will
be liquidated into Harris and First Federal Savings and Loan Association of
Harrisburg, the wholly-owned subsidiary of First Harrisburg, will then be merged
with and into Harris (the 'Harris Merger'). Approval by First Harrisburg's
stockholders of the Reorganization Agreement and the First Harrisburg Merger
Agreement is a condition to consummation of the First Harrisburg Merger and the
Harris Merger (which mergers are referred to collectively herein as the
'Merger'). The terms of the Merger are explained in detail in the accompanying
Joint Proxy Statement, which we urge you to read carefully.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE REORGANIZATION
AGREEMENT AND FIRST HARRISBURG MERGER AGREEMENT AND RECOMMENDS THAT YOU VOTE IN
FAVOR OF SAME BECAUSE THE BOARD BELIEVES THEM TO BE LN THE BEST INTERESTS OF THE
STOCKHOLDERS.
Enclosed is a Notice of Special Meeting of Stockholders, the Joint Proxy
Statement, a proxy card and, for First Harrisburg, its 1994 Annual Report to
Stockholders and Form 10-Q for the quarter ended September 30, 1995. Your vote
is important, regardless of the number of shares you own. Please complete, sign
and date the enclosed proxy card and return it as soon as possible in the
envelope provided. If you decide to attend the meeting, you may vote your shares
in person whether or not you have previously submitted a proxy. On behalf of the
Board, I thank you for your attention to this important matter.
Sincerely,
Patrick J. Aritz
President and Chief Executive Officer
<PAGE>
FIRST HARRISBURG BANCOR, INC.
234 North Second Street
Harrisburg, Pennsylvania 17101
(717) 232-6661
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON FEBRUARY 23, 1996
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of First
Harrisburg Bancor, Inc. ('First Harrisburg') will be held at The Ramada Inn on
Market Square located at 23 South Second Street, Harrisburg, Pennsylvania, on
Friday, February 23, 1996, commencing at 10:00 a.m., local time, for the
following purposes, all of which are more completely set forth in the
accompanying Joint Proxy Statement:
1. To consider and vote upon the Agreement and Plan of Reorganization dated
as of November 12, 1995 (the 'Reorganization Agreement'), by and among Harris
Savings Bank ('Harris'), Harris Acquisition Corporation ('HAC'), First
Harrisburg and First Federal Savings and Loan Association of Harrisburg ('First
Federal'), and a related Agreement and Plan of Merger (the 'First Harrisburg
Merger Agreement'), pursuant to which (i) HAC will be merged into First
Harrisburg (the 'First Harrisburg Merger'), with First Harrisburg as the
surviving corporation of the First Harrisburg Merger; and (ii) each share of
common stock of First Harrisburg, par value $.01 per share ('First Harrisburg
Common Stock'), outstanding immediately prior to consummation of the First
Harrisburg Merger (other than shares in First Harrisburg's treasury, shares as
to which dissenters' rights have been asserted and duly perfected in accordance
with Pennsylvania law, and shares held by Harris or its parent or subsidiaries
in other than a fiduciary capacity) shall be converted into and represent the
right to receive $14.77 in cash ('First Harrisburg Merger Consideration'), as
described in the Joint Proxy Statement, and the Reorganization Agreement and the
First Harrisburg Merger Agreement which is attached as Appendix A thereto; and
2. To transact such other business, if any, as may properly come before the
Special Meeting and any adjournment or postponement thereof.
Only holders of record of the First Harrisburg Common Stock at the close of
business on January 16, 1996 are entitled to notice of and to vote at the
Special Meeting and any adjournments or postponements thereof.
Each stockholder entitled to vote at the Special Meeting will have the
right to dissent from the First Harrisburg Merger and to obtain payment for the
fair value of his shares upon compliance with the applicable provisions of
Pennsylvania law. For a summary of the rights of stockholders of First
Harrisburg to dissent, see 'THE MERGER -Dissenters' Rights - First Harrisburg
Stockholders' in the attached Joint Proxy Statement and Appendix D thereto.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ J. Frederic Redslob
J. Frederic Redslob, Secretary
Harrisburg, Pennsylvania
January 23, 1996
YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. IT IS IMPORTANT THAT
YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER YOU OWN. EVEN IF YOU PLAN TO
BE PRESENT, YOU ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY
PROMPTLY IN THE ENVELOPE PROVIDED. IF YOU ATTEND THE MEETING, YOU MAY VOTE
EITHER IN PERSON OR BY YOUR PROXY. ANY PROXY GIVEN MAY BE REVOKED BY YOU IN
WRITING OR IN PERSON AT ANY TIME PRIOR TO THE EXERCISE THEREOF.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION.............................................................................................. 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................................................... 2
SUMMARY................................................................................................... 3
FIRST HARRISBURG SELECTED CONSOLIDATED FINANCIAL INFORMATION.............................................. 11
HARRIS SELECTED CONSOLIDATED FINANCIAL INFORMATION........................................................ 12
STOCKHOLDER MEETINGS...................................................................................... 14
Special Meeting of First Harrisburg Stockholders........................................................ 14
Special Meeting of Harris Stockholders.................................................................. 15
THE MERGER................................................................................................ 16
Background of and Reasons for the Merger; Recommendations of the Boards of
Directors............................................................................................ 16
Terms of the Merger..................................................................................... 18
Surrender of Certificates............................................................................... 19
Opinions of Financial Advisors.......................................................................... 19
Representations and Warranties; Conditions to the Merger................................................ 27
Regulatory and Other Approvals.......................................................................... 28
Business Pending the Merger............................................................................. 28
Effective Date of the Merger; Termination............................................................... 30
Interests of Certain Persons in the Merger.............................................................. 30
Certain Income Tax Consequences......................................................................... 32
Accounting Treatment of the Merger...................................................................... 33
Investment Agreement.................................................................................... 33
Dissenters' Rights -- First Harrisburg Stockholders..................................................... 34
Dissenters' Rights -- Harris Stockholders............................................................... 36
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION.............................................. 39
RELATIONSHIPS WITH INDEPENDENT AUDITORS................................................................... 43
STOCKHOLDER PROPOSALS..................................................................................... 43
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS FOR HARRIS............ 44
Independent Auditors' Report............................................................................ F-1
Consolidated Financial Statements as of and for the Period Ended December 31, 1994...................... F-2
Unaudited Financial Statements as of and for the Period Ended September 30, 1995..................... F-32
Management's Discussion and Analysis of Financial Condition and Results of Operations: December 31,
1994................................................................................................. F-42
September 30, 1995.................................................................................... F-72
APPENDIX A -- AGREEMENT AND PLAN OF REORGANIZATION AND THE EXHIBITS THERETO............................... A-1
APPENDIX B -- OPINION OF FINANCIAL ADVISOR TO HARRIS...................................................... B-1
APPENDIX C -- OPINION OF FINANCIAL ADVISOR TO FIRST HARRISBURG............................................ C-1
APPENDIX D -- STATUTES CONCERNING DISSENTERS' RIGHTS...................................................... D-1
</TABLE>
<PAGE>
HARRIS SAVINGS BANK
AND FIRST HARRISBURG BANCOR, INC.
JOINT PROXY STATEMENT
INTRODUCTION
This joint proxy statement ('Joint Proxy Statement') is being furnished to
stockholders of Harris Savings Bank ('Harris') and First Harrisburg Bancor, Inc.
('First Harrisburg') in connection with the solicitation of proxies by the
Boards of Directors of Harris and First Harrisburg (the 'Harris Board' and the
'First Harrisburg Board', respectively) for their use at their respective
special meetings of stockholders, and any adjournment or postponement thereof,
to be held at the time and place set forth in the accompanying respective
notices of special meeting ('Special Meetings'). It is anticipated that the
mailing of this Joint Proxy Statement and the enclosed proxy card will commence
on or about January 23, 1996.
At their respective Special Meetings, stockholders of Harris and First
Harrisburg will be asked to approve and adopt an Agreement and Plan of
Reorganization (the 'Reorganization Agreement'). The stockholders of First
Harrisburg will be asked to approve a related Agreement and Plan of Merger of
Harris Acquisition Corporation ('HAC') with and into First Harrisburg (the
'First Harrisburg Merger Agreement'). The stockholders of Harris will be asked
to approve a related Agreement and Plan of Merger of First Federal Savings and
Loan Association of Harrisburg with and into Harris (the 'Harris Merger
Agreement'). First Federal Savings and Loan Association of Harrisburg ('First
Federal') is a wholly-owned subsidiary of First Harrisburg. The Reorganization
Agreement and related First Harrisburg Merger Agreement and Harris Merger
Agreement each are dated as of November 12, 1995. Copies of each are attached
hereto as Appendix A.
Upon the Effective Date (as defined in the Reorganization Agreement) of the
merger transaction underlying the First Harrisburg Merger Agreement (the 'First
Harrisburg Merger'), each share of the common stock of First Harrisburg, par
value $.01 per share ('First Harrisburg Common Stock') issued and outstanding
immediately prior to the Effective Date, other than shares in First Harrisburg's
treasury, shares as to which dissenters' rights have been asserted and duly
perfected in accordance with Pennsylvania law, and shares held by Harris or its
parent or subsidiaries in other than a fiduciary capacity shall be converted
into and represent the right to receive $14.77 in cash without any interest
thereon (the 'First Harrisburg Merger Consideration'). Immediately after
effectiveness of the First Harrisburg Merger, First Harrisburg will be
liquidated and dissolved (the 'First Harrisburg Liquidation') pursuant to the
First Harrisburg Plan of Liquidation and Dissolution (the 'First Harrisburg Plan
of Liquidation'). Immediately thereafter, the merger transaction underlying the
Harris Merger Agreement (the 'Harris Merger') will be consummated. All shares of
common stock of Harris, par value $.01 per share ('Harris Common Stock') issued
and outstanding prior to effectiveness of the Harris Merger, except for shares
as to which dissenters' rights have been exercised and duly perfected in
accordance with Pennsylvania law, will remain outstanding thereafter. The First
Harrisburg Merger, the First Harrisburg Liquidation and the Harris Merger will
occur consecutively and are expected to occur contemporaneously, or with each
transaction occurring as soon as practicable after consummation of the preceding
transaction. The First Harrisburg Merger and the Harris Merger are referred to
collectively herein as the 'Merger'. For a more complete description of the
Reorganization Agreement and the terms of the Merger, see 'THE MERGER'.
All information concerning Harris contained in this Joint Proxy Statement
has been furnished by Harris, and all information contained herein concerning
First Harrisburg has been furnished by First Harrisburg.
The First Harrisburg Common Stock is quoted and traded from time to time on
the Nasdaq National Market System ('Nasdaq/NMS') under the symbol 'FFHP'. The
last reported closing sales price per share of First Harrisburg Common Stock as
of January 19, 1996, the latest practicable trading day before printing of this
Joint Proxy Statement, was $14.125. The last reported closing sales price per
share of Harris Common Stock on that date was $18.75. See 'SUMMARY -- Market and
Market Prices'.
ALL STOCKHOLDERS ARE URGED TO READ THIS JOINT PROXY STATEMENT CAREFULLY AND
IN ITS ENTIRETY.
1
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Securities and Exchange Commission
('SEC') by First Harrisburg (File No. 0-17913) pursuant to the Securities
Exchange Act of 1934, as amended ('Exchange Act') are incorporated by reference
in this Joint Proxy Statement:
1. First Harrisburg's Annual Report on Form 10-K for the year ended
December 31, 1994 (including certain information contained in First
Harrisburg's Proxy Statement dated March 17, 1995, used in connection with
First Harrisburg's 1995 Annual Meeting of Stockholders and incorporated by
reference in the Form 10-K);
2. First Harrisburg's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1995, June 30, 1995 and September 30, 1995;
3. First Harrisburg's Current Report on Form 8-K dated November 12,
1995; and
4. The following portions of First Harrisburg's Annual Report to
Stockholders for the year ended December 31, 1994: audited consolidated
financial statements and notes thereto (pages 3 through 31); management's
discussion and analysis of financial condition and results of operations
(pages 32 through 41); and selected consolidated financial and other data
(page 42).
Accompanying this Joint Proxy Statement are First Harrisburg's 1994 Annual
Report to Stockholders and Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995. Financial and other information included in the reports
incorporated by reference herein do not reflect stock splits or stock dividends
declared subsequent to the respective issuance dates of such reports.
The Reorganization Agreement between Harris, HAC, First Harrisburg and
First Federal dated as of November 12, 1995 and the exhibits thereto are
included herewith as Appendix A and are incorporated by reference herein.
Discussions of the terms and conditions of the Reorganization Agreement are
summary in nature, and holders of First Harrisburg Common Stock and Harris
Common Stock are referred to the Reorganization Agreement for a more complete
discussion of the terms and conditions of the Merger, the Reorganization
Agreement and related transactions.
Any statement contained herein, in any supplement hereto or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Joint Proxy Statement to the
extent that a statement contained herein, in any supplement hereto or in any
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Joint Proxy Statement or any supplement hereto.
Also incorporated herein by reference are the documents attached hereto as
Appendices B, C and D to this Joint Proxy Statement.
THIS JOINT PROXY STATEMENT INCORPORATES BY REFERENCE DOCUMENTS FILED BY
FIRST HARRISBURG WITH THE SEC WHICH ARE NOT PRESENTED HEREIN OR DELIVERED
HEREWITH. ALL OF SUCH DOCUMENTS WITH RESPECT TO FIRST HARRISBURG ARE AVAILABLE,
UPON WRITTEN OR ORAL REQUEST, FROM J. FREDERIC REDSLOB, SECRETARY, FIRST
HARRISBURG BANCOR, INC., 234 NORTH SECOND STREET, HARRISBURG, PENNSYLVANIA
17101; TELEPHONE NUMBER (717) 232-6661. COPIES WILL BE PROVIDED (WITHOUT
EXHIBITS UNLESS THE EXHIBITS HAVE BEEN SPECIFICALLY INCORPORATED BY REFERENCE)
FREE OF CHARGE BY FIRST CLASS MAIL OR OTHER EQUALLY PROMPT MEANS WITHIN ONE
BUSINESS DAY OF RECEIPT OF SUCH REQUEST. IN ORDER TO ENSURE TIMELY DELIVERY OF
SUCH DOCUMENTS, ANY REQUEST SHOULD BE MADE BY FEBRUARY 12, 1996.
2
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS JOINT PROXY STATEMENT AND IS NOT INTENDED TO BE A COMPLETE STATEMENT OF THE
MATTERS DESCRIBED HEREIN. REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED IN
ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED, OR INCORPORATED BY
REFERENCE, IN THIS JOINT PROXY STATEMENT AND IN THE APPENDICES ATTACHED HERETO.
STOCKHOLDERS ARE URGED TO READ THIS JOINT PROXY STATEMENT AND THE APPENDICES
HERETO IN THEIR ENTIRETY.
THE PARTIES TO THE MERGER
FIRST HARRISBURG AND FIRST FEDERAL. First Harrisburg is a Pennsylvania
corporation and a unitary savings and loan holding company registered under the
Home Owners' Loan Act, as amended (the 'HOLA'). First Harrisburg is the parent
holding company of First Federal, a federally chartered savings and loan
association. The deposits of First Federal are insured to the maximum extent
provided by law by the Savings Association Insurance Fund ('SAIF'), which is
administered by the Federal Deposit Insurance Corporation ('FDIC'). The
principal business of First Federal consists of attracting deposits from the
general public and applying these funds, together with borrowings, to the
origination and purchase of first mortgage loans on single-family residences and
origination of consumer loans which bear adjustable interest rates and/or have
relatively short maturities averaging approximately seven years. First Federal
also engages in the acquisition of land to be sold for residential real estate
and in mortgage banking through its wholly-owned subsidiaries. One of these
subsidiaries also provides financial services (including brokerage services) and
insurance products. First Harrisburg's executive offices are located at 234
North Second Street, Harrisburg, Pennsylvania 17101, and its telephone number is
(717) 232-6661. At September 30, 1995, First Harrisburg had total consolidated
assets of $309.7 million, total liabilities of $285.0 million, including
deposits of $167.8 million, and stockholders' equity of $24.7 million.
FOR ADDITIONAL INFORMATION CONCERNING FIRST HARRISBURG, ITS BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, SEE 'INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE', 'SUMMARY' AND 'FIRST HARRISBURG SELECTED CONSOLIDATED
FINANCIAL INFORMATION'.
HARRIS AND HAC. Harris is a Pennsylvania state-chartered stock savings
bank and the successor to a state-chartered mutual savings and loan formed in
1886. In 1991, Harris converted its charter to a state-chartered mutual savings
bank and in 1994, Harris became a state-chartered stock savings bank and the
majority-owned subsidiary of Harris Financial, MHC, a mutual holding company of
Harris. As part of the 1994 conversion and reorganization, Harris completed a
stock offering that raised net proceeds of $23.7 million. HAC is a special
purpose, acquisition entity with no operations and was formed for the sole
purpose of effecting the Merger.
The deposits of Harris are insured by the FDIC under the SAIF. Harris has
been a member of the Federal Home Loan Bank ('FHLB') System since 1941. Harris
operates 25 full-service offices, two mortgage lending offices and an operations
center. Harris operates primarily in the five central Pennsylvania counties of
Dauphin, Cumberland, York, Lancaster and Lebanon and the Maryland county of
Washington. It is the largest SAIF-insured institution headquartered in the five
Pennsylvania counties that it serves. At September 30, 1995, Harris had total
assets of $1.25 billion with deposits of $1.07 billion and stockholders' equity
of $148.4 million.
The principal executive offices of Harris are located at Second and Pine
Streets, Harrisburg, Pennsylvania 17101, telephone number (717) 236-4041.
3
<PAGE>
THE STOCKHOLDER MEETINGS
FIRST HARRISBURG. The First Harrisburg Special Meeting will be held at The
Ramada Inn on Market Square located at 23 South Second Street, Harrisburg,
Pennsylvania on February 23, 1996 at 10:00 a.m., local time. Only the holders of
record of the outstanding shares of First Harrisburg Common Stock at the close
of business on January 16, 1996 (the 'First Harrisburg Record Date') are
entitled to notice of and to vote at the First Harrisburg Special Meeting. At
the First Harrisburg Record Date, 2,530,526 shares of First Harrisburg Common
Stock were both outstanding and entitled to vote. A majority of the outstanding
shares of First Harrisburg Common Stock must be represented in person or by
proxy at the First Harrisburg Special Meeting in order for a quorum to be
present. Each share of First Harrisburg Common Stock entitles the holder thereof
to one vote on each matter to be submitted to First Harrisburg's stockholders at
the First Harrisburg Special Meeting.
At the First Harrisburg Special Meeting, First Harrisburg's stockholders
will be asked to consider and vote upon (i) a proposal to approve the
Reorganization Agreement and the First Harrisburg Merger Agreement (the 'First
Harrisburg Proposal'), and (ii) the transaction of such other business as may
properly come before the First Harrisburg Special Meeting and any adjournment or
postponement thereof. The affirmative vote of a majority of the votes cast by
all stockholders entitled to vote thereon at the First Harrisburg Special
Meeting is required to approve and adopt the First Harrisburg Proposal. Shares
as to which the 'ABSTAIN' box has been marked on the proxy and shares held by
brokers in street name for customers for which voting instructions have not been
received ('broker non-votes') will be counted as present for determining if a
quorum is present; however, such abstentions and broker non-votes are not
considered votes cast and thus will not affect the number of votes required for
approval. See 'STOCKHOLDER MEETINGS - Special Meeting of First Harrisburg
Stockholders'.
The directors of First Harrisburg and First Federal have agreed and intend
to vote or cause to be voted all shares of First Harrisburg Common Stock which
they have the right to vote for approval of the First Harrisburg Proposal. As of
the First Harrisburg Record Date, the directors and executive officers of First
Harrisburg and their associates in the aggregate beneficially owned 267,518
shares, or 10.4 percent, of the issued and outstanding First Harrisburg's Common
Stock, excluding shares subject to options.
Revocability of Proxies. Holders of First Harrisburg Common Stock may
revoke a proxy at any time prior to its exercise by filing with the Secretary of
First Harrisburg (J. Frederic Redslob, Secretary, 234 North Second Street,
Harrisburg, Pennsylvania 17101) a written notice of revocation or a proxy
bearing a later date, or by voting in person at the First Harrisburg Special
Meeting. Attendance at the First Harrisburg Special Meeting will not of itself
constitute revocation of a proxy. If your shares are not registered in your own
name, you will need additional documentation from your record holder in order to
vote personally at the First Harrisburg Special Meeting.
HOLDERS OF FIRST HARRISBURG COMMON STOCK ARE URGED TO COMPLETE, DATE AND
SIGN THE ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED,
POSTAGE-PAID ENVELOPE, EVEN IF THEY ARE PLANNING TO ATTEND THE FIRST HARRISBURG
SPECIAL MEETING. ALL PROPERLY EXECUTED PROXIES RECEIVED PRIOR TO OR AT THE FIRST
HARRISBURG SPECIAL MEETING WILL BE VOTED WITH RESPECT TO THE MATTER IDENTIFIED
ON THE PROXY CARDS IN ACCORDANCE WITH ANY INSTRUCTIONS THEREON AND, IF NO
INSTRUCTIONS ARE GIVEN, WILL BE VOTED FOR APPROVAL AND ADOPTION OF THE FIRST
HARRISBURG PROPOSAL.
HARRIS
The Harris Special Meeting will be held at the Zembo Temple located at
Third and Division Streets, Harrisburg, Pennsylvania on February 23, 1996 at
3:00 p.m., local time. Only the holders of record of the outstanding shares of
Harris Common Stock at the close of business on January 16, 1996 (the 'Harris
Record Date') are entitled to notice of and to vote at the Harris Special
Meeting. At the Harris Record Date, 11,210,400 shares of Harris Common Stock
were issued outstanding and entitled to vote. A majority of the outstanding
shares of Harris Common Stock must be represented in person or by proxy at the
Harris Special Meeting in order for a quorum to be present. Each share of Harris
4
<PAGE>
Common Stock entitles the holder thereof to one vote on each matter to be
submitted to Harris' stockholders at the Harris Special Meeting.
At the Harris Special Meeting, Harris' stockholders will be asked to
consider and vote upon: (i) a proposal to approve and adopt the Reorganization
Agreement and the Harris Merger Agreement (the 'Harris Proposal') and (ii) the
transaction of such other business as may properly come before the Harris
Special Meeting and any adjournment or postponement thereof. The affirmative
vote of two-thirds of the shares of Harris Common Stock outstanding as of the
Harris Record Date is required to approve and adopt the Harris Proposal. Because
Harris Financial, MHC beneficially owns 8,500,000 shares or 76 percent of the
Harris Common Stock outstanding as of the Harris Record Date and has indicated
its intent to vote in favor of the Harris Proposal, approval of the Harris
Proposal is thereby assured. See 'STOCKHOLDER MEETINGS - Special Meeting of
Harris Stockholders'.
Revocability of Proxies. Holders of Harris Common Stock may revoke a proxy
at any time prior to its exercise by notifying Bernard H. Sarfert, Sr.,
Corporate Secretary of Harris, Second and Pine Streets, Harrisburg, Pennsylvania
17101 of their intention to revoke and submitting a proxy bearing a later date
or by appearing in person at the Harris Special Meeting and voting in person
after giving notice to the Corporate Secretary. Attendance at the Harris Special
Meeting will not of itself constitute revocation of a proxy. If your shares are
not registered in your own name, you will need additional documentation from
your record holder in order to vote personally at the Harris Special Meeting.
HOLDERS OF HARRIS COMMON STOCK ARE URGED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED, POSTAGE-PAID
ENVELOPE EVEN IF THEY ARE PLANNING TO ATTEND THE HARRIS SPECIAL MEETING. ALL
PROPERLY EXECUTED PROXIES RECEIVED PRIOR TO OR AT THE HARRIS SPECIAL MEETING
WILL BE VOTED WITH RESPECT TO THE MATTER IDENTIFIED ON THE PROXY CARDS IN
ACCORDANCE WITH ANY INSTRUCTIONS THEREON AND, IF NO INSTRUCTIONS ARE GIVEN, WILL
BE VOTED FOR APPROVAL AND ADOPTION OF THE HARRIS PROPOSAL.
TERMS OF THE MERGER
In accordance with the terms of the Reorganization Agreement, on the
Effective Date, HAC will be merged with and into First Harrisburg with First
Harrisburg surviving (the 'First Harrisburg Merger'). Each share of First
Harrisburg Common Stock outstanding immediately prior to the consummation of the
First Harrisburg Merger (other than shares in First Harrisburg's treasury,
shares as to which dissenters' rights have been asserted and duly perfected in
accordance with Pennsylvania law, and shares held by Harris or its parent or
subsidiaries in other than a fiduciary capacity) shall be converted into and
represent the right to receive $14.77 in cash without any interest thereon (the
'First Harrisburg Merger Consideration'). Also on the Effective Date, First
Harrisburg will be liquidated into Harris and First Federal will then be merged
with and into Harris (the 'Harris Merger') and each share of Harris Common Stock
outstanding prior to the Harris Merger, except for shares as to which
dissenters' rights have been exercised and duly perfected in accordance with
Pennsylvania law, will remain outstanding thereafter.
FAIRNESS OPINIONS
FIRST HARRISBURG. The Board of Directors of First Harrisburg has received
a written opinion from National Capital Group, Inc. ('National Capital'), dated
as of January 19, 1996, to the effect that the consideration to be paid to First
Harrisburg's stockholders pursuant to the Reorganization Agreement is fair to
the stockholders of First Harrisburg from a financial point of view. A copy of
the fairness opinion of National Capital is attached hereto as Appendix C and
should be read in its entirety.
HARRIS. The Harris Board has received a written opinion from Ryan, Beck &
Co. ('Ryan Beck'), dated as of January 19, 1996, to the effect that the terms of
the Merger are fair from a financial point of view to Harris and its
stockholders. A copy of the fairness opinion of Ryan Beck is attached hereto as
Appendix B and should be read in its entirety.
5
<PAGE>
RECOMMENDATION OF THE BOARDS OF DIRECTORS OF FIRST HARRISBURG AND HARRIS
The Boards of Directors of First Harrisburg and Harris have determined that
the Merger is in the best interests of their respective stockholders and,
accordingly, have unanimously approved the Merger. THE BOARDS OF DIRECTORS OF
FIRST HARRISBURG AND HARRIS UNANIMOUSLY RECOMMEND THAT THEIR RESPECTIVE
STOCKHOLDERS VOTE FOR THE FIRST HARRISBURG PROPOSAL AND THE HARRIS PROPOSAL, AS
THE CASE MAY BE. SEE 'THE MERGER -- BACKGROUND OF AND REASONS FOR THE MERGER;
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS'.
INVESTMENT AGREEMENT
In fulfillment of a condition to Harris' entry into the Reorganization
Agreement and to induce such entry, First Harrisburg and Harris entered into an
Investment Agreement, a copy of which is attached as Exhibit 4 to the
Reorganization Agreement, which is attached to this Joint Proxy Statement as
Appendix A. Pursuant to the Investment Agreement, First Harrisburg granted to
Harris a warrant (the 'Harris Warrant'), exercisable in whole or in part only
under certain circumstances, to purchase up to 638,741 authorized but unissued
shares of First Harrisburg Common Stock (as adjusted for the 10 percent stock
dividend paid on November 15, 1995) at a price of $11.875 per share. The per
share exercise price of the Harris Warrant was determined by arm's-length
negotiations and was based on the historical market price of the First
Harrisburg Common Stock prior to the announcement of the Merger. The purpose of
the Harris Warrant is to increase the likelihood that the Merger will occur by
making it more difficult and expensive for another party to acquire First
Harrisburg. See 'THE MERGER -- Investment Agreement'.
CONDITIONS TO THE MERGER
The obligations of the parties to the Reorganization Agreement to
consummate the transactions contemplated thereunder are subject to fulfillment
of a variety of conditions, including the approval by the respective
stockholders of Harris and First Harrisburg, the receipt of all required
regulatory approvals, the receipt of an opinion concerning income tax
consequences of the Merger, the absence of more than 20 percent of the
outstanding shares of First Harrisburg Common Stock having exercised dissenters'
rights, the absence of any suit or proceeding seeking to enjoin the consummation
of the transactions contemplated by the Reorganization Agreement, the continuing
accuracy of the representations and warranties of the other party to the
Reorganization Agreement, compliance with all covenants not otherwise waived and
the delivery of certain documentation contemplated by the Reorganization
Agreement. See 'THE MERGER -- Representations and Warranties; Conditions to the
Merger'.
DISSENTERS' RIGHTS -- FIRST HARRISBURG STOCKHOLDERS
Holders of shares of First Harrisburg Common Stock who object to the First
Harrisburg Merger and comply with the prescribed statutory procedures are
entitled to have the fair value of their shares determined in accordance with
the Pennsylvania Business Corporation Law of 1988, as amended (the 'BCL') and
paid to them in cash in lieu of the cash they would otherwise be entitled to
receive in the First Harrisburg Merger. A copy of the pertinent statutory
provisions of the BCL is attached to this Joint Proxy Statement as Appendix D.
FAILURE TO FOLLOW SUCH PROVISIONS PRECISELY MAY RESULT IN A LOSS OF DISSENTERS'
RIGHTS. See 'THE MERGER -- Dissenters' Rights of First Harrisburg Stockholders'.
DISSENTERS' RIGHTS -- HARRIS STOCKHOLDERS
Holders of shares of Harris Common Stock who object to the Harris Merger
and comply with the prescribed statutory procedures are entitled to have the
fair value of their shares determined in accordance with the provisions of the
Pennsylvania Banking Code of 1965, as amended (the 'Pennsylvania Banking Code')
and the BCL and paid to them in cash. A copy of the pertinent statutory
provisions of the BCL and the Pennsylvania Banking Code are attached to this
Joint Proxy Statement as Appendix D. FAILURE TO FOLLOW SUCH PROVISIONS PRECISELY
MAY RESULT IN A LOSS OF DISSENTERS' RIGHTS. See 'THE MERGER -- Dissenters'
Rights of Harris Stockholders'.
6
<PAGE>
CERTAIN INCOME TAX CONSEQUENCES
It is a condition to consummation of the transactions contemplated by the
Reorganization Agreement that Harris shall have received an opinion from KPMG
Peat Marwick LLP ('KPMG'), in a form reasonably satisfactory to Harris, that
such transactions will not be taxable transactions to the parties to the
Reorganization Agreement under federal or Pennsylvania income tax law. The
opinion to be rendered by KPMG is expected to include a finding that the First
Harrisburg Merger will qualify for treatment under Section 338 of the Internal
Revenue Code of 1986, as amended (the 'Code') whereby Harris will be treated as
having acquired the First Harrisburg Common Stock in a qualified stock purchase
transaction and then liquidating First Harrisburg in a tax free transaction
under Section 332 of the Code with no gain or loss being recognized on either
the subsequent First Harrisburg Liquidation or Harris Merger.
NONETHELESS, THE RECEIPT OF THE FIRST HARRISBURG MERGER CONSIDERATION IN
EXCHANGE FOR SHARES OF FIRST HARRISBURG COMMON STOCK WILL RESULT IN TAXABLE GAIN
OR LOSS BEING RECOGNIZED BY EACH STOCKHOLDER OF FIRST HARRISBURG, MEASURED BY
THE DIFFERENCE BETWEEN THE AGGREGATE AMOUNT OF FIRST HARRISBURG MERGER
CONSIDERATION RECEIVED AND THE STOCKHOLDER'S ADJUSTED TAX BASIS IN SUCH SHARES.
See 'THE MERGER -- Certain Income Tax Consequences'.
ACCOUNTING TREATMENT OF THE MERGER
It is a condition to consummation of the Merger that the Merger be
accounted for as a purchase for accounting purposes. See 'THE MERGER --
Conditions to the Merger' and 'THE MERGER -- Accounting Treatment of the
Merger'.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The Reorganization Agreement contains provisions which require Harris to
(i) appoint Bruce S. Isaacman, the Chairman of the Board of First Harrisburg, as
a director of Harris upon consummation of the Merger, subject to the receipt of
any required regulatory approvals, (ii) honor the termination provisions of the
employment agreements between First Harrisburg and two of its executive
officers, (iii) honor the terms of First Federal's Non-Employee Directors'
Retirement Plan, First Federal's Deferred Compensation Agreements with certain
directors, and First Federal's Deferred Compensation Trust Agreement with an
independent trustee dated October 16, 1992, as amended, (iv) provide the
employees of First Harrisburg and its subsidiaries who become employed by Harris
immediately following consummation of the Merger with service credit from their
hire date at First Harrisburg or its subsidiaries under various employee benefit
plans offered by Harris, to the extent permissible in accordance with the
provisions of the applicable plan, insurance policies, contract and underlying
law, (v) provide severance payments to employees of First Harrisburg and its
subsidiaries (other than employees whose severance benefits are provided for in
written employment agreements) whose employment is terminated (other than for
cause) on or after the Effective Date and before the expiration of six months
following the Effective Date, in an amount equal to one week's pay for each year
of service with First Harrisburg or its subsidiaries, up to a maximum of 26
weeks, and (vi) indemnify all former and then-existing directors, officers,
employees and agents of First Harrisburg or of any of its subsidiaries for a
period of six years after the Effective Date with respect to any matter based in
whole or in part on or arising in whole or in part out of the fact that such
person is or was a director, officer, employee or agent of First Harrisburg or
any of its subsidiaries. In addition, Harris has agreed to hire Patrick J.
Aritz, the President and Chief Executive Officer of First Harrisburg, and
Michael L. Vitali, the President and Chief Executive Officer of AVSTAR Mortgage
Corporation, upon consummation of the Merger and to pay each of these two
officers a combination of cash and Harris Common Stock within 30 days following
the Effective Date in consideration of such officers waiving their rights to
severance pay under their current employment agreements. Furthermore, Harris has
agreed to honor the Business Consultant Agreement between First Federal and
Robert H. Trewhella for 1996 and 1997. See 'THE MERGER -- Interests of Certain
Persons in the Merger'.
Other than as set forth above, no director or executive officer of First
Harrisburg or Harris has any direct or indirect material interest in the Merger,
except in the case of First Harrisburg insofar as ownership of First Harrisburg
Common Stock and existing options to purchase such stock might be deemed such an
interest.
7
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED SUMMARY FINANCIAL INFORMATION
The unaudited pro forma condensed combined summary financial information
set forth below gives effect to the Merger under the purchase accounting method.
The pro forma condensed combined summary statements of income treat the Merger
as if it had been consummated at the beginning of the respective periods, and
the pro forma condensed combined summary balance sheet treats the Merger as if
it had been consummated on September 30, 1995. For a description of the bases
for the pro forma adjustments, see 'UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION'.
This pro forma financial information is presented for illustrative purposes
only and is not necessarily indicative of the operating results or financial
position that would have occurred if the Merger had been consummated at the
dates assumed for purposes hereof, nor is it necessarily indicative of future
operating results or financial position. See 'UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION'.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1995
-------------------------------------------------------
FIRST PRO FORMA PRO FORMA
HARRIS HARRISBURG ADJUSTMENTS COMBINED
----------- ---------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income..................................... $ 58,547 $ 16,808 $(2,293) $ 73,062
Interest expense.................................... 33,877 9,900 (371) 43,406
Net interest income................................. 24,670 6,908 (1,922) 29,656
Income before income taxes.......................... 11,622 3,083 (2,697) 12,008
Net income.......................................... 7,351 1,930 (2,697) 6,584
Net income per share:
Primary........................................... 0.67 0.80 0.60
Fully diluted..................................... 0.67 0.80 0.60
Weighted average shares and share equivalents
outstanding:
Primary........................................... 11,000,016 2,419,225 11,000,016
Fully diluted..................................... 11,003,554 2,420,580 11,003,554
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
-------------------------------------------------------
FIRST PRO FORMA PRO FORMA
HARRIS HARRISBURG ADJUSTMENTS COMBINED
----------- ---------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income..................................... $ 73,932 $ 18,593 $(3,133) $ 89,392
Interest expense.................................... 38,241 9,274 (495) 47,020
Net interest income................................. 35,691 9,319 (2,638) 42,372
Income before income taxes.......................... 17,401 4,519 (3,669) 18,251
Net income.......................................... 10,053 2,606 (3,669) 8,990
Net income per share:
Primary........................................... 0.85(1) 1.08 0.82
Fully diluted..................................... 0.85(1) 1.08 0.82
Weighted average shares and share equivalents
outstanding:
Primary........................................... 10,908,964 2,413,927 10,908,964
Fully diluted..................................... 10,908,964 2,413,927 10,908,964
</TABLE>
- ------------------
(1) Harris' earnings per share amount for 1994 excludes $.07 per share of net
income earned during the 25-day period ended January 25, 1994 because Harris
converted from a mutual savings bank to a stock savings bank on that date.
8
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA AS OF SEPTEMBER 30, 1995
-------------------------------------------------------
FIRST PRO FORMA PRO FORMA
HARRIS HARRISBURG ADJUSTMENTS COMBINED
----------- ---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents........................... $ 82,472 $ 6,880 $ 569 $ 89,921
Investment securities(1)............................ 159,193 20,979 180,172
Mortgage-backed securities.......................... 346,456 41,853 (40,889) 347,420
Loans receivable, net............................... 618,642 189,058 3,972 811,672
Loans held for sale................................. 0 40,022 40,022
Total assets........................................ 1,250,024 309,696 (20,623) 1,539,097
Deposits............................................ 1,066,962 167,843 1,409 1,236,214
Borrowings.......................................... 20,480 110,033 130,513
Total liabilities................................... 1,101,613 285,028 3,895 1,390,536
Total stockholders' equity.......................... 148,411 24,668 (24,518) 148,561
</TABLE>
- ------------------
(1) Includes stock in the FHLB of Pittsburgh.
MARKET AND MARKET PRICES
The First Harrisburg Common Stock and the Harris Common Stock are included
for quotation on the Nasdaq/NMS under the symbols 'FFHP' and 'HARS',
respectively. The table below sets forth, for the calendar quarters indicated,
the reported high and low closing sales prices of First Harrisburg Common Stock
and Harris Common Stock based on published financial sources and cash dividends
paid or declared per share by First Harrisburg and Harris. The closing sales
prices and the cash dividends paid per share for the First Harrisburg Common
Stock have been retroactively adjusted for the stock splits and stock dividends
paid during 1994 and 1995.
<TABLE>
<CAPTION>
FIRST HARRISBURG COMMON STOCK HARRIS COMMON STOCK
----------------------------- -----------------------------
CASH CASH
DIVIDENDS DIVIDENDS
PAID PER PAID PER
HIGH LOW SHARE HIGH LOW SHARE
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
1994
First Quarter.................................... $10.91 $10.00 $ 0.045 $20.00 $15.75 $ 0.000
Second Quarter................................... 10.91 9.43 0.045 18.50 16.25 0.072
Third Quarter.................................... 14.55 9.32 0.045 18.25 16.25 0.100
Fourth Quarter................................... 14.32 9.09 0.045 16.88 12.50 0.100
1995
First Quarter.................................... $11.59 $ 9.09 $ 0.050 $16.75 $13.25 $ 0.125
Second Quarter................................... 11.82 10.91 0.050 16.75 15.50 0.125
Third Quarter.................................... 11.82 11.14 0.050 18.50 15.75 0.130
Fourth Quarter................................... 14.63 11.25 0.055 20.50 18.00 0.130
</TABLE>
On November 10, 1995, the last full trading day prior to the execution and
delivery of the Reorganization Agreement and the public announcement thereof,
the closing sales prices per share of First Harrisburg Common Stock and Harris
Common Stock on the Nasdaq/NMS as reported in the Wall Street Journal were
$11.25 and $19.00, respectively. On January 19, 1996, the most recent
practicable date prior to the printing of this Joint Proxy Statement, the
closing sales prices per share of First Harrisburg Common Stock and Harris
Common Stock on the Nasdaq/NMS were $14.125 and $18.75, respectively.
9
<PAGE>
The following table sets forth (i) the last reported sales price for First
Harrisburg Common Stock and Harris Common Stock on November 10, 1995, the last
trading day preceding public announcement of the execution of the Merger
Agreement, and (ii) the equivalent per share price of the First Harrisburg
Common Stock after giving effect to the fixed acquisition price of $14.77 per
share.
<TABLE>
<CAPTION>
HISTORICAL MARKET FIRST
VALUE HARRISBURG
-------------------- EQUIVALENT
FIRST MARKET
HARRISBURG HARRIS VALUE PER SHARE
--------- ------ ---------------
<S> <C> <C> <C>
November 10, 1995..................................................... $ 11.25 $19.00 $ 14.77
</TABLE>
STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE FIRST
HARRISBURG COMMON STOCK AND HARRIS COMMON STOCK, TO THE EXTENT POSSIBLE, PRIOR
TO THE SPECIAL MEETINGS.
RECENT EVENTS--REGULATORY APPROVALS
In connection with the reorganization of Harris into a stock savings bank
on January 25, 1994, Harris Financial, MHC became the parent holding company of
Harris, holding 76.4 percent of the Harris Common Stock. Since the
reorganization, Harris Financial, MHC has waived dividends to which it would
otherwise have been entitled as a result of the shares of Harris Common Stock
that it owns and the dividend declarations thereon by Harris. Total dividends
waived during the year ended December 31, 1994, and the nine-month period ended
September 30, 1995 were $2.3 million and $3.2 million, respectively. As part of
the regulatory applications filed in connection with the Merger, federal banking
regulators have advised Harris that dividend waivers, such as those by Harris
Financial, MHC since the reorganization, typically give rise to the need to seek
prior regulatory approval and be subject to special treatment. The special
treatment typically includes one or more of the following: (i) prior application
to and approval by regulators prior to any waiver of dividends by Harris
Financial, MHC; (ii) the exclusion of the amount of dividends waived from the
capital accounts of Harris for purposes of calculating dividend payments
available for the payment of dividends to minority stockholders of Harris; and
(iii) the establishment by Harris Financial, MHC of a restricted capital account
in the amount of the cumulative dividends waived by Harris Financial, MHC being
included therein without future reduction and with such cumulative amount being
deemed senior as to claims of minority stockholders of Harris and added to any
liquidation account in Harris established in connection with any future
conversion of Harris Financial, MHC from mutual to stock form, thereby rendering
such amount unavailable for distribution to minority shareholders of Harris in
such event. Ultimately, the treatment of dividends waived would be handled in
accordance with any rules, regulations or policies promulgated by federal
banking regulators. There can be no assurance that any such rules, regulations
or policies will be promulgated by such regulators or, if promulgated, will
result in a requirement that each of the aforementioned steps be taken.
Moreover, it is unclear whether the regulators might impose these and/or
additional standards as a precondition of approving the Merger or, even if they
do not so impose such standards as a precondition to the Merger, that Harris
would be required to adopt such standards, and/or additional standards,
regardless of whether the Merger is consummated, in the event of any future
conversion, in whole or in part, of Harris Financial, MHC from mutual to stock
form. To the extent that one or more of these standards become regulatorily
mandated, then the effect of compliance could be a negative impact upon the
amount of dividends which might be paid to minority stockholders of Harris.
Additionally, when calculating the value of Harris in connection with any future
full conversion of Harris Financial, MHC from mutual to stock form, the total
market value of the Harris Common Stock held by minority stockholders would be
negatively impacted upon such full conversion due to the fact that Harris
Financial, MHC would then be deemed to own a greater portion of the calculated
value of Harris, resulting from the cumulative amount of dividends waived.
10
<PAGE>
FIRST HARRISBURG SELECTED CONSOLIDATED FINANCIAL INFORMATION
(Dollars in Thousands, Except Per Share Data)
The following tables set forth certain consolidated financial and other
data of First Harrisburg at the dates and for the periods indicated. For
additional financial information about First Harrisburg, see 'INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE'.
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------------------------------------------
1995 1994 1993 1992 1991 1990
------------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets............................ $ 309,696 $269,985 $266,417 $232,011 $234,830 $237,456
Loans receivable, net(1)................ 270,933 234,308 228,469 175,381 194,935 209,168
Investment securities and
interest-bearing deposits(2).......... 29,246 22,589 24,731 44,348 28,915 15,991
Deposits................................ 167,843 151,460 164,404 182,693 211,151 205,226
FHLB advances........................... 70,964 22,011 24,600 19,000 1,000 10,000
Short-term borrowings................... 39,069 64,980 46,295 5,717 -- 3,148
Stockholders' equity.................... 24,668 23,399 21,023 17,456 15,652 15,110
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- --------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income..................... $16,808 $ 13,453 $ 18,593 $ 17,253 $ 19,048 $ 22,046 $ 23,788
Total interest expense.................... 9,900 6,503 9,274 8,935 11,488 15,040 16,934
------- -------- -------- -------- -------- -------- --------
Net interest income....................... 6,908 6,950 9,319 8,318 7,560 7,006 6,854
Provision for loan losses................. -- -- -- -- 105 366 1,630
------- -------- -------- -------- -------- -------- --------
Net interest income after provision for
loan losses............................. 6,908 6,950 9,319 8,318 7,455 6,640 5,224
Gain (loss) on sale of investment and
trading securities...................... -- -- (11) -- (17) 8 1,746
Unrealized losses on securities held for
sale.................................... -- -- -- (16) -- -- --
Gain on sale of mortgage-backed
securities.............................. -- -- -- -- -- 6 --
Gain on sale of mortgages................. 1,295 1,198 1,338 2,173 1,450 773 502
Gain (loss) on sale of property and
equipment............................... -- (8) (7) 17 -- -- --
Gain on sale of servicing................. -- 114 114 -- 22 -- --
Income (loss) from real estate
operations.............................. 30 109 176 (35) 156 615 128
Other income excluding gains (losses) on
above sales............................. 952 1,086 1,440 1,689 1,196 1,110 1,108
Noninterest expenses...................... 6,102 5,952 7,850 7,738 6,963 6,373 6,522
------- -------- -------- -------- -------- -------- --------
Income before income taxes and cumulative
effect of change in accounting for
income taxes............................ 3,083 3,497 4,519 4,408 3,299 2,779 2,186
Income taxes.............................. 1,153 1,479 1,913 1,517 1,290 1,149 1,644
------- -------- -------- -------- -------- -------- --------
Income before cumulative effect of change
in accounting for income taxes.......... 1,930 2,018 2,606 2,891 2,009 1,630 542
Cumulative effect of change in accounting
for income taxes........................ -- -- -- 717 -- -- --
------- -------- -------- -------- -------- -------- --------
Net income................................ $ 1,930 $ 2,018 $ 2,606 $ 3,608 $ 2,009 $ 1,630 $ 542
------- -------- -------- -------- -------- -------- --------
------- -------- -------- -------- -------- -------- --------
Earnings per share(3)..................... .80 .84 1.08 1.51 .86 .71 .24
------- -------- -------- -------- -------- -------- --------
------- -------- -------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- --------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
----- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER SELECTED DATA:
Average yield earned on interest-earning
assets.................................... 8.16% 7.61% 7.70% 7.76% 8.46% 9.86% 10.31%
Average rate paid on interest-bearing
liabilities............................... 5.19 4.01 4.19 4.32 5.42 6.98 7.63
Average interest rate spread:
During period....................... 2.97 3.60 3.51 3.44 3.04 2.88 2.68
At end of period.................... 2.81 3.60 3.83 3.54 3.47 2.79 2.94
Ratio of noninterest expense to average
total assets.............................. 2.78 3.10 3.02 3.25 2.95 2.68 2.67
Return on average assets.................... .88 1.04 1.00 1.52 .85 .68 .22
Return on average equity.................... 10.69 12.22 11.73 18.59 12.12 10.50 3.66
Average equity to average assets............ 8.23 8.58 8.54 8.16 7.03 6.52 6.08
Dividend payout ratio....................... 20.63 17.86 18.52 11.59 17.96 19.58 49.22
Number of full service offices at end of
period.................................... 8 8 8 8 8 7 7
</TABLE>
- ------------------
(1) Includes mortgage-backed securities and loans held for sale.
(2) Includes securities held for sale, stock in the FHLB of Pittsburgh and
interest-bearing accounts. At September 30, 1995, the interest-bearing
accounts amounted to $2.8 million.
(3) Earnings per share were adjusted retroactively to reflect the two for one
stock split effective January 1995, the 20 percent stock dividend paid in
November 1993 and the 10 percent stock dividends paid in November 1995,
November 1992 and November 1991.
11
<PAGE>
HARRIS SELECTED CONSOLIDATED FINANCIAL INFORMATION
(Dollars in Thousands, Except Per Share Data)
The following tables set forth certain consolidated financial and other
data of Harris at the dates and for the periods indicated. For additional
financial information about Harris, reference is made to 'INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS FOR HARRIS'.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
SEPTEMBER 30, ------------------------------------------------------------------
1995 1994 1993 1992 1991 1990
------------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets..................... $ 1,250,024 $1,058,088 $1,087,006 $1,051,740 $1,060,765 $ 980,896
Loans receivable, net (Note 2)... 618,642 574,794 566,550 737,980 843,463 820,746
Investment securities and
interest-bearing deposits...... 577,226 438,808 485,650 280,177 180,185 122,976
Deposits......................... 1,066,962 910,576 937,903 950,662 963,685 877,517
FHLB advances.................... 18,500 0 0 0 10,000 25,000
Short-term borrowings............ 1,980 2,475 0 0 0 0
Stockholders' equity............. 148,411 135,036 107,886 90,228 76,990 69,031
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------ ------------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income............ $58,574 $ 55,308 $ 73,932 $ 81,020 $ 94,620 $ 96,980 $ 93,894
Total interest expense........... 33,877 28,388 38,241 41,409 52,333 65,984 69,463
Net interest income.............. 24,670 26,920 35,691 39,611 42,287 30,996 24,431
Provision for loan losses........ 0 0 0 800 2,484 1,002 1,666
Net interest income after
provision for loan losses...... 24,670 26,920 35,691 38,811 39,803 29,994 22,765
Gain (loss) on sale of investment
and trading securities......... 0 1,421 1,421 0 2,401 0 0
Gain on sale of mortgage-backed
securities..................... 0 (1,410) (1,410) 1,778 3,031 91 186
Gain on sale of mortgages 0 0 0 0 116 15 0
Gain (loss) on sale of property
and equipment.................. 0 1 1 (57) (4) 0 0
Income (loss) from real estate
operations..................... 418 (29) 144 522 (138) (237) (172)
Other income excluding gains
(losses) on above sales........ 1,971 1,905 2,491 2,842 2,358 1,915 1,767
Noninterest expenses............. 15,437 15,621 20,937 18,488 23,675 18,503 17,454
Income before income taxes and
cumulative effect of change in
accounting for income taxes.... 11,622 13,187 17,401 25,408 23,892 13,275 7,092
Income taxes..................... 4,271 5,566 7,348 9,170 10,654 5,316 3,440
Income before cumulative effect
of change in accounting for
income and postretirement
benefits....................... 7,351 7,621 10,053 16,238 13,238 7,959 3,652
Cumulative effect of change in
accounting for income taxes and
postretirement benefits........ 0 0 0 1,420 0 0 0
Net income....................... 7,351 7,621 10,053 17,658 13,238 7,959 3,652
Earnings per share (Notes 1 and
3)............................. 0.67 0.63 0.85 1.59 1.19 0.72 0.33
</TABLE>
- ------------------
Note 1: Earnings per share figures for 1993, 1992, 1991, and 1990 are pro forma
based on pro forma common shares outstanding of 11,125,000 shares.
Note 2: Includes loans held for sale of $31,392 and $3,948 in 1992 and 1990
respectively.
Note 3: Earnings per share figures for 1994 exclude $.07 per share earned during
the 25 day period (pre-conversion) ended January 25, 1994.
12
<PAGE>
<TABLE>
<CAPTION>
AS OF OR FOR
THE
NINE MONTHS
ENDED
SEPTEMBER 30, AS OF OR FOR THE YEARS ENDED DECEMBER 31,
-------------- -----------------------------------------
1995 1994 1994 1993 1992 1991 1990
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER SELECTED DATA:
Average yield on interest-earning assets........... 7.34% 6.97% 7.02% 7.80% 9.14% 9.61% 9.92%
Average rate paid on interest-bearing
liabilities...................................... 4.85% 4.05% 4.12% 4.42% 5.52% 7.00% 7.84%
Average interest rate spread:
During period.................................... 2.49% 2.92% 2.90% 3.38% 3.62% 2.61% 2.08%
At end of period................................. 2.16% 2.82% 2.86% 3.06% 4.33% 3.02% 3.30%
Ratio of noninterest expense to average total
assets........................................... 1.83% 1.92% 1.93% 1.70% 2.26% 1.59% 1.56%
Return on average assets........................... 0.90% 0.94% 0.93% 1.67% 1.26% 0.77% 0.37%
Return on average equity........................... 6.80% 7.70% 7.59% 17.75% 15.41% 10.95% 5.33%
Average equity to average assets................... 13.17% 12.16% 12.27% 9.42% 8.16% 7.04% 6.99%
Dividend payout ratio (Note 1)..................... 12.76% 5.37% 6.44% N/A N/A N/A N/A
Number of full service offices at end of period.... 25 23 23 22 22 22 21
</TABLE>
- ------------------
Note 1: Excludes dividends waived by the Bank's mutual holding company parent,
Harris Financial MHC, totaling approximately $3.2 million, $1.5 million,
and $2.3 million for the nine month period ended September 30, 1995 and
September 30, 1994, and the year ended December 31, 1994, respectively.
13
<PAGE>
STOCKHOLDER MEETINGS
This Joint Proxy Statement is being furnished to First Harrisburg's
stockholders in connection with the solicitation of proxies by the Board of
Directors of First Harrisburg for use at the First Harrisburg Special Meeting to
be held on February 23, 1996, and at any adjournment or postponement thereof.
This Joint Proxy Statement is also being furnished to Harris' stockholders
in connection with the solicitation of proxies by the Board of Directors of
Harris for use at the Harris Special Meeting to be held on February 23, 1996,
and at any adjournment or postponement thereof.
FIRST HARRISBURG STOCKHOLDERS SHOULD NOT FORWARD ANY STOCK CERTIFICATES
WITH THEIR PROXY CARDS. First Harrisburg stock certificates should not be
forwarded until after receipt of a letter of transmittal, which will be provided
to First Harrisburg stockholders promptly following consummation of the Merger
if the Merger is approved by the respective stockholders of First Harrisburg and
Harris.
This Joint Proxy Statement, the Notice of Special Meeting of Stockholders
of First Harrisburg and the Notice of Special Meeting of Stockholders of Harris
and the accompanying proxies solicited by the First Harrisburg Board and the
Harris Board, respectively, are first being mailed to the stockholders of First
Harrisburg and Harris on or about January 23, 1996.
All information contained in this Joint Proxy Statement relating to First
Harrisburg and its subsidiaries has been supplied by First Harrisburg, and all
information contained in this Joint Proxy Statement relating to Harris and its
subsidiaries has been supplied by Harris.
The principal executive offices of First Harrisburg are located at 234
North Second Street, Harrisburg, Pennsylvania 17101, and its telephone number is
(717) 232-6661. The principal executive offices of Harris are located at Second
and Pine Streets, Harrisburg, Pennsylvania 17101, and its telephone number is
(717) 236-4041.
SPECIAL MEETING OF FIRST HARRISBURG STOCKHOLDERS
The First Harrisburg Special Meeting will be held on February 23, 1996,
commencing at 10:00 a.m., local time, at The Ramada Inn on Market Square located
at 23 South Second Street, Harrisburg, Pennsylvania.
Purpose of Meeting. The purpose of the First Harrisburg Special Meeting is
to consider and vote upon a proposal to approve and adopt the Reorganization
Agreement and the First Harrisburg Merger Agreement (collectively the 'First
Harrisburg Proposal') and the transaction of such other business as may properly
come before the First Harrisburg Special Meeting and any adjournment or
postponement thereof. It is not anticipated that any matter other than the First
Harrisburg Proposal will be brought before the First Harrisburg Special Meeting.
If any other matter is properly presented at the First Harrisburg Special
Meeting for consideration, the persons named in the enclosed form of proxy card
and acting thereunder will have discretion to vote on such matter in accordance
with their best judgment.
Shares Outstanding and Entitled to Vote; Record Date. The close of
business on January 16, 1996 has been fixed by the Board of Directors of First
Harrisburg as the First Harrisburg Record Date for the determination of holders
of First Harrisburg Common Stock entitled to notice of and to vote at the First
Harrisburg Special Meeting and any adjournment or postponement thereof. At the
close of business on the First Harrisburg Record Date, there were 2,571,012
shares of First Harrisburg Common Stock issued and outstanding, held by
approximately 1,200 holders of record. Of the 2,571,012 shares of First
Harrisburg Common Stock issued and outstanding, 40,486 shares are deemed to be
owned by a subsidiary of First Harrisburg through a grantor trust and are thus
not entitled to be voted under applicable Pennsylvania law. Each other share of
First Harrisburg Common Stock entitles the holder thereof to one vote on each
matter to be submitted to First Harrisburg stockholders at the First Harrisburg
Special Meeting.
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<PAGE>
Vote Required. A quorum, consisting of a majority of the voting power of
the issued and outstanding stock of First Harrisburg entitled to vote at the
First Harrisburg Special Meeting, must be present in person or by proxy before
any action may be taken at the First Harrisburg Special Meeting. Under the BCL,
the affirmative vote of a majority of the votes cast by all stockholders of
First Harrisburg entitled to vote thereon is required to approve and adopt the
Reorganization Agreement and the First Harrisburg Merger Agreement. The votes
may be made in person or by proxy. Shares as to which the 'ABSTAIN' box has been
marked on the proxy and broker non-votes will be counted as present for
determining if a quorum is present; however, under the BCL, an abstention or a
broker non-vote is not a vote cast and thus will not affect the number of votes
required for approval.
As of the First Harrisburg Record Date, the directors and executive
officers of First Harrisburg and their associates in the aggregate beneficially
owned and are entitled to vote 267,518 shares or 10.4 percent of the outstanding
shares of First Harrisburg Common Stock (exclusive of shares of First Harrisburg
Common Stock which may be acquired upon the exercise of outstanding stock
options). The directors of First Harrisburg have agreed and intend to vote or
cause to be voted all shares of First Harrisburg which they have the right to
vote for approval of the First Harrisburg Proposal.
Voting and Revocation of Proxies. A proxy for use at the First Harrisburg
Special Meeting is being furnished to each First Harrisburg stockholder together
with this Joint Proxy Statement and is solicited by the Board of Directors of
First Harrisburg. Any First Harrisburg stockholder executing a proxy may revoke
it at any time before it is voted by filing with the Secretary of First
Harrisburg, at the address of First Harrisburg set forth on First Harrisburg's
Notice of Special Meeting of Stockholders, written notice of such revocation; by
executing a later-dated proxy; or by attending the First Harrisburg Special
Meeting and giving notice of such revocation in person. Attendance at the First
Harrisburg Special Meeting will not, in and of itself, constitute revocation of
a proxy. Each proxy returned to First Harrisburg (and not revoked) will be voted
in accordance with the instructions indicated thereon. IF NO INSTRUCTIONS ARE
INDICATED, THE PROXY WILL BE VOTED FOR APPROVAL OF THE MERGER AGREEMENT.
Solicitation of Proxies. In addition to solicitations by mail, proxies may
be solicited personally or by telephone, and directors, officers and employees
of First Harrisburg and Harris may solicit proxies from the stockholders of
First Harrisburg, without additional compensation to them and at nominal costs
to First Harrisburg and Harris, respectively. Brokerage houses, nominees,
fiduciaries and other custodians have been requested to forward proxy materials
to beneficial owners of First Harrisburg Common Stock and such parties will be
reimbursed for the expenses incurred by them. Harris and First Harrisburg each
will bear all expenses incurred by it in connection with the solicitations,
except for printing and mailing expenses which will be shared based on the
proportionate costs incurred by each.
SPECIAL MEETING OF HARRIS STOCKHOLDERS
The Harris Special Meeting will be held on February 23, 1996, commencing at
3:00 p.m., local time, at the Zembo Temple, located at Third and Division
Streets, Harrisburg, Pennsylvania.
Purpose of Meeting. The purpose of the Harris Special Meeting is to
consider and vote upon a proposal to approve and adopt the Reorganization
Agreement and the Harris Merger Agreement (the 'Harris Proposal') and the
transaction of such other business as may properly come before the Harris
Special Meeting and any adjournment or postponement thereof. It is not
anticipated that any matter other than the Harris Proposal will be brought
before the Harris Special Meeting. If any other matter is properly presented at
the Harris Special Meeting for consideration, the persons named in the enclosed
form of proxy card and acting thereunder will have discretion to vote on such
matter in accordance with their best judgment.
Record Date; Voting Rights; Shares Outstanding; Vote Required. The close
of business on January 16, 1996 has been fixed as the Harris Record Date for
purposes of determining stockholders entitled to notice of and to vote at the
Harris Special Meeting. On that date, there were issued and outstanding
11,210,400 shares of Harris Common Stock held by approximately 4,300
stockholders of
15
<PAGE>
record. The holders of Harris Common Stock are entitled to one vote per share.
The affirmative vote of the holders of two-thirds of the Harris Common Stock
outstanding will be required to approve and adopt the Harris Proposal. Under
Pennsylvania law and Harris' bylaws, a quorum is required to conduct business at
the Harris Special Meeting. A quorum is constituted by the presence, in person
or by proxy, of stockholders entitled to cast at least a majority of the votes
which all stockholders are entitled to cast on the particular matters to be
voted on. A quorum is of no practical relevance, however, in view of the
two-thirds vote required to approve the Harris Proposal.
AS A PRACTICAL MATTER, BOTH THE PRESENCE OF A QUORUM AND APPROVAL OF THE
HARRIS PROPOSAL IS ASSURED BECAUSE THE PARENT HOLDING COMPANY OF HARRIS, HARRIS
FINANCIAL, MHC, OWNS BENEFICIALLY 8,500,000 SHARES OR 76 PERCENT OF THE HARRIS
COMMON STOCK OUTSTANDING AND HAS INDICATED ITS INTENT TO VOTE IN FAVOR OF THE
HARRIS PROPOSAL.
Voting and Revocation of Proxies. Shares of Harris Common Stock
represented by a proxy properly signed and returned at or prior to the Harris
Special Meeting and not subsequently revoked prior to the vote will be voted at
the Harris Special Meeting in accordance with the instructions thereon. If a
proxy is signed and returned without indicating any voting instructions, the
shares of Harris Common Stock represented by such proxy will be voted FOR
approval of the Harris Proposal. Any stockholder giving a proxy may revoke it at
any time before it is exercised. In order to revoke a proxy, stockholders of
Harris should either provide notice to Bernard H. Sarfert, Sr., Corporate
Secretary of Harris at Second and Pine Streets, Harrisburg, Pennsylvania 17101
or execute a later-dated proxy and give notice thereof to the Corporate
Secretary. Alternatively, stockholders of Harris can appear at the Harris
Special Meeting and vote in person after giving notice to the Corporate
Secretary. The presence at the Harris Special Meeting of any stockholder who has
given a proxy will not, in and of itself, serve to revoke a proxy.
Solicitation of Proxies. In addition to solicitations by mail, proxies may
be solicited personally or by telephone, and directors, officers and employees
of Harris and First Harrisburg may solicit proxies from the stockholders of
Harris, without additional compensation to them and at nominal costs to Harris.
Brokerage houses, nominees, fiduciaries and other custodians have been requested
to forward proxy materials to beneficial owners of Harris Common Stock and such
parties will be reimbursed for the expenses incurred by them. Harris has
retained Chemical Mellon to assist in mailing proxy materials. Harris and First
Harrisburg each will bear all expenses incurred by it in connection with the
solicitations, except for printing and mailing expenses which will be shared
based on the proportionate costs incurred by each.
THE MERGER
The following description of the material terms of the Merger does not
purport to be complete and is qualified in its entirety by reference to the
Reorganization Agreement, a copy of which is attached to this Joint Proxy
Statement as Appendix A. All stockholders of First Harrisburg and Harris are
urged to read such document carefully.
BACKGROUND OF AND REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS OF
DIRECTOR
Background of the Merger. During the summer of 1994, First Harrisburg was
engaged in preliminary discussions with a bank holding company regarding a
stock-for-stock acquisition of First Harrisburg at a price per share lower than
the current $14.77 per share Merger Consideration (after adjusting for the
2-for-1 stock split and 10 percent stock dividend paid by First Harrisburg since
such time). In July 1994, Harris approached First Harrisburg with a proposal to
acquire First Harrisburg for cash at a per share price below the price being
proposed by the bank holding company, with the proposal being subject to a
number of conditions. First Harrisburg informed Harris in July 1994 that its
proposal was not acceptable and that First Harrisburg was not interested in
pursuing discussions based on such terms.
16
<PAGE>
In August 1994, the Board of Directors of First Harrisburg authorized
management to negotiate an acquisition of First Harrisburg by the above bank
holding company based upon a stock-for-stock exchange. On August 31, 1994, in
light of the increased price and trading volume of the First Harrisburg Common
Stock, First Harrisburg publicly announced that it was having discussions with a
prospective acquiror and that were no assurances that a definitive agreement
could be executed.
Following the August 31, 1994 press release, First Harrisburg was contacted
by a number of other prospective acquirors. On September 8, 1994, First
Harrisburg publicly announced that it had received preliminary indications of
interest from a number of prospective acquirors, that it had hired National
Capital to determine the level of such interest and to advise and assist First
Harrisburg with respect to acquisition proposals that may be received, and that
it would be several weeks before final proposals were received. First Harrisburg
entered into confidentiality agreements with 10 financial institutions or their
holding companies (including Harris) which had expressed interest in acquiring
First Harrisburg. Each of these institutions then received information regarding
First Harrisburg and were requested to submit their proposal by a specific date.
Of the 10 institutions, six submitted preliminary proposals, of which three
were below the current Merger Consideration. Of the three lowest proposals, two
of the bidders dropped out, and the third bidder increased its proposal by more
than 10 percent to be competitive with the other proposals received. The
remaining four bidders (including Harris) then conducted more extensive due
diligence in late September and October 1994. The three bidders other than
Harris were each proposing a stock-for-stock exchange. In October 1994, the
stock prices of these bidders dropped to at or near their 52 week lows, causing
two of the bidders to drop out and the third to substantially reduce its price
to below where the initial bank holding company had originally been. First
Harrisburg then contacted the initial bank holding company, which re-affirmed
its interest but then reduced its proposed price when the market price of its
stock also declined. First Harrisburg then determined in late October 1994 to
commence negotiations with Harris regarding a cash acquisition of First
Harrisburg.
The draft definitive agreement submitted by Harris contained provisions
providing for a possible downward adjustment to the per share acquisition price,
which were deemed unacceptable by First Harrisburg. Harris then revised its
proposed agreement by reducing the per share acquisition price and providing for
both upward and downward adjustments to the acquisition price based upon
purchase accounting adjustments. These adjustments would have been based upon
the fair market value of First Harrisburg's assets and liabilities at the time
of closing, and the per share price would have declined if interest rates
increased. Because interest rates had been increasing since February 1994, the
Board of Directors of First Harrisburg determined that it was not in the best
interests of First Harrisburg's stockholders to assume this interest rate risk.
On November 23, 1994, First Harrisburg terminated discussions and publicly
announced that it had been unable to reach agreement with respect to price in
light of the declines in the stock prices of the prospective stock acquirors
and, in the case of Harris, the continued rise in interest rates.
In September 1995, Harris renewed its interest in acquiring First
Harrisburg. After several discussions between the parties, First Harrisburg
informed Harris in mid-October that Harris' proposed price was not satisfactory.
The parties then had a further meeting at which Harris increased its price to
the current Merger Consideration (as adjusted for the 10 percent stock dividend
paid on November 15, 1995), and First Harrisburg determined to proceed with
negotiations of a definitive agreement.
The management of First Harrisburg then reviewed and revised several drafts
of the definitive agreement with the assistance of its legal counsel and
investment banker. The Reorganization Agreement was reviewed by the Board of
Directors of First Harrisburg on November 10, 1995 with First Harrisburg's legal
counsel and investment banker, and the investment banker orally opined at the
meeting that the Merger Consideration was fair to First Harrisburg's
stockholders from a financial point of view. After all of the questions of First
Harrisburg's directors were answered, the Board of Directors voted to adjourn
the meeting until November 12, 1995 to give all of the directors an additional
opportunity and sufficient time to further consider the Reorganization
Agreement.
17
<PAGE>
On November 12, 1995, the Board of Directors of First Harrisburg and the
Board of Directors of Harris met separately to review the proposed definitive
Reorganization Agreement. After consideration of all factors deemed relevant and
in conjunction with advice from each of their financial and legal advisors, the
respective Boards of Directors determined that the proposed Merger was in each
of their best interests and the best interests of their respective stockholders
and unanimously approved the Merger. Harris and First Harrisburg executed the
Reorganization Agreement and related agreements on November 12, 1995.
Reasons for the Merger. The terms of the Reorganization Agreement,
including the First Harrisburg Merger Consideration to be paid to First
Harrisburg's stockholders, were the result of arm's-length negotiations between
the representatives of First Harrisburg and Harris. Among the factors considered
by the Boards of Directors of First Harrisburg or Harris, as appropriate, in
deciding to approve and recommend the terms of the Merger were (i) the First
Harrisburg Merger Consideration to be paid to First Harrisburg's stockholders in
relation to the market value, book value, earnings per share and dividend rates
of the First Harrisburg Common Stock, (ii) information concerning the financial
condition, results of operations, capital levels, asset quality and prospects of
First Harrisburg and Harris, (iii) industry and economic conditions, (iv) the
impact of the Merger on the depositors, employees, customers and communities
served by First Harrisburg and Harris through expanded consumer lending and
retail banking products and services, (v) the opinions of First Harrisburg's and
Harris' financial advisors as to the fairness of the First Harrisburg Merger
Consideration from a financial point of view to the holders of the First
Harrisburg Common Stock and the Harris Common Stock, as the case may be, (vi)
the general structure of the transaction and the compatibility of management and
business philosophy, (vii) the likelihood of receiving the requisite regulatory
approvals in a timely manner, (viii) the ability of the combined enterprise to
compete in relevant banking and non-banking markets, (ix) the ability to
strengthen Harris' presence in the greater Harrisburg, Pennsylvania metropolitan
area (after the Merger, Harris will have approximately 18 branches in the
greater Harrisburg metropolitan area), (x) the short-term and long-term impact
the Merger will have on Harris' consolidated results of operations, including
anticipated cost savings resulting from consolidations in certain areas and
expanded consumer lending and retail banking products and services, and (xi) the
improvement of the franchise value of Harris to its stockholders as a result of
the enhanced network and products and services. In making their determination,
the Boards of Directors of First Harrisburg and Harris did not ascribe relative
weights to the factors which they considered.
The Boards of Directors of First Harrisburg and Harris believe that the
Merger is in the best interest of their respective organizations and their
respective stockholders. THE FIRST HARRISBURG AND HARRIS DIRECTORS UNANIMOUSLY
RECOMMEND THAT THE FIRST HARRISBURG AND HARRIS STOCKHOLDERS, RESPECTIVELY, VOTE
FOR THE APPROVAL OF THE MERGER.
TERMS OF THE MERGER
On the Effective Date, the First Harrisburg Merger will be effected
pursuant to which HAC, a wholly-owned subsidiary of Harris formed solely for the
purpose of effecting the transactions contemplated by the Reorganization
Agreement, will be merged with and into First Harrisburg and the separate
existence of HAC will cease. Each outstanding share of First Harrisburg Common
Stock outstanding immediately prior to the consummation of the First Harrisburg
Merger (other than shares in First Harrisburg's treasury, shares as to which
dissenters' rights have been asserted and duly perfected in accordance with
Pennsylvania law, and shares held by Harris or its parent or subsidiaries in
other than a fiduciary capacity) shall be converted into and represent the right
to receive $14.77 in cash representing the First Harrisburg Merger
Consideration. The aggregate amount of the First Harrisburg Merger Consideration
to be paid by Harris in connection with the First Harrisburg Merger is expected
to be approximately $40.9 million if all outstanding stock options of First
Harrisburg are exercised. Also, on the Effective Date, the First Harrisburg
Liquidation will occur pursuant to which the separate corporate existence of
First Harrisburg will cease and First Federal will become a wholly-
18
<PAGE>
owned subsidiary of Harris. Immediately thereafter, the Harris Merger will be
effected pursuant to which First Federal will be merged with and into Harris and
each share of Harris Common Stock (except for those shares as to which
stockholders have exercised their statutory right to dissent) issued and
outstanding immediately before the Harris Merger will remain outstanding
thereafter. The end result of consummating these transactions is that on the
Effective Date, the separate existence of each of First Harrisburg, First
Federal and HAC will cease and Harris will succeed to the rights, benefits and
obligations of each in accordance with the provisions of the Reorganization
Agreement.
First Harrisburg has in effect a variety of stock option plans, programs
and arrangements pursuant to which directors, officers and key employees of
First Harrisburg have been granted options to purchase First Harrisburg Common
Stock. The Reorganization Agreement provides that on or before the Effective
Date, each holder of an option to purchase shares of First Harrisburg Common
Stock then outstanding shall receive cash (whether or not such option is then
exercisable) in settlement thereof from First Harrisburg in an amount equal to
the excess, if any, of the $14.77 First Harrisburg Merger Consideration over the
per share exercise price under such stock option, multiplied by the number of
shares of First Harrisburg Common Stock covered by such option; provided,
however, that the aggregate amount paid in settlement of such options does not
exceed $1,408,681. All such options will automatically be deemed cancelled and
of no further effect as of the Effective Date.
SURRENDER OF CERTIFICATES
As soon as practicable after the Effective Date, the stock transfer agent
of Harris, Chemical Mellon, acting in the capacity of exchange agent, will mail
to all holders of First Harrisburg Common Stock a letter of transmittal,
together with instructions for the exchange of their First Harrisburg Common
Stock certificates for cash. Until so exchanged, each certificate representing
First Harrisburg Common Stock outstanding immediately prior to the Effective
Date shall be deemed for all purposes to evidence ownership of the First
Harrisburg Merger Consideration consisting of cash in the amount of $14.77 into
which each such share is to be converted. FIRST HARRISBURG STOCKHOLDERS SHOULD
NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE FURTHER INSTRUCTIONS.
OPINIONS OF FINANCIAL ADVISORS
First Harrisburg. The Board of Directors of First Harrisburg originally
retained National Capital in August 1994 to render an opinion regarding the
fairness to the stockholders of First Harrisburg of the proposed exchange ratio
in the stock-for-stock acquisition of First Harrisburg that was being negotiated
at the time. When the Board of Directors of First Harrisburg decided in
September 1994 to solicit and review additional proposals, First Harrisburg
retained National Capital to advise and assist it in connection with the
proposed sale and/or merger of First Harrisburg. National Capital was chosen as
First Harrisburg's financial advisor on the basis of its experience and
expertise in the valuation of securities in connection with mergers and
acquisitions. National Capital is a financial consulting and investment banking
firm that is engaged, among other things, in the evaluation of thrift and
banking institutions and their securities, the negotiation and structuring of
merger and acquisition transactions, and other financial advisory matters for
financial institutions. Except as described herein, National Capital is not
affiliated with First Harrisburg, Harris or their respective affiliates.
National Capital advised First Harrisburg on November 10, 1995, and
rendered its written opinion on November 12, 1995, that in its opinion, as of
November 12, 1995, the Merger Consideration to be received by the stockholders
of First Harrisburg was fair from a financial point of view. National Capital
has re-affirmed and updated its written opinion in its written opinion dated
January 19, 1996, which is attached hereto as Appendix C. No limitations were
imposed by the First Harrisburg Board of Directors upon National Capital with
respect to the investigations made or procedures followed by it in arriving at
its opinion. However, National Capital was not retained by First Harrisburg to
solicit indications of interest from other companies that may have had an
interest in acquiring First Harrisburg. If additional indications of interest
had been solicited, matters may have come to National Capital's attention to
cause National Capital to reach a different opinion.
19
<PAGE>
THE FULL TEXT OF THE WRITTEN OPINION OF NATIONAL CAPITAL DATED JANUARY 19,
1996, WHICH SETS FORTH ASSUMPTIONS MADE AND MATTERS CONSIDERED, IS ATTACHED AS
APPENDIX C TO THIS JOINT PROXY STATEMENT. FIRST HARRISBURG'S STOCKHOLDERS ARE
URGED TO READ THIS OPINION IN ITS ENTIRETY. NATIONAL CAPITAL'S OPINION IS
DIRECTED ONLY TO THE FINANCIAL TERMS OF THE MERGER AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY FIRST HARRISBURG STOCKHOLDER AS TO HOW SUCH STOCKHOLDER
SHOULD VOTE AT THE FIRST HARRISBURG SPECIAL MEETING. THE SUMMARY OF THE OPINION
OF NATIONAL CAPITAL SET FORTH IN THIS JOINT PROXY STATEMENT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION. NATIONAL CAPITAL'S
WRITTEN OPINION AS OF NOVEMBER 12, 1995 IS TO THE SAME EFFECT AS THE OPINION
ATTACHED HERETO.
For purposes of its opinion, National Capital reviewed the Merger Agreement
and analyzed various financial information relating to First Harrisburg and
Harris, including First Harrisburg's and Harris' most recently audited financial
statements and regulatory reports filed with regulatory agencies, including the
SEC and the FDIC. In addition, National Capital had discussions with the
management of First Harrisburg concerning its business, operations, assets,
financial condition and prospects; performed a discounted cash flow analysis of
the First Harrisburg Common Stock for certain cash flows attributable to such
shares over future periods utilizing varying assumptions; reviewed the
historical market prices and trading activity of the First Harrisburg Common
Stock; compared the results of operations of First Harrisburg with those of
certain other companies deemed by National Capital to be reasonably similar;
reviewed the markets for the common stock of thrift and banking institutions,
placing particular emphasis on those institutions located in Pennsylvania;
compared the Merger Consideration with the terms of certain other transactions
deemed by National Capital to be reasonably similar; and considered such other
matters and made such other financial analyses and investigations as National
Capital deemed appropriate. On the basis of the foregoing, National Capital
determined that the Merger Consideration to be received by the stockholders of
First Harrisburg in the Merger is fair from a financial point of view.
The following paragraphs summarize the material portions of the financial
and comparative analyses performed by National Capital in arriving at its
opinion as to the fairness, from a financial point of view, of the Merger
Consideration. The following summary does not purport to be a complete
description of the analyses performed, or the matters considered, by National
Capital in arriving at its opinion.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant methods of financial analyses and the
application of those methods to the particular circumstances, and, therefore,
such an opinion is not readily susceptible to summary description. Furthermore,
in arriving at its opinion, National Capital did not attribute any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, National Capital believes that its analyses must be considered as a
whole and that considering only portions of its analyses may be misleading or an
incomplete view of the analyses and the process underlying its opinion. In its
analyses, National Capital made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond First Harrisburg's and Harris' control. Any estimates contained
in these analyses are not necessarily indicative of actual values or predictive
of future results or values, which may be significantly more or less favorable
than such estimates. Analyses relating to the value of businesses do not purport
to be appraisals or to reflect the prices at which businesses or their
securities actually may be sold. In addition, as described above, National
Capital's opinion, along with its presentation to First Harrisburg's Board of
Directors, is just one of many factors taken into consideration by First
Harrisburg's Board of Directors.
As more fully described below, National Capital also considered certain
financial and stock market data relating to First Harrisburg and Harris and
compared it to similar data relating to other publicly held savings associations
and savings and loan holding companies and considered financial terms of
comparable transactions which have been either recently announced or effected.
20
<PAGE>
In connection with its review, National Capital relied upon and assumed,
without independent verification, the accuracy and completeness of the financial
and other information regarding First Harrisburg and Harris provided to National
Capital by the companies and their representatives. National Capital also relied
on the management of First Harrisburg as to the reasonableness and achievability
of the financial and operating forecasts (and the assumptions and bases
therefor) provided to National Capital, and National Capital assumed that such
forecasts reflect the best currently available estimates and judgments of the
management of First Harrisburg. National Capital was not retained to nor did it
review individual credit files or conduct a physical inspection of any of the
properties or facilities of First Harrisburg or Harris, nor was it retained to
nor did National Capital make any independent evaluation or appraisal of First
Harrisburg's or Harris' assets or liabilities. National Capital also assumed
that the Merger in all respects is, and will be, undertaken and consummated in
compliance with all laws and regulations that are applicable to First Harrisburg
and Harris.
The following is a brief summary of the analyses and procedures performed
by National Capital in the course of arriving at its opinion:
Valuation Analysis. Using a valuation analysis, National Capital estimated
the present value of theoretical values of First Harrisburg Common Stock based
upon certain estimates about the future performance of First Harrisburg over a
five-year period. The range of values were based on a projected asset growth for
First Harrisburg of 10 percent annually and estimates of annual profitability
for First Harrisburg as measured by a projected return on average assets ranging
from between .73 percent and .80 percent. (An adjustment was also made to
include an estimated payment to the FDIC as a special assessment to recapitalize
the SAIF.) These assumptions were based upon First Harrisburg's estimates of
prospective future performances as well as the past financial performance of
First Harrisburg. Based upon these assumptions and the estimate of an annual
dividend payout ratio of 20 percent, the calculated fully diluted book value per
share of the First Harrisburg Common Stock at the end of the five-year period
was estimated to be $13.70. Dividends paid over the five-year period were
estimated at $1.11. National Capital's analysis considered the present value of
the estimated future dividend stream over the five-year period and the present
value of the theoretical value for First Harrisburg's shares based upon a range
of terminal book value multiples between 150 percent and 200 percent and a range
of discount rates between 10 percent and 12.5 percent. The dividend payout ratio
assumed is within the target ranges established by First Harrisburg, and the
range of terminal multiples of book value are based on current price to book
value multiples of selected comparable companies. Such comparable companies are
referred to in ' -- Comparable Company Analysis' and in ' -- Comparable
Transaction Analysis' below. The dividend stream and terminal values were
discounted to present value using discount rates which reflect assumptions
regarding the required rates of return of the current and prospective
stockholders of First Harrisburg Common Stock under current economic conditions.
The range of present values per fully diluted shares of First Harrisburg Common
Stock resulting from the above referenced analysis was $12.17 to $17.84.
Comparable Company Analysis. National Capital compared the operating
performance of First Harrisburg to publicly traded savings institutions that
National Capital deemed to be comparable to First Harrisburg. The group
consisted of 18 Pennsylvania publicly traded savings institutions with total
assets between $50.9 million and $7.9 billion with a median asset size of $314.6
million. The companies reported an equity to assets ratio between 4.0 percent
and 30.8 percent with a median of 8.79 percent. National Capital compared First
Harrisburg with members of the comparable savings institutions based upon
selected operating fundamentals, including capital adequacy, profitability and
asset quality. Using pricing data as of November 3, 1995, the median price to
the last twelve months earnings multiple was 13.05 times for the comparable
savings institutions and 12.37 times for First Harrisburg. The median price to
stated book value was 111.8 percent for the comparable group savings
institutions and 127.5 percent for First Harrisburg. The implied market trading
values derived from such comparable company analysis resulted in a calculation
ranging from approximately $10.57 to $11.87 per fully diluted share for First
Harrisburg Common Stock.
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At September 30, 1995, the median equity to assets ratio of 8.79 percent
for the group of comparable savings institutions was slightly higher than the
7.69 percent for First Harrisburg. The median return on average equity for the
twelve months ending September 30, 1995 was 9.39 percent for the group of
comparable savings institutions and 11.03 percent for First Harrisburg. Based on
the Harris offer of $14.77 in cash for each share of First Harrisburg Common
Stock, the Harris offer represented 156.3 percent of First Harrisburg's fully
diluted book value and 16.23 times First Harrisburg's latest twelve months
earnings through September 30, 1995.
Comparable Transaction Analysis. National Capital performed an analysis of
prices and premiums offered in connection with 1995 announced acquisitions of
savings institutions located in the Mid Atlantic region (including Delaware,
Maryland, New Jersey, New York, Pennsylvania and the District of Columbia). The
analysis further evaluated pricing for cash transactions as compared to
transactions involving the exchange of common stock. Multiples of earnings and
fully diluted book value implied by the consideration to be received by First
Harrisburg's stockholders in the Merger were compared with multiples offered in
such transactions, which included nine cash transactions and three transactions
involving an exchange of stock. The median offer price to book value for the
cash transactions was 140.68 percent, while the median offer price to book value
for the stock exchange transactions was 147.74 percent. The equivalent offer
price to fully diluted book value for First Harrisburg was 156.3 percent based
on the Harris offer price of $14.77 in cash for each outstanding share of First
Harrisburg Common Stock as of September 30, 1995 (as adjusted for the 10 percent
stock dividend paid on November 15, 1995 and the impact of outstanding
unexercised stock options). The median multiple of offer price to latest 12
months earnings for the cash transactions was 15.49 times, while the median
multiple of offer price to latest twelve months earnings for the stock exchange
transactions was 17.44 times, as compared to 16.23 times for First Harrisburg on
a fully diluted basis and 15.07 times on an as reported basis. The median offer
price to deposits multiple for the cash transactions was 19.28 times, while the
median offer price to deposits multiple for the stock exchange transactions was
24.98 times. The equivalent offer price to First Harrisburg's deposits as of
September 30, 1995 was 24.36 times. National Capital reviewed the core capital
to total assets ratio of the comparable group, which had a median ratio of 8.79
percent for the cash transactions and 7.74 percent for the stock exchange
transactions versus First Harrisburg's ratio of 7.69 percent as of September 30,
1995. In addition, National Capital reviewed the profitability of the comparable
group, which had a median return on average assets for the prior 12 month period
preceding the sale announcement of .64 percent for the cash transactions and
1.33 percent for the stock exchange transactions, versus First Harrisburg's
ratio of .93 percent as of September 30, 1995.
National Capital also performed an analysis of prices and premiums offered
in connection with 1995 announced acquisitions of savings institutions with
total assets ranging from $100 million to $500 million. These transactions were
made up of companies throughout the United States. The analysis further
evaluated pricing for cash transactions as compared to transactions involving
the exchange of common stock. Multiples of earnings and fully diluted book value
implied by the consideration to be received by First Harrisburg's stockholders
in the Merger were compared with multiples offered in such transactions, which
included seven cash transactions and 16 transactions involving an exchange of
stock. The median offer price to book value for the cash transactions was 140.49
percent, while the median offer price to book value for the stock exchange
transactions was 143.13 percent. The equivalent offer price to fully diluted
book value for First Harrisburg was 156.3 percent based on the Harris offer
price of $14.77 in cash for each outstanding share of First Harrisburg Common
Stock as of September 30, 1995 (as adjusted for the 10 percent stock dividend
paid on November 15, 1995 and the impact of outstanding unexercised stock
options). The median multiple of offer price to latest twelve months earnings
for the cash transactions was 17.34 times, while the median multiple of offer
price to latest twelve month earnings for the stock exchange transactions was
16.84 times, as compared to 16.23 times for First Harrisburg on a fully diluted
basis and 15.07 times on an as reported basis. The median offer price to
deposits multiple for the cash transactions was 16.89 times, while the median
offer price to deposits multiple for the stock exchange transactions was 19.63
times. The equivalent offer price to First Harrisburg's deposits as of September
30, 1995 was 24.36 times. National Capital reviewed the core capital to total
assets ratio of the comparable group, which had a median ratio of
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9.62 percent for the cash transactions and 9.65 percent for the stock exchange
transactions versus First Harrisburg's ratio of 7.69 percent as of September 30,
1995. In addition, National Capital reviewed the profitability of the comparable
group, which had a median return on average assets for the prior twelve month
period preceding the sale announcement of .53 percent for the cash transactions
and .98 percent for the stock exchange transactions, versus First Harrisburg's
ratio of .93 percent as of September 30, 1995.
It is important to note that when National Capital took into account the
values shown in the comparables used in connection with the rendering of its
opinion, no company or transaction used in these analyses were identical to
First Harrisburg or the Merger. Accordingly, an analysis of the results of the
foregoing is not mathematical; rather, it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies, the timing of the transactions and prospective buyer interest,
the earnings trends and prospects for the future, as well as other factors that
could affect the public trading values of the companies included in the
comparisons.
Upon retaining National Capital as its financial advisor in September 1994,
First Harrisburg paid National Capital a non-refundable retainer fee of $20,000.
During the course of the initial engagement of National Capital as its financial
advisor, which expired on September 30, 1995, First Harrisburg also reimbursed
National Capital for its reasonable, documented out-of-pocket expenses. National
Capital's engagement was formally renewed in early November 1995, at which time
First Harrisburg paid a financial advisory fee of $20,000. In addition, First
Harrisburg agreed to pay National Capital a success fee upon consummation of the
Merger equal to 0.75 percent of the aggregate Merger Consideration. Based upon
the 2,571,012 shares of First Harrisburg Common Stock outstanding at the date of
the Merger Agreement (as adjusted for the 10 percent stock dividend paid on
November 15, 1995) and the cash to be paid upon settlement of outstanding stock
options, the success fee will be approximately $295,000. First Harrisburg has
also agreed to reimburse National Capital for its reasonable, documented
out-of-pocket expenses, which reimbursement shall not exceed $10,000 without
First Harrisburg's prior written approval. National Capital's compensation,
including the success fee which is contingent upon completion of the Merger, was
determined by arm's-length negotiations between First Harrisburg and Harris.
First Harrisburg has further agreed to indemnify and hold harmless National
Capital from and against certain liabilities which may arise in connection with
the engagement of National Capital, including liabilities under state or federal
thrift, banking and securities laws.
Harris. On October 30, 1995, Harris retained Ryan Beck to act as its
advisor in connection with the proposed acquisition of First Harrisburg. Ryan
Beck is regularly engaged in the valuation of banks, bank holding companies,
savings and loan associations and savings and loan holding companies in
connection with acquisitions and other securities-related transactions. Ryan
Beck has knowledge of, and experience with, the Pennsylvania banking market and
banking organizations operating in that market, and was selected by Harris
because of its knowledge of, experience with, and reputation in the financial
services industry.
In its capacity as Harris' financial advisor, Ryan Beck provided advice to
Harris with respect to certain terms and conditions of the acquisition. The
decisions as to whether to pursue the First Harrisburg acquisition and the final
pricing of the acquisition were ultimately made by the Harris Board; however,
Ryan Beck rendered its formal written opinion on November 12, 1995 that, as of
November 12, 1995, the financial terms of the acquisition of First Harrisburg
were 'fair' to Harris and its stockholders from a financial point of view. Ryan
Beck re-affirmed and updated its written opinion in its written opinion dated
January 19, 1996 (the 'Opinion'), which is attached hereto as Appendix B. No
limitations were imposed by the Harris Board upon Ryan Beck with respect to the
investigations made or procedures followed by it in arriving at the Opinion.
THE FULL TEXT OF THE OPINION OF RYAN BECK DATED JANUARY 19, 1996, WHICH
SETS FORTH ASSUMPTIONS MADE AND MATTERS CONSIDERED, IS ATTACHED AS APPENDIX B TO
THIS JOINT PROXY STATEMENT. HARRIS' STOCKHOLDERS ARE URGED TO READ THE OPINION
IN ITS ENTIRETY. RYAN BECK'S OPINION IS DIRECTED ONLY TO THE CONSIDERATION TO BE
PAID BY HARRIS IN THE ACQUISITION AND DOES NOT
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CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD
VOTE AT THE HARRIS SPECIAL MEETING. THE SUMMARY OF THE OPINION SET FORTH IN THIS
JOINT PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF SUCH OPINION. RYAN BECK'S WRITTEN OPINION AS OF NOVEMBER 12, 1995 IS TO THE
SAME EFFECT AS THE OPINION ATTACHED HERETO AS APPENDIX B.
In connection with its analysis, Ryan Beck reviewed: (i) the Reorganization
Agreement and related documents; (ii) First Harrisburg's Annual Reports to
Stockholders and Annual Reports on Form 10-K for the years ended December 31,
1992 through 1994, and First Harrisburg's Quarterly Reports on Form 10-Q for the
periods ended March 31, 1995 and June 30, 1995 and First Harrisburg's
Consolidated Report of Condition and Income for September 30, 1995; (iii)
Harris' Annual Reports to stockholders for the years ended December 31, 1992
through 1994 and Harris' Quarterly Reports on Form F-4 for the periods ended
March 31, 1995 and June 30, 1995 and Harris' Consolidated Report of Condition
and Income for September 30, 1995; (iv) certain operating and financial
information provided to Ryan Beck by the management of First Harrisburg relating
to its business and prospects; (v) certain operating and financial information
provided to Ryan Beck by the management of Harris relating to its business and
prospects; (vi) the historical stock prices and trading volume of the First
Harrisburg Common Stock; (vii) as more particularly described below, the terms
of recent acquisitions of thrift institutions which Ryan Beck deemed generally
comparable to First Harrisburg; (viii) as more particularly described below, the
publicly-available financial data of thrift institutions which Ryan Beck deemed
generally comparable to First Harrisburg; and (ix) such other studies, analyses,
inquiries and examinations as Ryan Beck deemed appropriate. Ryan Beck also
reviewed certain projections provided by Harris for the fiscal year ending
December 31, 1996 and met with certain members of First Harrisburg's senior
management to discuss First Harrisburg's past and current business operations,
financial condition, strategic plans and future prospects.
The preparation of a fairness opinion on a transaction such as the
acquisition involves various determinations as to the most appropriate and
relevant methods of financial analysis and application of those methods to the
particular circumstances and, therefore, such opinions are not readily
susceptible to summary description. In arriving at the Opinion, Ryan Beck
performed a variety of financial analyses. Ryan Beck believes that its analyses
must be considered as a whole and the consideration of portions of such analyses
and the factors considered therein, without considering all factors and
analyses, could create an incomplete view of the analyses and the process
underlying Ryan Beck's Opinion. No single analysis was assigned a greater
significance than any other.
In connection with its review, Ryan Beck relied upon and assumed, without
independent verification, the accuracy and completeness of the financial and
other information regarding Harris and First Harrisburg provided to Ryan Beck by
the companies and their representatives. Ryan Beck did not independently verify
but assumed that the allowance for loan losses set forth in the balance sheets
of First Harrisburg at September 30, 1995 was adequate and complied fully with
all applicable law, regulatory policy and sound banking practice as of the date
of such financial statements. Ryan Beck was not retained to, nor did it, conduct
a physical inspection of any of the properties or facilities of First Harrisburg
or make any independent evaluation or appraisal of First Harrisburg's assets or
liabilities. Ryan Beck reviewed certain historical financial data provided by
First Harrisburg and reviewed certain historical financial data and financial
and operating forecasts and projections (and the assumptions and bases therefor)
provided by Harris. In certain instances, for the purposes of its analyses, Ryan
Beck made adjustments to such financial and operating forecasts which, in Ryan
Beck's judgment, were appropriate under the circumstances. The projections
furnished to Ryan Beck were prepared by the management of Harris. Harris does
not publicly disclose internal management projections of the type provided to
Ryan Beck in connection with its review of the acquisition. Such projections
were not prepared with a view towards public disclosure. The projections were
based on numerous variables and assumptions which are inherently uncertain,
including without limitation factors related to future economic and competitive
conditions, the future financial condition and results of Harris and First
Harrisburg and the future cost savings and revenue enhancements associated with
the acquisition. Accordingly, actual results could vary significantly from those
reflected in such projections. Ryan Beck also assumed that the acquisition in
all respects is, and will be, undertaken and
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consummated in compliance with all laws and regulations that are applicable to
Harris and First Harrisburg.
In its analyses, Ryan Beck made numerous assumptions with respect to
industry performance, business and economic conditions and other matters, many
of which are beyond the control of Harris or First Harrisburg. Any estimates
contained in Ryan Beck's analyses are not necessarily indicative of future
results or values, which may be significantly more or less favorable than such
estimates. Such estimates of values of companies do not purport to be appraisals
or necessarily reflect the prices at which the underlying companies or their
securities may actually be sold.
The following is a brief summary of the analyses and procedures performed
by Ryan Beck in the course of arriving at the Opinion, which analyses and
procedures were presented to Harris' Board of Directors.
Comparable Companies and Comparable Acquisition Analyses. Ryan Beck
compared First Harrisburg's financial data as of June 30, 1995 with that of a
group of 30 selected thrift institutions with total assets between $200 million
and $600 million located in the Mid Atlantic region for which public trading and
pricing data was available. Ryan Beck deemed this group to be generally
comparable to First Harrisburg. At or for the 12 months ended June 30, 1995,
First Harrisburg had tangible equity to assets of 7.69 percent, a total capital
to risk adjusted assets ratio of 12.96 percent, a 0.93 percent return on average
assets, a return on average equity of 11.03 percent, a net interest margin of
3.63 percent, an efficiency ratio of 73.30 percent, a ratio of non-performing
loans to total loans of 0.75 percent, a ratio of loan loss reserves to
non-performing loans of 60.84 percent, and a ratio of non-performing assets to
loans plus real estate owned of 0.85 percent. These ratios were compared to the
median ratios of the 30 selected thrift institutions, which were, as calculated,
tangible equity to assets of 8.40 percent, a total capital to risk adjusted
assets ratio of 16.28 percent, a return on average assets of 0.92 percent, a
return on average equity of 10.18 percent, a net interest margin of 3.57
percent, an efficiency ratio of 61.28 percent, a ratio of non-performing loans
to total loans of 1.53 percent, a ratio of loan loss reserves to non-performing
loans of 82.00 percent, and a ratio of non-performing assets to loans plus real
estate owned of 2.01 percent.
Ryan Beck also compared the First Harrisburg Common Stock bid and asked
quotations of approximately $12.00 per share prior to the announcement of the
executed Reorganization Agreement noting that $12.00 per share represents 127.52
percent of the tangible book value and 12.4 times the latest 12 month earnings,
as compared to the median trading multiples of 111.62 percent of tangible book
value and 11.99 times the latest 12 months earnings for the peer group.
Ryan Beck compared First Harrisburg's financial data as of June 30, 1995
with that of a group of 16 selected thrift institutions being acquired in
transactions announced since January 1, 1995 and for which pricing data
pertaining to the transactions was publicly available. This group was comprised
of thrift institutions each having total assets between $175 million and $425
million. Ryan Beck deemed this group to be generally comparable to First
Harrisburg. The median ratios of the 16 selected thrift institutions, as
calculated, represented a 8.56 percent tangible equity to assets ratio, a
non-performing assets to assets ratio of 0.34 percent and an annualized
year-to-date return on average assets of 0.84 percent and were compared to First
Harrisburg's 7.69 percent tangible equity to assets ratio, a non-performing
assets to assets ratio of 0.55 percent and a 0.93 percent return on average
assets.
Ryan Beck also calculated certain ratios based on the proposed transaction
price for the First Harrisburg Common Stock of $14.77 per share. These ratios
yielded the following results: (i) 154.01 percent of First Harrisburg's
September 30, 1995 stated book value per share; (ii) 154.01 percent of First
Harrisburg's September 30, 1995 tangible book value per share; (iii) 15.55 times
First Harrisburg's actual earnings per share for the 12 month period ended
September 30, 1995; and (iv) tangible book premium as a percentage of core
deposits of 7.93 percent. The median ratios for the group of 16 comparable
acquisition transactions and their respective transaction prices were 148.94
percent of book value, 148.94 percent of tangible book value, 15.73 times
earnings and tangible book premium expressed as a percentage of core deposits of
5.95 percent.
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No company or transaction analyzed, as described above is identical to
First Harrisburg or the transaction involving its acquisition by Harris.
Accordingly, an analysis of the results of the foregoing is not mathematical;
rather it involves complex considerations and judgments concerning differences
in financial and operating characteristics of the companies involved and other
factors that could affect the trading values of the securities of the company or
companies to which they are being compared.
Merger Accretion/Dilution Analysis. Ryan Beck calculated Harris'
post-merger, pro forma tangible book value, earnings per share, return on
average assets and return on average equity based on the $14.77 First Harrisburg
Merger Consideration assuming (i) projected 1996 net income for Harris as
provided by Harris's management; (ii) net income for the nine months ended
September 30, 1995 annualized for First Harrisburg; and (iii) cost savings and
revenue enhancements anticipated as a result of the acquisition as provided by
Harris' management. Such projections were not prepared with a view towards
public disclosure. The public disclosure of such projections could be misleading
since the projections were based on numerous variables and assumptions which are
inherently uncertain, including, without limitation, factors related to general
economic and competitive conditions. Accordingly, actual results could vary
significantly from those set forth in such projections. Ryan Beck then compared
Harris' post-merger, pro forma tangible book value, earnings per share, return
on average assets and return on average equity with Harris' tangible book value,
pre-merger 1996 projected earnings per share, pre-merger 1996 projected return
on average assets and pre-merger 1996 projected return on average equity.
Assuming cost savings and revenue enhancements anticipated as a result of the
acquisition as provided by Harris' management, this pro forma acquisition would
be approximately 10.71 percent dilutive to tangible book value and 35.44 percent
accretive to earnings per share and would result in an increase in the return on
average assets of approximately 8 basis points and an increase in the return on
average equity of approximately 207 basis points.
Return on Investment Analysis. Ryan Beck calculated a pro forma return on
investment based on the projected cash flow contribution of First Harrisburg as
compared to the acquisition cost of First Harrisburg, including one-time
acquisition-related expenses. The cash flow contributions were based on: (i)
First Harrisburg's net income for the nine months ended September 30, 1995
annualized and grown at an annual growth rate of 7 percent, (ii) cost savings
and revenue enhancements anticipated as a result of the acquisition as provided
by Harris' management unadjusted for inflation; (iii) a seven-year investment
period; and (iv) a residual valuation of First Harrisburg equal to eight times
pro forma net income in year seven. Based on these assumptions, the pro forma
return on investment was approximately 14.92 percent.
In connection with its written Opinion dated as of January 19, 1996, Ryan
Beck confirmed the appropriateness of its reliance on the analyses used to
render its November 12, 1995 written opinion by performing procedures to update
certain of such analyses and by reviewing the assumptions upon which such
analyses were based and the factors considered in connection therewith.
RYAN BECK'S WRITTEN OPINION DATED AS OF JANUARY 19, 1996 WAS BASED SOLELY
UPON THE INFORMATION AVAILABLE TO IT AND THE ECONOMIC, MARKET AND OTHER
CIRCUMSTANCES THAT EXISTED AS OF THE DATE OF SUCH OPINION. EVENTS OCCURRING
AFTER SUCH DATE COULD MATERIALLY AFFECT THE ASSUMPTIONS AND CONCLUSIONS
CONTAINED IN THE OPINION. RYAN BECK HAS NOT UNDERTAKEN TO REAFFIRM OR REVISE ITS
OPINION OR OTHERWISE COMMENT UPON ANY EVENTS OCCURRING AFTER THE DATE THEREOF.
The summary set forth above does not purport to be a complete description,
but is a brief summary of the material analyses and procedures performed by Ryan
Beck in the course of arriving at its Opinion.
With regard to Ryan Beck's services in connection with the financial
advisory agreement and the Reorganization Agreement, Harris has agreed to pay
Ryan Beck a $100,000 advisory and fairness opinion fee. To date, Harris has paid
Ryan Beck $35,000 of this fee, plus reimbursement of out-of-pocket expenses. The
balance will be payable at the closing of the transaction. In addition, Harris
has agreed to reimburse Ryan Beck for its reasonable out-of-pocket costs and
expenses incurred in connection with the services rendered to Harris pursuant to
its engagement, including the fees of its
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legal counsel. Harris has also agreed to identify Ryan Beck against certain
liabilities, including liabilities under federal securities laws, incurred in
connection with its services. The amounts of all of Ryan Beck's fees were
determined by negotiation between Harris and Ryan Beck.
Ryan Beck provided financial advisory services to Harris during 1994 with
respect to Harris' negotiations with First Harrisburg and received a fee of
$35,000 for such services. Additionally, in 1994 Ryan Beck provided financial
advisory services to Harris regarding the formation of Harris Financial, MHC and
provided advisory, administrative, and securities marketing services in
connection with the offering by Harris of the Harris Common Stock issued in
connection with the conversion of Harris from a mutual to a capital stock
organization and received fees and commissions in connection therewith. Ryan
Beck also provided various other financial advisory services to Harris and
received a fee of approximately $16,300 therefor during 1994 and 1995.
Ryan Beck's trading department has engaged in making a market in the First
Harrisburg Common Stock. Ryan Beck has not had an investment banking
relationship with First Harrisburg during the last three years. Ryan Beck's
research department has periodically produced earnings estimates and research
reports on First Harrisburg.
REPRESENTATIONS AND WARRANTIES; CONDITIONS TO THE MERGER
The Reorganization Agreement contains representations and warranties by
Harris, HAC, First Harrisburg and First Federal regarding a variety of matters.
In the case of Harris and HAC, representations and warranties have been made
concerning their organization, authority to conduct business, the power and
authority to enter into the Reorganization Agreement and to consummate the
transactions thereunder, the sufficiency of resources available to Harris to
consummate the transactions under the Reorganization Agreement, the accuracy of
information prepared and provided by them in connection with the Reorganization
Agreement and the approval of the Reorganization Agreement by Harris Financial,
MHC, among other things. In the case of First Harrisburg and First Federal,
representations and warranties have been provided concerning their organization,
capitalization, authority to conduct business, the power and authority to enter
the Reorganization Agreement and to consummate the transactions thereunder, the
paid-up status and coverage of federal deposit insurance, completeness and
sufficiency of regulatory filings, material accuracy of financial statements,
compliance with applicable laws, the absence of certain legal proceedings and
other events including material adverse changes in their business or financial
condition, the adequacy of insurance coverage generally, validity of loans,
taxes, employee benefit plans, certain contracts, undisclosed liabilities,
environmental matters, properties, the propriety of the operations of the
mortgage banking business of AVSTAR Mortgage Corporation and the accuracy of
information prepared and provided in connection with the Reorganization
Agreement, among other things.
The obligations of Harris and First Harrisburg to consummate the Merger are
subject to the fulfillment, at or prior to the Effective Date, of a variety of
conditions, the material conditions of which are as follows: (i) approval of the
Harris Proposal and the First Harrisburg Proposal by the requisite votes of
stockholders of Harris and First Harrisburg, respectively; (ii) receipt of all
requisite regulatory approvals for the Merger, the expiration of all waiting
periods and the satisfaction of all pre-consummation conditions in any such
approval, without any nonstandard term or condition which would materially
impair the value of First Harrisburg to Harris or otherwise impact Harris in a
materially adverse way; (iii) the receipt of an opinion concerning the income
tax consequences of the Merger, as discussed under '-- Certain Income Tax
Consequences' below; (iv) the absence of more than 20 percent of the outstanding
shares of First Harrisburg Common Stock having exercised their statutory
dissenters' rights; (v) the absence of any action, suit, proceeding, order,
decree or injunction seeking to enjoin or prohibit the consummation of the
transactions contemplated by the Reorganization Agreement; (vi) the continuing
accuracy and applicability of the representations and warranties of the other
party to the Reorganization Agreement; (vii) compliance with all covenants not
otherwise waived; (viii) execution of 'Support Agreements' by the directors of
First Harrisburg; (ix) delivery of consents and other authorizations required
for closing the transactions contemplated by the
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Reorganization Agreement; and (x) the receipt of certain certificates, legal
opinions, auditors' letters and fairness opinions.
Except with respect to any required stockholder or regulatory approvals and
in the absence of any order, decree or injunction enjoining or prohibiting the
consummation of the Merger, all of the conditions of consummating the Merger may
be waived at any time by the party for whose benefit they were created, and the
Reorganization Agreement may be amended or supplemented at any time by written
agreement of the parties, except that no such waiver, amendment or supplement
executed after approval by Harris' or First Harrisburg's stockholders shall
alter the First Harrisburg Merger Consideration.
REGULATORY AND OTHER APPROVALS
A variety of regulatory applications have been filed and are pending in
connection with the consummation of the transactions contemplated under the
Reorganization Agreement. Receipt of all requisite regulatory approvals is a
condition precedent to consummating the transactions contemplated by the
Reorganization Agreement. There can be no assurance, however, that any or all of
such regulatory approvals will be forthcoming or, if received, the timing of
such receipt.
Harris Financial, MHC, the parent holding company of Harris, has filed an
application with the Board of Governors of the Federal Reserve System (the
'Federal Reserve') under the provisions of the Bank Holding Company Act of 1956,
as amended (the 'BHCA'). The Federal Reserve will take into consideration the
financial and managerial resources and future prospects of Harris Financial, MHC
and its subsidiaries as well as the convenience and needs of the communities to
be served in reaching a decision as to whether or not to approve the
application.
Harris Financial, MHC and Harris have filed an application with the Office
of Thrift Supervision (the 'OTS') under the provisions of the Savings and Loan
Holding Company Act. The prior approval of the OTS is required because of the
fact that a savings association is being acquired. First Federal, the wholly
owned subsidiary of First Harrisburg, has also filed with the OTS the requisite
notice of its intention to merge with and into Harris.
Harris has filed an application with the Pennsylvania Department of Banking
in accordance with the applicable provisions of Pennsylvania banking law. Harris
has also filed an application with the FDIC under the Bank Merger Act which
requires approval by the primary federal regulator of Harris as the survivor of
the Harris Merger. The Harris Merger cannot be consummated until the 15th day
after approval by the FDIC.
Consummation of the Merger will be subject to obtaining a variety of
additional clearances and approvals, including change of ownership clearances
concerning AVSTAR Mortgage Corporation in each state in which it is licensed to
do business. Harris and First Harrisburg are unaware of any other governmental
approvals or actions that are required for consummation of the Merger except as
described above. Should any such approval or action be required, it is presently
contemplated that such approval or action will be sought. There can be no
assurance, however, that any such approval or action, if needed, could be
obtained, would not delay the consummation of the transactions contemplated
under the Reorganization Agreement and would not be conditioned in a manner that
would cause Harris to terminate the Reorganization Agreement. Moreover, there
can be no assurance that no action will be brought challenging the Merger on
antitrust or other grounds.
BUSINESS PENDING THE MERGER
The provisions of the Reorganization Agreement provide that, until the
Effective Date, Harris is required to conduct its business in a manner that will
not adversely affect its ability to obtain the necessary regulatory approvals
contemplated under the Reorganization Agreement or its ability to perform its
obligations thereunder. Likewise, during the period prior to the Effective Date,
Harris is required to maintain and preserve its business, comply with its duties
and obligations imposed under applicable law, use its best efforts to satisfy
all transactions contemplated under the Reorganization
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Agreement and use its best efforts to promptly file all required regulatory
applications and amendments thereto.
Prior to the Effective Date, First Harrisburg and First Federal are
required to conduct their business only in the ordinary course consistent with
past practices and written policies, refrain from suffering a material adverse
change in their business or operations, preserve their businesses, maintain
their properties and insurance coverage, perform material obligations under
contractual agreements, furnish financial statements to Harris concerning their
operations and financial position, comply with material obligations imposed
under law, maintain their standing and existence and that of their subsidiaries,
notify Harris of any facts that would prevent them from satisfying the
conditions in the Reorganization Agreement or that would constitute a material
adverse change in their business or operations, use their best efforts to
satisfy the conditions under the Reorganization Agreement and refrain from
amending their corporate organic documents.
First Harrisburg and First Federal have also undertaken to take a number of
affirmative actions prior to the Effective Date, including the suspension of the
First Harrisburg Dividend Reinvestment Plan, the termination of all stock option
plans and employee benefit plans (other than the directors' retirement plan),
cooperation with Harris in approving any revision to the Reorganization
Agreement involving a structural change to the Merger (provided that such
cooperation and approval does not impact the First Harrisburg Merger
Consideration) and the divestiture of any non-permitted activity now being
undertaken that will be prohibited to be undertaken by Harris after the
Effective Date unless otherwise approved by the applicable regulatory
authorities.
First Harrisburg and First Federal are also obligated under the
Reorganization Agreement to refrain, and to ensure that their subsidiaries
refrain, from issuing shares of capital stock or securities convertible into
capital stock (other than pursuant to stock options outstanding as of November
12, 1995 or pursuant to the Harris Warrant), purchasing or redeeming any shares
of capital stock, merging with or into another entity (except pursuant to
written advice of counsel that the failure to do so is likely to be deemed to
constitute a breach of fiduciary duty by the First Harrisburg Board), paying
dividends other than regular quarterly cash dividends in an amount not to exceed
$.055 per share per quarter (except for the 10 percent stock dividend paid on
November 15, 1995), entering into any employment agreement or compensation
arrangement other than in the ordinary course of business, entering into or
modifying any pension or retirement plan (except as required by law or pursuant
to the provisions of the Reorganization Agreement), incurring indebtedness or
liability for borrowed money, entering into any material contract other than in
the ordinary course of business, taking action that would constitute a breach of
a representation or warranty set forth in the Reorganization Agreement, entering
into any related party transaction concerning the extension of credit other than
in accordance with applicable law and in the ordinary course of business,
changing accounting principles or practices (except as required), waiving or
materially modifying existing agreements, making any loan in excess of $250,000
to any affiliate other than AVSTAR Mortgage Corporation in the ordinary course
of business, entering into any swap or similar arrangement, entering into any
derivative or similar arrangement, taking any action that would knowingly impair
the receipt of regulatory approvals of the transactions contemplated under the
Reorganization Agreement, selling or transferring any servicing rights other
than in the ordinary course of business, materially altering underwriting
standards, or directly or indirectly agreeing to take any of the aforementioned
actions.
In addition, First Harrisburg and First Federal have agreed not to solicit
inquiries or proposals, or furnish information to or participate in any
discussions or negotiations with third parties, concerning any acquisition of
all or a material portion of their assets or equity interests or involving any
business combination with them or their subsidiaries. First Harrisburg and First
Federal are required to notify Harris immediately if any such inquiries or
proposals are forthcoming. They are also required to refrain from permitting
their officers, directors, agents and advisors from taking any such action.
Notwithstanding the foregoing, First Harrisburg is permitted to respond to
unsolicited inquiries from third parties and/or engage in discussions or
negotiations with third parties provided the First Harrisburg Board receives
written advice from counsel that the First Harrisburg Board is likely to be
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deemed to have breached its fiduciary duty under applicable Pennsylvania law if
it refrains from so doing.
EFFECTIVE DATE OF THE MERGER; TERMINATION
The Effective Date shall be the date and time of the later to occur of the
acceptance for filing by the Secretary of State of the Commonwealth of
Pennsylvania of articles of merger for the First Harrisburg Merger, or such
later date and time as shall be specified in such articles as agreed to by the
parties to the Reorganization Agreement; provided, however, that on such
Effective Date, the First Harrisburg Liquidation and the Harris Merger shall
also be effectuated. Unless the parties otherwise agree, the Effective Date is
required to occur on or before the 30th calendar day following the later of the
receipt of all requisite regulatory approvals, together with the expiration of
all applicable waiting periods, and the receipt of all requisite stockholder
approvals. The closing of the transactions contemplated by the Reorganization
Agreement (the 'Closing') will take place at 10:00 a.m., local time, on the
Effective Date unless otherwise agreed to by the parties.
Harris and First Harrisburg each anticipate that the Merger will be
consummated in the second quarter of 1996. Consummation of the Merger could be
delayed, however, as a result of delays in obtaining the necessary governmental
and regulatory approvals or if any other condition to the consummation of the
Merger is not satisfied. There can be no assurance as to if or when such
approvals will be obtained or conditions satisfied.
The Reorganization Agreement may be terminated whether before or after its
approval by stockholders: (i) by any party if the Closing does not occur before
October 31, 1996, unless otherwise agreed to by the parties or unless the
failure to so consummate by such time is due to a breach by the party seeking to
terminate; (ii) at any time by the mutual written agreement of all of the
parties to the Reorganization Agreement; (iii) upon the expiration of 30 days
from the date of notice to First Harrisburg of its or its subsidiary's material
misrepresentation or breach of a warranty, representation, covenant or agreement
unless it is reasonably evident that such situation will be completely
corrected; (iv) upon the expiration of 30 days from the date of notice to Harris
of its or its subsidiary's material misrepresentation or breach of a warranty,
representation, covenant or agreement unless it is reasonably evident that such
situation will be completely corrected; (v) by the vote of a majority of the
Board of Directors of Harris and Harris Acquisition or First Harrisburg and
First Federal if the stockholders of First Harrisburg or Harris fail to approve
the Reorganization Agreement; or (vi) any party who has been informed in writing
by a federal or state banking regulatory authority, or by any other required
regulatory authority, that a required approval or consent will not be granted
and the time period for all appeals and reconsiderations has expired.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board of Directors of First
Harrisburg, stockholders should be aware that members of First Harrisburg's
management and the First Harrisburg Board of Directors have interests in the
Merger that are in addition to the interests of stockholders generally. The
First Harrisburg Board of Directors was aware of these interests and considered
them, among other matters, in approving the Reorganization Agreement and the
transactions contemplated thereby.
Board of Directors of Harris. Upon consummation of the First Harrisburg
Merger and subject to the receipt of any required regulatory approvals, Harris
will appoint Bruce S. Isaacman, the Chairman of the Board of First Harrisburg,
as a director of Harris for a term expiring at Harris' annual stockholders'
meeting to be held in April 1997.
Existing Employment Agreements. Under the Reorganization Agreement, Harris
has agreed to honor the termination provisions of the employment agreements
between First Harrisburg and two of its executive officers. Each of the
agreements is substantially similar, except with respect to titles and base
salaries. The agreements provide that each of the two officers may terminate his
employment for good reason if certain events occur subsequent to a change in
control of First Harrisburg, including but not limited to a change in the
officer's reporting responsibilities, titles or offices. Upon such
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termination, each of the two officers will be entitled to receive severance
equal to 2.99 times his average aggregate annual compensation during the
preceding five calendar years, provided that such amount together with any other
payments which the officer has the right to receive does not exceed three times
the officer's 'base amount' as defined in Section 280G(b)(3) of the Code.
Consummation of the First Harrisburg Merger will constitute a change in control
for purposes of these agreements.
New Employment Agreements. Upon consummation of the First Harrisburg
Merger, Harris has agreed to hire (i) Patrick J. Aritz, the President and Chief
Executive Officer of First Harrisburg, as the Executive Vice President and Chief
Operating Officer of Harris at an initial annual salary of between $112,000 and
$115,000, and (ii) Michael L. Vitali, the President and Chief Executive Officer
of AVSTAR Mortgage Corporation, a wholly-owned subsidiary of First Federal.
Messrs. Aritz and Vitali have waived their rights to severance pay under their
current employment agreements with First Harrisburg and First Federal in
consideration of the new employment agreements with Harris, the payment of cash
by Harris ($150,000 to Mr. Aritz and $50,000 to Mr. Vitali) and the issuance of
Harris Common Stock (stock valued at $100,000 to Mr. Aritz and $50,000 to Mr.
Vitali), with the cash payment and stock issuance to occur within 30 days after
the Effective Date. In addition, following the Effective Date, Mr. Aritz will
receive from Harris benefits commensurate with those given to other senior
officers of Harris, the use of an automobile, and the payment of county club
dues.
Continuation of Business Consultant Agreement. Robert H. Trewhella, who
retired as President and Chief Executive Officer of First Harrisburg and First
Federal in 1995, has a Business Consultant Agreement with First Federal dated
July 1, 1995. Pursuant to the consulting agreement, Mr. Trewhella has agreed to
provide certain consulting services during 1996 and 1997 for a fee of $40,000
per year, plus the continuation of his medical coverage during 1996 and 1997 at
First Federal's expense. Harris has agreed to retain Mr. Trewhella as a
consultant for 1996 and 1997.
Directors' Retirement Plan. Harris has agreed to honor the terms of First
Federal's Non-Employee Directors' Retirement Plan, provided that its obligations
under such plan shall not exceed $470,000. Pursuant to such plan, Mr. Isaacman
will receive an aggregate of $110,000 in equal monthly installments over 10
years, and Messrs. Aronson, Berry, Kessler and Trewhella will each receive an
aggregate of $90,000 in equal monthly installments over 10 years.
Deferred Compensation Agreements. Harris has agreed to honor the terms of
First Federal's Deferred Compensation Agreements with Messrs. Trewhella,
Aronson, Isaacman and Kessler and Mrs. Graham and First Federal's Deferred
Compensation Trust Agreement with an independent trustee dated October 16, 1992,
as amended. However, under no circumstances shall Harris' obligations under such
agreements exceed the amounts deferred on or prior to the Effective Date and the
investment returns on such amounts deferred.
Employees; Employee Benefit Plans. Immediately prior to or as of the
Effective Date, First Harrisburg shall terminate all qualified employee pension,
profit sharing and stock bonus plans (including its Employee Stock Ownership
Plan) and all employees of First Harrisburg and its subsidiaries will, to the
extent provided by the relevant plan and by law, become fully vested in and
eligible to receive benefits under all such plans of First Harrisburg and its
subsidiaries, and such plans will be fully funded prior to termination. First
Harrisburg shall distribute all vested accrued benefits as soon as reasonably
practicable following such termination and shall obtain such regulatory
determinations as may be appropriate to ensure the qualified status of such
plans pursuant to Section 401(a) of the Code upon termination. Harris and HAC
shall have no liability under such plans.
Former employees of First Harrisburg or its subsidiaries who become
employed by Harris immediately following the Effective Date shall be entitled to
participate in those hospitalization, medical, life and disability benefit plans
provided by Harris for its employees in accordance with the terms of those
plans. Former employees of First Harrisburg or any of its subsidiaries who
become employed by Harris on the Effective Date shall, to the extent permissible
in accordance with the provisions of the applicable plan, insurance policies,
contract and underlying law, receive service credit from their hire date for
employment at First Harrisburg or its subsidiaries for purposes of eligibility
to participate in the above plans provided by Harris.
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Upon the Effective Date, former employees of First Harrisburg or its
subsidiaries who become employed by Harris will be entitled to participate,
pursuant to the terms of the applicable plan, in the qualified pension, profit
sharing and stock bonus plans in effect at such time for employees of Harris.
Former employees of First Harrisburg and its subsidiaries who become employed by
Harris on the Effective Date shall receive service credit from their hire date
for employment at First Harrisburg or its subsidiaries for purposes of
eligibility and vesting requirements under Harris' retirement savings plan and
defined benefit pension plan and service credit from the Effective Date for
purposes of benefit calculation under Harris' defined benefit pension plan.
Pre-existing condition requirements for health, life, disability and other
benefits and any insurance waiting period will be waived only for those former
employees of First Harrisburg or its subsidiaries offered employment with Harris
to the extent that Harris' benefit plans, insurance policies or programs would
permit the same without a material increase in Harris' premiums or costs
associated therewith.
Harris will provide or allow severance payments to employees of First
Harrisburg and its subsidiaries (other than employees whose severance benefits
are provided for in written employment agreements) whose employment is
terminated (other than for cause) on or after the Effective Date and before the
expiration of six months following the Effective Date, in the amount equal to
one week's pay for each year of service with First Harrisburg or its
subsidiaries, up to a maximum of 26 weeks. In computing such severance payments
for non-exempt, full-time employees, overtime and bonus are excluded. In
computing such severance payments for non-exempt regular part-time employees,
the weekly compensation shall be based on one-fifty-second (1/52) of the
employee's total salary, excluding overtime and bonus, paid in 1995. For
full-time exempt employees, weekly compensation is calculated by taking 1/52 of
the employee's 1995 annual salary, excluding bonus.
Indemnification and Insurance. On and after the Effective Date and for a
period ending six years thereafter, Harris shall indemnify, defend and hold
harmless all former and then-existing directors, officers, employees and agents
of First Harrisburg or of any of its subsidiaries against all losses, claims,
damages, costs, expenses, liabilities or judgments or amounts that are paid in
settlement (with the approval of Harris, which approval shall not be
unreasonably withheld) or in connection with any claim, action, suit, proceeding
or investigation based in whole or in part on or arising in whole or in part out
of the fact that such person is or was a director, officer, employee or agent of
First Harrisburg or any of its subsidiaries, whether pertaining to any matter
existing or occurring at or prior to the Effective Date and whether asserted or
claimed prior to, or at or after, the Effective Date to the same extent as such
officer, director, employee or agent would be entitled to indemnification by
First Harrisburg or any of its subsidiaries as of the date of the Merger
Agreement, including the right to advancement of expenses, provided, however,
that any such officer, director, employee or agent of First Harrisburg may be
indemnified by Harris only to the extent permitted by applicable law and to the
extent permitted by Harris' Articles of Incorporation and By-laws. In addition,
Harris shall use commercially reasonable efforts to obtain and maintain a
directors' and officers' liability insurance tail coverage policy with respect
to the directors' and officers' of First Harrisburg and its subsidiaries
relating to periods prior to the Effective Date and for a period ending two
years thereafter.
Other than as set forth above, no director or executive officer of First
Harrisburg or Harris has any direct or indirect material interest in the Merger,
except in the case of First Harrisburg insofar as ownership of First Harrisburg
Common Stock and existing options might be deemed such an interest.
CERTAIN INCOME TAX CONSEQUENCES
It is a condition to the obligation of Harris to consummate the
transactions contemplated by the Reorganization Agreement that it shall have
received an opinion from KPMG Peat Marwick LLP as to certain income tax
consequences resulting from such transactions.
The income tax laws are complex and each stockholder's individual
circumstances may affect the tax consequences to the stockholder. In addition,
no information is provided with respect to the tax consequences to the holders
of First Harrisburg Common Stock of the Merger under applicable state, local,
foreign and other tax laws. Consequently, each stockholder is urged to consult a
tax advisor
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regarding the federal, state, local, foreign and other tax consequences of the
Merger applicable to such stockholder.
On the basis of facts, representations and assumptions which will be
referred to or set forth in their opinion, Harris believes that on the Effective
Date, KPMG Peat Marwick LLP will opine that (i) for federal and Pennsylvania
income tax purposes, the transactions contemplated by the Reorganization
Agreement will be tax free to the parties thereto; (ii) from the standpoint of
Harris, it will be treated as having acquired the stock of First Harrisburg in a
qualified stock purchase transaction pursuant to Section 338 of the Code; and
(iii) the subsequent First Harrisburg Liquidation will qualify for treatment
under Section 332 of the Code with no gain or loss being recognized as a result
of such liquidation or as a result of the subsequent Harris Merger.
THE RECEIPT BY STOCKHOLDERS OF FIRST HARRISBURG OF THE FIRST HARRISBURG
MERGER CONSIDERATION IN EXCHANGE FOR THEIR SHARES OF FIRST HARRISBURG COMMON
STOCK WILL BE TREATED AS A TAXABLE EVENT TO SUCH STOCKHOLDERS WITH GAIN OR LOSS
BEING RECOGNIZED BY SUCH STOCKHOLDERS MEASURED BY THE DIFFERENCE BETWEEN THE
AGGREGATE AMOUNT OF FIRST HARRISBURG MERGER CONSIDERATION RECEIVED AND THE
STOCKHOLDERS' ADJUSTED TAX BASIS IN SUCH SHARES.
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for as a purchase for financial reporting
purposes. Under this method of accounting, Harris will record the acquisition of
First Harrisburg at its cost at the Effective Time of the Merger, which cost
would include the cash paid in the Merger and all direct acquisition costs. The
acquisition cost will be allocated to the acquired assets and liabilities of
First Harrisburg based upon their fair values at the Effective Time of the
Merger in accordance with generally accepted accounting principles. Acquisition
cost in excess of the fair values of the net assets acquired, if any, will be
recorded as an intangible asset and amortized over a period of 15 years for
financial accounting purposes. The reported income of Harris will include the
operations of First Harrisburg after the Effective Time of the Merger. See
'Unaudited Pro Forma Condensed Combined Financial Information'.
INVESTMENT AGREEMENT
In connection with the Reorganization Agreement, Harris and First
Harrisburg have entered into an Investment Agreement and First Harrisburg has
issued to Harris a Warrant (the 'Harris Warrant') thereunder (collectively the
'Warrant Agreement'), entitling Harris to purchase up to 638,741 shares of First
Harrisburg Common Stock upon the occurrence of certain events described below.
The exercise price under the Warrant Agreement is $11.875 per share. The Warrant
Agreement is designed to compensate Harris for its risks, costs and expenses and
the commitment of resources associated with the Merger in the event the Merger
is not consummated due to an attempt by a third person to gain control of First
Harrisburg. Harris may not exercise the Harris Warrant except upon (i) a willful
breach of the Reorganization Agreement by First Harrisburg that would permit
termination by Harris, unless cured prior to exercise of the Harris Warrant;
(ii) the failure of First Harrisburg stockholders to approve the transaction
contemplated by the Reorganization Agreement after the announcement by any
person other than Harris or an affiliate of Harris of an offer or proposal to
acquire 15 percent or more of the First Harrisburg Common Stock or to acquire,
merge or consolidate with First Harrisburg or First Federal or to acquire all or
substantially all of the assets of either; (iii) the acquisition by anyone other
than Harris or its affiliates of beneficial ownership of 15 percent or more of
the First Harrisburg Common Stock; (iv) any person other than Harris or its
affiliates having commenced a tender or exchange offer or having filed an
application with an appropriate bank regulatory authority to purchase or acquire
shares of First Harrisburg Common Stock or by publicly announcing any offer
therefor, such that upon consummation thereof, such person would own, control or
have the right to acquire 15 percent or more of the First Harrisburg Common
Stock; or (v) First Harrisburg having entered into an agreement or understanding
with someone other than Harris or its subsidiaries for such person to acquire,
merge or consolidate with First Harrisburg or to purchase or acquire all or
substantially all of the assets of First Federal. Each of the foregoing is
referred to herein as a 'Warrant Event'. No
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Warrant Event has occurred as of the date of this Joint Proxy Statement and
neither Harris nor First Harrisburg is aware that any Warrant Event is being
contemplated by any third person. The Warrant Agreement may discourage third
persons from making competing offers to acquire First Harrisburg and is intended
to increase the likelihood that the Merger will be consummated in accordance
with the terms set forth in the Reorganization Agreement.
If a Warrant Event occurs, Harris may exercise the Harris Warrant in whole
or in part. Under federal banking law, exercise of the Harris Warrant by Harris
for more than 5 percent of the outstanding First Harrisburg Common Stock would
require prior approval by federal banking regulators. Any sale of shares of
First Harrisburg Common Stock purchased by Harris would, in all likelihood,
require registration under the Securities Act of 1933. First Harrisburg has
agreed to effect such registration, if requested.
DISSENTERS' RIGHTS -- FIRST HARRISBURG STOCKHOLDERS
Any owner of shares of First Harrisburg Common Stock has the right under
Subchapter 15D of the BCL to object to the First Harrisburg Merger and demand to
be paid in cash the fair value of such shares upon complying in full with the
provisions of Subchapter 15D. THE FOLLOWING DOES NOT PURPORT TO BE A COMPLETE
STATEMENT OF THE PROVISIONS OF SUBCHAPTER 15D OR SECTION 1930 OF THE BCL AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THOSE PROVISIONS, A COPY OF WHICH IS
ATTACHED HERETO AS APPENDIX D. SUCH PROVISIONS MUST BE STRICTLY COMPLIED WITH OR
A STOCKHOLDER'S DISSENTERS' RIGHTS WILL BE LOST.
If an owner of shares of First Harrisburg Common Stock wants to exercise
the right to dissent, such owner must satisfy all the following conditions: (i)
the owner must file with First Harrisburg prior to the vote with respect to the
First Harrisburg Merger a written notice of his intention to demand that he be
paid the fair value of his shares of First Harrisburg Common Stock if the First
Harrisburg Merger takes place (Neither a vote in person or by proxy against
approval of the First Harrisburg Proposal nor an abstention from voting with
respect to, or a failure to vote for approval of the First Harrisburg Proposal
will constitute such a written notice.); (ii) the owner must not effect any
change in the beneficial ownership of his shares of First Harrisburg Common
Stock from the date of filing such written notice continuously through the
Effective Date; and (iii) the owner must not vote in person or by proxy for
approval of the First Harrisburg Proposal. (Neither an abstention from voting
with respect to, nor a failure to vote in person or by proxy against approval of
the First Harrisburg Proposal will constitute a vote for adoption and approval
of the First Harrisburg Proposal.) Unless an owner follows all these steps, he
will not acquire any right to payment of the fair value of his shares and will
be conclusively presumed to have consented to the First Harrisburg Merger and
will be bound by its terms. A written notice of an intention to demand payment
of fair value should be sent prior to the First Harrisburg Special Meeting to
First Harrisburg Bancor, Inc., 234 North Second Street, Harrisburg, Pennsylvania
17101, Attention: Secretary.
A person who is the beneficial owner, but not the record holder, of shares
of First Harrisburg Common Stock and who desires to exercise the rights of a
dissenting stockholder may assert those rights with respect to shares held on
that person's behalf. Such a person will be treated as a dissenting stockholder
if he submits to First Harrisburg a written consent of the record holder of
those shares to such treatment no later than the time dissenters' rights are
asserted with respect to those shares. A beneficial owner may not dissent with
respect to less than all shares of which such person is the owner, whether or
not the shares so owned are registered in such person's name.
A record holder for more than one beneficial owner may assert dissenters'
rights as to less than all of the shares registered in his name only if that
holder dissents with respect to all shares beneficially owned by a person that
are held by him and discloses the name and address of that person. In that
event, the record holder will be treated as if the shares as to which he has
dissented and the other shares held by him were registered in the names of
different persons.
If the First Harrisburg Proposal is approved by the requisite vote of the
stockholders of First Harrisburg, either First Harrisburg or Harris, as the
surviving corporation, will mail a 'further notice'
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to each owner who followed all of the steps described above. The 'further
notice' will (i) state the location where and the date by which a demand for
payment must be sent and certificates formerly representing shares of First
Harrisburg Common Stock must be deposited in order to obtain payment, which date
will not be less than 30 days after the date of mailing of the 'further notice',
(ii) supply a form for demanding payment that includes a request for
certification of the date on which the dissenter acquired beneficial ownership
of his shares of First Harrisburg Common Stock, and (iii) include a copy of
Subchapter 15D of the BCL. If a dissenter fails to timely demand payment or to
timely deposit his certificates as required by the 'further notice', that person
will not have any right to receive payment of the fair value of his shares.
If the First Harrisburg Merger has not been consummated within 60 days
after the date specified in the 'further notice' for demanding payment and
depositing certificates, First Harrisburg will return any deposited
certificates. At any time thereafter, First Harrisburg or Harris, as the
surviving corporation, may send a new 'further notice' containing the provisions
described above to all dissenters.
Promptly after the Effective Date, or upon timely receipt of demand for
payment if the First Harrisburg Merger has already occurred, Harris will either
(i) pay the amount that Harris estimates is the fair value of the dissenters'
shares to the dissenters who timely made demand for payment and timely deposited
their certificates, or (ii) provide written notice to those dissenters that no
payment will be made. This payment or written notice will be accompanied by a
closing balance sheet and statement of income of First Harrisburg for a fiscal
year ending not more than 16 months before the date of payment or notice, the
latest available interim financial statements of First Harrisburg, a statement
of Harris' estimate of the fair value of the dissenters' shares, a notice of the
right of a dissenter to demand payment or supplemental payment, as the case may
be, and a copy of Subchapter 15D of the BCL. If Harris does not pay its estimate
of the fair value of the shares of First Harrisburg Common Stock of any
dissenter, it must return his deposited certificates to him. Harris may make a
notation on any returned certificate that a demand for payment of fair value
with respect to that certificate has been made. If that certificate is
transferred, any new certificate will bear a similar notation, together with the
name of the original dissenting holder or owner thereof. A transferee will not
acquire by transfer any rights other than those that the original dissenter had
after making demand for payment of fair value.
If a dissenter believes that Harris' estimate of the fair value of his
shares of First Harrisburg Common Stock is less than their fair value, that
dissenter should send Harris his own estimate of their fair value. A dissenter's
estimate will constitute a demand for payment of the his estimate of the fair
value of his shares of First Harrisburg Common Stock or for payment of the
difference between the two estimates if Harris has paid that dissenter its
estimate. If a dissenter does not file with Harris his own estimate within 30
days after the mailing to him of the payment of Harris' estimated fair value or
its written notice thereof, that dissenter will not be entitled to receive any
amount greater than the payment remitted by Harris or the amount stated in that
notice.
Within 60 days after the latest of (i) the Effective Date, (ii) timely
receipt of any demands for payment of fair value in response to a 'further
notice', or (iii) timely receipt of a dissenter's estimate of the fair value of
his shares of First Harrisburg Common Stock, if any demand for payment remains
unsettled, Harris may file an application for relief in the Court of Common
Pleas of Dauphin County, Pennsylvania (the 'Dauphin Court'), requesting that the
fair value of the remaining dissenters' shares be determined. All dissenters
whose demands for payment of the fair value of their dissenters' shares have not
been settled will be made parties to such proceeding. Each dissenter who is made
a party to such proceeding will be entitled to recover the amount by which the
fair value of his dissenters' shares exceeds any amount previously paid to that
dissenter by Harris for his shares, plus interest. If Harris fails to file an
application with the Dauphin Court prior to the expiration of that 60-day
period, any dissenter who has made a demand for payment of the fair value of his
dissenters' shares, and has not already settled his claim against Harris may
file an application with the Dauphin Court in the name of Harris within 30 days
of the expiration of that 60-day period. If no such dissenter files an
application within that 30-day period, all remaining dissenters will be paid
Harris' estimate of the fair value of their dissenters' shares and will not be
entitled to any additional amounts. In any proceeding before the
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Dauphin Court, the fair value of the dissenters' shares to be determined by the
Dauphin Court is the fair value of those shares immediately prior to the
Effective Date, taking into account all relevant factors, but excluding any
appreciation or depreciation in anticipation of the Merger.
The costs and expenses of any proceeding to determine the fair value of the
remaining dissenters' shares will be determined by the Dauphin Court and
assessed against Harris, although all or any part of those costs and expenses
may be apportioned and assessed as the Dauphin Court deems appropriate against
any dissenters who are parties to the proceeding and whose actions in demanding
supplemental payments the Dauphin Court finds to be dilatory, obdurate,
arbitrary, vexatious or in bad faith. The fees and expenses of counsel and
experts for the respective parties may be assessed as the Dauphin Court deems
appropriate against Harris and in favor of any or all dissenters if Harris
failed to comply substantially with the requirements of Subchapter 15D and may
be assessed against Harris or any dissenter, in favor of any other party, if the
Dauphin Court finds that the party against whom the fees and expenses are
assessed acted in bad faith or in a dilatory, obdurate, arbitrary or vexatious
manner in respect to the rights provided by Subchapter 15D. If the Dauphin Court
decides that any dissenter's counsel provided substantial benefits to other
dissenters, but that the fees of such counsel should not be assessed against
Harris, then the Dauphin Court may award that counsel reasonable fees to be paid
out of the amounts awarded to those other dissenters.
It is a condition to the obligations of the parties to the Reorganization
Agreement to consummate the First Harrisburg Merger that the number of
dissenters' shares be less than 20 percent of the First Harrisburg Common Stock
immediately prior to the Effective Date. See 'THE MERGER -- Conditions to the
Merger'.
FIRST HARRISBURG STOCKHOLDERS WISHING TO EXERCISE DISSENTERS' RIGHTS ARE
ADVISED TO CONSULT THEIR OWN COUNSEL TO ENSURE THAT THEY FULLY AND PROPERLY
COMPLY WITH THE REQUIREMENTS OF SUBCHAPTER 15D.
DISSENTERS' RIGHTS -- HARRIS STOCKHOLDERS
A holder of shares of Harris Common Stock is entitled under the
Pennsylvania Banking Code of 1965, as amended (the 'Pennsylvania Banking Code')
to exercise the rights of a dissenting stockholder under Subchapter 15D of the
BCL, to object to the Harris Merger and make written demands that Harris pay in
cash the fair value of the shares of Harris Common Stock held as determined in
accordance with such statutory provisions. The following summary does not
purport to be a complete statement of the provisions of Subchapter 15D or
Section 1930 of the BCL and is qualified in its entirety by reference to such
statutory provisions, which (together with Sections 1607(a) and 1222 of the
Pennsylvania Banking Code) are set forth in full as to this Joint Proxy
Statement/Prospectus as Appendix D.
A record holder of shares of Harris Common Stock may assert dissenters'
rights as to fewer than all such shares registered in his name only if he
dissents with respect to all the shares beneficially owned by any one person and
discloses the name and address of the person or persons on whose behalf he
dissents.
A beneficial owner of shares of Harris Common Stock who is not the record
holder of such shares is entitled to assert dissenters' rights with respect to
shares held on his behalf only if he submits to Harris no later than the time of
the assertion of dissenters' rights a written consent of the record holder of
such shares. A beneficial owner may not dissent with respect to less than all
shares of Harris Common Stock owned by him, whether or not the shares so owned
by him are registered in his name.
In the event that a holder of shares of Harris Common Stock wishes to
dissent to the Harris Merger and obtain payment of the fair value of his shares,
he must satisfy all of the following conditions to acquire any right to payment
of the fair value of his shares under Pennsylvania law: (i) the owner must file
with Harris, prior to the vote on the Harris Proposal, a written notice of
intention to demand that he be paid the fair value for his shares if the Harris
Merger is effectuated (Neither a proxy indicating a vote against, an abstention,
a vote in person against nor the failure to vote with regard to
36
<PAGE>
the Harris Proposal shall constitute the written notice required.); (ii) the
owner must effect no change in the beneficial ownership of his shares from the
date of filing such written notice continuously through the Effective Date; and
(iii) the owner must not vote his shares in favor of the Harris Proposal.
Neither an abstention from voting with respect to, nor failure to vote in person
or by proxy against approval of, the Harris Proposal constitutes a vote for
adoption and approval of the Harris Proposal. However, a signed proxy that is
returned without any instruction as to how the proxy shall be voted will be
voted for the Harris Proposal and will be deemed a waiver of the rights of a
dissenting stockholder.
A dissenter who fails in any of these respects shall not acquire any right
to payment of the fair value of his shares under Subchapter 15D of the BCL. Each
written notice of intention to demand payment must clearly state that the
stockholder intends to demand that he be paid the fair value of his shares if
the Harris Merger is effectuated, must provide the name, address and telephone
number of the stockholder and should be sent to Harris Savings Bank, Second and
Pine Streets, Harrisburg, Pennsylvania 17101, Attention: Bernard H. Sarfert,
Sr., Corporate Secretary. A dissenting stockholder retains all other rights of a
Harris stockholder.
If the Harris Proposal is approved by the stockholders of Harris by the
required vote at the Harris Special Meeting, Harris shall mail a notice to all
dissenters who gave due notice of intention to demand payment of the fair value
of their shares and who did not vote in favor of the Harris Proposal. Such
notice shall: (i) state where and when a demand for payment must be sent and
certificates representing shares must be deposited in order to obtain payment.
The time set for receipt of the demand and deposit of certificates shall be not
less than 30 days from the mailing of the notice; (ii) be accompanied by a copy
of Subchapter 15D of the BCL and Sections 1607(a) and 1222 of the Pennsylvania
Banking Code; and (iii) supply a form for demanding payment that includes a
request for certification of the date on which the stockholder, or the person on
whose behalf the stockholder dissents, acquired beneficial ownership of the
shares.
The dissenting stockholder must make written demand for payment of the fair
value of the shares with respect to which dissent is made and must deposit
certificates representing such shares in accordance with the terms of the notice
to demand payment sent by Harris. A stockholder who fails to timely demand
payment, or fails to timely deposit certificates, as required by the notice to
demand payment, shall not have any right under Subchapter 15D to receive payment
of the fair value of his shares.
Within 60 days after the date set for demanding payment and depositing
certificates, if the Harris Merger has not been effectuated, Harris shall return
any certificates that have been deposited. When deposited certificates have been
returned, Harris may at any later time send a new notice to demand payment,
which will have a like effect as the original notice.
Promptly after effectuation of the Harris Merger, or upon timely receipt of
demand for payment if the Harris Merger has already been effectuated, Harris
shall either remit to dissenters who have made demand and have deposited their
certificates the amount that Harris estimates to be the fair value of the
shares, or shall give written notice that no remittance will be made. The
remittance or notice shall be accompanied by: (i) the closing balance sheet and
statement of income of Harris for the fiscal year ending not more than 16 months
before the date of remittance or notice, together with the latest available
interim financial statements; (ii) a statement of Harris' estimate of the fair
value of the shares; and (iii) a notice of the right of the dissenter to demand
payment or supplemental payment, as the case may be, accompanied by a copy of
Subchapter 15D of the BCL and Sections 1607(a) and 1222 of the Pennsylvania
Banking Code.
If Harris gives notice of its estimate of the fair value of the shares,
without remitting such amount, or remits payment of its estimate of the fair
value of a dissenter's shares and the dissenter believes that the amount stated
or remitted is less than the fair value of his shares, the dissenter may send to
Harris his own estimate of the fair value of the shares, which shall be deemed a
demand for payment of such amount or the deficiency.
37
<PAGE>
Where the dissenter does not file his own estimate within 30 days after the
mailing by Harris of its remittance or notice, the dissenter shall be entitled
to no more than the amount stated on the notice or remitted to him by Harris.
Within 60 days after the latest of (i) effectuation of the Harris Merger;
(ii) timely receipt of any demands for payment; or (iii) timely receipt of any
estimates by dissenters of the fair value of their shares, if any demands for
payment remain unsettled, Harris may file in the Dauphin Court an application
for relief requesting that the fair value of the shares be determined by the
court. All dissenting shareholders, wherever residing, whose demands have not
been settled shall be made parties to the proceeding. A copy of the application
for relief shall be served on each such dissenter.
The court may appoint an appraiser to receive evidence and recommend a
decision on the issue of fair value, which appraiser shall have such power and
authority as may be specified by the court.
Each dissenter who is made a party to the proceeding shall be entitled to
recover the amount, if any, by which the fair value of his shares is found to
exceed the amount, if any, previously remitted by Harris, plus interest.
If Harris fails to file an application for relief, any dissenter who made a
demand and who has not already settled his claim against Harris may do so in the
name of Harris at any time within 30 days after the expiration of the 60-day
period. If a dissenter does not file an application with the Dauphin Court
within the 30-day period, such dissenter will be paid Harris' estimate of the
fair value of his shares and no more, and may bring an action to recover any
amount not previously remitted.
In general, the costs and expenses of any valuation proceeding, including
the reasonable compensation and expenses of the appraiser appointed by the
court, shall be determined by the court and assessed against Harris. However,
any part of the costs and expenses may be apportioned and assessed as the court
deems appropriate against all or some of the dissenting shareholders who are
parties to the proceeding and whose action in demanding supplemental payment the
court finds to be dilatory, obdurate, arbitrary, vexatious or in bad faith.
Fees and expenses of counsel and of experts for the respective parties may
be assessed as the court deems appropriate against Harris and in favor of any or
all dissenters if Harris failed to comply substantially with the requirements of
Subchapter 15D of the BCL. Such fees and expenses may be assessed against either
Harris or a dissenter, in favor of any other party if the court finds that the
party against whom the fees and expenses are assessed acted in bad faith or in a
dilatory, obdurate, arbitrary or vexatious manner in respect to the rights
provided by Subchapter 15D of the BCL. If the court finds that the services of
counsel for any dissenter were of substantial benefit to other dissenters
similarly situated and should not be assessed against Harris, it may award to
those counsel reasonable fees to be paid out of the amounts awarded to the
dissenters who were benefited.
HARRIS STOCKHOLDERS WISHING TO EXERCISE DISSENTERS' RIGHTS ARE ADVISED TO
CONSULT THEIR OWN COUNSEL TO ENSURE THAT THEY FULLY AND PROPERLY COMPLY WITH THE
REQUIREMENTS OF SUBCHAPTER 15D AND SECTIONS 1607(A) AND 1222 OF THE PENNSYLVANIA
BANKING CODE.
38
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial information set
forth below should be read in conjunction with the audited consolidated
financial statements, including the notes thereto, of First Harrisburg and
Harris that are included or incorporated by reference in this Joint Proxy
Statement. See 'INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE', 'FIRST
HARRISBURG SELECTED CONSOLIDATED FINANCIAL INFORMATION' and 'HARRIS SELECTED
CONSOLIDATED FINANCIAL INFORMATION'. The unaudited pro forma condensed
combined financial information set forth below gives effect to the Merger
under the purchase accounting method. The pro forma condensed combined balance
sheet treats the Merger as if it had been consummated on September 30, 1995,
and the pro forma condensed combined statements of income treat the Merger as
if it had been consummated at the beginning of the respective periods.
This pro forma financial information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the Merger had been consummated
at the dates assumed for purposes hereof, nor is it necessarily indicative of
future operating results or financial position.
<TABLE>
<CAPTION>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1995
------------------------------------------------------
FIRST PRO FORMA PRO FORMA
HARRIS HARRISBURG ADJUSTMENTS COMBINED
----------- ------------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash on hand and due from banks............... $ 10,895 $ 4,115 $ 569 (G) $ 15,579
Interest-earning deposits in other
institutions................................ 71,577 2,765 0 74,342
Investment securities held to maturity........ 88,750 18,662 219 (B) 107,631
Investment and mortgage-backed securities
available for sale.......................... 237,729 9,496 (40,151)(A) 207,074
Mortgage-backed securities held to maturity... 172,595 34,674 (263)(B) 207,006
Loans receivable, net......................... 618,642 189,058 3,972 (C) 811,672
Loans held for sale........................... 0 40,022 0 40,022
Federal Home Loan Bank stock.................. 6,575 5,502 0 12,077
Other assets.................................. 43,261 5,402 15,031 (D) 63,694
----------- ----------- ----------- -----------
Total Assets................................ $ 1,250,024 $ 309,696 $ (20,623) $ 1,539,097
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Liabilities:
Deposits...................................... $ 1,066,962 $ 167,843 $ 1,409 (E) $ 1,236,214
Borrowed funds................................ 20,480 110,033 0 130,513
Other liabilities............................. 14,171 7,152 2,486 (D) 23,809
----------- ----------- ----------- -----------
Total liabilities........................... 1,101,613 285,028 3,895 1,390,536
----------- ----------- ----------- -----------
Stockholders' Equity:
Common stock, par value....................... 112 24 24 (F) 112
Additional paid-in capital.................... 25,097 15,298 (15,148)(F) 25,247
Retained earnings............................. 123,705 10,073 (10,073)(F) 123,705
Treasury stock, at cost....................... 0 (641) 641 (F) 0
ESOP.......................................... (1,643) (209) 209 (F) (1,643)
RRP........................................... (860) 0 0 (860)
Net unrealized gain on marketable securities
available for sale.......................... 2,000 (F) 123 (123)(F) 2,000
----------- ----------- ----------- -----------
Total stockholders' equity.................. 148,411 24,668 (24,518) 148,561
----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity.................................... $ 1,250,024 $ 309,696 $ (20,623) $ 1,539,097
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
39
<PAGE>
HARRIS SAVINGS BANK
Notes to Pro Forma Consolidated Balance Sheet
(Unaudited)
As of September 30, 1995
<TABLE>
<S> <C>
(A) Harris intends to liquidate $40.2 million of marketable securities as a source of funds for the
Merger Consideration. The total cash component of the acquisition price is calculated as shown
below:
Shares of First Harrisburg Common Stock outstanding at September 30, 1995, as
adjusted for the 10 percent stock dividend paid on November 15, 1995, and
exercise of all outstanding options............................................. 2,768,411
Cash payment per share............................................................ $14.77
--------------
Cash portion of the Merger Consideration.......................................... $40,889,430
Less:
Cash to be paid by holders of options to purchase 197,399 shares of First
Harrisburg Common Stock......................................................... 1,506,902
Plus:
Estimated acquisition costs....................................................... 768,000
--------------
Total estimated cash payment by Harris............................................ $40,150,528
--------------
--------------
The funds for the cash portion of the acquisition price were assumed to come primarily from the
liquidation of marketable securities and cash on hand.
(B) The adjustments to investment securities and mortgage-backed securities reflect the adjustment of
First Harrisburg's respective portfolios to their estimated market value, using market quotations
and other comparable information.
(C) The adjustment to loans receivable, net of unearned interest, reflects the write-up of First
Harrisburg's portfolio to its estimated market value by discounting the portfolio using the
estimated remaining lives of the various types of loans and estimated current interest rates.
(D) Includes an adjustment to purchased mortgage servicing rights of $2,663,000 which reflects the
write-up of the servicing rights to fair market value based on current assumptions about future
cash flows. Also includes an adjustment to fixed assets of $816,000 which reflects a write-up to
appraised market values and an adjustment of $11,552,000 to reflect the allocation of goodwill
including the tax effect ($2,117,000) of purchase accounting adjustments.
(E) The adjustment to deposits reflect the adjustments of the deposits to their estimated market value
by discounting the liabilities using the estimated remaining lives of the various types of the
deposits and estimated current interest rates.
(F) Represents the elimination of First Harrisburg's Common Stock, additional paid-in capital,
retained earnings, treasury stock and miscellaneous equity items.
(G) Represents residual cash from exercised FHB Common Stock options (Note A), less estimated
acquisition cash expenditures.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONDENSED COMBINED INCOME STATEMENT FOR
NINE MONTHS ENDED SEPTEMBER 30, 1995
-----------------------------------------------------------------
FIRST PRO FORMA PRO FORMA
HARRIS HARRISBURG ADJUSTMENTS COMBINED
-------------- --------------- ------------- ---------------
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income:
Loans............................... $ 36,546 $ 13,388 $ (421)(A) $ 49,513
Mortgage-backed
securities....................... 12,870 1,966 (23)(B) 14,813
Investments......................... 8,794 1,216 (1,849)(C) 8,161
FHLB stock.......................... 337 238 575
-------------- --------------- ---------- --------------
Total interest income............ 58,547 16,808 (2,293) 73,062
-------------- --------------- ---------- --------------
Interest expense:
Deposits and escrow................. 33,304 5,609 (371)(D) 38,542
Borrowed funds...................... 573 4,291 4,864
-------------- --------------- ---------- --------------
Total interest expense........... 33,877 9,900 (371) 43,406
-------------- --------------- ---------- --------------
Net interest income................... 24,670 6,908 (1,922) 29,656
Provisions for possible losses on
loans............................... 0 0 0
-------------- --------------- ---------- --------------
Net interest income after provision
for possible losses on loans........ 24,670 6,908 (1,922) 29,656
Non-interest income................... 1,971 2,277 4,248
Non-interest expense.................. 15,019 6,102 775 (E) 21,896
-------------- --------------- ---------- --------------
Income before income taxes............ 11,622 3,083 (2,697) 12,008
Income taxes.......................... 4,271 1,153 5,424
-------------- --------------- ---------- --------------
Net income............................ $ 7,351 $ 1,930 $ (2,697) $ 6,584
-------------- --------------- ---------- --------------
-------------- --------------- ---------- --------------
Net income per share (F):
Primary............................. $ 0.67 $ 0.80 $ 0.60
Fully diluted....................... 0.67 0.80 0.60
Weighted average shares and share
equivalents outstanding:
Primary............................. 11,000,016 2,419,225 11,000,016
Fully diluted....................... 11,003,554 2,420,580 11,003,554
Book value per share (G).............. $ 13.25 $ 10.55 $ 13.01
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONDENSED COMBINED INCOME STATEMENT FOR
YEAR ENDED DECEMBER 31, 1994
-------------------------------------------------------------
FIRST PRO FORMA PRO FORMA
HARRIS HARRISBURG ADJUSTMENTS COMBINED
------------- ------------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income:
Loans................................. $ 47,355 $ 15,056 $ (561)(A) $ 61,850
Mortgage-backed securities............ 20,809 2,435 30 (B) 23,274
Investments........................... 5,325 918 (2,602)(C) 3,641
FHLB stock............................ 443 184 627
------------- ----------- ---------- -------------
Total interest income.............. 73,932 18,593 (3,133) 89,392
------------- ----------- ---------- -------------
Interest expense:
Deposits and escrow................... 38,107 6,070 (495)(D) 43,682
Borrowed funds........................ 134 3,204 3,338
------------- ----------- ---------- -------------
Total interest expense............. 38,241 9,274 (495) 47,020
------------- ----------- ---------- -------------
Net interest income..................... 35,691 9,319 (2,638) 42,372
Provisions for possible losses on
loans................................. 0 0 0
------------- ----------- ---------- -------------
Net interest income after provision for
possible losses on loans.............. 35,691 9,319 (2,638) 42,372
Non-interest income..................... 2,503 3,050 5,553
Non-interest expense.................... 20,793 7,850 1,031 (E) 29,674
------------- ----------- ---------- -------------
Income before income taxes and
cumulative effect of change in
accounting principle.................. 17,401 4,519 (3,669) 18,251
Income taxes............................ 7,348 1,913 9,261
------------- ----------- ---------- -------------
Net income.............................. $ 10,053 $ 2,606 $ (3,669) $ 8,990
------------- ----------- ---------- -------------
------------- ----------- ---------- -------------
Net income per share (F):
Primary............................... $ 0.85(*) $ 1.08 $ 0.82
Fully diluted......................... 0.85(*) 1.08 0.82
Weighted average shares and share
equivalents outstanding:
Primary............................... 10,908,964 2,413,927 10,908,964
Fully diluted......................... 10,908,964 2,413,927 10,908,964
Book value per share (G)................ $ 12.08 $ 9.93 $ 12.08
</TABLE>
- ------------------
* Harris' earnings per share amount for 1994 excludes $.07 per share of net
income earned during the 25-day period ended January 25, 1994 because Harris
converted from a mutual savings bank to a stock savings bank on that date.
42
<PAGE>
HARRIS SAVINGS BANK
Notes to Pro Forma Condensed Combined Statements of Income
(Unaudited)
(A) Represents the current period amortization of the adjustment to fair
value of the loans receivable of First Harrisburg on the level yield
method over an estimated life of approximately nine years.
(B) Represents the current period amortization of the adjustment to fair
value of the mortgage-backed securities of First Harrisburg on the
level yield method over an estimated life of nine years.
(C) Represents the loss of earnings on the $40.2 million of cash and
marketable securities used to fund the acquisition price, at an average
rate of 6.37 percent for 1994 and 86.25 percent for the nine months
ended September 30, 1995.
(D) Represents the current period accretion of the adjustment to fair value
of the savings deposits of First Harrisburg on the level yield method
over an estimated life of approximately three years.
(E) Represents the current period write-off of the amortization expense on
intangible assets as recorded in the financial statements over a period
of 15 years.
(F) Earnings per share are based upon the combined historical income of
First Harrisburg and Harris, including the effects of the pro forma
purchase accounting adjustments.
(G) The book value for Harris has not been adjusted to reflect the amount
of dividends waived by Harris' parent, Harris Financial, MHC in the
amounts of $2.3 million and $3.2 million during the year ended December
31, 1994 and the nine months ended September 30, 1995, respectively.
RELATIONSHIPS WITH INDEPENDENT AUDITORS
The Harris Board and the First Harrisburg Board each have appointed KPMG
Peat Marwick LLP as independent auditors for Harris and First Harrisburg,
respectively, for the fiscal year ending December 31, 1995. KPMG Peat Marwick
LLP has served as independent auditors for Harris for over 20 years and for
First Harrisburg continuously since 1990 . A representative of KPMG Peat
Marwick LLP is expected to be present at the Harris Special Meeting and at the
First Harrisburg Special Meeting, will have an opportunity to make a statement
if he or she desires and will be available to respond to questions.
STOCKHOLDER PROPOSALS
FIRST HARRISBURG
If the Merger is not consummated prior to First Harrisburg's next annual
meeting of stockholders, any proposal which a stockholder wished to have
included in First Harrisburg's proxy statement and form of proxy relating to
First Harrisburg's 1996 Annual Meeting of Stockholders must have been received
by First Harrisburg at 232 North Second Street, Harrisburg, Pennsylvania 17101
by November 20, 1995. No proposals were received by such date.
HARRIS
To be considered for inclusion in the proxy materials relating to the
1996 Annual Meeting of Harris, stockholder proposals were required to have
been received at the principal executive offices of Harris on or before
December 19, 1995. No proposals were received by such date.
43
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
MANAGEMENT'S DISCUSSION AND ANALYSIS FOR HARRIS
Independent Auditors' Report....................................... F-1
Consolidated Financial Statements as of and for the Period Ended
December 31, 1994................................................ F-2
Unaudited Financial Statements as of and for the Period Ended
September 30, 1995............................................... F-32
Management's Discussion and Analysis of Financial Condition and
Results of Operation:
December 31, 1994.......................................... F-42
September 30, 1995......................................... F-72
44
<PAGE>
INDEPENDENT
AUDITORS' REPORT
- -------------------------------------------------------------------------------
Peat Marwick LLP
Certified Public Accountants
225 Market Street Telephone 717 238-7131 Telefax 7l7 233 1101
Suite 300
P.O. Box 1190
Harrisburg, PA 17108-1190
The Board of Directors
Harris Savings Bank
We have audited the accompanying consolidated statements of financial condition
of Harris Savings Bank and subsidiaries as of December 31, 1994 and 1993, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1994.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Harris Savings Bank
and subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31,1994 in conformity with generally accepted accounting
principles.
As discussed in notes 1 and 4 to the consolidated financial statements, the
Company changed its method of accounting for marketable securities in 1994 to
adopt the provisions of Financial Accounting Standards Board's Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". As discussed in notes 1 and 18, the
Company changed its method of accounting for income taxes in 1993 to adopt the
provisions of Financial Accounting Standards Board's SFAS No. 109, "Accounting
for Income Taxes". As discussed in note 15, the Company also adopted the
provisions of Financial Accounting Standards Board's SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions" in 1993.
KPMG Peat Marwick LLP
January 27, 1995
F-1
<PAGE>
Harris Savings Bank And Subsidiaries
CONSOLIDATED STATEMENTS
OF FINANCIAL CONDITION
- -------------------------------------------------------------------------------
December 31, 1994 and 1993 (in thousands, except share data)
<TABLE>
<CAPTION>
1994 1993
----------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents .............................. $ 44,356 $ 64,486
Marketable securities (fair value
of $399,418 and $435,235) (notes 1 and 4) ............. 409,123 424,181
Loans receivable, net (note 5) ......................... 574,794 566,550
Real estate held for investment (note 7) ............... 1,626 1,850
Foreclosed real estate ................................. 6,697 6,523
Premises and equipment, net of accumulated
depreciation of $11,436 and $10,351 (note 8) .......... 10,384 10,949
Accrued interest receivable (note 9) ................... 6,165 6,446
Deferred tax asset (note 18) ........................... 3,506 4,182
Other assets ........................................... 1,437 1,839
----------------------------
Total assets .......................................... $ 1,058,088 $ 1,087,006
============================
LIABILITES AND STOCKHOLDERS' EQUITY
Deposits (note 11) ..................................... $ 910,576 $ 937,903
Escrow and stock over-subscriptions (note 3) ........... 5,116 11,643
Accrued interest payable ............................... 608 486
Stock subscriptions payable (note 3) ................... 0 25,000
Other borrowings (note 12) .............................. 2,475 0
Postretirement benefit obligation (note 15) ............ 1,975 1,741
Other liabilities ...................................... 1,768 2,038
Accrued income taxes ................................... 534 309
----------------------------
Total liabilities ..................................... 923,052 979,120
----------------------------
Commitments (notes 14 and 19)
Common stock, $.01 par value, authorized
50,000,000 shares; 11,178,750 shares issued
and outstanding at December 31, 1994 .................. 112 0
Paid in capital ........................................ 24,544 0
Retained earnings ...................................... 117,292 107,886
Net unrealized loss on marketable securities (note 4) .. (3,905) 0
Employee stock ownership plan (note 16) ................ (2,014) 0
Recognition and retention plans (note 17) .............. (993) 0
----------------------------
Total stockholders' equity ............................ 135,036 107,886
----------------------------
Total liabilities & stockholders' equity .............. $ 1,058,088 $ 1,087,006
============================
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
Harris Savings Bank And Subsidiaries
CONSOLIDATED STATEMENTS
OF INCOME
- -------------------------------------------------------------------------------
Years ended December 31, 1994, 1993 and 1992 (in thousands, except share data)
<TABLE>
<CAPTION>
1994 1993 1992
-------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable:
First mortgage loans ................................. $39,998 $52,837 $72,189
Consumer and other loans.............................. 7,357 7,012 8,358
Held-to-maturity securities............................ 13,468 8,984 8,578
Available-for-sale and held-for-sale securities........ 13,109 12,187 5,495
-------------------------------------
Total interest income ................................ 73,932 81,020 94,620
-------------------------------------
INTEREST EXPENSE:
Deposits (net of withdrawal fees of $154, $129
and $145) (note 11)................................... 37,905 41,254 52,136
Borrowed funds (note 12)............................... 134 0 61
Escrow and stock subscriptions ........................ 202 155 136
-------------------------------------
Total interest expense................................ 38,241 41,409 52,333
-------------------------------------
Net interest income................................... 35,691 39,611 42,287
Provision for loan losses (note 5)..................... 0 800 2,484
-------------------------------------
Net interest income after provision for loan losses .. 35,691 38,811 39,803
-------------------------------------
NON-INTEREST INCOME:
Service charges on deposits ........................... 729 734 752
Other service charges/commissions/fees................. 743 1,161 1,028
Servicing income (note 6) ............................. 911 871 679
Gain on sale of securities, net (note 4) .............. 11 1,778 5,432
Other.................................................. 109 19 11
-------------------------------------
Total non-interest income............................. 2,503 4,563 7,902
-------------------------------------
NON-INTEREST EXPENSE:
Salaries and benefits.................................. 11,390 9,659 8,634
Equipment expense ..................................... 1,286 1,386 1,310
Occupancy expense ..................................... 1,709 1,671 1,594
Advertising and public relations....................... 630 467 487
FDIC insurance.......................................... 2,151 1,970 2,144
Director fees ......................................... 304 312 269
(Income) loss from real estate operations (note 7) .... (144) (522) 138
Amortization and write-off of intangibles (note 10).... 0 0 5,974
Other.................................................. 3,467 3,023 3,263
-------------------------------------
Total non-interest expense............................ 20,793 17,966 23,813
-------------------------------------
Income before income taxes and cumulative effect
of accounting changes................................. 17,401 25,408 23,892
Income taxcs (note 18)................................. 7,348 9,170 10,654
-------------------------------------
Income after income taxes and before
cumulative effect of accounting changes............... 10,053 16,238 13,238
Cumulative effect of accounting changes
(notes 15 and 18) .................................... 0 1,420 0
-------------------------------------
Net income ........................................... $10,053 $17,658 $13,238
=====================================
Earnings per share (notes 1 and 3)..................... $ 0.85 N/A N/A
=====================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
Harris Savings Bank And Subsidiaries
CONSOLIDATED STATEMENTS
OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
Years ended December 31, 1994, 1993 and 1992 (in thousands)
<TABLE>
<CAPTION>
1994 1993 1992
---------------------------------
<S> <C> <C> <C>
COMMON STOCK (par value: $.01)
Balance at January 1...................................... $ 0 $ 0 $ 0
Stock issuance............................................ 111 0 0
Exercised stock options................................... 1 0 0
---------------------------------
Balance at December 31................................... 112 0 0
---------------------------------
PAID IN CAPITAL
Balance at January 1...................................... 0 0 0
Stock issuance............................................ 23,606 0 0
Exercised stock options................................... 537 0 0
Excess of fair value above cost
of ESOP stock committed for release ..................... 306 0 0
Excess of fair value above cost
of earned portion of RRP stock .......................... 95 0 0
---------------------------------
Balance at December 31................................... 24,544 0 0
---------------------------------
RETAINED EARNINGS
Balance at January 1..................................... 107,886 90,228 76,990
Net income ............................................... 10,053 17,658 13,238
Dividends ($.27 per share in 1994) (note 1)................ (647) 0 0
---------------------------------
Balance at December 31...................................... 117,292 107,886 90,228
---------------------------------
NET UNREALIZED GAIN (LOSS) ON
MARKETABLE SECURITIES AVAILABLE FOR SALE
Balance at January 1...................................... 0 0 0
Implementation change in accounting for marketable
securities, net of tax effect of $4,004.................. 6,645 0 0
Change in unrealized gain (loss) on markerable securities
available for sale, net of tax effect of $(6,356) ....... (10,550) 0 0
---------------------------------
Balance ar December 31................................... (3,905) 0 0
---------------------------------
EMPLOYEE STOCK OWNERSHIP PLAN
Balance at January 1...................................... 0 0 0
Common stock acquired by ESOP............................. (2,475) 0 0
ESOP stock committed for release.......................... 461 0 0
---------------------------------
Balance at December 31................................... (2,014) 0 0
---------------------------------
RECOGNITION AND RETENTION PLANS
Balance at January 1...................................... 0 0 0
Common stock acquired by RRPs............................. (1,250) 0 0
Earned portion of RRPs .................................... 257 0 0
---------------------------------
Balance at December 31................................... (993) 0 0
---------------------------------
Total stockholders' equity................................ $135,036 $107,886 $90,228
=================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Harris Savings Bank and Subsidiaries
CONSOLDATED STATEMENTS
OF CASH FLOWS
- -------------------------------------------------------------------------------
Years ended December 31, 1994, 1993 and 1992 (in thousands)
<TABLE>
<CAPTION>
1994 1993 1992
--------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................ $10,053 $17,658 $13,238
Adjustments to reconcile net income to net cash
provided by operating activities:
Interest credited to deposit accounts ............... 24,714 26,904 27,135
Provision for loan losses ........................... 0 800 2,484
Net depreciation, amortization and accretion ........ (22) (2,101) 825
Net gain on sales of interest earning assets.......... (11) (1,778) (5,548)
(Gain) loss on the sale of foreclosed real estate ... 6 28 (4)
Equity losses from joint ventures.................... 7 9 90
Decrease (increase) in accrued interest receivable... 281 (823) 1,381
Increase (decrease) in accrued interest payable...... 122 (192) (589)
Amortization and write-off of intangibles............. 0 0 5,974
Earned ESOP shares ................................... 767 0 0
Earned RRP shares..................................... 352 0 0
Deferred income taxes ............................... 3,029 (464) (241)
Other, net........................................... 1,229 669 1,131
--------------------------------------
Net cash provided by operating activities............. 40,527 40,710 45,876
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal reductions of
marketable securities:
Held-to-maturity .................................... 54,189 39,231 110,214
Available-for-sale and held-for-sale................. 40,254 27,251 7,237
Proceeds from sales of marketable securities:
Held-to-maturity..................................... 0 0 30,485
Available-for-sale and held-for-sale ................ 108,092 3l,943 32,708
Purchase of marketable securities:
Held-to-maturity..................................... (103,663) (120,678) (99,008)
Available-for-sale and held-for-sale................. (82,919) (208,675) (76,186)
Loans sold............................................. 378 0 2,135
Net increase in loan originations less principal
payments of loans .................................... (16,473) 171,841 60,528
Decrease in loans held for sale........................ 0 0 (31,392)
Investment in real estate held for investment.......... 0 (56) 0
Proceeds from payments on real estate
held for investment .................................. 355 1,128 857
Purchase of premises and equipment..................... (550) (849) (445)
Cash proceeds received from the sale of foreclosed
real estate .......................................... 890 1,204 659
--------------------------------------
Net cash provided by (used in) investing activities .. 553 (57,660) 37,792
--------------------------------------
</TABLE>
F-5
<PAGE>
Harris Savings Bank and Subsidiaries
CONSOLDATED STATEMENTS
OF CASH FLOWS
(continued)
- -------------------------------------------------------------------------------
Years ended December 31, 1994, 1993 and 1992 (in thousands)
<TABLE>
<CAPTION>
1994 1993 1992
---------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits.............................. $(52,041) $(39,663) $(40,158)
Net increase (decrease) in other borrowings .......... 2,475 0 (10,000)
Net (decrease) increase in escrow, stock
over-subscriptions, and stock subscriptions payable . (31,527) 30,943 424
Net proceeds from stock issuance ..................... 23,717 0 0
Cash dividends........................................ (647) 0 0
Purchase of ESOP shares .............................. (2,475) 0 0
Purchase of RRP shares................................ (1,250) 0 0
Proceeds from the exercise of stock options .......... 538 0 0
---------------------------------------
Net cash used in financing activities................. (61,210) (8,720) (49,734)
---------------------------------------
Net (decrease) increase in cash and cash equivalents.. (20,130) (25,670) 33,934
Cash and cash equivalents at beginning of year......... 64,486 90,156 56,222
---------------------------------------
Cash and cash equivalents at end of year............... $44,356 $64,486 $90,156
=======================================
SUPPLEMENTAL DISCLOSURES:
Cash paid during the years for:
Interest on deposits, advances and other borrowings
(includes interest credited to deposit accounts) .... $38,092 $41,601 $52,922
Income taxes.......................................... 5,494 10,771 9,853
NON-CASH INVESTING ACTIVITIES:
Transfers from loans to foreclosed real estate......... $ 1,213 $ 735 $ 6,778
Mortgage-backed securities received in exchange for
mortgage loans........................................ 8,296 158,644 65,778
Decrease in carrying value of marketable securities
available-for-sale.................................... 6,257 0 0
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
December 31, 1994, 1993 and 1992
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Harris Savings Bank and subsidiaries
conform to generally accepted accounting principles and to general practices
within the thrift industry.
The following is a description of the more significant of those policies.
(a) Basis of Financial Statement Presentation The accompanying consolidated
financial statements include the accounts of Harris Savings Bank (the "Bank")
and HS Service Corporation and CBL Service Corporation, its wholly-owned
subsidiaries. All significant intercompany transactions and balances are
eliminated in consolidation. The Bank is subject to the regulations of certain
federal agencies and undergoes periodic examinations by those regulatory
authorities.
In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for loan losses
and foreclosed real estate, management obtains independent appraisals for
significant properties.
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.
In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowances for losses
on loans and foreclosed real estate. Such agencies may require the Bank to
recognize additions to the allowances based on their judgments of information
available to them at the time of their examination.
(b) Cash and Cash Equivalents For purposes of the statement of cash flows,
the Bank defines cash equivalents as demand deposits with other financial
institutions.
(c) Marketable Securities As of January 1, 1994, the Bank adopted Statement
of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). SFAS 115 addresses the
accounting and reporting for investments in equity securities that have readily
detemminable fair values and for all investments in debt securities. These
investments are classified in three categories and accounted for as follows:
o Debt securities that the Bank has the positive intent and ability to hold
to maturity are classified as held-to-maturity securities and reported at
amortized cost.
o Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
o Debt and equity securities not classified as either held-to-maturity or
trading securities are classified as available-for-sale securities and
reported at fair value, with unrealized gains and losses excluded from
earnings and reported in a separate component of shareholders' equity.
F-7
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
- -------------------------------------------------------------------------------
December 31, 1994, 1993 and 1992
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(c) Marketable Securities (continued) Premiums and discounts are amortized
or accreted over the term of the related securities using a method that
approximates the interest method. Gains or losses upon sale are determined using
the specific identification method.
Prior to the adoption of SFAS 115 on January 1, 1994, the Bank classified
its marketable securities as either held-for-investment or held-for-sale.
Held-for-investment securities were recorded at amortized cost, and
held-for-sale securities were recorded at the lower of cost or fair value.
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.
(d) 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.
Discounts on first mortgage loans are amortized to income using a method
that approximates the interest method over the remaining period to
contractual maturity, adjusted for prepayments. Discounts on consumer loans are
recognized over the lives of the loans using methods that approximate the
interest method.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, estimated value of any
underlying collateral and current economic conditions.
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.
(e) 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. The Bank had no loans held for
sale as of December 31, 1994 and 1993.
(f) Real Estate Held for Investment and Foreclosed Real Estate Real estate
properties acquired through loan foreclosure and in-substance foreclosure are
initially recorded at the lower of the loan value or fair value less estimated
costs to sell at the date of foreclosure. At the time of foreclosure the excess,
if any, of the loan carrying value over the estimated fair value of the property
is charged to the allowance for loan losses. Real estate properties held for
investment are carried at the lower of cost, including cost of improvements and
amenities incurred subsequent to acquisition, or estimated net realizable value.
Costs relating to development and improvement of property are capitalized,
whereas costs relating to holding property are expensed.
Valuations are periodically performed by management on both real estate
held for investment and foreclosed real estate. An allowance for losses is
established by a charge to operations if the carrying value of real estate held
for investment exceeds its estimated net realizable value, or the carrying value
of foreclosed real estate exceeds its estimated fair value.
(g) Premises and Equipment Buildings, leasehold improvements, furniture,
fixtures, and equipment are carried at cost, less accumulated depreciation and
amortization. Buildings, furnture, 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 life or terms of the related leases.
F-8
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
- -------------------------------------------------------------------------------
December 31, 1994, 1993 and 1992
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(h) Loan Origination and Commitment Fees and Related Costs Loan fees are
accounted for in accordance with Statement of Financial Accounting Standards No.
91, "Accounting for Non-Refundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases." 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.
(i) Intangible Assets Intangible assets represented the excess of fair
values of liabilities assumed over fair values assigned to net assets
received in the acquisition of savings and loan associations which had been
accounted for as purchases. Such amounts were written off during the year ended
December 31, 1992.
(j) Loan Servicing Fees earned for servicing loans for others are reported
as income when the related loan payments are collected. Loan servicing
costs are charged to expense as incurred.
(k) Income Taxes Effective January 1, 1993 the Bank adopted the provisions
of Statement of Financial Accounting Standard No. 109, "Accounting for
Income Taxes", on a prospective basis. The Statement changed the Bank's method
of accounting for income taxes from the deferred method to the asset and
liability method. The deferred method required matching of annual income tax
expense with pretax accounting income by providing deferred taxes at current
rates for timing differences between the determination of net income for
financial reporting and tax purposes. The objective of the asset and liability
method is to establish deferred tax assets and liabilities for temporary
differences between the financial reporting and tax basis of the Bank's assets
and liabilities at enacted tax rates expected to be in effect when such amounts
are realized or settled.
(l) Derivative Financial Instruments In October 1994, the FASB issued
Statement of Financial Accounting Standards No. 119, "Disclosures about
Derivative Financial Instruments and Fair Value of Financial Instruments" (SFAS
119). SFAS 119 is effective for years ending after December 15, 1994. The Bank
has no involvement with derivative financial instruments that meet the
definition of a derivative as defined by SFAS 119.
(m) Earnings Per Share Primary and fully diluted earnings per share are
based on the weighted average number of common shares outstanding during
each period and common equivalent shares (using the treasury share method)
outstanding at the end of the year. The Bank's common equivalent shares consist
of stock options, shares awarded for the RRPs and shares earned under the ESOP.
The resulting number of shares used in computing primary and fully diluted
earnings per share was 10,908,964 in 1994. Earnings per share totaled $.85 per
share in 1994. Per share net income for the 25-day period ended January 25, 1994
totaled $.07 per share and is excluded from 1994 earnings per share. Proforma
earnings per share, based on proforma common shares outstanding of 11,125,000
shares, totaled $1.59 and $1.19 in 1993 and 1992, respectively.
(n) Dividends The Bank 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.
F-9
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
- -------------------------------------------------------------------------------
December 31, 1994, 1993 and 1992
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(n) Dividends (continued) During 1994, the Bank's mutual holding company parent,
Harris Financial, MHC, waived all of its dividends due from the Bank. These
dividends, had they not been waived, would have totaled $2,314,000 in 1994.
(2) REGULATORY STRUCTURE
The Bank's primary regulators are the Pennsylvania State Department of
Banking and the Federal Deposit Insurance Corporation (FDIC). Harris also
is bound by many of the provisions of Financial Institutions Reform, Recovery
and Enforcement Act of 1989 (FIRREA).
The FDIC required institutions to have a minimum regulatory leverage
capital ratio equal to 4% of total assets and a risk-based capital ratio of
8.00% at December 31, 1994 and December 31, 1993. The Pennsylvania Department of
Banking also required minimum regulatory leverage capital of 6% and risk-based
capital of 10% as of December 31, 1994 and December 31, 1993. The Bank exceeded
minimum regulatory capital levels at December 31,
1994 and 1993.
(3) CORPORATE REORGANIZATION AND STOCK ISSUANCE
On December 15, 1992, the Board of Trustees of the Bank unanimously adopted
a plan of reorganization whereby the Bank would reorganize into a Pennsylvania
chartered mutual holding company.
The reorganization was accomplished on January 25, 1994 through a purchase
and assumption of assets and liabilities whereby the Bank: (i) incorporated
as a Pennsylvania capital stock savings bank; (ii) 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 the Bank not sold in the Offering; and (iii) 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 the Bank 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 the Bank.
Prior to the reorganization, the Bank received the approval of the Federal
Reserve, the Department of Banking and the FDIC for transactions
contemplated by the plan of reorganization. The plan of reorganization
authorized the Bank to offer stock in one or more stock offerings up to a
maximum of 49% of the issued and outstanding shares of its common stock. The
common stock was offered on a priority basis to: (i) eligible depositors as of
December 31, 1992; (ii) the employee stock ownership plan (ESOP); (iii)
officers, trustees and employees of the Bank, and the Bank's recognition and
retention plans (RRP); (iv) other depositors and borrowers as of October 29,
1993; and (v) the general public. Subscriptions received dunng the offering
period which ended December 29, 1993, including shares reserved for the ESOP,
exceeded the maximum offering of 2,500,000 shares ($25,000,000) . As a result of
the maximum subscription, Harris Financial, MHC (mutual holding company)
received 8,500,000 shares (76.4%) of Harris Savings Bank (stock bank) stock.
Also, the ESOP received 247,500 shares and the RRP received 125,000 shares.
As a result of the stock offering, Harris Savings Bank received gross
proceeds of $25,250,000. Expenses associated with the offering totaled
$1,533,000, resulting in net capital additions to the Bank of $23,717,000. The
Bank recorded common stock at par of $111,000 and paid in capital of $23,606,000
from the stock issuance.
F-10
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
(4) MARKETABLE SECURITIES
Upon adoption of SFAS 115 on January 1, 1994, (note 1) the Bank recorded a
net increase of $10,649,000 in the carrying value of its available-for-sale
securities portfolio. The corresponding increase to capital, net of tax, was
$6,645,000. During the twelve month period ended December 31, 1994, the Bank
recorded a net decrease of $16,906,000 in the carrying value of its
available-for-sale securities portfolio, with a corresponding decrease to
capital, net of tax, of $10,550,000.
Marketable Securities at December 31, 1994, consist of:
Held-to-maturity, at amortized cost..... $ 222,735
Available-for-sale, at fair value....... 186,388
---------
$ 409,123
=========
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, 1994, were as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
-----------------------------------------------
<S> <C> <C> <C> <C>
HELD-TO-MATURITY:
U.S. Government and agencies ....... $ 37,052 $ 0 $ (1,972) $ 35,080
FHLB securities .................... 301 0 0 301
Mortgage-backed securities:
FNMA PC's ......................... 1,469 8 0 1,477
FHLMC PC's ........................ 3,841 6 (9) 3,838
FNMA CMO's ........................ 89,704 0 (4,220) 85,484
FHLMC CMO's ....................... 90,368 0 (3,518) 86,850
-----------------------------------------------
Total mortgage-backed securities ... 185,382 14 (7,747) 177,649
-----------------------------------------------
Total securities held-to-maturity .. $ 222,735 $ 14 $ (9,719) $ 213,030
===============================================
AVAILABLE-FOR-SALE:
U.S. Government and agencies ...... $ 16,028 $ 20 $ 0 $ 16,048
Equity ............................ 22,574 1,426 (1,484) 22,516
Mortgage-backed securities:
FNMA PC's ........................ 18,580 0 (509) 18,071
FHLMC PC's ....................... 135,463 0 (5,710) 129,753
-----------------------------------------------
Total mortgage-backed securities .. 154,043 0 (6,219) 147,824
-----------------------------------------------
Total securities available-for-sale $ 192,645 $ 1,446 $ (7,703) $ 186,388
===============================================
</TABLE>
F-11
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
(4) MARKETABLE SECURITIES (continued)
The amortized cost and fair value of marketable securities at December 31, 1994
by contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------------------------------
<S> <C> <C>
HELD-TO-MATURITY:
Due in one year or less ................ $ 15,298 $ 15,063
Due after one year through five years... 7,050 6,403
Due after five years through ten years.. 15,005 13,915
Due after ten years..................... 0 0
Mortgage-backed securities.............. 185,382 177,649
--------------------------------
Total securities held-to-maturity....... $ 222,735 $ 213,030
================================
AVAILABLE-FOR-SALE:
Due in one year or less ................. $ 0 $ 0
Due after one year through five years ... 0 0
Due after five years through ten years .. 0 0
Due after ten years ..................... 16,028 16,048
Equity securities........................ 22,574 22,516
Mortgage-backed securities .............. 154,043 147,824
--------------------------------
Total securities available-for-sale .... $ 192,645 $ 186,388
================================
</TABLE>
Marketable securities having a carrying value of $5,049,000 at December 31,
1994 were pledged to secure public deposits.
The amortized cost and fair value of investment securities, mortgage-backed
securities, and securities held-for-sale at December 31, 1993 are as follows:
<TABLE>
<CAPTION>
1993
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES:
U.S. treasuries and agencies ........ $ 40,040 $ 471 $ (123) $ 40,388
FHLB stock.......................... 7,551 0 0 7,551
------------------------------------------
Total investment securities ....... 47,591 471 (123) 47,939
------------------------------------------
MORTGAGE-BACKED SECURITIES:
FNMA PC's........................... 4,395 151 0 4,546
FHLMC PC's.......................... 8,063 209 0 8,272
FNMA CMO's ......................... 75,031 182 (185) 75,028
FHLMC CMO's.......................... 68,038 176 (110) 68,104
------------------------------------------
Total mortgage-backed securities .. 155,527 718 (295) 155,950
------------------------------------------
SECURITIES HELD FOR SALE:
Equity.............................. 10,232 3,253 0 13,485
FNMA PC's........................... 14,666 0 (9) 14,657
FHLMC PC's.......................... 196,165 7,449 (410) 203,204
------------------------------------------
Total securities held for sale...... 221,063 10,702 (419) 231,346
------------------------------------------
Total investment and mortgage-
backed securities................. $424,181 $ 11,891 $ (837) $ 435,235
==========================================
</TABLE>
F-12
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
(4) MARKTABLE SECURITIES (continued)
Activity from the sale of marketable securities is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------------------------------
<S> <C> <C> <C>
Proceeds ......................................... $108,092 $ 31,943 $ 63,193
================================
Gross gains ...................................... $ 2,556 $ 1,778 $ 5,533
Gross losses ..................................... 2,545 0 101
--------------------------------
Net gain ......................................... $ 11 $ 1,778 $ 5,432
================================
</TABLE>
All sales of marketable securities occurred in the available-for-sale
portfolio in 1994 and in the held-for-sale portfolio in 1993 and 1992.
(5) LOANS RECEIVABLE
Loans receivable at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1994 1993
----------------------
<S> <C> <C>
FIRST MORTGAGE LOANS (principally conventional):
Principal balances:
Secured by one-to-four family residences ............ $ 433,206 $ 439,230
Secured by other residential real estate properties . 27,443 27,004
Construction loans (net of undisbursed portion
of $10,802 and $9,983) ............................. 8,642 5,915
Other (primarily secured by commercial
real estate properties) ............................ 22,299 25,257
----------------------
491,590 497,406
Less:
Unearned premiums .................................... (81) (138)
Net deferred loan origination fees .................. 7,840 8,157
----------------------
Total first mortgage loans .......................... 483,831 489,387
----------------------
CONSUMER AND OTHER LOANS:
Principal Balances:
Automobile .......................................... 86 96
Mobile home ......................................... 10,767 7,196
Home equity and second mortgage ..................... 74,295 66,941
Credit cards ........................................ 3,765 3,881
Commercial .......................................... 1,884 880
Other ............................................... 4,110 3,281
----------------------
94,907 82,275
Plus:
Net deferred loan origination costs ................. 226 179
Unearned discounts .................................. (3) (7)
Dealer reserves ..................................... 2,102 1,300
----------------------
Total consumer and other loans ...................... 97,232 83,747
----------------------
Less allowance for loan losses ....................... 6,269 6,584
----------------------
Net loans ........................................... $ 574,794 $ 566,550
======================
</TABLE>
F-13
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
(5) LOANS RECEIVABLE (continued)
Activity in the allowance for loan losses is summarized as follows for the
years ended December 31:
1994 1993 1992
---------------------------------
Balance at beginning of year ............ $ 6,584 $ 6,000 $ 3,593
Provision charged to income ............. 0 800 2,484
Charge-offs and recoveries, net ......... (315) (216) (77)
---------------------------------
Balance at end of year .................. $ 6,269 $ 6,584 $ 6,000
=================================
Nonaccrual and renegotiated loans for which interest has been reduced
totaled approximately $3,000,000, $2,427,000 and $4,663,000 at December 31,
1994, 1993 and 1992, respectively. Interest income foregone on these loans
amounted to $141,000, $148,000 and $269,000 during 1994, 1993 and 1992,
respectively.
(6) LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans at December 31 are summarized as follows:
1994 1993
--------------------------
MORTGAGE LOAN PORTFOLIOS SERVICED FOR:
FHLMC ...................................... $198,022 $225,514
FNMA ....................................... 1,937 2,692
Other investors ............................ 2,003 2,941
--------------------------
$201,962 $231,147
==========================
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $ 1,736,000 and $ 1,838,000 at December 31, 1994
and 1993, respectively.
The Bank recognized servicing fees of $911,000, $871,000 and $679,000 for
the years ended 1994, 1993 and 1992, respectively.
(7) REAL ESTATE HELD FOR INVESTMENT
The Bank and its wholly-owned subsidiaries have direct investments in real
estate projects and participate in joint ventures with third parties engaged
primarily in acquiring, developing and constructing residential housing units.
Real estate held for investment at December 31 is summarized as follows:
1994 1993
------------------------
Investment in real estate partnerships.......... $ 1,626 $ 1,850
------------------------
Income (losses) from real estate operations for the years ended December 31
are as follows:
1994 1993 1992
-----------------------
Equity losses in partnerships ....................... $ (7) $ (9) $ (90)
Net gain (loss) on sale of foreclosed real estate ... (6) (28) 4
Foreclosed real estate income (expense), net ........ 157 559 (52)
-----------------------
Net income (loss) .................................. $ 144 $ 522 $(138)
=======================
F-14
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
(7) REAL ESTATE HELD FOR INVESTMENT (continued)
Summaries of assets, liabilities and partners' equity (deficit) of the
partnerships and operations for the years ended December 31, 1994, 1993 and 1992
are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
-----------------------------
<S> <C> <C> <C>
ASSETS:
Cash ............................................... $ 105 $ 214 $ 181
Land, buildings and construction in progress ....... 2,762 3,036 3,619
Other assets ....................................... 711 494 1,470
-----------------------------
Total assets ...................................... $ 3,578 $ 3,744 $ 5,270
=============================
LIABILITIES AND PARTNERS' EQUITY (DEFICIT):
Mortgage loans payable ............................. $ 3,322 $ 3,678 $ 4,835
Other liabilities .................................. 806 610 961
-----------------------------
Total liabilities ................................. 4,128 4,288 5,796
-----------------------------
PARTNERS' EQUITY (DEFICIT):
HS Service Corporation ............................. (275) (272) (263)
Other .............................................. (275) (272) (263)
-----------------------------
Total partners' equity (deficit) .................. (550) (544) (526)
-----------------------------
Total liabilities and partners' equity (deficit) .. $ 3,578 $ 3,744 $ 5,270
=============================
OPERATIONS OF PARTNERSHIPS:
Real estate sales .................................. $ 738 $ 1,167 $ 1,106
Other income ....................................... 18 40 60
-----------------------------
756 1,207 1,166
Cost of sales ...................................... (444) (788) (828)
Selling and other expenses ......................... (297) (438) (486)
-----------------------------
Net income (loss) ................................. $ 15 $ (19) $ (148)
=============================
</TABLE>
(8) PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1994 and 1993 follows:
<TABLE>
<CAPTION>
Estimated
1994 1993 Useful Lives
--------------------------------------
<S> <C> <C> <C>
Land ............................... $ 1,654 $ 1,654
Buildings and improvements ......... 9,457 9,434 5-50 years
Leasehold improvements ............. 1,855 1,833 5-10 years
Furniture and equipment ............. 7,435 7,015 5-10 years
Automobiles ........................ 111 83 3 years
Software ........................... 1,308 1,281 5 years
Accumulated depreciation ........... (11,436) (10,351)
--------------------------------------
$ 10,384 $10,949
======================================
</TABLE>
Depreciation expense for the years 1994, 1993 and 1992 amounted to
$1,115,000, $1,229,000 and $1,242,000, respectively.
F-15
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
(9) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31 is summarized as follows:
1994 1993
-------------------
Government and other securities ........ $ 939 $ 1,137
Mortgage-backed securities ............. 2,073 1,979
Loans receivable ....................... 3,153 3,330
-------------------
$ 6,165 $ 6,446
===================
(10) INTANGIBLE ASSETS
Intangible assets resulting from the acquisitions of the West Shore,
Conestoga and Manheim Savings and Loan Associations and the deposits of a local
branch office of a savings bank were fully amortized/written-off by December 31,
1992.
Amortization expense for 1992 was $2,239,000. Management wrote off the
remaining intangible assets as of December 31, 1992. This write-off amounted to
$3,735,000.
(11) DEPOSITS
Deposits at December 31, 1994 and 1993 are summarized as follows:
<TABLE>
<CAPTION>
Weighted-average rate
at December 31, 1994
1994 1993
------------------------------------------------
Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$9,429,000 and $9,880,000 .......................... 2.53% $ 56,341 6.19 $ 53,637 5.72
Money market ........................................ 3.35% 60,793 6.67 69,618 7.42
Savings ............................................. 3.12% 195,664 21.49 50,224 26.68
-------------------------------------------------
$312,798 34.35 $373,479 39.82
-------------------------------------------------
Certificates of deposit:
0% to 3.99% ....................................... 3.68% $ 77,103 8.47 $251,550 26.82
4% to 4.99% ....................................... 4.37% 195,643 21.10 3,441 11.03
5% to 5.99% ....................................... 5.44% 186,125 20.44 64,824 6.91
6% to 6.99% ....................................... 6.17% 86,112 9.46 68,358 7.29
7% to 7.99% ....................................... 7.44% 25,306 2.78 37,422 3.99
8% to 8.99% ....................................... 8.26% 24,673 2.71 35,356 3.77
9% to 9.99% ....................................... 9.03% 1,554 0.17 1,552 0.17
10% to l0.99% ...................................... 10.18% 79 0.01 81 0.01
11% and over ....................................... 11.09% 39 0.00 703 0.07
-------------------------------------------------
596,634 65.52 563,287 60.06
Clubs ............................................... 2.88% 1,144 0.13 1,137 0.12
-------------------------------------------------
Total time deposits ................................. 597,778 65.56 4,424 60.18
-------------------------------------------------
Total deposits ...................................... 4.41% $910,576 100.00 $937,903 100.00
=================================================
</TABLE>
F-16
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
(11) DEPOSITS (continued)
The aggregate amount of deposits with a minimum denomination of $100,000
was approximately $69,826,000 and $84,840,000 at December 31, 1994 and 1993,
respectively. At December 31, 1994, scheduled maturities by weighted average
rate of certificates of deposit are as follows:
Year ending December 31,
--------------------------------
Weighted average rate 1995 1996 1997
- -------------------------------------------------------------------------------
0% to 3.99% .......................... $ 72,115 $ 4,988 $ 0
4% to 4.99% .......................... 147,410 41,487 3,572
5% to 5.99% .......................... 66,144 52,115 33,314
6% to 6.99% .......................... 2,708 5,514 24,502
7% to 7.99% .......................... 4,559 14,976 2,478
8% to 8.99% .......................... 13,630 728 4,593
9% to 9.99% .......................... 57 16 1,481
10% to l0.99% ......................... 49 30 0
11% and over .......................... 39 0 0
--------------------------------
$306,711 $119,854 $69,940
================================
Year ending December 31,
--------------------------------
Weighted average rate 1998 1999 Thereafter
- -------------------------------------------------------------------------------
0% to 3.99% .......................... $ 0 $ 0 $ 0
4% to 4.99% .......................... 3,080 13 81
5% to 5.99% .......................... 21,864 11,205 1,483
6% to 6.99% .......................... 29,589 20,245 3,554
7% to 7.99% .......................... 26 613 2,654
8% to 8.99% .......................... 2,578 2,600 544
9% to 9.99% .......................... 0 0 0
10% to l0.99% ......................... 0 0 0
11% and over .......................... 0 0 0
--------------------------------
$ 57,137 $ 34,676 $ 8,316
================================
Interest expense on deposits for the years ended December 31 is summarized
as follows:
1994 1993 1992
--------------------------------
Money market ........................... $ 2,056 $ 2,286 $ 3,239
Savings ................................ 7,361 7,858 6,516
NOW .................................... 1,107 1,162 1,313
Certificates of deposit ................ 27,326 29,882 40,944
Clubs .................................. 55 66 124
--------------------------------
$37,905 $41,254 $52,136
================================
F-17
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
(12) BORROWED FUNDS
No advances from the Federal Home Loan Bank (FHLB) or other borrowed funds
were outstanding at December 31, 1994 or 1993.
Interest expense on advances from the FHLB totalled $61,000 in 1992, with
no corresponding expense in 1993 and 1994.
Pursuant to collateral agreements with the FHLB, advances are fully secured
by stock in the FHLB, certain debt securities and qualifying first mortgage
loans. There were available lines of credit totaling $105,595,000 at December
31, 1994 and 1993.
In conjunction with the corporate reorganization and stock issuance
accomplished on January 25, 1994, as discussed in note (3), the Bank borrowed
$2,475,000 from an unrelated local institution to fund the purchase of 247,500
shares of Harris Savings Bank stock. The purpose of this stock purchase was to
establish the Bank's ESOP.
The terms of the ESOP borrowing include five equal annual principal
installments of $495,000 beginning January 25, 1995 and on the last day of
January each year thereafter until retirement of the debt. Interest on the
borrowing accrues at the rate of 5.75% per annum and is payable monthly.
Interest expense recorded on the ESOP loan totaled $134,000 for the year ended
December 31, 1994.
(13) RETAINED EARNINGS -- PARTIALLY RESTRICTED
Retained earnings are partially restricted in connection with regulations
related to the insurance of savings accounts which require the Bank to maintain
certain statutory reserves.
(14) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
AND CONCENTRATIONS OF CREDIT RISK
The Bank issues financial instruments with off-balance sheet risk in the
normal course of business to meet the financing 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.
The Bank's exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit and
performance standby letters of credit is represented by the contractual notional
amount of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
At December 31, 1994 and 1993, the Bank had the following off-balance sheet
risk items:
Financial instruments whose contract amounts represent credit risk:
1994 1993
----------------------
COMMITMENTS TO EXTEND CREDIT:
Unused open-end consumer lines of credit .. $ 23,387 $ 25,805
Unused credit card lines .................. 23,625 24,218
Funds available on construction loans...... 10,802 9,983
Loan originations.......................... 4,407 16,431
Performance standby letters of credit....... 2,228 1,946
F-18
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
(14) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
AND CONCENTRATIONS OF CREDIT RISK (continued)
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.
The Bank evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by the Bank 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
the Bank 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.
The Bank holds collateral supporting those commitments for which collateral is
deemed necessary.
Most of the Bank's business activity is with customers located within the
Bank's defined market area. The Bank grants commercial, residential and
consumer loans throughout central Pennsylvania. Since the majority of the Bank's
loan portfolio is located in central Pennsylvania, a substantial portion of the
Bank'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.
(15) EMPLOYEE BENEFITS
The Bank has a qualified non-contributory defined benefit pension plan
covering substantially all of its employees. Pension expense for 1994, 1993 and
1992 was $401,000, $375,000 and $340,000, respectively. Benefits are based on
years of service and the employee's average monthly pay using the five highest
years of Bank 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.
The following sets forth the plan's funded status and amounts recognized
in the Bank's statement of financial condition at December 31, 1994 and 1993:
1994 1993
----------------------
ACTUARIAL PRESENT VALUE OF
BENEFIT OBLIGATIONS:
Accumulated benefit obligation:
Vested................................... $ 5,670 $ 5,457
Non-vested .............................. 140 215
----------------------
5,810 5,672
Effect of projected future compensation... 2,433 2,081
----------------------
F-19
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
(15) EMPLOYEE BENEFITS (continued)
1994 1993
----------------
Projected benefit obligation for service rendered to date.. $ 8,243 $ 7,753
Plan assets at fair value.................................. 8,112 7,646
----------------
Plan assets below projected obligation..................... (131) (107)
Unrecognized net loss ..................................... 1,054 812
Unrecognized prior service cost............................ 225 240
Unrecognized net asset being amortized over 22 years....... (537) (576)
----------------
Prepaid pension cost...................................... $ 611 $ 369
================
The components of net pension expense for the years ended December 31,
1994, 1993 and 1992 are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
-------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period ............ $ 539 $ 465 $ 425
Interest cost on projected benefit obligation ............. 510 463 401
Actual return on plan assets .............................. (205) (674) (518)
Net amortization and deferral of gains and (losses) (1) ... (443) 121 32
-------------------------
Net pension expense ...................................... $ 401 $ 375 $ 340
=========================
(1) This item comprises:
Current years net asset gain (loss)
deferred for later recognition .......................... (429) $ 145 $ 56
Amortization of prior service cost ....................... 15 15 15
Amortization of unrecognized net asset or
obligation at transition ................................ (38) (39) (39)
Amortization of net loss ................................. 9 0 0
-------------------------
$ (443) $ 121 $ 32
=========================
</TABLE>
Assumptions used to develop the net pension cost were:
<TABLE>
<CAPTION>
1994 1993 1992
--------------------------
<S> <C> <C> <C>
Discount rate ............................................. 7.0% 6.5% 7.0%
Expected long-term rate of return on assets ............... 8.0% 8.0% 8.0%
Rate increase in compensation levels ...................... 5.0% 4.5% 5.0%
</TABLE>
Assets of the Bank's qualified non-contributory defined benefit pension
plan consists primarily of certificates of deposit, U.S. Government securities,
corporate bonds and collective investment funds.
The Bank also has a defined contribution pension plan covering
substantially all employees. The Bank will provide a matching contribution of
25% of employee contributions to a maximum of 6% of employee compensation.
Pension expense related to the defined contribution plan was $60,000, $54,000
and $47,000 in 1994, 1993 and 1992, respectively.
F-20
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
(15) EMPLOYEE BENEFITS (continued)
In addition to pension benefits, the Bank provides certain health care and
life insurance benefits for retired employees. Effective January 1, 1993, the
Bank adopted Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits other than Pensions" (SFAS106). SFAS 106
requires the accrual method of accounting for postretirement benefits other than
pensions. Previously, the Bank accounted for these benefits on a pay-as-you-go
(cash) basis. Cash expenditures for these benefits totaled $6,000 in 1992.
The Bank recorded the entire transition obligation amounting to $1,528,000
upon adoption of SFAS 106. The effect on net income was approximately $1,009,000
after a deferred tax benefit of $519,000.
The components of net periodic postretirement benefit cost for the years
ended December 31, 1994 and 1993 are as follows:
1994 1993
-----------------
NET PERIODIC POSTRETIREMENT BENEFIT COST:
Service cost ......................................... $ 126 $ 106
Interest cost ........................................ 103 107
Amortization of unrecognized prior service cost ...... 6 0
Recognition of transition obligation existing
at January 1, 1993 .................................. 0 1,528
-----------------
Total net periodic postretirement benefit cost ...... $ 235 $ 1,741
=================
ACCUMULATED POSTRETIREMENT
BENEFIT OBLIGATION:
Fully eligible active and former members ............. $ 371 $ 504
Other active members ................................. 1,005 998
Retired members ...................................... 228 263
-----------------
1,604 1,765
Plan assets .......................................... 0 0
Unrecognized net gain (loss) ......................... 371 (24)
-----------------
Accumulated postretirement benefit obligation
recognized in the statement of condition ............ $ 1,975 $ 1,741
=================
The postretirement benefit obligation was determined using a discount rate
of 7.0%. The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation was 9.0% in 1994, decreasing by
0.5% per year to an ultimate rate of 6.0% in 2000 and thereafter over the
projected payout period of benefits.
The health care cost trend rate assumption has a significant effect on the
amounts reported. For example, a 1.0% increase in the health care trend rate
would increase the accumulated postretirement benefit obligation by
approximately $501,000 at December 31, 1994 and increase the aggregate of the
service and interest cost components by $91,000 for the year ended December 31,
1994.
The FASB has issued Statement of Financial Accounting Standard No. 112,
"Employers' Accounting for Postemployment Benefits". The Bank currently has no
obligation for postemployment benefits; therefore, SFAS 112 does not impact the
Bank.
F-21
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
(16) EMPLOYEE STOCK OWNERSH1P PLAN
On January 25, 1994 the Bank established a leveraged employee stock ownership
plan (ESOP) for employees who have attained age 21 and who have completed a
twelve-month period of employment with the Bank during which they worked at
least 1,000 hours. The Bank makes annual contributions to the ESOP equal to the
ESOP's debt service less dividends received by the ESOP. All dividends received
on unearned ESOP shares are used to pay debt service. 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 the Bank's total eligible compensation recorded
during the year shares are earned.
The Bank accounts for its ESOP in accordance with AICPA Statement of
Position 93-6. Accordingly, the debt of the ESOP is recorded as debt and the
shares pledged as collateral are reported as unearned ESOP shares in the Bank's
statement of condition. As shares are eamed, the Bank 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. ESOP
compensation expense was $767,000 for 1994.
The ESOP shares as of December 31, 1994 were as follows:
1994
-----------
Allocated shares............................................ 0
Shares released for allocation.............................. 0
Earned shares not yet released for allocation............... 46,110
Unearned shares............................................. 201,390
-----------
247,500
===========
Fair value of unearned shares at December 31................ $ 2,769,000
===========
F-22
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(17) STOCK AWARD AND OPTION PLANS
On January 25, 1994 the Bank established the Harris Savings Bank Recognition
and Retention Plan for Officers and Employees (the "RRP for Employees") and the
Harris Savings Bank Recognition and Retention Plan for Outside Directors (the
"RRP for Outside Directors").
Under the RRP for Employees, awards totaling 104,000 shares of common stock
may be granted. As of December 31, 1994, restricted stock performance awards
have been granted. These restricted stock awards will vest only if the Bank
achieves certain financial goals over one-year performance periods. Vesting
periods range from four to five years beginning with the inception of the plan.
Recipients of restricted stock awards are not required to provide consideration
to the Bank other than rendering service and have the right to vote the shares
and receive dividends. In 1994, awards totaling 79,000 shares were granted under
the RRP for Employees. The awards are recorded at market value at the time the
shares are earned. At the time of inception of the plan, 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 share market value,
unearned compensation is reduced at share cost ($10 per share), thereby
increasing stockholders' equity, and paid in capital is increased by the
appreciated portion of the shares' market value. The Bank recorded compensation
expense under the RRP for Employees totaling $282,000 for the year ended
December 31, 1994, including $187,000 charged from unearned compensation and
$95,000 recorded as an increase to paid in capital. At December 31, 1994, the
RRP for Employees held 25,000 shares reserved for future grants.
Under the RRP for Outside Directors, awards totaling 21,000 common shares
may be granted. In 1994, unrestricted shares were granted with a vesting period
of three years beginning with the inception of the plan. These stock awards are
not based on the achievement of performance goals. Recipients of these stock
awards are not required to provide consideration to the Bank other than the
rendering service and have the right to vote the shares and receive dividends.
During 1994, awards totaling 20,000 shares were granted under the RRP for
Outside Directors. The awards are recorded at cost at the time the shares are
awarded ($10 per share). At the inception of the plan, the cost of the shares
was recorded as unearned compensation in stockholders' equity. As granted shares
vest, compensation expense is recorded at cost and charged from unearned
compensation. The Bank recorded compensation expense under the RRP for Outside
Directors totaling $70,000 for the year ended December 31, 1994 with a
corresponding charge from unearned compensation. At December 31, 1994, the RRP
for Outside Directors held 1,000 shares reserved for future grants.
On January 25, 1994, the Bank also established the Harris Savings Bank 1994
Incentive Stock Option Plan (the "Option Plan") for key employees of the Bank
and the Harris Savings Bank 1994 Stock Option Plan for Outside Directors (the
"Directors' Option Plan") for non-employee directors of the Bank. Recipients of
options under the Option Plan and Directors' Option Plan are required to pay
consideration to the Bank to exercise option shares as well as render service
over the applicable vesting periods. Also, recipients of options have no rights
with respect to share voting or receipt of dividends on unexercised option
shares.
F-23
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
(17) STOCK AWARD AND OPTION PLANS (continued)
During 1994, the Bank granted incentive options under the Option Plan for the
purchase of 171,250 shares at an exercise price of $10.00 per share. Incentive
stock options under the Option Plan vest over periods of three to five years, or
at the time of certain qualified events, and are exercisable within a ten-year
period from the date options become vested. A total of 53,750 shares were
exercised under the Option Plan during 1994. Although the exercise of options
under the Option Plan normally does not result in the recording of compensation
expense, a total of $159,000 of compensation expense has been recognized in the
statement of income during 1994 due to the settlement of certain exercised
shares for cash. At December 31,1994, incentive stock options to purchase
117,500 shares remain outstanding.
During 1994, the Bank granted options under the Directors' Option Plan to
purchase 75,000 shares at an exercise price of $10.00 per share. Also, options
to purchase an additional 3,750 shares have been reserved for future issuance.
Stock options under the Option Plan for Outside Directors vest after one year
from the date of grant and are exercisable within a ten-year period beginning
with the date options become vested. At December 31,1994, the entire 75,000
options initially granted under the Directors' Option Plan remain outstanding.
(18) INCOME TAXES
The Bank and subsidiaries file consolidated federal income tax returns on a
calendar year basis. If certain conditions are met in determining taxable
income, the Bank is allowed a special bad-debt deduction based on a percentage
of taxable income (presently 8%) or on specified experience formulas. The Bank
used the percentage of taxable income method in the post-reorganization period
of 1994 (note 3) and in 1993.
Retained earnings includes approximately $28,392,000 at December 31, 1994
for which no deferred federal income tax liability has been recognized. This
amount represents an allocation of income to bad-debt deductions for tax
purposes only. Reduction of amounts so allocated for purposes other than tax
bad-debt losses or adjustments arising from carry back of net operating losses
would create income for tax purposes equal to an amount which net of the federal
tax liability would be equal to the amount so used. The percentage-of-taxable
income bad-debt deduction amounted to approximately $876,000 and $1,982,000 for
1994 and 1993, respectively.
As previously discussed in note 1, the Bank adopted Statement 109 in 1993
on a prospective basis, with the cumulative effect of this accounting change
amounting to an increase in the financial statement deferred tax asset of
$2,429,000, with a corresponding increase to income.
Income tax expense for the years ended December 31 1994, 1993, and 1992 is
summarized as follows:
1994 1993 1992
------------------------------------
Federal:
Current ............................ $ 2,854 $ 7,892 $ 9,371
Deferred............................ 3,029 (464) (241)
------------------------------------
5,883 7,428 9,130
State-current......................... 1,465 1,742 1,524
------------------------------------
Income tax expense.................... $ 7,348 $ 9,170 $10,654
====================================
F-24
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
(18) INCOME TAXES (continued)
Total income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of of 35% in 1994 and 1993, and 34% in 1992 to income
before income taxes as a result of the following:
<TABLE>
<CAPTION>
1994 1993 1992
---------------------------
<S> <C> <C> <C>
Expected income tax expense at federal tax rate ...... $ 6,090 $ 8,893 $ 8,123
Taxable interest income not recorded in book income .. 180 0 0
Dividends received deduction ......................... (246) (132) (68)
Non-taxable amortization:
Intangible assets ................................... 0 0 2,031
Loan discount ....................................... 0 0 (362)
Non-deductible ESOP expense .......................... 107 0 0
State tax based income, net of federal income taxes .. 973 1,132 1,006
Adjustment of prior year accrual ..................... 0 (534) 0
Other ................................................ 244 (189) (76)
---------------------------
Total income tax expense ............................. $ 7,348 $ 9,170 $10,654
===========================
</TABLE>
Prior to the adoption of SFAS 109, deferred tax expense (income) resulted
from timing differences in the recognition of income and expense for tax and
financial reporting purposes. The sources and tax effects of the timing
differences for the year ended December 31, 1992 is as follows:
1992
--------
Loan fees deferred for financial reporting purposes... $ (202)
Uncollected interest and late charges ................ (74)
Deferred compensation ................................ 31
Excess servicing...................................... (53)
Other................................................. 57
--------
$ (241)
========
F-25
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
(18) INCOME TAXES (continued)
In accordance with SFAS 109, the tax effects of temporary differences that give
rise to significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1994 and 1993 are presented below.
1994 1993
--------------------
DEFERRED TAX ASSETS:
Deferred interest and fee income .................... $ 1,280 $ 3,853
Deferred compensation expense ........................ 365 377
Reserve for uncollected interest ..................... 69 184
Postretirement health benefits expense .............. 691 609
Excess loan servicing fees ........................... 123 257
Allowance for loan losses ............................ 2,239 2,304
Net unrealized loss on marketable securities
available-for-sale .................................. 2,352 0
Stock-based compensation expense ..................... 123 0
--------------------
Total ............................................... 7,242 7,584
--------------------
DEFERRED TAX LIABILITIES
Depreciation expense ................................. $ 182 $ 191
Pension expense ...................................... 214 129
Excess prepaid expense ............................... 141 189
Bad-debt reserve ..................................... 3,199 2,893
--------------------
Total ............................................... 3,736 3,402
--------------------
Net deferred tax asset ............................. $ 3,506 $ 4,182
====================
Management has determined that it is not required to establish a valuation
reserve for the deferred asset since it is more likely than not that the
deferred tax asset will be realized through future reversals of existing
temporary differences, future taxable income, and tax planning strategies.
(19) LEASES
At December 31, 1994, the Bank 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 $413,000, $371,000 and $362,000 for
1994, 1993 and 1992, respectively.
The projected minimum rental payments under the terms of the leases at
December 31, 1994, net of projected sub-lease rentals, are as follows:
Years ending
December 31 Amount
- ------------------------------------------------------------
1995.................................... $ 407
1996.................................... 368
1997.................................... 360
1998.................................... 355
1999.................................... 341
2000 and thereafter........................... 5,311
---------
$ 7,142
=========
F-26
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
(20) FAIR VALUE ACCOUNTING
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments" (SFAS 107) requires all entities to disclose the
fair value of its financial instruments and liabilities. For Harris Savings
Bank, as for most financial institutions, the majority of its assets and
liabilities are considered financial instruments as defined in SFAS 107. Many of
the Bank's financial instruments, however, lack an available trading market as
characterized by a willing buyer and willing seller engaging in an exchange
transaction. Since it is the Bank's general practice not to engage in trading or
sales activities, significant assumptions and estimations were used in
calculating present values in discounted cash flow models.
Estimated fair values at December 31, 1994 and 1993 have been determined by
the Bank using the best available data, as generally provided in the 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 the
Bank's financial instruments.
Cash and cash equivalents The carrying amounts for short-term investments
approximate fair value because of the short maturity of, and negligible credit
concerns within, those instruments.
<TABLE>
<CAPTION>
1994 1993
--------------------------------------------
Estimated Carrying Estimated Carrying
Fair value Amount Fair value Amount
--------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents............. $ 44,356 $ 44,356 $ 64,486 $ 64,486
</TABLE>
Marketable securities (including available-for-sale and held-for-sale
securities) The fair value of marketable securities actively traded in the
secondary market have been valued based on quotations received from securities
dealers.
<TABLE>
<CAPTION>
1994 1993
----------------------------------------------------------
Estimated Carrying Estimated Carrying
Fair value Amount Fair value Amount
----------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-maturity................................. $ 213,030 $ 222,735 $ 203,889 $ 203,118
Securities available-for-sale and held-for sale.. 186,388 186,388 231,346 221,063
----------------------------------------------------------
$ 399,418 $ 409,123 $ 435,235 $ 424,181
</TABLE>
F-27
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
(20) FAIR VALUE ACCOUNTING (continued)
Deposits, Escrow and Stock Subscriptions, 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 with stated
maturities is based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for deposits of
similar remaining maturities. The fair value of escrow and stock subscriptions,
which have no stated maturity, is equal to the amount on deposit. The fair value
of other borrowings is based on the discounted value of contractual cash flows.
<TABLE>
<CAPTION>
1994 1993
-----------------------------------------------------
Estimated Carrying Estimated Carrying
Fair value Amount Fair value Amount
-----------------------------------------------------
<S> <C> <C> <C> <C>
Demand and NOW accounts ................ $ 56,341 $ 56,341 $ 53,637 $ 53,637
Money market accounts .................. 60,793 60,793 69,618 69,618
Savings ................................ 195,664 195,664 250,224 250,224
Time deposits .......................... 595,396 597,778 575,252 564,424
-----------------------------------------------------
$ 908,194 $910,576 $948,731 $937,903
=====================================================
Escrow and stock subscriptions ......... $ 5,116 $ 5,116 $ 36,643 $ 36,643
=====================================================
Other borrowings ....................... $ 2,384 $ 2,475 $ 0 $ 0
=====================================================
</TABLE>
Loans Fair values are estimated for portfolios of loans with similar
characteristics. Residential mortgages make up a substantial percentage of the
Bank'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
market value of a comparable Freddie Mac participation certificate (for
participation certificates with similar interest rates and maturity dates)
adjusted by deducting .50% for credit risk and cost of servicing.
Term fed funds and construction loans are of relatively short maturity and
have an estimated fair value equal to the carrying value. Fair values for all
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 non-interest operating costs, credit risk and assumed
prepayment risk.
<TABLE>
<CAPTION>
1994 1993
-----------------------------------------------------
Estimated Carrying Estimated Carrying
Fair value Amount Fair value Amount
-----------------------------------------------------
<S> <C> <C> <C> <C>
One-to-four family mortgages........... $ 408,585 $ 435,278 $ 447,819 $ 439,230
Construction loans..................... 8,642 8,642 5,805 5,915
Credit cards .......................... 3,765 3,765 3,881 3,881
Other loans............................ 135,649 138,812 135,908 130,655
Less: Allowances for loan losses....... 0 (6,269) 0 (6,584)
-----------------------------------------------------
$ 556,641 $ 580,228 $ 593,413 $ 573,097
</TABLE>
F-28
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
(20) FAIR VALUE ACCOUNTING (continued)
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 on fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties.
<TABLE>
<CAPTION>
1994
---------------------------------------
Contract Carrying Estimated
Amount Amount(1) Fair value
---------------------------------------
<S> <C> <C> <C>
COMMITMENTS TO EXTEND CREDIT:
Unused open-end consumer lines of credit ............ $23,387 $ 0 $ 0
Unused credit card lines ............................ 23,625 0 0
Funds available on construction loans ............... 10,802 324 324
Loan originations .................................... 4,407 85 85
Performance standby letters of credit ............... 2,228 1 1
---------------------------------------
$64,449 $ 410 $ 410
=======================================
</TABLE>
<TABLE>
<CAPTION>
1993
---------------------------------------
Contract Carrying Estimated
Amount Amount(1) Fair value
---------------------------------------
<S> <C> <C> <C>
COMMITMENTS TO EXTEND CREDIT:
Unused open-end consumer lines of credit ............ $ 25 805 $ 0 $ 0
Unused credit card lines ............................ 24,218 0 0
Funds available on construction loans ............... 9,983 295 295
Loan originations ................................... 16,431 326 326
Performance standby letters of credit ............... 1,946 1 1
---------------------------------------
$ 78,383 $ 622 $ 622
=======================================
</TABLE>
(l) 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 the Bank's entire holdings or of a particular
financial instrument. Because no market exists for a significant portion of the
Bank's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, 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-29
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are thousands)
(21) NEW ACCOUNTING STANDARDS
In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" (SFAS 114). Also, in October 1994, the FASB issued Statement of
Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment
of a Loan--Income Recognition and Disclosures" (SFAS 118), which amends SFAS
114.
SFAS 114 and SFAS 118 address the accounting by creditors for impairment of
certain loans. The Statements require that impaired loans that are within the
scope of SFAS 114 be 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 the fair value of the collateral if the loan is collateral dependent.
SFAS 118 amends the provisions of SFAS 114 to allow a creditor to use existing
methods for recognizing interest income on an impaired loan and to require
additional disclosure on interest income recognition related to impaired loans.
SFAS 114 and SFAS 118 are effective for years beginning after December 15,
1994. The Bank expects to adopt SFAS 114 and SFAS 118 in January, 1995 with no
material effect on the Bank's financial condition or results of operations.
As of December 31, 1994, the aggregate principal balance of loans that meet the
definition of impaired loans under SFAS 114 was $413,000.
In June 1994, the FASB issued Statement of Financial Accounting Standards
No. 116 "Accounting for Contributions Received and Contributions Made" (SFAS
116). SFAS 116 presents standards for contributions and applies to all entities
that receive or make contributions. Under SFAS 116, contributions received,
including unconditional promises to give, are recognized as revenue in the
period received at their fair values. Contributions made, including
unconditional promises to give, are recognized as expenses in the period made at
their fair values.
SFAS 116 is effective for years beginning after December 15, 1994. The Bank
expects to adopt SFAS 116 in January 1995 with no material effect on the Bank's
financial condition or results of operations.
F-30
<PAGE>
Harris Savings Bank and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
(22) CONSOLIDATED QUARTERLY FINANCIAL DATA (unaudited)
1994
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------
Interest income ...................... $18,684 $18,090 $18,534 $18,624
Interest expense ..................... 9,395 9,284 9,709 9,853
----------------------------------------
Net interest income ................ 9,289 8,806 8,825 8,771
Provision for loan losses ............ 0 0 0 0
Non-interest income .................. 616 639 662 586
Non-interest expense ................. 4,955 5,250 5,445 5,l43
----------------------------------------
Income before income taxes ......... 4,950 4,195 4,042 4,214
Provision for income taxes ........... 2,011 1,844 1,711 1,782
----------------------------------------
Net income ......................... $ 2,939 $ 2,351 $ 2,331 $ 2,432
========================================
Earnings per share ................... $ 0.20 $ 0.22 $ 0.21 $ 0.22
========================================
1993
-------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------
Interest income ......................... $20,788 $21,025 $19,969 $19,238
Interest expense ........................ 11,139 10,446 10,085 9,739
-------------------------------------
Net interest income ................... 9,649 10,579 9,884 9,499
Provision for loan losses ............... 60 140 300 300
Non-interest income ..................... 605 1,685 759 1,514
Non-interest expense .................... 4,404 4,252 4,461 4,849
-------------------------------------
Income before income taxes ............ 5,790 7,872 5,882 5,864
Provision for income taxes .............. 1,857 3,211 2,332 1,770
Cumulative effect of accounting changes . 1,420 0 0 0
-------------------------------------
Net income ............................ $ 5,353 $ 4,661 $ 3,550 $ 4,094
=====================================
F-31
<PAGE>
UNAUDITED FINANCIAL INFORMATION
AS OF AND FOR THE PERIOD ENDED
SEPTEMBER 30, 1995
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
(Consolidated Statements of Financial Condition
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1995 1994 1994
------------- ------------ -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Assets
Cash and cash equivalents ....................... $ 82,472 $ 44,356 $ 37,614
Marketable securities (note 2)................... 505,649 409,123 435,165
Loans receivable, net (note 3)................... 618,642 574,794 572,895
Loan servicing rights (note 4)................... 4,612 0 0
Real estate held for investment.................. 1,099 1,626 1,739
Foreclosed real estate........................... 6,534 6,697 7,069
Premises and equipment, net of accumulated
depreciation of $12,152, $11,436, and $11,091... 10,088 10,384 10,533
Accrued interest receivable...................... 7,873 6,165 6,205
Deferred tax asset (note 5)...................... 0 3,506 2,473
Intangible assets (note 6)....................... 10,366 0 0
Other assets..................................... 2,689 1,437 2,026
----------- ----------- -----------
Total assets................................... $ 1,250,024 $ 1,058,088 $ 1,075,719
=========== =========== ===========
Liabilities and Stockholders' Equity
Deposits......................................... $ 1,066,962 $ 910,576 $ 927,867
Escrow........................................... 3,223 5,116 2,834
Accrued interest payable......................... 6,759 608 5,149
Postretirement benefit obligation............... 2,183 1,975 1,912
Other borrowings................................. 20,480 2,475 2,475
Deferred tax liability (note 5).................. 330 0 0
Other liabilities................................ 1,709 1,768 1,733
Accrued income taxes............................. (33) 534 (402)
----------- ----------- -----------
Total liabilities 1,101,613 923,052 941,568
----------- ----------- -----------
Common stock, $.01 par value, authorized
50,000,000 shares; 11,203,150 shares issued
and outstanding at September 30, 1995,
11,178,750 shares issued and outstanding at
December 31, 1994, and 11,125,000 shares
issued and outstanding at September 30, 1994.... 112 112 111
Paid in capital.................................. 25,097 24,544 23,963
Retained earnings................................ 123,705 117,292 115,098
Net unrealized gain (loss) on marketable
securities (note 2)............................. 2,000 (3,905) (1,860)
Employee stock ownership plan.................... (1,643) (2,014) (2,104)
Recognition and retention plans.................. (860) (993) (1,057)
----------- ----------- -----------
Total stockholders' equity...................... 148,411 135,036 134,151
----------- ----------- -----------
Total liabilities & stockholders' equity....... $ 1,250,024 $ 1,058,088 $ 1,075,719
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30, Three months ended September 30,
------------------------------- --------------------------------
1995 1994 1995 1994
--------- --------- ---------- -----------
Interest income: (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Loans receivable:
First mortgage loans........................ $ 30,111 $ 30,224 $ 10,135 $ 9,898
Consumer and other loans.................... 6,435 5,367 2,302 1,900
Held-to-maturity securities.................. 11,809 15,549 4,006 5,260
Available-for-sale securities................ 10,192 4,168 3,611 1,476
------------ ------------ ------------ ------------
Total interest income....................... 58,547 55,308 20,054 18,534
------------ ------------ ------------ ------------
Interest expense:
Deposits (net of withdrawal fees of $199,
$99, $39, and $31).......................... 33,199 28,111 11,848 9,651
Borrowed funds............................... 573 98 314 37
Escrow and stock subscriptions............... 105 179 34 21
------------ ------------ ------------ ------------
Total interest expense...................... 33,877 28,388 12,196 9,709
------------ ------------ ------------ ------------
Net interest income......................... 24,670 26,920 7,858 8,825
Provision for loan losses..................... 0 0 0 0
------------ ------------ ------------ ------------
Net interest income after
provision for loan losses.................. 24,670 26,920 7,858 8,825
------------ ------------ ------------ ------------
Non-interest income:
Service charges on deposits.................. 552 533 189 186
Other service charges/commissions/fees....... 504 586 150 166
Net Servicing income......................... 805 691 300 223
Gain on sale of securities, net (note 2)..... 0 11 0 0
Other........................................ 110 96 55 87
------------ ------------ ------------ ------------
Total non-interest income.................... 1,971 1,917 694 662
------------ ------------ ------------ ------------
Non-interest expense:
Salaries and benefits........................ 8,473 8,647 2,858 3,011
Equipment expense............................ 829 971 271 321
Occupancy expense............................ 1,342 1,285 446 431
Advertising and public relations............. 423 413 155 197
FDIC insurance............................... 1,576 1,615 523 539
Director fees................................ 228 224 71 70
(Income) loss from real estate operations.... (418) 29 (152) 41
Amortization of intangibles.................. 4 0 4 0
Other........................................ 2,562 2,466 953 835
------------ ------------ ------------ ------------
Total non-interest expense.................. 15,019 15,650 5,129 5,445
------------ ------------ ------------ ------------
Income before income taxes.................... 11,622 13,187 3,423 4,042
Income tax expense (note 5)................... 4,271 5,566 1,278 1,711
------------ ------------ ------------ ------------
Net income.................................. $ 7,351 $ 7,621 $ 2,145 $ 2,331
============ ============ ============ ============
Earnings per share (1)........................ $ 0.67 $ 0.63 $ 0.19 $ 0.21
============ ============ ============ ============
Average shares outstanding................... 11,003,554 10,945,575 11,025,355 10,951,348
</TABLE>
(1) The Bank executed its initial public stock issuance on January 25,
1994; accordingly, net income for the nine months ended September 30, 1994
excludes $735.000. or $.07 per share, earned during the 25-day period
ended January 25,1994.
See accompanying notes to consolidated financial statements.
F-33
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1995 1994
(unaudited) (unaudited)
----------- ------------
<S> <C> <C>
Common stock (par value: $.01)
Balance at January 1.................................. $ 112 $ 0
Stock issuance........................................ 0 111
--------- ---------
Balance at September 30.............................. 112 111
--------- ---------
Paid in capital
Balance at January 1.................................. 24,544 0
Stock issuance........................................ 0 23,605
Exercised stock options............................... 244 0
Excess of fair value above cost
of ESOP stock committed for release.................. 242 260
Excess of fair value above cost
of earned portion of RRP stock....................... 67 98
--------- ---------
Balance at September 30.............................. 25,097 23,963
--------- ---------
Retained earnings
Balance at January 1.................................. 117,292 107,886
Net income............................................ 7,351 7,621
Dividends ($.380 and $.172 per share)................. (938) (409)
--------- ---------
Balance at September 30.............................. 123,705 115,098
--------- ---------
Net unrealized gain (loss) on marketable
securities available for sale
Balance at January 1................................ (3,905) 0
Change in unrealized gain (loss) on marketable
securities, available for sale, net of tax
effect of ($3,557) and $1,120....................... 5,905 (1,860)
--------- ---------
Balance at September 30............................. 2,000 (1,860)
--------- ---------
Employee stock ownership plan
Balance at January 1................................. (2,014) 0
Common stock acquired by ESOP........................ 0 (2,475)
ESOP stock committed for release..................... 371 371
--------- ---------
Balance at September 30............................. (1,643)
--------- ---------
Recognition and retention plans
Balance at January 1................................. (993) 0
Common stock acquired by RRPs........................ 0 (1,250)
Earned portion of RRPs............................... 133 193
--------- ---------
Balance at September 30............................. (860) (1,057)
--------- ---------
Total stockholders' equity............................ $ 148,411 $ 134,151
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1995 1994
-------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 7,351 $ 7,621
Adjustments to reconcile net income to net cash
provided by operating activities:
Interest credited to deposit accounts.................. 15,706 14,404
Provision for loan losses.............................. 0 0
Net depreciation, amortization and accretion........... 610 (61)
Net gain on sales of interest earning assets........... 0 (5)
Gain on the sale of foreclosed real estate............. (106) (23)
Equity losses from joint ventures...................... 16 19
(Increase) decrease in accrued interest receivable..... (1,708) 240
Increase in accrued interest payable................... 6,151 4,680
Earned ESOP shares..................................... 613 631
Earned RRP shares...................................... 200 291
Deferred income taxes.................................. 279 2,830
Other, net............................................. (914) (466)
--------- ---------
Net cash provided by operating activities............... 28,198 30,161
--------- ---------
Cash flows from investing activities:
Proceeds from maturities and principal reductions of
marketable securities................................... 57,051 70,250
Proceeds from sales of marketable securities............. 0 108,565
Purchase of marketable securities........................ (144,293) (194,409)
Purchase of loans........................................ (10,764) 0
Loans sold............................................... 0 378
Net increase in loan originations less principal
payments of loans....................................... (33,266) (6,034)
Purchase of loan servicing rights........................ (4,808) 0
Investment in real estate held for investment............ (299) 0
Proceeds from payments on real estate held for investment 288 329
Purchase of premises and equipment....................... (424) (420)
Cash proceeds received from the sale of foreclosed 702
real estate............................................. 499
Acquisition of intangible asset.......................... (10,367) 0
--------- ---------
Net cash used in investing activities................... (146,180) (20,842)
--------- ---------
</TABLE>
(continued)
F-35
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(continued)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1995 1994
------------- ------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits.......................... $ 140,680 $ (24,440)
Net increase in other borrowings 18,005 2,475
Net increase (decrease) in escrow, stock over-subscriptions,
and stock subscriptions payable............................. (1,893) (33,809)
Net proceeds from stock issuance............................. 0 23,717
Cash dividends............................................... (938) (409)
Purchase of ESOP shares...................................... 0 (2,475)
Purchase of RRP shares....................................... 0 (1,250)
Proceeds from the exercise of stock options.................. 244 0
--------- ---------
Net cash provided by (used in) financing activities.......... 156,098 (36,191)
Net decrease in cash and cash equivalents.................... 38,116 (26,872)
Cash and cash equivalents at beginning of period.............. 44,356 64,486
--------- ---------
Cash and cash equivalents at end of period.................... $ 82,472 $ 37,614
========= =========
Supplemental disclosures:
Cash paid during the years for:
Interest on deposits, advances and other borrowings
(includes interest credited to deposit accounts)............ $ 27,726 $ 23,675
Income taxes................................................. 4,559 3,969
Non-cash investing activities:
Transfers from loans to foreclosed real estate............... $ 554 $ 1,184
Mortgage-backed securities received in exchange for
mortgage loans.............................................. 0 8,296
Maryland branch acquisition (note 6):
Fair value of assets acquired............................... $ 115,604 $ 0
Deposit premium paid........................................ 10,367 0
Fair value of liabilities assumed........................... 125,971 0
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(1) Accounting Policies
The Consolidated Financial Statements include the accounts of Harris
Savings Bank and its wholly-owned subsidiaries Harris Delaware Corporation,
H. S. Service Corporation, and C.B.L. Service Corporation. All material
intercompany balances and transactions have been eliminated in consolidation.
The information contained in the Consolidated Financial Statements is
unaudited. In the opinion of management all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the results of interim
periods have been made. Operating results for the nine month period ended
September 30, 1995 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1995.
The accounting policies followed in the presentation of interim financial
results are the same as those followed on an annual basis, except for the
accounting for loans receivable as described in note (3) below. These policies
are presented on pages 45 through 48 of the 1994 Annual Report to Stockholders.
(2) Marketable Securities
Marketable securities consist of the following as of the dates indicated:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994 September 30, 1994
------------------ ----------------- ------------------
<S> <C> <C> <C>
Held-to-maturity, at amortized cost.............. $ 267,920 $ 222,735 $ 238,400
--------- --------- ---------
Available-for-sale, at amortized cost............ 234,524 192,645 199,745
Available-for-sale, net unrealized gain (loss)... 3,205 (6,257) (2,980)
--------- --------- ---------
Available-for-sale, at fair value................ 237,729 186,388 196,765
--------- --------- ---------
Total marketable securities.................... $ 505,649 $ 409,123 $ 435,165
========= ========= =========
</TABLE>
The amortized cost and fair value of marketable securities at September 30,
1995 by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
-------- --------
Held-to-maturity:
Due in one year or less................... $ 10,700 $ 10,678
Due after one year through five years..... 68,428 68,268
Due after five years through ten years.... 16,197 16,254
Due after ten years
Mortgage-backed securities................ 172,595 170,938
-------- --------
Total securities held-to-maturity....... $267,920 $266,138
======== ========
Available-for-sale:
Due in one year or less................... $ 0 $ 0
Due after one year through five years..... 0 0
Due after five years through ten years.... 0 0
Due after ten years....................... 38,251 38,854
Equity securities......................... 22,833 25,014
Mortgage-backed securities................ 173,440 173,861
-------- --------
Total securities available-for-sale.... $234,524 $237,729
======== ========
(continued)
F-37
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(2) Marketable Securities (continued)
Activity from the sale of marketable securities was as follows:
For the nine months ended
September 30,
-------------------------
1995 1994
---------- ----------
Proceeds...... $ 0 $108,092
======== ========
Gross gains... $ 0 $ 2,556
Gross losses.. 0 2,545
-------- --------
Net gain...... $ 0 $ 11
======== ========
All sales of marketable securities occurred in the available-for-sale
portfolio for the nine month period ended September 30, 1994.
(3) Loans Receivable
On January 1, 1995, the Bank adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114)
and Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan--Income Recognition Disclosures" (SFAS 118),
which amends SFAS 114.
SFAS 114 and SFAS 118 address the accounting by creditors for impairment of
certain loans. The Statements require that impaired loans that are within the
scope of SFAS 114 be 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 the fair value of the collateral if the loan is collateral
dependent. SFAS 118 amends the provisions of SFAS 114 to allow a creditor to use
existing methods for recognizing interest income on an impaired loan and to
require additional disclosure on interest income recognition related to impaired
loans.
The carrying value of impaired loans as of September 30, 1995 was
$6,001,000, of which $4,517,000 required a loss reserve. The total allowance for
loan losses related to these loans was $1,117,000 as of September 30, 1995.
During the nine months ended September 30,1995, the Bank's average
carrying value of impaired loans was $6,041,363. Interest income recognized on
impaired loans during this period totaled $298,000. Recognition of interest
income on impaired loans is computed using the interest method. Interest on such
loans that are contractually past due ninety days and over is reserved in
accordance with regulatory requirements.
F-38
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(4) Loans Serviced for Others
The following table sets forth information concerning loans serviced for
others as of the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1995 1994 1994
------------- ------------ -------------
<S> <C> <C> <C>
Unpaid principal balances of
mortgage loans serviced for:
FHLMC................................... $427,785 $198,022 $202,548
FNMA.................................... 1,567 1,937 2,110
Other investors......................... 1,595 2,003 2,130
-------- -------- --------
Total mortgage loans serviced........ $430,947 $201,962 $206,788
======== ======== ========
Carrying value of purchased mortgage
loan servicing rights.................. $ 4,612 $ 0 $ 0
======== ======== =========
</TABLE>
Unpaid principal balances of mortgage loans serviced for others are not
included in the accompanying statements of financial condition.
In May 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No.122, "Accounting for Mortgage
Servicing Rights, an amendment of FASB Statement No. 65" (SFAS 122). SFAS 122
amends 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. SFAS 122 also requires an entity to
measure the impairment of servicing rights based on the difference between the
carrying amount of the servicing rights and their current fair value.
The Bank presently does not know and cannot reasonably estimate the impact
of adopting the provisions of SFAS 122 on its financial condition or results of
operations.
SFAS 122 is to be applied prospectively in fiscal years beginning after
December 15, 1995, with early application encouraged, to transactions which an
institution sell or securitizes mortgage loans with servicing rights retained.
In addition, the provisions of SFAS 12 should be applied to the measurement of
impairment for all capitalized servicing rights, including servicing rights
capitalized prior to the initial adoption of SFAS 122. The Bank expects to adopt
the provisions of SFAS 122 effective January 1, 1996.
(5) Income Taxes
Income tax expense for the nine month periods ended September 30, 1995 and
September 30, 1994 was as follows:
September 30,
------------------------
1995 1994
--------- ----------
Federal:
Current.......... $ 3,276 $ 2,944
Deferred......... 664 1,513
------- -------
3,940 4,457
State - current....... 331 1,109
------- -------
Income tax expense.... $ 4,271 $ 5,566
======= =======
F-39
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(5) Income Taxes (continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below.
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1995 1994 1994
------------ ----------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Deferred interest and fee income..... $ 876 $ 1,280 $ 1,382
Deferred compensation expense........ 335 365 370
Reserve for uncollected interest..... 65 69 53
Postretirement benefits expense...... 764 691 669
Excess loan servicing fees........... 230 123 169
Allowance for loan losses............ 2,192 2,239 2,247
Net unrealized loss on marketable
securities available-for-sale....... 0 2,352 1,121
Stock-based compensation expense..... 142 123 102
------- -------- --------
Total.............................. 4,604 7,242 6,113
------- -------- --------
Deferred tax liabilities:
Depreciation expense................ 145 182 171
Pension expense..................... 358 214 249
Excess prepaid expense.............. 84 141 118
Bad-debt reserve.................... 3,142 3,199 3,102
Net unrealized gain on marketable
securities available-for-sale...... 1,205 0 0
------- -------- --------
Total............................. 4,934 3,736 3,640
------- -------- --------
Net deferred tax (liability) asset $ (330) $ 3,506 $ 2,473
======= ======== ========
</TABLE>
(6) Intangible assets
Effective September 29, 1995, Harris Savings Bank completed an acquisition
of two banking offices located in Hagerstown, Maryland from Columbia First
Bank. The acquisition included the purchase of $125,971,000 in deposit
liabilities, $115,350,000 of cash and cash equivalents, and $254,000 in selected
loans and fixed assets. The acquisition was accounted for as a purchase and
resulted in a deposit premium of $10,367,000, which will be amortized over a
seven year period using the straight-line method. This acquisition provided the
Bank with a presence in the Maryland market.
F-40
<PAGE>
HARRIS SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands)
(7) New Accounting Standards
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 establishes a new method of accounting for
stock-based compensation arrangements with employees. The new method is a fair
value based method rather than the intrinsic value based method that is
currently utilized. However, SFAS 123 does not require an entity to adopt the
new fair value based method for purposes of preparing basic financial
statements. If an entity chooses not to adopt the new fair value based method,
SFAS 123 requires as entity to display in the footnotes pro forma net income and
earnings per share information as if the fair value based method had been
adopted.
Currently, the Bank has not determined whether it will adopt the fair value
based method and accordingly, cannot estimate the impact on the basic financial
statements that SFAS 123 will have upon adoption.
SFAS 123 is effective for financial statements with fiscal years beginning
after December 15, 1995.
(8) Dividend Waiver
Harris Financial, MHC, the parent holding company of Harris has waived
dividends amounting to $3.2 million during the nine month period ended September
30, 1995 with respect to the shares of Harris that it owns.
F-41
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
This section presents Management's discussion and analysis of the financial
condition and results of operations of Harris Savings Bank and Subsidiaries.
This discussion and analysis should be read in conjunction with the consolidated
financial statements and notes which appear later in this report. Such financial
condition and results of operations are not intended to be indicative of future
performance.
SUMMARY Harris Savings Bank (the Bank) commonly referred to as "Harris
Savings" was formed as a state chartered mutual savings and loan
association in 1886. In 1991, Harris Savings Association converted its charter
to a state chartered mutual savings bank and on January 25, 1994, the Bank
became a state chartered stock savings bank. Contemporaneously with this
conversion to a state chartered stock savings bank, the Bank completed a
successful stock issuance that raised net proceeds of $23.7 million.
The deposits of the Bank are insured by Federal Deposit Insurance
Corporation (FDIC) under the Savings Association Insurance Fund (SAIF). The
Bank has been a member of the Federal Home Loan Bank System since 1941. The Bank
operates 23 full service offfices, three mortgage lending offfices, and an
operations center.
The Bank primarily operates in the five central Pennsylvania counties of
Dauphin, Cumberland, York, Lancaster, and Lebanon. It is the largest SAIF
insured institution headquartered in the five county area that it serves. At
December 31, 1994, the Bank had total assets of $1.058 billion with deposits of
$910.6 million and stockholders' equity of $135.0 million.
The Bank's lending activities are concentrated on origination of loans
secured by first mortgages on owner-occupied one-to-four family residences
located throughout the five county area that it serves. At December 31, 1994,
such loans accounted for 73.9% of total loans. The Bank also offers a variety of
consumer loans.
The net income of the Bank is dependent to a substantial extent on the
difference between interest income, consisting of interest received on
loans and investments, and interest expense, consisting of interest paid on
deposit accounts and borrowings. The difference between such income and expense
is referred to as net interest income. Interest income is derived from the
average interest rate received on average interest earning assets, while
interest expense represents the average rate paid on average interest-bearing
liabilities.
The Bank, therefore, is affected by changes in the overall level of
interest rates and prevailing economic conditions. Generally, as interest
rates rise, the percentage of net interest income of the Bank will tend to fall.
Conversely, when interest rates fall, the percentage of net interest income will
tend to rise. This condition is often referred to as "interest rate risk". The
more interest rate risk that an institution has, the larger the fluctuations in
net interest income. How an institution manages its interest rate risk often
determines its success or lack of success.
F-42
<PAGE>
During most of 1994, interest rates rose significantly, with short-term
rates rising at a more rapid pace than long-term rates. Since the rates
offered on the Bank's deposit products are driven largely by competition in the
short-term investment market and the rates offered on its loan products are
driven by competition in the long-term capital markets, the Bank experienced a
significant decline in net interest income and gains on sales of marketable
securities in 1994. Conversely, the lowering interest rate environment that
characterized 1993 and 1992 allowed the Bank to post record net interest income,
marketable securities gains, and net income in those years. The Bank does not
anticipate a return to the record performance levels of 1993 and 1992 until the
capital markets experience a sustained period of lowering interest rates.
Another major risk normally undertaken by financial institutions is
"credit risk". This is the risk that a borrower will not repay a loan and
that the underlying collateral will be insufficient to prevent a loss. Net
credit losses in 1994 were considered to be insignificant. The Bank's experience
in credit losses has consistently been among the best in the industry and can be
attributed to conservative underwriting and the relatively stable economic
environment in central Pennsylvania.
The Bank has historically practiced strong expense control, resulting in
the achievement of overhead expense performance that consistently ranks
favorably to the Bank's peers. The Bank continues to emphasize expense control;
however, non-interest expense has increased significantly in 1994 in large part
because of stock-based incentive compensation plans and the employee stock
ownership plan established with the Bank's stock issuance on January 25, 1994.
These plans are intended to promote the long-term financial success of the Bank
and are expected to remain a significant component of the Bank's compensation
structure in the future.
The pages that follow present detailed discussion and analysis of the
matters discussed in this summary as well as other significant components
of the Bank's financial condition and results of operations.
F-43
<PAGE>
SELECTED CONSOLIDATED
FINANCIAL DATA
- -------------------------------------------------------------------------------
(All dollar amounts presented in the tables,
except for per share amounts, are in thousands)
Set forth below are selected financial data of Harris Savings Bank. This
information is derived in part from and should be read in conjunction with the
Consolidated Financial Statements of Harris Savings Bank and Notes which are
presented later in this report.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------
AT YEAR END: 1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Total assets...................................... $1,058,088 $1,087,006 $1,051,740 $1,060,765 $ 980,896
Loans receivable, net............................. 574,794 566,550 706,588 843,643 816,798
Loans held-for-sale............................... 0 0 31,392 0 3,948
Marketable securities............................. 409,123 424,181 193,425 127,960 98,683
Deposits.......................................... 910,576 937,903 950,662 963,685 877,517
Escrow/stock over-subscriptions................... 5,116 11,643 5,700 5,276 4,629
Advances from FHLB-Pittsburgh
and other borrowed funds......................... 0 0 0 10,000 25,000
Other borrowings.................................. 2,475 0 0 0 0
Retained eamings
(partially restricted) (1)........................ 117,292 107,886 90,228 76,990 69,031
Paid in capital and common stock .................. 24,656 0 0 0 0
Unearned ESOP and RRP shares....................... (3,007) 0 0 0 0
Net unrealized loss on
marketable securities............................. (3,905) 0 0 0 0
</TABLE>
(1) Retained earnings are partially restricted in connection with regulations
related to the insurance of savings accounts which require the Bank to
maintain certain statutory reserves. In addition, see Note 18 to the
Consolidated Financial Statements.
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------------------
FOR THE YEAR: 1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest income................................... $ 73,932 $ 81,020 $ 94,620 $ 96,980 $ 93,894
Interest expense.................................. 38,241 41,409 52,333 65,984 69,463
-----------------------------------------------------------------------
Net interest income.............................. 35,691 39,611 42,287 30,996 24,431
Provision for loan losses....................... 0 800 2,484 1,002 1,666
-----------------------------------------------------------------------
Net interest income after
provision for loan losses....................... 35,691 38,811 39,803 29,994 22,765
Non-interest income............................... 2,503 4,563 7,902 2,021 1,953
Non-interest expense ............................. 20,793 17,966 23,813 18,740 17,626
-----------------------------------------------------------------------
Income before income taxes and
cumulative effect of accounting changes.......... 17,401 25,408 23,892 13,275 7,092
Income taxes...................................... 7,348 9,170 10,654 5,316 3,440
-----------------------------------------------------------------------
Income after income taxes and before cumulative
effect of accounting changes.................... 10,053 16,238 13,238 7,959 3,652
Cumulative effect of accounting changes .......... 0 1,420 0 0 0
-----------------------------------------------------------------------
Net income ...................................... $ 10,053 $ 17,658 $ 13,238 $ 7,959 $ 3,652
=======================================================================
</TABLE>
<TABLE>
<CAPTION>
At or for the Years Ended December 31,
--------------------------------------------------------------------
FINANCIAL RATI0S: 1994 1993 1992 1991(1) 1990
------- ----- ------ ------- -----
<S> <C> <C> <C> <C> <C>
Return on average assets.......................... 0.93% 1.67% 1.26% 0.77% 0.37%
Return on average equity.......................... 7.59% 17.75% 15.41% 10.95% 5.33%
Average equity to average assets.................. 12.27% 9.42% 8.16% 7.04% 6.99%
PER SHARE DATA:
Combined pre- and post-reorganization
earning per share................................ $ 0.92
Earnings per share (2) (3) ....................... $ 0.85 $ 1.59 $ 1.19 $ 0.72 $ 0.33
Dividends/share................................... $ 0.27
Book value/share (2) ............................. $12.08 $ 9.70 $ 8.11 $ 6.92 $ 6.21
Dividend payout ratio (4) ........................ 6.44%
</TABLE>
(1) Includes the acquisition of Heritage Federal Savings Assocation from the
Resolution Trust Corporation (RTC).
(2) Proforma per share data presented for years prior to 1994 is based on
11,125,000 common shares outstanding.
(3) Earnings per share for 1994 includes only earnings generated subsequent to
the corporate reorganization and stock issuance completed January 25, 1994.
(4) Excludes dividends waived by the Bank's mutual holding company parent,
Harris Financial, MHC, totaling approximately $2.3 million in 1994.
F-44
<PAGE>
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
NET INTEREST INCOME The primary component of the Bank's earnings is its net
interest income. Net interest income is the excess of interest income on average
interest-earning assets above interest expense incurred on average
interest-bearing liabilities. Net interest income is significantly affected by
changes in average account balances (volume), interest rates, and by the mix of
interest-earning assets and interest-bearing liabilities. Net interest income
was $35.7 million in 1994, a decrease of $3.9 million or 9.9% from $39.6 million
in 1993. Net interest income in 1993 decreased $2.7 million or 6.4% from $42.3
million in 1992.
TABLE 1 Average Balance Sheets, Rates, and Interest Income and Expense
Summary
<TABLE>
<CAPTION>
------------------------------------------
1994
------------------------------------------
Average Average
Balance Interest(7) Yield/Cost
-------------------------------------------
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans, net (1) (8)................ $ 489,134 $ 39,998 8.18%
Other loans, net (8)....................... 88,655 7,357 8.30
Marketable securities, net (2)............. 431,529 24,837 5.76
Other interest-earning assets (3) ......... 43,196 1,740 4.03
------------------------------------------
Total interest-earning assets............... 1,052,514 73,932 7.02%
------------------------------------------
Non-interest-earning assets................. 27,027
------------------------------------------
Total assets ............................... $ 1,079,541
==========================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings deposits .......................... $ 234,090 $ 7,361 3.14%
Time deposits.............................. 571,710 27,381 4.79
NOW and money market accounts ........... 112,072 3,163 2.82
Escrow/stock subscriptions................. 7,629 202 2.65
Borrowed funds............................. 2,312 134 5.80
------------------------------------------
Total interest-bearing liabilities.......... 927,813 38,241 4.12%
------------------------------------------
Non-interest-bearing liabilities............ 19,218
------------------------------------------
Total liabilities .......................... 947,031
Stockholders' Equity ....................... 132,510
------------------------------------------
Total liabilities and Stockholders' Equity.. $ 1,079,541
==========================================
Net interest income......................... $ 35,691
==========================================
Interest rate spread (4).................... 2.90%
Net interest-earning assets................. $ 124,701
==========================================
Net interest margin (5) .................... 3.39%
Ratio of interest-earning assets to
Interest-bearing liabilities............... 1.13x
==========================================
</TABLE>
(1) Includes mortgage loans held-for-sale.
(2) Includes available-for-sale securities in 1994 and held-for-sale marketable
securities in 1993 and 1992.
(3) Includes interest-earning deposits in the FHLB-Pittsburgh, federal funds
sold and FHLB-Pittsburgh stock.
(4) Interest rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
F-45
<PAGE>
Table 1 presents the average asset and liability balances, interest rates,
interest income, and interest expense for each of the years in the three year
period ended December 31, 1994. The data in Table 1 has not been presented using
a taxable equivalent basis because tax exempt income was not material in
relation to net interest income for the periods shown.
<TABLE>
<CAPTION>
For the Years Ended December 31, (6)
- --------------------------------------------------------------------------------------
1993 1992
- --------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest(7) Yield/Cost Balance Interest(7) Yield/Cost
- --------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ 580,358 $ 52,837 9.10% $ 730,815 $ 72,189 9.88%
80,239 7,012 8.74 95,983 8,358 8.71
312,091 19,224 6.16 160,150 12,412 7.75
65,564 1,947 2.97 48,238 1,661 3.44
- --------------------------------------------------------------------------------------
1,038,252 81,020 7.80% 1,035,186 94,620 9.14%
- --------------------------------------------------------------------------------------
18,228 17,921
- --------------------------------------------------------------------------------------
$1,056,480 $ 1,053,107
======================================================================================
$ 224,085 $ 7,924 3.54% $ 151,255 $ 6,640 4.39%
594,633 29,882 5.03 675,386 40,944 6.06
112,296 3,448 3.07 113,883 4,552 4.00
6,065 155 2.56 6,198 136 2.19
-- -- -- 726 61 8.40
- --------------------------------------------------------------------------------------
937,079 41,409 4.42% 947,448 52,333 5.52%
- --------------------------------------------------------------------------------------
19,901 19,755
- --------------------------------------------------------------------------------------
956,980 967,203
99,500 85,904
- --------------------------------------------------------------------------------------
$1,056,480 $ 1,053,107
======================================================================================
$ 39,611 $ 42,287
======================================================================================
3.38% 3.62%
$ 101,173 $ 87,738
======================================================================================
3.82% 4.08%
1.11x 1.09x
======================================================================================
</TABLE>
(5) Net interest margin represents net interest income before provision for
loan losses divided by average interest-earning assets.
(6) Amounts not presented on a tax-equivalent basis.
(7) lncludes income recognized on deferred loan fees of $1,879,000, $4,190,000,
and $4,447,000 in 1994, 1993, and 1992, respectively.
(8) Includes non-accrual loans.
F-46
<PAGE>
RESULTS OF OPERATIONS
(CONTINUED)
- -------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
NET INTEREST INCOME (continued) Table 2 presents an analysis of the
changes in net interest income attributable to changes in the volume and
rate components of net interest income. During 1994, there was a decrease in net
interest income of $0.2 million due to changes in volume and a decrease of $3.7
million due to changes in rates. In 1993, there was a decrease in net interest
income of $1.6 million due to changes in volume and a decrease of $l.l million
due to changes in rates.
TABLE 2 Rate-Volume Analysis of Changes in Net Interest Income
<TABLE>
<CAPTION>
Year Ended December 31, 1994 Year Ended December 31, 1993
Compared to Compared to
Year Ended December 31, 1993 Year Ended December 31, 1992
Increase (Decrease) Increase (Decrease)
-----------------------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage loans,net................... $ (8,301) $ (4,538) $(12,839) $(14,865) $ (4,487) $(19,352)
Other loans, net..................... 736 (391) 345 (1,371) 25 (1,346)
Marketable securities, net........... 7,357 (1,744) 5,613 12,230 (5,418) 6,812
Other interest-earning assets........ (664) 457 (207) 596 (310) 286
-----------------------------------------------------------------------------------------
Total interest-earning assets....... (872) (6,216) (7,088) (3,410) (10,190) (13,600)
-----------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings deposits..................... 354 (917) (563) 3,197 (1,913) 1,284
Time deposits........................ (1,153) (1,348) (2,501) (4,894) (6,168) (11,062)
NOW and money market accounts........ (7) (278) (285) (63) (1,041) (1,104)
Escrow/stock subscriptions........... 41 6 47 (3) 22 19
Borrowed funds....................... 134 0 134 (61) 0 (61)
-----------------------------------------------------------------------------------------
Total interest-bearing liabilities.. (631) (2,537) (3,168) (1,824) (9,100) (10,924)
-----------------------------------------------------------------------------------------
Net change in net interest income.... $ (241) $ (3,679) $ (3,920) $ (1,586) $ (1,090) $ (2,676)
=========================================================================================
</TABLE>
Note: Changes in interest income and interest expense arising from the
combination of rate and volume variances are allocated entirely
as rate variances.
As shown in Table 2, the decrease in net interest income for 1994 was
primarily attributable to changes in rates. The magnitude of this change
can be understood by analyzing the interest rate spread and the net interest
margin presented in Table 1. The interest rate spread for 1994 was 2.90%,
compared to 3.38% in 1993 and 3.62% in 1992. The net interest margin was 3.39%
in 1994 as compared to 3.82% for 1993 and 4.08% for 1992. The decreases recorded
in 1994 for both measures can be attributed to the rising interest rate trend
that characterized most of 1994. The decreases in interest rate spread and net
interest margin in 1993 relative to 1992 is due largely to the slowing of
general interest rate decreases in 1993 as compared to 1992.
As illustrated in Table 1, a pronounced lag exists between the time
changes occur in market interest rates and when such changes appear in the
Bank's interest-earning asset and interest-bearing liability portfolios. The
average yield on average 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 rates. Similarly, the average cost of average
interest-bearing liabilities is influenced by redemptions, early withdrawals,
deposit inflow, and the mix of liability maturities as well as current market
rates.
F-47
<PAGE>
RESULTS OF OPERATIONS
(CONTINUED)
- ------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
NET INTEREST INCOME (continued) The Bank expects short-term interest
rates, and to a lesser extent long-term interest rates, to continue rising
moderately throughout 1995. This trend in rates, should it continue, is expected
to exert downward pressure on the Bank's net interest margin. Management
believes the Bank's asset and deposit portfolios are structured to mitigate the
effects of the expected rate increases while retuming a reasonable net interest
income performance.
PROVISION FOR LOAN LOSSES The Bank maintains an allowance for loan losses
to provide for possible future losses in its loan portfolio. During 1994,
no provisions for loan losses were charged against earnings, as compared to
provisions totaling $800,000 and $2,484,000 charged against earnings in 1993 and
1992, respectively. The decrease in the provision in 1994 and 1993 primarily
reflects reduced loan balances and management's assessment of the loan portfolio
in consideration of the improving condition of the economy and a continued low
level of delinquencies. Loan loss provisions charged during 1992 resulted
primarily from management's consideration of the general economic decline
existing during that period and a corresponding increase in loan delinquencies,
particularly loans secured by real estate other than one- to four-family
residential properties.
Management reviews loan delinquencies on a continuous basis and performs
an analysis of loan quality on a quarterly basis, classifying assets to
determine the adequacy of its allowance for loan losses. The Bank will continue
to provide for possible loan losses when deemed appropriate. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses and valuation of
foreclosed real estate. Such agencies may require the Bank to recognize
additional provision for loan losses based on their judgment about information
available to them at the time of their examination.
NON-INTEREST INCOME Table 3 presents an analysis of changes in the Bank's
non-interest income during the years 1994 and 1993.
TABLE 3 Non-Interest Income
<TABLE>
<CAPTION>
1994/1993 1993/1992
------------------- ---------------
Increase Increase
(Decrease) (Decrease)
------------------- ---------------
1994 Amount % 1993 Amount % 1992
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Service charges on deposits .... $ 729 $ (5) (0.7) $ 734 $ (18) (2.4) $ 752
Other service charges/
commissions/fees............... 743 (418) (36.0) 1,161 133 12.9 1,028
Service income.................. 911 40 4.6 871 192 28.3 679
Gain on sale of securities, net 11 (1,767) (99.4) 1,778 (3,654) (67.3) 5,432
Other........................... 109 90 473.7 19 8 72.7 11
----------------------------------------------------------------------------
Total.......................... $ 2,503 $ (2,060) (45.1) $ 4,563 $ (3,339) (42.3) $ 7,902
============================================================================
</TABLE>
F-48
<PAGE>
RESULTS OF OPERATIONS
(CONTINUED)
- -------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
NON-INTEREST INCOME (continued) Non-interest income totaled $2.5 million in
1994, which represents a decrease of $2.1 million, or 45.1%, from the $4.6
million of total non-interest income recorded in 1993. The 1994 decrease was due
primarily to a reduction of gains on sales of marketable securities of $ 1.8
million, or 100% of the total gains on sales of marketable securities recorded
in 1993. Management attributes this trend to rising interest rates in 1994,
which reduced the market value of the Bank's predominantly interest-
rate-sensitive securities portfolio, thereby reducing the potential for
realizing gains. Also contributing to the 1994 decrease in total non-interest
income was a $.4 million decrease in fee income from the sale of uninsured
investment products, which represents a 50.0% decrease from the $ .8 million of
such income recorded in 1993. Management attributes this fee income reduction to
net outflows of funds from uninsured investment products back to insured deposit
products as deposit rates climbed during 1994.
Non-interest income totaled $4.6 million in 1993, which represents a
decrease of $3.3 million, or 42.3%, from the $7.9 million of total
non-interest income recorded in 1992. This total decrease resulted primarily
from a reduction of $3.7 million, or 67.3% in 1993 from the $5.4 million in
gains on sales of marketable securities in 1992. Management considers the 1992
selling gains to be an extraordinarily high level of such income resulting from
one-time opportunities presented by the rapid and sustained interest rate
decreases that dominated the capital markets in 1992. Management does not expect
that high levels of income due to gains on securities sales will be achieved in
1995 or in the near term.
NON-INTEREST EXPENSE Table 4 presents a summary of the changes in
non-interest expense for the two year period ended December 31, 1994.
TABLE 4 Non-Interest Expense
<TABLE>
<CAPTION>
1994/1993 1993/1992
---------------- ---------------
Increase Increase
(Decrease) (Decrease)
---------------- -----------------
1994 Amount % 1993 Amount % 1992
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and benefits (1) .................. $11,390 $ 1,731 17.9 $ 9,659 $ 1,025 11.9 $ 8,634
Equipment expense........................... 1,286 (100) (7.2) 1,386 76 5.8 1,310
Occupancy expense........................... 1,709 38 2.3 1,671 77 4.8 1,594
Advertising and public relations............ 630 163 34.9 467 (20) (4.1) 487
FDIC insurance.............................. 2,151 181 9.2 1,970 (174) (8.1) 2,144
Trustee fees ............................... 304 (8) (2.6) 312 43 16.0 269
(Income) loss from real estate operations .. (144) 378 (72.4) (522) (660) (478.3) 138
Amortization and write-off of intangibles... 0 0 0.0 0 (5,974) (100.0) 5,974
Other....................................... 3,467 444 14.7 3,023 (240) (7.4) 3,263
--------------------------------------------------------------------------
Total...................................... $20,793 $ 2,827 15.7 $17,966 $(5,847) (24.6) $23,813
==========================================================================
</TABLE>
(1) Full-time equivalent employees totaled 346, 350, and 342 at December 31,
1994, 1993, and 1992, respectively. The actual number of employees,
including part-time employees, totaled 384, 380, and 372 at December 31,
1994, 1993, and 1992, respectively.
During 1994, total non-interest expense increased $2.8 million, or 15.7%,
to $20.8 million as compared to the $18.0 million in total non-interest expense
recorded in 1993. The most significant component of this increase was an
increase of $1.7 million, or 17.9%, in total salaries and benefits expense. In
addition to normal merit pay and benefit cost increases, the increase in total
salaries and benefits expense included the effects of the Bank's stock-based
incentive compensation plans and ESOP plan, which were established in
conjunction with the Bank's stock issuance on January 25, 1994.
F-49
<PAGE>
RESULTS OF OPERATIONS
(CONTINUED)
- -------------------------------------------------------------------------------
NON-INTEREST EXPENSE (continued) Compensation expense related to the
incentive stock plans and ESOP plan totaled $1.3 million in 1994, with no
corresponding expense recorded in prior years. These plans are intended to
promote the long-term financial success of the Bank and are expected to remain a
significant component of the Bank's compensation structure in future years.
Total non-interest expense was also increased in 1994 by a reduction of $.4
million in income from real estate operations. The Bank's real estate operations
include direct investments by the Bank and subsidiaries in real estate projects,
equity investments in joint ventures that engage in real estate projects, and
the operation of foreclosed real estate.
Total non-interest expense decreased $5.8 million, or 24.6%, in 1993 from
the $23.8 million recorded in 1992. The 1993 decrease resulted primarily
because all remaining intangible assets were either amortized or written
off during 1992, resulting in a charge to earnings during that period of $6.0
million. During 1994 and 1993, earnings were not charged for any expenses
related to intangible assets. During 1993, total salaries and benefits expense
increased $1.0 million, or 11.9%, from the $8.6 million recorded in 1992. During
1993, the Bank adopted Statement of Financial Accounting Standards No. 106 (SFAS
106), "Employer's Accounting for Postretirement Benefits Other Than Pensions."
During 1993, the Bank recorded a charge to net income of $1.0 million after a
deferred tax benefit of $.5 million upon adoption of SFAS 106 as well as $.2
million of postretirement benefits expense. Under the pay-as-you-go accounting
for postretirement benefits that existed in 1992 and prior years, related
earnings charges were negligible. The remaining increase in salaries and
benefits expense in 1993 was due primarily to normal merit increases in
salaries and increases in employee benefit costs. During 1993, management
implemented an employee benefit cost sharing policy as part of a long-term cost
containment program. Also contributing to the decrease in total non-interest
expense in 1993 was an increase of $.7 million in income from real estate
operations, which resulted primarily from the recognition of income on
in-substance foreclosed real estate.
PROVISION FOR INCOME TAxES Income tax provisions totaled $7.3 million in
1994, which represents a decrease of $ 1.8 million, or 19.9%, from the $9.2
million of income tax expense recorded in 1993. This decrease reflects a
reduction of $8.0 million, or 31.5%, in income before taxes in 1994 from the
$25.4 million recorded in 1993. Also reflected in 1993 was a reduction of $.6
million in the Bank's recorded federal tax liability related to the adoption of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). The adoption of SFAS 109 was recorded as the cumulative
effect of an accounting change and resulted in an increase in the financial
statement deferred tax asset of $2.4 million, with a corresponding increase in
income.
Income tax expense in 1993 was $1.5 million, or 13.9%, less than the $10.7
million recorded in 1992. This decrease resulted primarily from a decrease in
1993 of $4.5 million, or 15.1%, in income before income taxes after excluding
the effect of amortization and write-off of intangibles which is nondeductible
for tax purposes. Also reflected in 1993 was an increase in the Bank's federal
income tax rate from 34% to 35%, which was imposed by the Omnibus Budget
Reconciliation Act of 1993.
F-50
<PAGE>
FINANCIAL CONDITION
- -------------------------------------------------------------------------------
SOURCES AND USES OF FUNDS The Bank's operating activities generated cash
totaling $40.5 million and $40.7 million in 1994 and 1993, respectively. In
addition to cash flows from operations, the Bank generates and uses cash in its
investing and financing activities. During 1994, the Bank's cash flows from
investing activities resulted in a net source of cash of $.6 million, which
included net cash generated by securities transactions totaling $16.0 million
and a net use of cash from loan transactions totaling $16.1 million. During
1994, the Bank's financing activities resulted in a net use of cash of $61.2
million, including net withdrawals from deposits totaling $52.0 million and a
net decrease of $31.5 million in escrow and stock subscriptions, which were
partially offset by proceeds from the Bank's stock issuance totaling $23.7
million.
In 1993, the Bank's investing activities resulted in a net use of cash
of $57.7 million, including net cash used in securities activities totaling
$230.9 million and cash generated by loan activities totaling $171.8 million.
The Bank's financing activities in 1993 resulted in a net use of cash of $8.7
million, including net withdrawals on deposits totaling $39.7 million offset by
an increase in escrow and stock subscriptions totaling $30.9 million.
CAPITAL RESOURCES Total equity increased $27.1 million, or 25.1%, in 1994.
This increase included capital additions of $23.7 million from proceeds from the
Bank's stock issuance, net income of $ 10.1 million, earned ESOP and RRP shares
totaling $ 1.1 million, and paid in capital from the exercise of stock options
totaling $.5 million. Offsetting these capital additions in 1994 were
reductions of $3.9 million from net unrealized losses on available-for-sale
securities, net of tax effect, $3.8 million of unearned ESOP and RRP shares
established with the Bank's stock issuance, and $.6 million in dividends
declared to stockholders. Total equity increased $17.7 million, or 19.6%, in
1993, due entirely to net income. During 1994, 1993, and 1992, the ratio of
average equity to average assets amounted to 12.27%, 9.42%, and 8.16%,
respectively.
Ratios of capital to assets are common measures of adequate capitalization
for financial institutions. The Bank, as an FDIC-insured state-chartered
savings bank, must maintain minimum levels of capital under regulations of the
FDIC and the Pennsylvania Department of Banking. During 1994 and 1993, the Bank
was required under FDIC regulations to maintain a minimum of 4% leverage capital
and 8% risk-based capital, according to FDIC capital definitions. During 1994
and 1993, the Pennsylvania Department of Banking required a minimum of 6%
leverage capital and 10% risk-based capital according to capital definitions
similar to those of the FDIC.
Under FDIC capital definitions, leverage capital is composed of equity
capital reduced by goodwill and other intangible assets. The leverage ratio
equals leverage capital divided by total assets. Under FDIC capital definitions,
risk-based capital is composed of Tier 1 and Tier 2 capital. Tier 1 capital
equates to leverage capital and Tier 2 capital includes the allowance for loan
losses and qualifying debt obligations. The risk-based capital ratio equals the
total of Tier 1 and Tier 2 capital divided by total risk-weighted assets.
F-51
<PAGE>
FINANCIAL CONDITION
- --------------------------------------------------------------------------------
(CONTINUED)
(All dollar amounts presented in the tables are in thousands)
CAPITAL RESOURCES (continued) Table 5 presents an analysis of the Bank's
regulatory capital ratios as of December 31, 1994 and 1993. At December 31, 1994
and 1993, the Bank exceeded all regulatory capital requirements.
TABLE 5 Capital Analysis
At December 31,
--------------------------
1994 1993
--------------------------
CAPITAL:
Tier 1 capital ......................... $ 138,941 $ 107,886
Tier 2 capital ......................... 6,202 6,584
--------------------------
Total capital........................... $ 145,143 $ 114,470
==========================
Total risk-weighted assets.............. $ 496,124 $ 497,013
==========================
RATIOS:
Tier 1 capital to risk-weighted asses... 28.0% 21.7%
Tier 2 capital to risk-weighted assets.. 1.3% 1.3%
--------------------------
Total capital to risk-weighted assets... 29.3% 23.0%
==========================
Leverage ratio.......................... 13.1% 9.9%
==========================
INTEREST RATE SENSITIVITY The largest component of the Bank's net income is
net interest income, which the Bank attempts to maximize by properly managing
credit risk and interest rate risk. The remainder of this section is dedicated
to discussing interest rate risk; credit risk is discussed in later sections of
this report.
The Bank manages its interest rate risk primarily through its
Asset/Liability Management Committee ("the Committee"). The Committee
generally meets at least twice each month to review the Bank's current interest
rate risk position, monitor current asset and liability products and rates, and
communicate to the Bank's Board of Directors concerning the Bank's interest rate
risk exposure.
The Committee uses a variety of analytical tools to measure the Bank's
interest rate risk exposure, including standard repricing analysis ("GAP
analysis"), market value of portfolio equity analysis ("MVPE analysis"), and net
interest income analysis ("NII analysis"). The Bank maintains an interest rate
risk policy, which establishes acceptable limits and ranges for the Bank's GAP
MVPE, and NII positions. The Committee monitors the Bank's various interest rate
risk measures in light of current and expected market interest rate conditions
and approves desired asset and liability transactions and offerings accordingly.
The Bank also securitizes conforming mortgage loans where the Committee has
determined that carrying such loans in the loan portfolio would raise the Bank's
interest rate risk exposure to unacceptable levels.
Table 6 sets forth the amounts of the Bank's interest-earning assets and
interest-bearing liabilities at December 31, 1994, which are anticipated by
the Bank to reprice or mature in each of the future time periods shown.
F-52
<PAGE>
FINANCIAL CONDITION
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
INTEREST RATE SENSITIVITY (continued)
TABLE 6 GAP Analysis
<TABLE>
<CAPTION>
December 31, 1994
-------------------------------------------------------------------------------------------
More Than More Than More Than More Than
One Year One Year to Three Years to Five Years to Ten Years to More Than
or Less Three Years Five Years Ten Years Twenty Years Twenty Years Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Real estate loans..................... $ 107,779 $ 116,015 $ 79,542 $ 119,138 $ 66,814 $ 2,302 $ 491,590
Consumer loans........................ 57,950 24,612 8,771 3,397 177 0 94,907
Marketable securities ................ 166,237 149,653 31,893 34,563 10,461 22,574 415,381
Other interest-earning assets......... 29,685 0 0 0 0 0 29,685
-------------------------------------------------------------------------------------------
Total interest-earning assets........ 361,651 290,280 120,206 157,098 77,452 24,876 1,031,563
-------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts...................... 93,267 0 102,397 0 0 0 195,664
NOW accounts (1)...................... 0 0 46,912 0 0 0 46,912
Money market accounts................. 60,793 0 0 0 0 0 60,793
Time deposits......................... 325,175 172,492 91,796 8,315 0 0 597,778
Escrow (1)............................ 5,056 0 0 0 0 0 5,056
-------------------------------------------------------------------------------------------
Total interest-bearing liabilities... $ 484,291 $ 172,492 $ 241,105 $ 8,315 $ 0 $ 0 $ 906,203
-------------------------------------------------------------------------------------------
Interest sensitivity gap per period... $(122,640) $ 117,788 $ (120,899) $ 148,783 $ 77,452 $ 24,876 $ 125,360
-------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap... $(122,640) $ (4,852) $ (125,751) $ 23,032 $ 100,484 $ 125,360
-------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap
as a percentage of total assets...... (11.58)% (0.45)% (11.88)% 2.18% 9.50% 11.86%
-------------------------------------------------------------------------------------------
Cumulative net interest-earning
assets as a percentage of
net interest-bearing liabilities..... 74.69% 99.27% 86.00% 102.55% 111.10% 113.84%
-------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes non-interest accounts
Generally, the amount of assets and liabilities shown in Table 6 were
determined in accordance with 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. Real
estate loans include primarily conventional fixed-rate loans secured by one- to
four-family homes. In the current interest rate environment, refinancing
activity is expected to remain slow; therefore, empirical normal prepayment
speeds have been assumed for this portfolio. Marketable securities primarily
reflect the contractual maturities of the underlying assets, as do consumer
loans and other interest-earning assets. Time deposits, money market accounts,
and escrow accounts reflect the contractual maturities of the underlying
deposits. All NOW accounts and approximately half of the Bank's savings accounts
are considered not to be interest rate sensitive, and therefore were assumed to
mature in three to five years.
F-53
<PAGE>
FINANCIAL CONDITION
(CONTINUED)
- --------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY (continued) Management believes its asset and
liability portfolios were properly structured as of December 31, 1994 to limit
the Bank's exposure to continued rising interest rates while producing a
reasonable level of net interest income. During the first quarter of 1994, the
Bank completed a significant restructuring of its marketable securities
portfolio to reduce its overall interest rate risk exposure. This restructuring
is discussed in the section that follows.
MARKETABLE SECURITIES The Bank maintains a marketable securities portfolio
to provide liquidity, manage interest rate risk and credit risk, and to
invest excess cash. The Bank's investment policy currently provides for
held-to-maturity, available-for-sale, and trading portfolios as defined by
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115); however, the Bank
currently does not engage in trading portfolio activities. The Bank adopted SFAS
115 on January 1, 1994, recording a net increase of $10.6 million in the
carrying value of its available-for-sale securities portfolio and an increase of
$6.6 million, net of tax effect, in stockholders' equity. The market value of
the Bank's marketable securities has decreased as interest rates increased in
1994, resulting in a net decrease during 1994 of $16.9 million in the carrying
value of the Bank's available-for-sale securities portfolio and a decrease in
stockholders' equity of $10.5 million, net of tax effect.
During the first quarter of 1994, the Bank completed a restructuring of
its available-for-sale securities portfolio for the purpose of reducing the
Bank's exposure to rising interest rates. This restructuring included the sale
of primarily long-term fixed-rate mortgage pool securities, netting proceeds of
$108.1 million and a negligible net gain. These proceeds were invested
primarily in shorter-term and adjustable-rate securities. Management believes
the Bank's marketable securities portfolio is properly structured at December
31, 1994 to limit the Bank's exposure to continued rising interest rates while
achieving an acceptable investment yield. Table 7 presents the marketable
securities portfolio maturity stratification as of December 31, 1994. Following
Table 7 is Table 8, which presents a summary of the Bank's marketable securities
portfolio as of December 31, 1994, 1993, and 1992.
F-54
<PAGE>
FINANCIAL CONDITION
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
TABLE 7 Analysis of Investments
The table below sets forth certain information regarding the amortized
cost, weighted average yields, and maturities of the Bank's marketable
securities, including available-for-sale, at December 31, 1994. The
stratification of balances is based on stated final maturities.
<TABLE>
<CAPTION>
-----------------------------------------------
One Year After One Through
or Less Five Years
-----------------------------------------------
Weighted Weighted
Amortized Average Amortized Average
Cost Yield Cost Yield
-----------------------------------------------
<S> <C> <C> <C> <C>
HELD-TO-MATURITY:
U.S. government and agency obligations... $ 14,997 5.66% $ 7,050 5.73%
FHLB CD's................................ 301 6.60 0 0.00
Mortgage-Backed Securities (3):
FNMA PC's............................... 0 0.00 1,469 8.53
FHLMC PC's ............................. 0 0.00 3,841 8.42
FNMA CMO's ............................. 21,981 5.20 59,041 5.62
FHLMC CMO's ............................ 27,320 4.60 44,558 5.35
-----------------------------------------------
Total mortgage-backed securities......... 49,301 4.87 108,909 5.65
-----------------------------------------------
Total securities held-to-maturity........ $ 64,599 5.06% $ 115,959 5.65%
-----------------------------------------------
AVAILABLE FOR-SALE
U.S. government and agency obligations .. $ 0 0.00% $ 0 0.00%
Equity (1) (2)........................... 0 0.00 15,210 7.31
Mortgage-backed securities:
FNMA PC's............................... 0 0.00 0 0.00
FHLMC PC's.............................. 0 0.00 0 0.00
-----------------------------------------------
Total mortgage-backed securities......... 0 0.00 0 0.00
-----------------------------------------------
Total securities available-for-sale ..... $ 0 0.00% $ 15,210 7.31%
-----------------------------------------------
Total marketable securities............... $ 64,599 5.06% $ 131,169 5.85%
===============================================
</TABLE>
(1) Includes FHLMC, FNMA, and FHLB stocks.
(2) The yleld on the Preferred Stocks has not been computed on a tax equivalent
basis for the 70% dividend exclusion.
(3) Based on current prepayment trends, $199.0 million of mortgage-backed
securities are anticipated to prepay or reprice within three years.
F-55
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1994
- ------------------------------------------------------------------------------------------
After Five Through
Ten Years Over Ten Years Total
- ------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Market Average
Cost Yield Cost Yield Cost Value Yield
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 15,005 6.48% $ 0 0.00% $ 37,052 $ 35,080 6.01%
0 0.00 0 0.00 301 301 6.60
0 0.00 0 0.00 1,469 1,477 8.53
0 0.00 0 0.00 3,841 3,838 8.42
8,682 5.51 0 0.00 89,704 85,484 5.51
18,490 6.42 0 0.00 90,368 86,850 5.34
- ------------------------------------------------------------------------------------------
27,172 6.13 0 0.00 185,382 177,649 5.51
- ------------------------------------------------------------------------------------------
$ 42,177 6.26% $ 0 0.00% $ 222,735 $ 213,030 5.59%
- ------------------------------------------------------------------------------------------
$ 0 0.00% $ 16,028 6.49% $ 16,028 $ 16,048 6.49%
0 0.00 7,364 6.34 22,574 22,516 6.99
0 0.00 18,580 5.71 18,580 18,071 5.71
10 7.00 135,453 6.34 135,463 129,753 6.34
- ------------------------------------------------------------------------------------------
10 7.00 154,033 6.27 154,043 147,824 6.27
- ------------------------------------------------------------------------------------------
$ 10 7.00% $ 177,425 6.29% $ 192,645 $ 186,388 6.37%
- ------------------------------------------------------------------------------------------
$ 42,187 6.26% $ 177,425 6.29% $ 415,380 $ 399,418 5.96%
==========================================================================================
</TABLE>
F-56
<PAGE>
FINANCIAL CONDITION
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
MARKETABLE SECURITIES (continued)
TABLE 8 Composition of Marketable Securities Portfolios
The following table sets forth certain information regarding the amortized
cost and fair values of the Bank's marketable securities portfolio at
December 31, 1994:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
-------------------------
<S> <C> <C>
HELD-TO-MATURITY:
U.S. Government and agencies..................................... $ 37,052 $ 35,080
FHLB certificates of deposit..................................... 301 301
Mortgage-backed securities:
FNMA PC's....................................................... 1,469 1,477
FHLMC PC's...................................................... 3,841 3,838
FNMA CMO's...................................................... 89,704 85,484
FHLMC CMO's..................................................... 90,368 86,850
-------------------------
Total mortgage-backed securities................................. 185,382 177,649
-------------------------
Total securities held-to-maturity................................ $ 222,735 $ 213,030
-------------------------
AVAILABLE-FOR-SALE:
U.S. Government and agencies..................................... $ 16,028 $ 16,048
Equity........................................................... 22,574 22,516
Mortgage-backed securities:
FNMA PC's....................................................... 18,580 18,071
FHLMC PC's...................................................... 135,463 129,753
-------------------------
Total mortgage-backed securities................................. 154,043 147,824
-------------------------
Total securities available-for-sale ............................. $ 192,645 $ 186,388
-------------------------
OTHER INTEREST EARNING SECURITIES:
FHLB daily investment............................................ $ 29,685 $ 29,685
-------------------------
Total marketable securities and interest earning investments ..... $ 445,065 $ 429,103
=========================
</TABLE>
F-57
<PAGE>
FINANCIAL CONDITION
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
MARKETABLE SECURITIES (continued)
TABLE 8 Composition of Marketable Securities Portfolios (continued)
The following table sets forth certain information regarding the carrying
and fair values of the Bank's investment securities portfolio,
mortgage-backed securities portfolio and its held-for-sale portfolio at the
dates indicated:
<TABLE>
<CAPTION>
At December 31
----------------------------------------------------
1993 1992
----------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES:
U.S.Government and agency obligations............. $ 22,136 $ 22,217 $ 14,015 $ 14,065
SBA pools......................................... 17,904 18,171 19,007 19,020
Equity securities (1)............................. 7,551 7,551 8,932 8,932
------------------------------------------------------
Total investment securities...................... $ 47,591 $ 47,939 $ 41,954 $ 42,017
------------------------------------------------------
INVESTMENT SECURITIES HELD-FOR-SALE:
FHLMC common stock................................ $ 232 $ 2,959 $ 232 $ 2,803
FHLMC preferred stock............................. 10,000 10,526 5,000 5,125
------------------------------------------------------
Total investment securities held-for-sale ....... $ 10,232 $ 13,485 $ 5,232 $ 7,928
------------------------------------------------------
Total investment securities....................... $ 57,823 $ 61,424 $ 47,186 $ 49,945
------------------------------------------------------
MORTGAGE-BACKED SECURITIES:
FNMA.............................................. $ 4,395 $ 4,546 $ 9,709 $ 10,073
FHLMC............................................. 8,063 8,272 14,821 15,273
CMOs (FNMA and FHLMC)............................. 143,069 143,132 57,841 57,392
------------------------------------------------------
Total mortgage-backed securities................. $ 155,527 $ 155,950 $ 82,371 $ 82,738
------------------------------------------------------
MORTGAGE-BACKED SECURITIES HELD-FOR-SALE
FNMA.............................................. $ 14,666 $ 14,657 $ 0 $ 0
FHLMC............................................. 196,165 203,204 63,868 66,228
------------------------------------------------------
Total mortgage-backed securities held-for-sale:.. $ 210,831 $ 217,861 $ 63,868 $ 66,228
------------------------------------------------------
Total mortgage-backed securities.................. $ 366,358 $ 373,811 $ 146,239 $ 148,966
------------------------------------------------------
Total investment and mortgage-backed securities... $ 424,181 $ 435,235 $ 193,425 $ 198,911
------------------------------------------------------
OTHER INTEREST-EARNING SECURITIES:
FHLB daily investment............................. $ 61,469 $ 61,469 $ 86,752 $ 86,752
------------------------------------------------------
Total investment, mortgage-backed and
other interest-earning investments............... $ 485,650 $ 496,704 $ 280,177 $ 285,663
======================================================
</TABLE>
(1) Equity securities are comprised of FHLB-Pittsburgh and FNMA stock which
are required by regulation to be held by the Bank.
F-58
<PAGE>
FINANCIAL CONDITION
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in millions)
MARKETABLE SECURITIES (continued) The Bank invests heavily in mortgage-backed
securities, including balloon, adjustable rate, and fixed rate
participation certificates ("PCs") as well as collateralized mortgage
obligations ("CMOs"). All of the Bank's PC and CMO securities are directly
insured or guaranteed by the FHLMC, FNMA, or GNMA. Also, the Bank's CMO
securities are predominantly "planned amortization class one" and all of the
Bank's CMOs pass established Federal Financial Institution Examination Council
("FFIEC") standards for inclusion in the held-to-maturity portfolio.
Table 9 presents selected financial information related to the Bank's
held-to-maturity securities portfolio and available-for-sale and
held-to-maturity portfolios at, or for the years ended, December 31, 1994, 1993,
and 1992.
TABLE 9 Marketable Securities Classification
The following table shows the amortized cost, percent of total assets,
portfolio yields, pre-tax profit on sales, volume of sales, and net
unrealized gains and losses on marketable securities at, or for the years ended,
December 31, 1994, 1993, and 1992:
<TABLE>
<CAPTION>
1994 1993 1992
-------------------------------
<S> <C> <C> <C>
HELD-TO-MATURITY PORTFOLIO:
Year-end amortized cost.............................. $ 222.7 $ 203.1 $ 124.3
Percent of total asses .............................. 21.05% 18.69% 11.82%
Year-end portfolio yields............................ 5.59% 5.08% 5.99%
Pre-tax profit on sales ............................. $ 0.0 $ 0.0 $ 5.4
Volume of sales ..................................... $ 0.0 $ 0.0 $ 40.5
Year-end net unrealized (losses) gains............... $ (9.7) $ 0.8 $ 0.4
AVAILABLE-FOR-SALE AND HELD-FOR-SALE PORTFOLIOS:
Year-end amortized cost.............................. $ 192.6 $ 221.1 $ 69.1
Percent of total assets ............................. 18.20% 20.34% 6.57%
Year-end portfolio yields............................ 6.37% 6.81% 8.02%
Pre-tax profit on sales ............................. $ 0.01 $ 1.8 $ 0.0
Volume of sales ..................................... $ 108.6 $ 30.2 $ 17.3
Year-end net unrealized (losses) gains............... $ (6.3) $ 10.3 $ 5.1
</TABLE>
F-59
<PAGE>
FINANCIAL CONDITION
(CONTINUED)
- --------------------------------------------------------------------------------
MARKETABLE SECURITIES (continued) As of the date of this report, both the
United States Congress and the Bank's federal regulators are considering more
stringent supervisory standards for financial institutions engaged in derivative
securities activities. Also, in October 1994, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 119,
"Disclosures about Derivative Financial Instruments and Fair Value of Financial
Instruments" (SFAS 119), which is effective for years ending after December 15,
1994. The Bank has no involvement with derivative financial instruments that
meet the definition of SFAS 119.
LOANS The Bank continues to emphasize the origination of one- to
four-family residential mortgage loans. These mortgage loans, the majority of
which are secured by owner-occupied residences, are generally considered to have
less credit risk than other types of loans. The Bank also provides home equity
lines of credit and second mortgage loans, multi-family residential mortgage
loans, commercial real estate mortgage loans, and consumer loans. The Bank
offers its loan products with fixed and adjustable interest rate terms and a
wide variety of repayment terms.
The Bank experienced a decline in its mortgage origination business during
1994 as compared to 1993. During 1994, the Bank originated mortgage loans
totaling $79.6 million, which was down $55.2 million, or 40.9%, from the $134.8
million recorded in 1993. Management attributes this decrease in mortgage
origination activity primarily to the precipitous drop in mortgage refinancing
business as interest rates climbed during 1994 as well as the fierce competition
for the remaining residential mortgage loan business.
During 1994, management implemented more aggressive rate pricing,
marketing, and origination techniques to sustain and grow mortgage loan
origination volume in the rigorously competitive market that is anticipated to
continue for the foreseeable future. Also, the Bank has been moderately
successful during 1994 in expanding its consumer and other loan origination
volume, increasing both originations and asset holdings in this profitable
portfolio.
F-60
<PAGE>
FINANCIAL CONDITION
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
LOANS (continued) Table 10 presents the composition of the Bank's mortgage,
consumer and other loan portfolios as of December 31, 1994, 1993, and 1992,
respectively.
TABLE 10 Loan Composition
<TABLE>
<CAPTION>
1994 1993
-------------------------------------------------
Percent Percent
of of
Amount Total Amount Total
-------------------------------------------------
<S> <C> <C> <C> <C>
MORTGAGE LOANS:
One-to-four family ............................ $ 433,206 73.87% $ 439,230 75.77%
Other residential real estate (multi-family) .. 27,443 4.68 27,004 4.66
Construction (1)............................... 8,642 1.47 5,915 1.02
Other (primarily commercial real estate) ...... 22,299 3.80 25,257 4.36
-------------------------------------------------
Total mortgage loans.......................... 491,590 83.82 497,406 85.81
-------------------------------------------------
CONSUMER AND OTHER LOANS:
Automobile..................................... 86 0.01 96 0.02
Mobile home.................................... 10,767 1.84 7,196 1.24
Home equity and second mortgage................ 74,295 12.67 66,941 11.55
Credit cards................................... 3,765 0.64 3,881 0.67
Commercial..................................... 1,884 0.32 880 0.15
Other ......................................... 4,110 0.70 3,281 0.56
-------------------------------------------------
Total consumer and other loans................ 94,907 16.18 82,275 14.19
-------------------------------------------------
Loans receivable, gross....................... 586,497 100.00% 579,681 100.00%
-------------------------------------------------
PLUS:
Dealer reserves ............................... 2,102 1,300
LESS:
Unearned discounts............................. (78) (131)
Net deferred loan origination fees ............ 7,614 7,978
Allowance for loan losses...................... 6,269 6,584
-------------------------------------------------
13,805 14,431
-------------------------------------------------
Loans receivable, net ........................ $ 574,794 $ 566,550
=================================================
LOANS HELD-FOR-SALE:
Loans held-for-sale, gross..................... $ -- $ --
LESS:
Net deferred loan origination fees............. -- --
-------------------------------------------------
Loans held-for-sale, net...................... -- --
-------------------------------------------------
Total loans, including held-for-sale, gross... $ 586,497 $ 579,681
=================================================
MORTGAGE LOANS:
ARM............................................ $ 95,713 19.47% $ 91,010 18.30%
Fixed-rate..................................... 395,877 80.53 406,396 81.70
-------------------------------------------------
Total mortgage loans.......................... $ 491,590 100.00% $497,406 100.00%
=================================================
</TABLE>
(1) Net of undisbursed portion of $10,802, $9,983, $8,904, $9,897, and
$14,071 at December 31, 1994, 1993, 1992, 1991, and 1990, respectively.
F-61
<PAGE>
At December 31,
- --------------------------------------------------------------------------------
1992 1991 1990
- --------------------------------------------------------------------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
- --------------------------------------------------------------------------------
$575,983 79.92% $ 721,453 84.19% $707,417 85.48%
26,785 3.71 26,234 3.06 15,716 1.90
11,664 1.62 12,357 1.44 19,707 2.38
25,127 3.49 16,533 1.93 12,374 1.49
- --------------------------------------------------------------------------------
639,559 88.74 776,577 90.62 755,214 91.25
- --------------------------------------------------------------------------------
393 0.05 399 0.04 670 0.08
4,773 0.66 4,594 0.54 4,641 0.56
68,945 9.57 71,532 8.35 63,038 7.62
3,862 0.54 1,200 0.14 -- --
389 0.05 83 0.01 10 0.00
2,780 0.39 2,589 0.30 4,015 0.49
- --------------------------------------------------------------------------------
81,142 11.26 80,397 9.38 72,374 8.75
- --------------------------------------------------------------------------------
720,701 100.00% 856,974 100.00% 827,588 100.00%
- --------------------------------------------------------------------------------
811 644 880
(183) 829 1,484
9,107 9,733 8,138
6,000 3,593 2,048
- --------------------------------------------------------------------------------
14,924 14,155 11,670
- --------------------------------------------------------------------------------
$706,588 $843,463 $816,798
================================================================================
$ 32,328 $ -- $ --
936 -- --
- --------------------------------------------------------------------------------
31,392 -- --
- --------------------------------------------------------------------------------
$753,029 $856,974 $827,588
================================================================================
$131,983 20.64% $125,343 16.14% $141,466 18.73%
507,576 79.36 651,234 83.86 613,748 81.27
- --------------------------------------------------------------------------------
$639,559 100.00% $776,577 100.00% $755,214 100.00%
================================================================================
F-62
<PAGE>
FINANCIAL CONDITION
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
LOANS (continued) The Bank typically accepts a moderate degree of interest
rate risk in its loan portfolio due to its emphasis on conforming residential
mortgage loans. However, when market rates on such loans are considered to be
below an acceptable long-term yield, or when significant prepayment risk is
anticipated, the Bank will securitize such loans for sale or swapping in the
secondary mortgage market. Corresponding to the rising rate environment that
predominated in 1994, and the lowering rate environment that existed in 1993,
the Bank's mortgage loan swapping and selling activity dropped dramatically in
1994 relative to 1993. Total swapped and sold mortgage loans dropped $150.0
million, or 94.6%, from the $158.6 million recorded in 1993 to $8.6 million in
1994.
Table 11 shows the maturity or period to repricing of the Bank's loan
portfolio at December 31, 1994. Adjustable rate loans are included as being due
in the period of scheduled rate adjustment. The table does not include
prepayments or scheduled principal amortization.
TABLE 11 Loan Maturity and Repricing
<TABLE>
<CAPTION>
Amounts Due or Repricing at December 31, 1994
---------------------------------------------------------------------------------------------------
After One Year
------------------------------------------------------------
Over One Over Three Over Five Over Ten Over Total
Within Through Through Through Through Twenty After One
One Year Three Years Five Years Ten Years Twenty Years Years Year Total
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
One-to four-family.......... $ 42,002 $ 26,942 $ 7,565 $ 71,407 $128,725 $156,565 $391,204 $433,206
Other residential real estate
(multi-family)............. 10,803 11,985 2,245 1,586 750 74 16,640 27,443
Construction (1) ........... 3,045 2,837 345 253 824 1,338 5,597 8,642
Other (primarily
commercial real estate).... 8,223 2,786 7,872 1,718 391 1,309 14,076 22,299
----------------------------------------------------------------------------------------------------
Total mortgage loans ...... 64,073 44,550 18,027 74,964 130,690 159,286 427,517 491,590
----------------------------------------------------------------------------------------------------
CONSUMER AND OTHER LOANS:
Home equity and
second mortgage............ 22,496 5,952 12,479 19,304 13,976 88 51,799 74,295
Credit cards ............... 3,765 0 0 0 0 0 0 3,765
Other....................... 1,616 1,921 1,645 1,494 10,010 161 15,231 16,847
----------------------------------------------------------------------------------------------------
Total consumer and
other loans............... 27,877 7,873 14,124 20,798 23,986 249 67,030 94,907
----------------------------------------------------------------------------------------------------
Loans receivable, gross.... $ 91,950 $ 52,423 $ 32,151 $ 95,762 $154,676 $159,535 $494,547 $586,497
====================================================================================================
</TABLE>
(I) Includes obligations to convert at contractually stated rates into
permanent mortgage loans.
ASSET QUALITY The Bank's experience in credit losses continues to rank
among the best in the industry. Due to conservative underwriting and the
relatively stable economic environment in central Pennsylvania, the Bank's
overall loan quality remains very strong. To enhance this condition, management
follows a policy of continuous credit monitoring, including assessment of the
adequacy of the allowance for loan losses. This assessment is performed by
considering current asset quality, anticipated external economic conditions,
overall trends of internal delinquency by loan category, and the balance of
loans in the portfolio. These assessments are performed on a quarterly basis
and the provision for loan losses is adjusted accordingly.
Table 12 presents an allocation of the allowance for loan losses by
category of loans as of December 31, 1994, 1993, 1992, 1991, and
1990.The specific allocation ascribed to each category may be different than
actual experience. Accordingly, the entire allowance is available to absorb
losses in any category.
F-63
<PAGE>
FINANCIAL CONDITION
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
ASSET QUALITY (continued)
TABLE 12 Allocation of the Allowance for Loan Losses
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------------------------------------------------------------------------------------
% of Total % of Total % of Total % of Total % of Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family
mortgage loans........ $ 1,718 73.86% $2,121 75.77% $ 1,805 79.92% $ 1,838 84.19% $ 607 85.48%
Other mortgage loans .. 1,744 9.96 1,435 10.04 1,221 8.82 1,043 6.43 411 5.77
Consumer and other
loans................ 774 16.18 821 14.19 1,117 11.26 513 9.38 462 8.75
Unallocated............ 2,033 N/A 2,207 N/A 1,857 N/A 199 N/A 568 N/A
------------------------------------------------------------------------------------------
Total................. $ 6,269 100.00% $6,584 100.00% $ 6,000 100.00% $ 3,593 100.00% $2,048 100.00%
==========================================================================================
</TABLE>
Table 13 presents an analysis of activity in the Bank's allowance for loan
losses for the five-year period ending December 31, 1994. Net additions to the
allowance during this five-year period amounted to $5.9 million or 93.9% of the
$6.3 million balance in the allowance at December 31, 1994. Charge-offs of
loans, net of recoveries, amounted to $315,000, $216,000, $77,000, $18,000, and
$1,000 for 1994, 1993, 1992, 1991, and 1990, respectively, and totaled $627,000
for the five years combined.
In May 1993, the FASB issued Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114). Also, in
October 1994, the FASB issued Statement of Financial Accounting Standards
No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition
Disclosures" (SFAS 118), which amends SFAS 114.
SFAS 114 and SFAS 118 address the accounting by creditors for impairment of
certain loans. The Statements require that impaired loans that are within the
scope of SFAS 114 be 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 the fair value of the collateral if the loan is collateral dependent.
SFAS 118 amends the provisions of SFAS 114 to allow a creditor to use existing
methods for recognizing interest income on an impaired loan and to require
additional disclosure on interest income recognition related to impaired loans.
SFAS 114 and SFAS 118 are effective for years beginning after December 15,
1994. The Bank expects to adopt SFAS 114 and SFAS 118 in January 1995 with no
material effect on the Bank's financial condition or results of operations.
F-64
<PAGE>
FINANCIAL CONDITION
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
ASSET QUALITY (continued)
TABLE 13 Analysis of the Allowance for Loan Losses
<TABLE>
<CAPTION>
At or For the Year Ended December 31, (1)
--------------------------------------------------------
1994 1993 1992 1991 1990
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ..... $ 6,584 $ 6,000 $ 3,593 $ 2,048 $ 383
Provision for loan losses (2) ...... 0 800 2,484 1,563 1,666
--------------------------------------------------------
Charge-offs:
One-to-four family mortgage loans .. (106) (17) (7) (10) 0
Other mortgage loans ............... (112) (137) (53) 0 0
Consume and other loans ............ (123) (66) (19) (8) (1)
--------------------------------------------------------
Total charge-offs ................. (341) (220) (79) (18) (1)
--------------------------------------------------------
Recoveries:
One-to-four family mortgage loans .. 0 0 2 0 0
Other mortgage loans ............... 0 0 0 0 0
Consumer and other loans ........... 26 4 0 0 0
--------------------------------------------------------
Total recoveries .................. 26 4 2 0 0
--------------------------------------------------------
Balance at end of period ............ $ 6,269 $ 6,584 $ 6,000 $ 3,593 $ 2,048
========================================================
Ratio of net charge-offs
to average loans outstanding ....... 0.06% 0.03% 0.01% 0.00% 0.00%
</TABLE>
(I) During the periods noted, the Bank held no foreign loans.
(2) Includes $561,000 in addition in 1991 for acquired loans.
Table 14 reflects the Bank's non-performing asset balances as of December
31, 1994, 1993, 1992, 1991, and 1990. The Bank's policy is to discontinue the
accrual of interest on all loans, except credit card loans, that become 90 days
or more delinquent. Unpaid interest is charged against income at the time a loan
is placed on non-accrual status. Foreclosed real estate, including properties
that are held for investment or deemed "in-substance foreclosed" under generally
accepted accounting principles, are also included in non-performing assets.
Foreclosed real estate includes $6.3 million, $6.1 million, and $6.1
million as of December 31, 1994, 1993, and 1992 that represents the Bank's
carrying value of a large apartment complex in the Bank's primary market area.
This asset was recorded as in-substance foreclosed real estate as of December
31, 1993 and 1992, and subsequently was acquired by the Bank at bankruptcy sale
in 1994. During 1994, the Bank elected to retain the property for investment
purposes and recorded $.3 million of related net rental income during that
period.
F-65
<PAGE>
FINANCIAL CONDITION
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
ASSET QUALITY (continued) The Bank's ratio of non-performing loans to total
loans and its ratio of non-performing assets to total assets compare favorably
to national industry peer group averages. Loans which are considered performing
and are current as to payments of principal and interest but have an above
normal risk of becoming non-performing or requiring restructuring in the future
are estimated to total approximately $ 13.6 million at December 31, 1994.
TABLE 14 Non-Performing Assets
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------
1994 1993 1992 1991 1990
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual mortgage loans................. $ 2,830 $ 2,352 $ 4,603 $ 6,858 $ 2,490
Non-acctual other loans.................... 170 75 60 80 133
--------------------------------------------------
Total non-accrual loans (1)............... 3,000 2,427 4,663 6,938 2,623
Loans 90 days or more
delinquent and still accruing ............ 78 119 81 -- --
--------------------------------------------------
Total non-performing loans................ 3,078 2,546 4,744 6,938 2,623
Total foreclosed real estate, net of
related allowance for loss (2) .......... 6,697 6,523 7,241 1,118 1,072
--------------------------------------------------
Total non-performing assets ............... $ 9,775 $ 9,069 $11,985 $ 8,056 $ 3,695
==================================================
Non-performing loans to total loans (3) ... 0.54% 0.44% 0.66% 0.81% 0.32%
Total non-performing loans and foreclosed
real estate to total assets............... 0.92% 0.83% 1.14% 0.76% 0.41%
</TABLE>
(1) The amounts of additional interest income that would have been recorded
on non-accrual loans, had they been current, totaled $141,000, $ 148,000,
$269,000, $349,000, and $134,000 for the years 1994, 1993, 1992, 1991,
and 1990, respectively.
(2) Includes $6,281,000 of foreclosed real estate held for investment in 1994.
(3) Total loans excludes loans held-for-sale.
DEPOSITS AND BORROWINGS The Bank's deposit mix as of December 31, 1994
and 1993 reflects the change in interest rate trends from a lowering environment
in 1993 to a rising environment in 1994. As of December 31, 1994, the Bank's
total deposit portfolio of $910.6 million included time deposits of $597.8
million, or 65.6% of total deposits, and NOW, money market, and savings deposits
totaling $312.8 million, or 34.4% of total deposits. As of December 31, 1993,
the Bank's total deposit portfolio of $937.9 million included time deposits of
$564.4 million, or 60.2% of total deposits, and NOW, money market, and savings
deposits totaling $373.5 million, or 39.8% of total deposits. Management
attributes the decrease in the total deposit portfolio of $27.3 million in 1994
relative to 1993 to outflows of deposit funds into competing non-deposit
products, particularly mutual funds and U.S. Treasury investments. Management
believes that short term interest rates will continue rising in 1995, putting
continued upward pressure on the Bank's cost of deposit funds through the
effects of deposit rates and a shift by customers to higher-cost time deposits.
F-66
<PAGE>
FINANCIAL CONDITION
(CONTINUED)
- --------------------------------------------------------------------------------
(All dollar amounts presented in the tables are in thousands)
DEPOSITS AND BORROWINGS (continued) Table 15 provides a detailed analysis
of the Bank's average deposit balances, average cost, and interest expense for
the three-year period ended December 31, 1994.
TABLE 15 Average Interest-Bearing Deposits, Interest Expense, and Average Cost
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------------------------------------------------------
1994 1993 1992
---------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Cost Balance Interest Cost Balance Interest Cost
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Savings deposits...... $234,090 $ 7,361 3.14% $224,085 $ 7,924 3.54% $151,255 $ 6,640 4.39%
Time deposits......... 571,710 27,382 4.79 594,633 29,882 5.03 675,386 40,944 6.06
NOW and money
market accounts...... 112,072 3,163 2.82 112,296 3,448 3.07 113,883 4,552 4.00
---------------------------------------------------------------------------------------------------------
Total interest-
bearing deposits.... $917,872 $37,906 4.13% $931,014 $41,254 4.43% $940,524 $52,136 5.54%
=========================================================================================================
</TABLE>
Management believes the Bank's deposit portfolio remains stable as of
December 31, 1994, mainly due to the conservative nature of the Bank's customer
base as well as a deposit taking policy that prohibits the acceptance of
brokered deposits. The aggregate amount of deposits with a minimum denomination
of $ 100,000 was $69.8 million, $84.8 million, and $73.5 million as of December
31, 1994, 1993, and 1992, respectively. Table 16 presents a maturity
stratification of the Bank's time deposits with minimum denominations of
$100,000 as of December 31, 1994, 1993, and 1992, respectively.
TABLE 16 Maturity of Time Deposits of $100,000 or More
At December 31,
--------------------------------
1994 1993 1992
--------------------------------
Three months or less .................. $ 6,134 $ 6,324 $ 13,101
Over three months through six months .. 4,636 6,533 7,337
Over six months through twelve months.. 7,184 5,780 5,493
Over twelve months..................... 19,147 15,986 11,177
--------------------------------
Total................................. $37,101 $34,623 $37,108
=================================
The Bank pays deposit insurance premiums to the Savings Association
Insurance Fund ("SAIF") of the FDIC. The Bank's assessment rate is currently 23
basis points and the Bank's insurance premiums paid to the SAIF totaled $2.2
million, $2.0 million, and $2.1 million in 1994, 1993, and 1992, respectively.
In addition to the SAIF, the FDIC oversees the Bank Insurance Fund ("BIF") for
the purpose of insuring the deposits of federally-chartered institutions. As of
the date of this writing, the FDIC is proposing a reduction in 1995 of BIF
assessment rates from the 1994 average of approximately 23 basis points to an
approximate average of 5 basis points. This reduction would coincide with the
expected full recapitalization of the BIF reserve ratio, which is set by statute
at 1.25% of total insured deposits. The FDIC has proposed maintaining the SAIF
assessment rates as they exist now until the SAIF statutory reserve ratio is
reached, which the FDIC estimates will occur in 2002. The FDIC is also
considering various alternatives to resolve expected premium disparities.
F-67
<PAGE>
FINANCIAL CONDITION
(CONTINUED)
- --------------------------------------------------------------------------------
DEPOSITS AND BORROWINGS (continued) Should a BIF - SAIF insurance premium
disparity of the magnitude noted above be implemented, the Bank and the thrift
industry as a whole could be placed at a significant competitive disadvantage
relative to BIF-insured institutions in maintaining acceptable earnings and
raising deposit funds. The Bank expects to continue paying 23 basis points for
deposit insurance premiums.
Average non-deposit borrowings, which include escrow accounts, stock
subscriptions, and other borrowed funds, amounted to $9.9 million, $6.1 million,
and $6.9 million in 1994, 1993, and 1992, respectively. The increase of $3.8
million in 1994 compared to 1993 resulted from the combined effect of the Bank's
ESOP loan, which carried an average balance of $2.3 million in 1994 and was
established in 1994, and an increase in average escrow/stock subscriptions
of $1.5 million.
LIQUIDITY The Bank's primary sources of funds are deposits and proceeds
from principal and interest payments on loans and mortgage-backed securities.
While maturities and scheduled amortization of loans and mortgage-backed
securities are a predictable source of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions, and competition.
The Bank is required to maintain a sufficient level of liquid assets, as
determined by management and reviewed for adequacy by the FDIC during their
regular examination. The FDIC, however, does not prescribe by regulation a
minimum amount or percentage of liquid assets. The FDIC allows any marketable
security, whose sale would not impair the capital adequacy of the Bank, to be
eligible for liquidity. The Bank's liquidity is quantified through the use of
three ratios: a standard liquidity ratio of liquid assets to short-term
borrowings plus deposits and two "dependency" ratios of volatile liabilities
(certificates of deposit greater than $100,000 plus short-term borrowings) less
short-term assets, to long-term assets, with the desired result being a
negative percentage. The first dependency ratio is calculated internally by the
Bank and includes investments in the available-for-sale portfolio in short-term
assets. The second dependency ratio is calculated according to FDIC guidelines
and excludes the available-for-sale portfolio from short-term assets.
The Bank's standard FDIC liquidity ratios were 48.2%, 51.7%, and 32.7% at
December 31, 1994, 1993, and 1992, respectively. The Bank's FDIC qualified
liquid assets were $441.8 million, $490.9 million, and $311.5 million at
December 31, 1994, 1993, and 1992, respectively. The Bank's internal
"dependency" liquidity ratios, as calculated by management, were (12.4%),
(33.4%), and (18.7%) at December 31, 1994, 1993, and 1992, respectively. The
FDIC's "dependency" liquidity ratios for the Bank were .7%, (2.7%), and (5.6%)
at December 31, 1994, 1993, and 1992, respectively.
The Bank anticipates that it will have sufficient funds available to meet
its current commitments. At December 31, 1994, the Bank had commitments to
originate loans, including funds available on construction loans of $15.2
million. At December 31, 1994, the Bank had no commitments to purchase
marketable securities. The Bank also is obligated to pay $7.1 million under its
lease agreements for branch and administrative facilities. Certificates of
deposit which are scheduled to mature in one year or less at December 31, 1994,
totaled $306.7 million. Based on historical experience, management estimates
that a significant portion of such deposits will remain with the Bank. The
Bank's 1995 strategic plan initiatives, should many of them be successfully
implemented, are expected by management to utilize some of the Bank's excess
liquidity.
F-68
<PAGE>
FINANCIAL CONDITION
(CONTINUED)
- --------------------------------------------------------------------------------
REGULATIONS From time to time, legislation is enacted which has the effect
of increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, and before various bank regulatory
agencies.
No prediction can be made as to the likelihood of any major changes or
the impact such changes might have on the Bank. Certain changes of potential
significance to the Bank which have been enacted recently and others which are
currently under consideration by Congress or various regulatory or professional
agencies are discussed below.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
requires financial institutions to take certain actions relating to internal
operations including providing annual reports on financial condition and
management to the Bank's appropriate regulatory authorities, which are the
Federal Deposit Insurance Corporation (FDIC) and the Pennsylvania Department of
Banking.
Management has the responsibility for maintaining adequate internal
control standards as well as standards relating to loan documentation, credit
underwriting, interest rate exposure, asset growth, and compensation, fees and
benefits. An assessment of these standards must be made and management must
assert in writing to the regulatory authorities that these standards are in
place at year-end or report on exceptions.
Management has the responsibility for complying with the laws and
regulations relating to safety and soundness as designated by the FDIC or the
Pennsylvania Department of Banking. At December 31st of each year, management
must make an assessment and assert to the regulatory authorities in writing
regarding its compliance during the year. During 1994 and 1993, the Bank was in
compliance, in all significant respects, with the applicable designated safety
and soundness laws and regulations.
The FDICIA also established new regulations regarding divestiture by
FDIC-insured institutions of impermissible state authorized investments and
activities. The Bank currently maintains a subsidiary which has invested in
joint venture projects for the acquisition and development of land for
residential housing. The activities of this subsidiary are now impermissible
activities. The Federal Reserve Bank ("FRB"), as a condition of approval of the
Bank's mutual holding company application, required the Bank to divest of its
impermissible activities within two years of its reorganization, which occurred
on January 25, 1994. The FDIC has extended the approval period indefinitely.
Should the Bank be required to divest of its impermissible investments within
the FRB-imposed deadline, losses up to the Bank's carrying value of $1.6
million may be incurred.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Riegle-Neal Act") potentially will remove many state law barriers to
cross-state acquisitions, mergers, and branching. Although interstate banking
and branching authority will be subject to certain conditions and restrictions
and much state authority will be preserved, this law is expected to increase
opportunities for expansion by and thereby increase competition among financial
institutions. The relevant provisions of this law will become effective on June
1, 1997, but states can pass laws to either opt in early or opt out completely
prior to that date.
The Bank conducts its banking and branching operations within Pennsylvania,
which has not passed "opt in" or "opt out" laws as of the date of this writing.
Due to the proximity of the Bank's primary market to Pennsylvania's border
states, management believes the Riegle-Neal Act may have a significant impact on
the Bank's competitive environment in future years.
F-69
<PAGE>
FINANCIAL CONDITION
(CONTINUED)
- --------------------------------------------------------------------------------
REGULATIONS (continued) On September 23, 1994, President Clinton signed
into law the Community Development/Regulatory Relief Bill (the "CDRR Bill")
which takes effect on January 1, 1995. The CDRR Bill provides $382 million over
a four year period to fund community development projects in low- and
moderate-income neighborhoods through banks and community development financial
institutions.
Management has no way of anticipating whether any of these measures will be
enacted or if enacted, their impact on the Bank's financial position and
reported results of operation. As a consequence of the extensive regulation of
banking activities in the United States, the Bank's business is particularly
susceptible to being affected by federal and state legislation and regulations
that may increase the costs of doing business.
MONETARY POLICY The earnings of the Bank are affected by domestic economic
conditions and the monetary and fiscal policies of the United States Government
and its agencies. An important function of the Federal Reserve System is to
regulate the money supply and interest rates. Among the instruments used to
implement those objectives are open market operations in United States
government securities and changes in reserve requirements against member bank
deposits. These instruments are used in varying combinations to influence
overall growth and distribution of bank loans, investments and deposits, and
their use may also affect rates charged on loans or paid for deposits.
The Bank is a member of the Federal Reserve System and, therefore, the
policies and regulations of the Federal Reserve Board have a significant effect
on its deposits, loans and investment growth, as well as the rate of interest
earned and paid, and are expected to affect the Bank's operations in the future.
The effect of such policies and regulations upon the future business and
earnings of the Bank cannot be predicted.
ENVIRONMENTAL REGULATION There are several federal and state statutes
which regulate the obligations and liabilities of financial institutions
pertaining to environmental issues. In addition to the potential for attachment
of liability resulting from its own actions, a bank may be held liable under
certain circumstances for the actions of its borrowers, or third parties, when
such actions result in environmental problems on properties that collateralize
loans held by the bank. Further, the liability has the potential to far exceed
the original amount of the loan issued by the Bank. Currently, the Bank is not a
party to any pending legal proceeding pursuant to any environmental statute, nor
is the Bank aware of any circumstances which may give rise to liability under
any such statute.
INFLATION AND CHANGING PRICES The consolidated statements in this report
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 changes in the relative
purchasing power of money due to inflation. The impact of inflation is reflected
in the increased cost of the Bank's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Bank are monetary in
nature. As a result, interest rates have a greater impact on the Bank'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.
CORPORATE REORGANIZATION AND STOCK ISSUANCE On December 15, 1992, the
Board of Trustees of the Bank unanimously adopted a plan of reorganization
whereby the Bank would reorganize into a Pennsylvania chartered mutual holding
company.
F-70
<PAGE>
FINANCIAL CONDITION
(CONTINUED)
- --------------------------------------------------------------------------------
CORPORATE REORGANIZATION AND STOCK ISSUANCE (continued) The reorganization
was accomplished on January 25, 1994 through a purchase and assumption of assets
and liabilities whereby the Bank: (i) incorporated a Pennsylvania capital stock
savings bank; (ii) 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 the Bank not sold
in the Offering; and (iii) 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 the Bank 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 the Bank.
Prior to the reorganization, the Bank received the approval of the Federal
Reserve, the Pennsylvania Department of Banking and the FDIC for transactions
contemplated by the plan of reorganization. The plan of reorganization
authorized the Bank to offer stock in one or more stock offerings up to a
maximum of 49% of the issued and outstanding shares of its common stock. The
common stock was offered on a priority basis to: (i) eligible depositors as of
December 31, 1992; (ii) employee stock ownership plan (ESOP); (iii) officers,
trustees and employees of the Bank, and the Bank's recognition and retention
plans (RRP); (iv) other depositors and borrowers as of October 29, 1993; and (v)
the general public. Subscriptions received during the offering period which
ended December 29, 1993, including shares reserved for the ESOP exceeded the
maximum offering of 2,500,000 shares ($25,000,000). As a result of the maximum
subscription, Harris Financial, MHC (mutual holding company) received 8,500,000
shares (76.4%) of Harris Savings Bank (stock bank) stock. Also, the ESOP
received 247,500 shares and the RRP received 125,000 shares.
As a result of the stock offering, Harris Savings Bank received gross
proceeds of $25.2 million which net of expenses associated with the offering of
$1.5 million resulted in net capital additions to the Bank of $23.7 million.
During 1994, the Bank's mutual holding company parent, Harris Financial,
MHC, waived all of its dividends due from Harris Savings Bank. These dividends,
had they not been waived, would have totaled $2.3 million in 1994. Recently, the
FDIC has devoted attention to the issue of such dividend waivers and their
potential impact on future appraisals of FDIC-insured institutions considering a
full stock conversion. The FDIC is also reviewing whether such dividend waivers
potentially represent a breach of fiduciary duties by directors of mutual
holding companies. Management is currently monitoring developments related to
its existing and contemplated future dividend waivers. There is currently no
indication that the Bank will be adversely affected by this regulatory process.
NEW ACCOUNTING GUIDANCE In June, 1994, the FASB issued Statement of
Financial Accounting Standards No. 116, "Accounting for Contributions Received
and Contributions Made" (SFAS 116). SFAS 116 presents standards for
contributions and applies to all entities that receive or make contributions.
Under SFAS 116, contributions received, including unconditional promises to
give, are recognized as revenue in the period received at their fair values.
Contributions made, including unconditional promises to give, are recognized as
expenses in the period made at their fair values
SFAS 116 is effective for years beginning after December 15, 1994. The Bank
expects to adopt SFAS 116 in January, 1995 with no material effect on the Bank's
financial condition or results of operations.
F-71
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDlTION AND RESULTS OF OPERATION
SEPTEMBER 30, 1995
<PAGE>
Material Changes in Results of Operations
Net Interest Income Net Interest income totaled $7,858,000 for the
quarter ended September 30, 1995, which represents a decrease of
$967,000, or 11.0%, from the $8,825,000 of net interest income recorded
in the quarter ended September 30, 1994. This decrease reflected a
favorable volume variance of $50,000 and an unfavorable rate variance of
$1,017,000. Net Interest margin decreased 48 basis points to 2.87% in
the quarter ended September 30, 1995 as compared to 3.35% recorded
during the quarter ended September 30, 1994. Excluding the effects of a
decrease in deferred mortgage income of $75,000 in the quarter ended
September 30, 1995 as compared to the quarter ended September 30, 1994,
the Bank recorded an unfavorable rate variance of $942,000, or 45 basis
points in net interest margin. There were no provisions for loan losses
recorded in the quarters ended September 30, 1995 and September 30,
1994.
Net interest income totaled $24,670,000 for the nine month period
ended September 30, 1995, which represents a decrease of $2,250,000, or
8.4%, from the $26,920,000 of net interest income recorded in the nine
month period ended September 30, 1994. This decrease reflected an
unfavorable volume variance of $312,000 and an unfavorable rate variance
of $1,938,000. Net interest margin decreased 30 basis points to 3.09% in
the nine month period ended September 30, 1995 as compared to 3.39%
recorded during the nine month period ended September 30, 1994.
Excluding the effects of a decrease in deferred mortgage income of
$699,000 in the nine month period ended September 30, 1995 as compared
to the nine month period ended September 30, 1994, the Bank recorded an
unfavorable rate variance of $1,239,000 or 21 basis points in net
interest margin. There were no provisions for loan losses recorded in
the nine month periods ended September 30, 1995 and September 30, 1994.
Table 1 on the following pages presents the Bank's average asset and
liability balances, interest rates, interest income, and interest
expense for each of the nine month periods ended September 30, 1995 and
September 30, 1994, respectively, and for each of the quarters ended
September 30, 1995 and September 30, 1994, respectively. The data in
Table 1 have not been presented using a taxable equivalent basis because
tax exempt income was not material in relation to net interest income
for the periods shown. Following Table 1 is Table 2 which presents a
rate-volume analysis of changes in net interest income.
F-72
<PAGE>
TABLE 1 -- Average Balance Sheets, Rate, and Interest Income and Expense Summary
<TABLE>
<CAPTION>
For the nine months ended
----------------------------------------------------------------------------------
September 30, 1995 September 30, 1994
-----------------------------------------------------------------------------------
Average (1) Average Average (1) Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------ ---------- ---------- --------- --------- -----------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Mortgage loans, net $ 494,965 $ 30,110 8.11% $ 490,311 $ 30,224 8.22%
Other loans,net 100,119 6,436 8.57% 86,714 5,367 8.25%
Marketable securities 434,327 20,351 6.25% 434,456 18,455 5.66%
Other interest-earning assets 33,889 1,650 6.49% 46,677 1,262 3.60%
----------- --------- ----------- ---------
Total interest-earning assets 1,063,300 58,547 7.34% 1,058,158 55,308 6.97%
--------- ---------
Noninterest-earnings assets 30,853 26,452
----------- -----------
Total assets $ 1,094,153 $ 1,084,610
=========== ===========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings deposits $ 154,342 $ 3,580 3.09% $ 243,135 $ 5,750 3.15%
Time deposits 645,936 26,775 5.53% 565,660 19,953 4.70%
NOW and money market deposits 111,589 2,844 3.40% 113,824 2,408 2.82%
Escrow and stock subscriptions 5,885 105 2.38% 8,917 179 2.68%
Borrowed funds 12,708 573 6.01% 2,257 98 5.79%
----------- --------- ----------- ---------
Total interest-bearing liabilities 930,460 33,877 4.85% 933,793 28,388 4.05%
--------- ---------
Noninterest-bearing liabilities 19,565 18,933
----------- -----------
Total liabilities 950,025 952,726
Stockholders' equity 144,128 131,884
----------- -----------
Total liabilities and stockholders'
equity $ 1,094,153 $ 1,084,610
=========== ===========
Net interest income before provision
for loan losses $ 24,670 $ 26,920
========= =========
Interest rate spread(2) 2.49% 2.92%
Net interest-earnings assets $ 132,840 $ 124,365
=========== ===========
Net interest margin(3) 3.09% 3.39%
Ratio of interest-earning assets
to interest-bearing liabilities 1.14x 1.13x
=========== ===========
</TABLE>
(1) Includes income recognized on deferred loan fees of $878,000 and $1,577,000
for the comparable 1995 and 1994 periods, respectively.
(2) Represents the difference between the average yield on interest-earning
assets and the average cost on interest-bearing liabilities.
(3) Represents the annualized net interest income before provision for loan
losses divided by average interest-earning assets.
F-73
<PAGE>
TABLE 1 -- Average Balance Sheets, Rate, and Interest Income and Expense Summary
(continued)
<TABLE>
<CAPTION>
For the quarters ended
-----------------------------------------------------------------------------------
September 30, 1995 September 30, 1994
---------------------------------------- ------------------------------------
Average (1) Average Average (1) Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
----------- ---------- ----------- --------- ---------- -----------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Mortgage loans, net $ 504,002 $ 10,135 8.04% $ 487,722 $ 9,942 8.15%
Other loans, net 104,335 2,301 8.82% 90,125 1,856 8.24%
Marketable securities 467,250 7,276 6.23% 442,896 6,358 5.74%
Other interest-earning assets 19,704 341 6.92% 32,002 378 4.72%
---------- --------- ---------- --------
Total interest-earning assets 1,095,291 20,053 7.32% 1,052,745 18,534 7,04%
--------- --------
Noninterest-earning assets 32,345 27,833
---------- ----------
Total assets $1,127,636 $1,080,578
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings deposits $ 141,697 $ 1,107 3.12% $ 232,699 $ 1,820 3.13%
Time deposits 672,221 9,676 5.76% 577,387 7,035 4.87%
NOW and money market deposits 118,852 1,064 3.58% 112,711 795 2.82%
Escrow and stock subscriptions 5,990 34 2.27% 3,300 22 2.67%
Borrowed funds 20,882 314 6.01% 2,475 37 5.98%
---------- --------- ---------- --------
Total interest-bearing liabilities 959,642 12,195 5.08% 928,572 9,709 4.18%
--------- --------
Noninterest-bearing liabilities 21,256 17,823
---------- ----------
Total liabilities 980,898 946,395
Stockholders' equity 146,738 134,183
---------- ----------
Total liabilities and stockholders'
equity $1,127,636 $ 1,080,578
========== ==========
Net interest income before provision
for loan losses $ 7,858 $ 8,825
========= ========
Interest rate spread(2) 2.24% 2.86%
Net interest-earning assets $ 135,649 $ 124,173
========== ==========
Net interest margin(3) 2.87% 3.35%
Ratio of interest-earning assets to
interest-bearing liabilities 1.14x 1.13x
========== ==========
</TABLE>
(1) Includes income recognized on deferred loan fees of $303,000 and $378,000
for the comparable 1995 and 1994 periods, respectively.
(2) Represents the difference between the average yield on interest-earning
assets and the average cost on interest-bearing liabilities.
(3) Represents the annualized net interest income before provision for loan
losses divided by average interest-earning assets.
F-74
<PAGE>
TABLE 2 -- Rate - Volume Analysis of Changes in Net Interest Income
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1995 Quarter Ended September 30, 1995
Compared to Compared to
Nine Months Ended September 30, 1994 Quarter Ended September 30, 1994
Increase (Decrease) Increase (Decrease)
------------------------------------------ -------------------------------------
Volume Rate Net Volume Rate Net
------------- ---------- ----------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans, net $ 287 $ (401) $ (114) $ 332 $ (139) $ 193
Other loans, net 829 240 1,069 293 152 445
Marketable securities (5) 1,901 1,896 349 569 918
Other interest-earning assets (345) 733 388 (145) 108 (37)
-------- ------- ------- ------ ------- ------
Total interest-earning assets 766 2,473 3,239 829 690 1,519
-------- ------- ------- ------ ------- ------
Interest-bearing liabilities:
Savings deposits (2,098) (72) (2,170) (712) (1) (713)
Time deposits 2,830 3,992 6,822 1,155 1,486 2,641
NOW and money market deposits (47) 483 436 43 226 269
Escrow and stock subscriptions (61) (13) (74) 18 (6) 12
Borrowed funds 454 21 475 275 2 277
------- ------- ------- ------ ------- ------
Total interest-bearing liabilities 1,078 4,411 5,489 779 1,707 2,486
------- ------- ------- ------ ------- ------
Net change in net interest income $ (312) $(1,938) $(2,250) $ 50 $(1,017) $ (967)
======= ======= ======= ====== ======= ======
</TABLE>
Note: Changes in interest income and interest expense arising
from the combination of rate and volume variances are allocated
entirely as rate variances.
F-75
<PAGE>
Non-interest Income Non-interest income totaled $694,000 for the
quarter ended September 30, 1995, which represents an increase of
$32,000, or 4.8%, from the $662,000 recorded in the quarter ended
September 30, 1994. This increase can be attributed primarily to net
servicing income, which increased $77,000, or 34.5%, to $300,000 for the
quarter ended September 30, 1995 as compared to $223,000 for the quarter
ended September 30, 1994.
Non-interest income totaled $1,971,000 for the nine month period ended
September 30, 1995, which represents an increase of $54,000, or 2.8%,
from $1,917,000 recorded in the nine month period ended September 30,
1994. This increase can be attributed primarily to net servicing
income, which increased $114,000, or 16.5% to $805,000 for the nine
month period ended September 30, 1995 as compared to $691,000 for the
nine month period ended September 30, 1994.
Non-interest expense Non-interest expense totaled $5,129,000 for the
quarter ended September 30, 1995, which represents a decrease of
$316,000, or 5.8%, from $5,445,000 of non-interest expense recorded in
the quarter ended September 30, 1994. This decrease variance resulted
primarily from an increase of $193,000 in income from real estate
operations to $152,000 for the quarter ended September 30, 1995 from a
net loss of $41,000 recorded in the quarter ended September 30, 1994.
Also reflected was a decrease in total salary and benefits expense of
$153,000, or 5.1%, to $2,858,000 for the quarter ended September 30,
1995 as compared to $3,011,000 recorded for the quarter ended September
30, 1994.
Non-interest expense totaled $15,019,000 for the nine month period
ended September 30, 1995, which represents a decrease of $631,000, or
4.0%, from $15,650,000 of non-interest expense recorded in the nine
month period ended September 30, 1994. This decrease resulted primarily
from an increase of $447,000 in income from real estate operations to
$418,000 for the nine month period ended September 30, 1995 from a net
loss of $29,000 recorded in the nine month period ended September 30,
1994. Also reflected was a decrease in total salary and benefits expense
of $174,000, or 2.1%, to $8,473,000 for the nine month period ended
September 30, 1995 as compared to $8,647,000 recorded for the nine month
period ended September 30, 1994.
Provision for Income Taxes Corporate income tax expense totaled
$1,278,000 for the quarter ended September 30, 1995, which resulted in
an effective tax rate of 37.3% on pretax income of $3,423,000. This
represents a decrease of $433,000 from the $1,711,000 of corporate
income tax expense recorded during the quarter ended September 30, 1994,
which resulted in an effective tax rate of 42.3% for that period on
pretax income of $4,042,000. The reduction of 5.0% in the Bank's
effective tax rate during the quarter ended September 30, 1995 resulted
primarily from state income tax savings on investment income.
F-76
<PAGE>
Corporate income tax expense totaled $4,271,000 for the nine month period
ended September 30, 1995, which resulted in an effective tax rate of 36.7% on
pretax income Of $11,622,000. This represents a decrease Of $1,295,000 from the
$5,566,000 of corporate income tax expense recorded during the nine month period
ended September 30, 1994, which resulted in an effective tax rate of 42.2% for
that period on pretax income of $13,187,000. The reduction of 5.5% in the Bank's
effective tax rate during the nine month period ended September 30, 1995
resulted primarily from state income tax savings on investment income.
F-77
<PAGE>
Material Changes in Financial Condition
ACQUISITION OF TWO BRANCH OFFICES Effective September 29, 1995 the Bank
completed an acquisition of two banking offices located in Hagerstown, Maryland
from Columbia First Bank. The offices are now the 24th and 25th branch offices
of the Bank.
The acquisition included the purchase of $126.0 million in deposit
liabilities, including $109.3 million in time deposits and $16.7 million in
shorter term deposits, $115.3 million in cash and cash equivalents, $.2 million
in loans, and $.1 million in fixed assets. The acquisition was accounted for as
a purchase and resulted in a deposit premium of $10.4 million. This acquisition
provided the Bank with a presence in the Maryland market.
SOURCES AND USES OF FUNDS Total cash and cash equivalents increased $38.1
million during the nine month period ended September 30, 1995. Operating
activities generated cash totaling $28.2 million during the nine month period
ended September 30, 1995. During this period, investing activities of the Bank
resulted in a net use of cash of $146.2 million. Activities in the Bank's
portfolio of marketable securities resulted in a net use of cash of $87.2
million and activities in the Bank's loan portfolio resulted in a net use of
cash of $44.0 million for the nine month period ended September 30, 1995. The
Bank's financing activities generated cash totaling $156.1 million during the
nine month period ended September 30, 1995 primarily due to the acquisition of
$126.0 million in deposits from Columbia First Bank.
STOCKHOLDERS' EQUITY Stockholders' Equity totaled $148.4 million, $135.0
million, and $134.2 million at September 30, 1995, December 31, 1994, and
September 30, 1994, respectively. Stockholders' Equity amounted to 11.9% on
total assets of $1.250 billion as of September 30, 1995, as compared to 12.8% on
total assets of $1.058 billion at December 31, 1994 and 12.5% on total assets of
$1.076 billion at September 30, 1994.
The increase in Stockholders' equity of $13.4 million in the nine month
period ended September 30, 1995 included capital additions of $7.4 million from
net income, $5.9 million from a net increase in the market value, net of tax
effect, of the available-for-sale securities portfolio, and an increase in
capital of $1.0 million from stock awards and options. Offsetting capital
additions during the nine month period ended September 30, 1995 were
reductions of $.9 million for dividends to shareholder.
The increase in Stockholders' equity of $14.2 million in the twelve month
period ended September 30, 1995 included capital additions of $9.8 million from
net income, a net increase of $3.9 million in the market value, net of tax
effect, of the available-for-sale securities portfolio, and an increase in
capital of $1.7 million from stock awards and options. Offsetting capital
additions during the twelve month period ended September 30, 1995 were $1.2
million in dividends to shareholders.
F-78
<PAGE>
The Bank's leverage capital ratio, calculated using FDIC capital
definitions, totaled 10.9%, 13.1%, and 12.6% at September 30, 1995, December 31,
1994, and September 30, 1994, respectively. The Bank's risk-based capital ratio,
calculated using FDIC capital definitions, totaled 22.9%, 29.3%, and 28.3% at
September 30, 1995, December 31, 1994, and September 30, 1994, respectively. As
of these dates, the Bank's capital ratios exceeded all regulatory minimum
capital requirements.
MARKETABLE SECURITIES Marketable securities, excluding cash, totaled $505.6
million, $409.1 million, and $435.2 million at September 30, 1995, December 31,
1994, and September 30, 1994, respectively. The increase of $70.4 million in
marketable securities during the twelve month period ended September 30, 1995
resulted primarily from the investment of cash received in the Maryland branch
office acquisition noted above.
Table 3 on the following pages presents the composition of the Bank's
marketable securities portfolio as of September 30, 1995, December 31, 1994, and
September 30, 1994, respectively.
F-79
<PAGE>
TABLE 3--Composition of Marketable Securities Portfolios
The following table sets forth certain information regarding the amortized
cost and fair values of the Bank's marketable securities portolio at September
30, 1995, December 31, 1994. and September 30, 1994.
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994 September 30, 1994
-------------------- ------------------- --------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- -------- --------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
U.S. Government and agencies ...... $ 94,625 $ 94,500 $37,052 $ 35,080 $ 37,054 $ 35,650
FHLB certificates of deposit ...... 700 700 301 301 0 0
Mortgage-backcd securities:
FNMA PC's ........................ 5,762 5,920 1,469 1,477 1,533 1,569
FHLMC PC's ....................... 3,251 3,253 3,841 3,838 4,048 4,095
FNMA CMO's ....................... 77,040 75,967 89,704 85,484 93,327 90,686
FHLMC CMO's ...................... 72,008 71,274 90,368 86,850 102,438 100,072
Non-agency CMO's ................. 14,534 14,524 0 0 0 0
--------- -------- --------- -------- --------- --------
Total mortgage-backed securities .. 172,595 170,938 185,382 177,649 201,346 196,422
--------- -------- --------- ------- --------- --------
Total securities held-to-maturity . $267,920 $266,138 $222,735 $213,030 $238,400 $232,072
--------- -------- --------- -------- --------- --------
Available-for-sale:
U.S. Government and agencies ...... $ 38,251 $ 38,854 $ 16,028 $ 16,048 $ 16,398 $ 16,477
Equity ............................ 22,833 25,014 22,574 22,516 22,593 23,466
Mortgage-backed securities:
FNMA PC's ........................ 15,276 15,060 18,580 18,071 19,951 19,701
FHLMC PC's ....................... 132,201 132,885 135,463 129,753 140,803 137,121
Non-agency PC's .................. 25,963 25,916 0 0 0 0
--------- -------- --------- -------- --------- --------
Total mortgage-backed securities .. 173,440 173,861 154,043 147,824 160,754 156,822
--------- -------- --------- ------- --------- --------
Total securities available-for-sale $234,524 $237,729 $192,645 $186,388 $199,745 $196,765
--------- -------- --------- -------- --------- --------
Other interest-earning investments:
FHLB daily investment ............. $ 71,577 $ 71,577 $ 29,685 $ 29,685 $ 27,999 $ 27,999
--------- -------- --------- -------- --------- --------
Total marketable securities and
interest-earning investments ...... $574,021 $575,444 $445,065 $429,103 $466,144 $456,836
======== ======== ======== ======== ======== ========
</TABLE>
F-80
<PAGE>
LOANS Net loans totaled $618.6 million, $574.8 million, and $572.9 million at
September 30, 1995, December 31, 1994, and September 30, 1994, respectively. The
increase of $43.8 million for the nine month period ended September 30, 1995 and
the increase of $45.7 million for the twelve month period ended September 30,
1995 both result from a combination of substantially increased loan demand, low
prepayment experience, and a low level of loan swapping and selling activity.
Table 4 on the following page presents an analysis of the Bank's loan
portfolio as of September 30, 1995, December 31, 1994, and September 30, 1994,
respectively.
F-81
<PAGE>
TABLE 4 - Loan Composition
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994 September 30, 1994
---------------------- ----------------------- -----------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family $454,107 72.17% $433,206 73.87% $435,020 74.38%
Other residential real estate (multi-family) 26,401 4.20 27,443 4.68 28,312 4.84
Construction(1) 19,157 3.04 8,642 1.47 8,159 1.40
Other (primarily commercial real estate) 22,802 3.62 22,299 3.80 23,018 3.94
-------- ------ -------- ------ -------- -------
Total mortgage loans 522,467 83.03 491,590 83.82 494,509 84.56
-------- ------ -------- ------ -------- -------
Consumer and other loans:
Automobile 32 0.01 86 0.01 102 0.02
Mobile home 15,371 2.44 10,767 1.84 10,077 1.72
Home equity and second mortgage 81,350 12.93 74,295 12.67 72,380 12.37
Credit cards 3,271 0.52 3,765 0.64 2,945 0.50
Commercial 2,051 0.32 1,884 0.32 1,617 0.28
Other 4,714 0.75 4,110 0.70 3,203 0.55
-------- ------ -------- ----- -------- -------
Total consumer and other loans 106,789 16.97 94,907 16.18 90,324 15.44
-------- ------ -------- ------ -------- -------
Loans receivable, gross 629,256 100.00% 586,497 100.00% 584,833 100.00%
-------- ------ -------- ------ -------- -------
Plus:
Dealer reserves 3,131 2,102 2,011
------ ------ ------
Less:
Unearned discounts (247) (78) (91)
Net deferred loan origination fees 7,860 7,614 7,621
Allowance for loan losses 6,132 6,269 6,419
------ ------ -------
13,745 13,805 13,949
-------- --------- --------
Loans receivable, net $618,642 $574,794 $572,895
======== ======== ========
Mortgage loans:
ARM $112,853 21.60% $ 95,713 19.47% $ 96,924 19.60%
Fixed-rate 409,614 78.40 395,877 80.53 397,585 80.40
-------- ------ -------- ------ -------- -------
Total mortgage loans $522,467 100.00% $491,590 100.00% $494,509 100.00%
======== ====== ======== ====== ======== =======
</TABLE>
(1) Net of undisbursed portion of $23,728 at September 30, 1995, $10,802 at
December 31, 1994, and $10,084 at September 30, 1994, respectively.
(2) There were no loans held-for-sale as of the dates indicated.
F-82
<PAGE>
Purchased Mortgage Servicing Rights As of September 30, 1995, December 31,
1994, and September 30, 1994 the Bank held purchased mortgage servicing
rights with carrying values totaling $4.6 million, $0, and $0, respectively. The
unpaid principal balances of loans serviced for others totaled $430.9 million,
$202.0 million, and $206.8 million at September 30, 1995, December 31, 1994, and
September 30, 1994, respectively. The Bank recorded amortization expense on
purchased mortgage servicing rights totaling $101,000 and $196,000 during the
quarter ended September 30, 1995 and the nine month period ended September 30,
1995, respectively. The Bank recorded no related amortization expense during
1994.
Asset Quality The Bank's asset quality continues to remain sound. Loan
charge-offs net of recoveries, totaled $137,000 for the nine month period ended
September 30, 1995 compared to $164,000 for the nine month period ended
September 30, 1994. Loan charge-offs, net of recoveries, totaled $288,000 for
the twelve month period ended September 30, 1995. Based on management's
continuing review of the loan portfolio, no provisions were considered necessary
in the nine month and twelve month periods ended September 30, 1995.
The allowances for loan losses totaled $6,132,000, $6,269,000, and
$6,419,000 at September 30, 1995, December 31, 1994, and September 30, 1994,
respectively. Stated as a percentage of total loans receivable, the allowance
for loan losses amounted to .97%, 1.07%, and 1.10% at September 30, 1995,
December 31, 1994, and September 30, 1994, respectively.
Deposits and Borrowings Deposits, not including escrow, totaled $1.067 billion,
$910.6 million, and $927.9 million at September 30, 1995, December 31, 1994, and
September 30, 1994, respectively. Net deposit inflows of $156.4 million in the
nine month period ended September 30, 1995, included $126.0 million in deposits
from the Maryland branch office acquisition noted above and $30.4 million
from internal deposit growth. During the twelve month period ended September 30,
1995, deposits increased $139.1 million, including $126.0 million in acquired
deposits and $13.1 million from internal deposit growth. The composition of the
Bank's deposit portfolio shifted markedly in the twelve month period ended
September 30, 1995 including a net reduction of $51.8 million in non-time
deposits and a net increase of $190.9 million in time deposits.
Table 5 on the following pages presents the composition of the Bank's
deposit portfolio as of September 30, 1995, December 31, 1994, and September
30, 1994, respectively.
F-83
<PAGE>
TABLE 5--Deposit Composition
<TABLE>
<CAPTION>
At September 30, 1995 At December 31, 1994 At September 30, 1994
--------------------- -------------------- ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Demand and Now accounts $ 57,180 5.36 $ 56,341 6.19 $ 51,695 5.57
Money market 86,400 8.10 60,793 6.67 64,552 6.96
Savings 143,607 13.46 195,664 21.49 222,700 24.00
Time deposits 779,775 73.08 597,778 65.65 588,920 63.47
---------- ------ -------- ------ -------- ------
Total deposits $1,066,962 100.00 $910,576 100.00 $927,867 100.00
========== ====== ======== ====== ======== ======
</TABLE>
F-84
<PAGE>
Liquidity The Bank's primary sources of funds are deposits and proceeds from
principal and interest payments on loans and mortgage-backed securities. While
maturities and scheduled amortization of loans and mortgage-backed securities
are a predictable source of funds, deposit flows and mortgage prepayments are
greatly influenced by general interest rates, economic conditions, and
competition. The Bank anticipates that it will have sufficient funds available
to meet its current commitments.
The Bank achieved all regulatory standards for liquidity at September 30,
1995, December 31, 1994, and September 30, 1994.
Pending legislation concerning SAIF premiums As of the date of this report, the
United States Congress is considering legislation that would impose a one-time
recapitalization assessment by the Federal Deposit Insurance Corporation (FDIC)
on Savings Association Insurance Fund (SAIF) members. At present, various
legislative initiatives are under Congressional consideration which include a
wide range of potential assessment rates and dates, deposit measurement dates,
federal tax treatments, financial institution charter issues and SAIF
structural changes. The Bank currently estimates that the one-time SAIF
assessment on its deposit base will likely fall within a range of $8.0 million
and $10.1 million before income tax savings and will likely be assessed prior to
March 31, 1996. Subsequent to this recapitalization assessment, the Bank expects
a substantial reduction in its deposit insurance premium rates.
The Bank's estimates regarding the proposed SAIF assessment are subject to
great uncertainty as actual legislation may diverge from current proposals.
Also, the Bank cannot reasonably estimate the effects on its results of
operations or financial condition from legislation enacted concerning issues
beyond the SAIF assessment itself.
F-85
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
AMONG
HARRIS SAVINGS BANK
HARRIS ACQUISITION CORPORATION
AND
FIRST HARRISBURG BANCOR, INC.
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF HARRISBURG
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. REORGANIZATION AND MERGER............................................................................ A-2
(a) Merger of Harris Acquisition and First Harrisburg............................................. A-2
(b) Effective Date................................................................................ A-2
(c) Conversion of First Harrisburg Common Stock................................................... A-3
(d) Harris Common Stock........................................................................... A-3
(e) Harris Acquisition Common Stock............................................................... A-3
(f) Exchange of Stock Certificates................................................................ A-3
(g) Stock Options, Stock Option Plans, and Related Matters........................................ A-4
(h) Shareholders' Meetings........................................................................ A-5
(i) Proxy Statement............................................................................... A-5
(j) Cooperation, Regulatory Approvals............................................................. A-6
(k) First Harrisburg Liquidation.................................................................. A-6
(l) First Federal Merger.......................................................................... A-6
(m) Dissenting Shares............................................................................. A-6
2. REPRESENTATIONS AND WARRANTIES BY HARRIS AND HARRIS ACQUISITION...................................... A-6
(a) Organization, Good Standing, Authority, Insurance, Etc........................................ A-6
(b) Agreement, Authority, Absence of Conflicts.................................................... A-6
(c) Sufficient Resources.......................................................................... A-7
(d) Harris Acquisition Representations and Warranties............................................. A-7
(e) Ownership of First Harrisburg Common Stock.................................................... A-7
(f) Full Disclosure............................................................................... A-7
(g) CRA Compliance................................................................................ A-8
(h) Approval by Harris Financial, MHC............................................................. A-8
3. REPRESENTATIONS AND WARRANTIES BY FIRST HARRISBURG AND FIRST FEDERAL................................. A-8
(a) Organization, Good Standing, Authority, Deposit Insurance, Etc................................ A-8
(b) Capitalization, Investments................................................................... A-8
(c) Financial Statements and Exchange Act Reports................................................. A-9
(d) Absence of Certain Developments............................................................... A-10
(e) Taxes......................................................................................... A-10
(f) Litigation.................................................................................... A-11
(g) Brokerage..................................................................................... A-11
(h) Properties.................................................................................... A-11
(i) Compliance with Applicable Laws............................................................... A-12
(j) Contracts and Commitments, Etc................................................................ A-12
(k) Insurance..................................................................................... A-13
(l) No Guarantees................................................................................. A-13
(m) Examination Reports........................................................................... A-13
(n) Agreement, Authority, Absence of Conflicts.................................................... A-13
(o) Reporting..................................................................................... A-13
(p) Full Disclosure............................................................................... A-14
(q) Employee Benefit Plans........................................................................ A-14
(r) Labor Matters................................................................................. A-14
(s) Environmental Matters......................................................................... A-15
(t) Proceedings................................................................................... A-16
(u) Undisclosed Liabilities....................................................................... A-16
(v) Financial Institutions Bond................................................................... A-16
(w) Repurchase Agreements......................................................................... A-16
(x) Assumability of Leases and Contracts.......................................................... A-16
(y) Loans......................................................................................... A-17
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
(z) Loan Portfolio................................................................................ A-17
(aa) Trademarks, Trade Names....................................................................... A-17
(bb) Accuracy of Representations................................................................... A-17
(cc) Absence of Questionable Payments.............................................................. A-17
(dd) Powers of Attorney, Guarantees................................................................ A-17
(ee) Mortgage Banking Operations and Activities.................................................... A-17
(ff) CRA Compliance................................................................................ A-19
(gg) Derivatives................................................................................... A-19
(hh) Loan Loss Reserves............................................................................ A-19
4. ACCESS TO AND INFORMATION CONCERNING PROPERTIES, RECORDS, ETC........................................ A-19
5. AFFIRMATIVE COVENANTS OF HARRIS...................................................................... A-20
(a) Conduct of Business........................................................................... A-20
(b) Preservation of Business...................................................................... A-20
(c) Insurance..................................................................................... A-20
(d) Laws, Rules, Etc.............................................................................. A-20
(e) Best Efforts.................................................................................. A-20
(f) Notices....................................................................................... A-20
(g) Regulatory Applications....................................................................... A-20
6. AFFIRMATIVE COVENANTS OF FIRST HARRISBURG AND FIRST FEDERAL.......................................... A-21
(a) Conduct of Business........................................................................... A-21
(b) Preservation of Business...................................................................... A-21
(c) Properties.................................................................................... A-21
(d) Insurance..................................................................................... A-21
(e) Contracts, Etc................................................................................ A-21
(f) Financial Statements.......................................................................... A-21
(g) Laws, Rules, Etc.............................................................................. A-22
(h) Corporate Existence........................................................................... A-22
(i) Notices....................................................................................... A-22
(j) Best Efforts.................................................................................. A-22
(k) Amend Corporate Documents..................................................................... A-23
(l) Suspend Stock and Dividend Reinvestment Plans................................................. A-23
(m) First Harrisburg Benefit Plans................................................................ A-23
(n) Good Faith Cooperative Effort to Revise Structure............................................. A-23
(o) Non-permitted Activities Divestiture.......................................................... A-23
7. NEGATIVE COVENANTS OF FIRST HARRISBURG AND FIRST FEDERAL............................................. A-23
8. CONDITIONS TO THE OBLIGATIONS OF HARRIS, HARRIS ACQUISITION, FIRST HARRISBURG, AND FIRST FEDERAL..... A-26
(a) Approval of Shareholders...................................................................... A-26
(b) Approval of Regulatory Agencies............................................................... A-26
(c) Dissenters' Rights............................................................................ A-26
(d) Antitrust Laws................................................................................ A-26
(e) Suits, Actions................................................................................ A-26
(f) Statutes, Orders.............................................................................. A-26
(g) Other Requirements............................................................................ A-26
9. CONDITIONS TO THE OBLIGATIONS OF HARRIS AND HARRIS ACQUISITION....................................... A-26
(a) Representations, Warranties and Covenants..................................................... A-26
(b) Opinion of Special Counsel.................................................................... A-27
(c) Opinion of Local Counsel...................................................................... A-28
(d) Suit, Action, Etc............................................................................. A-29
(e) Accountants' Comfort Letter................................................................... A-29
(f) Accountants' Letter........................................................................... A-29
(g) Support Agreement............................................................................. A-29
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C> <C>
(h) Investment Agreement.......................................................................... A-30
(i) Tax Ruling or Opinion......................................................................... A-30
(j) Closing Documents............................................................................. A-30
(k) Outstanding Stock Options..................................................................... A-30
(l) Effectiveness of Transactions................................................................. A-30
(m) Non-permitted Activities...................................................................... A-30
(n) Harris Fairness Opinion....................................................................... A-30
10. CONDITIONS TO THE OBLIGATIONS OF FIRST HARRISBURG AND FIRST FEDERAL.................................. A-30
(a) Representations and Warranties................................................................ A-30
(b) Opinion of Counsel............................................................................ A-31
(c) Suit, Action, Etc............................................................................. A-32
(d) Deposit into Payment Fund..................................................................... A-32
(e) First Harrisburg Fairness Opinion............................................................. A-32
11. TERMINATION OF AGREEMENT............................................................................. A-32
12. EXPENSES............................................................................................. A-33
13. CONFIDENTIALITY...................................................................................... A-33
14. SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ETC...................................................... A-33
15. CERTAIN POST-MERGER AGREEMENTS....................................................................... A-33
(a) Employees..................................................................................... A-33
(b) Existing Employment Agreements................................................................ A-34
(c) Board of Directors of Harris.................................................................. A-34
(d) Directors' Retirement Plan.................................................................... A-35
(e) Deferred Compensation Agreements.............................................................. A-35
(f) Indemnification and Insurance................................................................. A-35
16. ENTIRE AGREEMENT..................................................................................... A-35
17. PUBLICITY............................................................................................ A-35
18. AMENDMENT AND WAIVER................................................................................. A-36
19. GOVERNING LAW........................................................................................ A-36
20. COMMUNICATIONS....................................................................................... A-36
21. SUCCESSORS AND ASSIGNS............................................................................... A-37
22. HEADINGS, ETC........................................................................................ A-37
23. SEVERABILITY......................................................................................... A-37
24. NO THIRD PARTY BENEFICIARY........................................................................... A-37
25. COUNTERPARTS......................................................................................... A-37
26. FURTHER ASSURANCES................................................................................... A-37
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
AGREEMENT AND PLAN OF MERGER OF
HARRIS ACQUISITION CORPORATION
WITH AND INTO FIRST HARRISBURG BANCOR, INC...................................................... EXHIBIT 1
FIRST HARRISBURG BANCOR, INC. PLAN OF LIQUIDATION
AND DISSOLUTION................................................................................. EXHIBIT 2
AGREEMENT AND PLAN OF MERGER OF FIRST FEDERAL
SAVINGS AND LOAN ASSOCIATION OF HARRISBURG WITH
AND INTO HARRIS SAVINGS BANK.................................................................... EXHIBIT 3
INVESTMENT AGREEMENT.............................................................................. EXHIBIT 4
</TABLE>
iv
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (hereinafter 'Agreement') is
dated as of November 12, 1995, by and among HARRIS SAVINGS BANK, a Pennsylvania
state-chartered stock savings bank ('Harris'), HARRIS ACQUISITION CORPORATION, a
Pennsylvania corporation ('Harris Acquisition'), FIRST HARRISBURG BANCOR, INC.,
a Pennsylvania corporation ('First Harrisburg'), and FIRST FEDERAL SAVINGS AND
LOAN ASSOCIATION OF HARRISBURG, a federal savings and loan association and a
wholly-owned subsidiary of First Harrisburg ('First Federal') (collectively
sometimes referred to as the 'Parties').
WHEREAS, the respective Boards of Directors of Harris, First Harrisburg,
and First Federal have approved and deem it advisable and in the best interests
of their respective companies to consummate the transactions provided for in
this Agreement and the exhibits hereto in the sequential order and manner
provided herein and therein;
WHEREAS, Harris shall incorporate Harris Acquisition as a Pennsylvania
business corporation and capitalize Harris Acquisition with sufficient funds as
Harris' wholly-owned subsidiary prior to the effectuation of the transactions
contemplated by this Agreement and the exhibits thereto;
WHEREAS, the respective Boards of Directors of Harris and First Harrisburg
have approved, and deem it advisable and in the best interests of the Harris and
First Harrisburg shareholders to consummate a merger of Harris Acquisition with
and into First Harrisburg pursuant to the terms and subject to the conditions
set forth in this Agreement and the Agreement and Plan of Merger of Harris
Acquisition Corporation with and into First Harrisburg Bancor, Inc. in the form
attached hereto as Exhibit 1 (the 'Merger Agreement'). Such merger of Harris
Acquisition with and into First Harrisburg on the terms and conditions provided
in this Agreement and the Merger Agreement shall be referred to herein and
therein as the 'Merger'.
WHEREAS, subsequent to and immediately after the consummation of the
Merger, First Harrisburg shall liquidate and dissolve in a transaction that is
not taxable and has no adverse tax consequences to the Parties hereto, such
liquidation and dissolution to be undertaken and effectuated pursuant to the
First Harrisburg Bancor, Inc. Plan of Liquidation and Dissolution (the 'First
Harrisburg Plan of Liquidation') in the form attached hereto as Exhibit 2;
WHEREAS, subsequent to and immediately after the effectiveness of the First
Harrisburg Plan of Liquidation, First Federal shall merge with and into Harris
in a transaction that is not taxable and has no adverse tax consequences to the
Parties hereto, such merger to be undertaken and effectuated pursuant to the
Agreement and Plan of Merger of First Federal Savings and Loan Association of
Harrisburg with and into Harris Savings Bank (the 'First Federal Merger') in the
form attached hereto as Exhibit 3;
WHEREAS, the Parties desire and intend that the Merger, the First
Harrisburg Plan of Liquidation and the First Federal Merger (collectively the
'Reorganization') shall be effectuated in sequential order, each contingent upon
effectiveness of all, and on the same day;
WHEREAS, as a condition to Harris' entry into this Agreement and to induce
such entry, First Harrisburg is entering into the Investment Agreement (the
'Option Agreement') attached hereto as Exhibit 4;
WHEREAS, the Parties hereto intend that for federal income tax purposes,
none of the transactions contemplated by this Agreement, the Merger Agreement,
the First Harrisburg Plan of Liquidation, and the First Federal Merger will
result in the realization or recognition of taxable income or loss to the
Parties hereto under the Internal Revenue Code of 1986, as amended (the 'Code'),
and that for accounting purposes the collective effect of all of these
transactions will be treated under the purchase method of accounting; and
A-1
<PAGE>
WHEREAS, the Parties desire to provide for certain undertakings,
conditions, representations, warranties and covenants in connection with the
transactions contemplated hereby and governing the transactions contemplated
herein.
NOW, THEREFORE, in consideration of the premises, mutual promises,
covenants, agreements, representations and warranties hereinafter set forth, and
of other good and valuable consideration the receipt and sufficiency of which
are hereby acknowledged, and intending to be legally bound hereby, the Parties
hereto agree as follows:
1. REORGANIZATION AND MERGER. Upon the terms and subject to the conditions
of this Agreement, the Merger Agreement, the First Harrisburg Plan of
Liquidation, and the First Federal Merger, the Reorganization is to be
accomplished in the manner described herein.
(a) Merger of Harris Acquisition and First Harrisburg. In accordance
with the provisions of this Agreement, the Merger Agreement and the laws of
the Commonwealth of Pennsylvania, at the Effective Date (as hereinafter
defined), Harris Acquisition shall be merged with and into First
Harrisburg, the separate corporate existence of Harris Acquisition shall
cease, and First Harrisburg shall continue its corporate existence as the
surviving corporation of the Merger as a Pennsylvania business corporation
under the name 'First Harrisburg Bancor, Inc.' with all the rights and
powers provided to such corporation under the Pennsylvania Business
Corporation Law of 1988, as amended (the 'Business Corporation Law'). Also
at the Effective Date, all of the outstanding shares of First Harrisburg's
common stock, par value $.01 per share (the 'First Harrisburg Common
Stock'), except for shares held by First Harrisburg as treasury shares,
shares owned by any direct or indirect subsidiary of First Harrisburg
(other than shares held pursuant to the Deferred Compensation Trust
Agreement dated October 16, 1992, between First Federal and an independent
trustee, as amended), shares of First Harrisburg Common Stock owned by any
First Harrisburg shareholder who elects to exercise dissenters' rights in
accordance with Pennsylvania law ('Dissenting Shares'), and any shares
owned by Harris or its parent or subsidiaries in other than a fiduciary
capacity, will be converted into the right to receive Fourteen Dollars and
Seventy-Seven Cents ($14.77) in cash per share without interest in the
manner specified in Section 1(c) hereof, and each outstanding share of
Harris Acquisition common stock shall be converted into one fully paid and
non-assessable share of First Harrisburg Common Stock, resulting in all
outstanding shares of First Harrisburg being owned by Harris at and after
the Effective Date. At the Effective Date, Harris shall be the sole
shareholder of First Harrisburg and First Harrisburg shall be a
wholly-owned subsidiary of Harris.
(b) Effective Date. At the Effective Date (as hereinafter defined),
the Merger shall be effected pursuant to the provisions of and with the
effects provided by the Business Corporation Law, and the First Harrisburg
Plan of Liquidation and the First Federal Merger shall be immediately
thereafter effectuated. The Effective Date shall be the date and time of
the later to occur of the acceptance for filing by the Secretary of State
of the Commonwealth of Pennsylvania of articles of merger of Harris
Acquisition and First Harrisburg, or such later date and time as shall be
specified in such articles as agreed to by the Parties hereto, as the case
may be; provided, however, that on such Effective Date, the First
Harrisburg Plan of Liquidation and the First Federal Merger shall also be
effectuated. Unless otherwise mutually agreed upon in writing by Harris
Acquisition and First Harrisburg, upon the terms and subject to the
conditions of this Agreement and the exhibits hereto, the Effective Date
shall occur on or before the thirtieth (30th) calendar day following the
later of (i) the receipt of all requisite regulatory approvals and the
expiration of all applicable waiting periods, and (ii) the receipt of all
requisite shareholder approvals, unless the Parties mutually agree to a
later date. The closing of the transactions contemplated hereby (the
'Closing') shall take place at 10:00 a.m. local time at the offices of
Harris on the date the Effective Date occurs, or at such other time or
place as the Parties hereto shall mutually agree. At the Effective Date,
Harris Acquisition shall cease to exist as a separate corporation, and
First Harrisburg shall become the surviving corporation of the Merger (the
'Surviving Corporation'). The Articles of Incorporation and Bylaws of First
Harrisburg, as in
A-2
<PAGE>
effect immediately prior to the Effective Date, shall be the Articles of
Incorporation and Bylaws of the Surviving Corporation.
(c) Conversion of First Harrisburg Common Stock. Each share of First
Harrisburg Common Stock issued and outstanding immediately prior to the
Effective Date (other than shares of First Harrisburg Common Stock held by
First Harrisburg as treasury stock, shares owned by any direct or indirect
subsidiary of First Harrisburg (other than shares held pursuant to the
Deferred Compensation Trust Agreement dated October 16, 1992, between First
Federal and an independent trustee, as amended), shares owned by Harris or
its parent or subsidiaries in other than a fiduciary capacity, and
Dissenting Shares) ('Eligible Shares'), shall, by virtue of this Agreement
and the Merger Agreement and without any action on the part of the holder
thereof, be cancelled and converted into the right to receive Fourteen
Dollars and Seventy-Seven Cents ($14.77) in cash without interest, subject
to the provisions of Section 1(f) below (the 'Merger Consideration'). In no
event shall the number of Eligible Shares exceed 2,768,411 shares. The
aggregate amount paid for all Eligible Shares shall be the 'Aggregate
Merger Consideration.' In no event shall the Aggregate Merger Consideration
exceed $40,889,430. Each share of First Harrisburg Common Stock held in the
treasury of First Harrisburg, held by any direct or indirect subsidiary of
First Harrisburg (other than shares held pursuant to the Deferred
Compensation Trust Agreement dated October 16, 1992, between First Federal
and an independent trustee, as amended), or held by Harris or its parent or
subsidiaries in other than a fiduciary capacity immediately prior to the
Effective Date shall automatically, by virtue of this Agreement and the
Merger Agreement, be cancelled and retired, and shall cease to exist,
without any conversion thereof into the right to receive the Merger
Consideration.
(d) Harris Common Stock. Each share of Harris' common stock, par
value $.01 per share (the 'Harris Common Stock') issued and outstanding
immediately prior to the Effective Date shall, on and after the Effective
Date, continue to be issued and outstanding as an identical share of Harris
Common Stock. Each share of Harris Common Stock issued and held in treasury
of Harris as of the Effective Date, if any, shall, on and after the
Effective Date, continue to be issued and held in the treasury of Harris.
(e) Harris Acquisition Common Stock. At the Effective Date, each
issued and outstanding share of Harris Acquisition Common Stock shall be
converted into one fully paid and non-assessable share of First Harrisburg
Common Stock, resulting in all outstanding shares of First Harrisburg being
owned by Harris at and after the Effective Date. After the Effective Date,
Harris shall be the sole shareholder of First Harrisburg, and First
Harrisburg shall be a wholly-owned subsidiary of Harris.
(f) Exchange of Stock Certificates. Certificates underlying shares of
First Harrisburg Common Stock shall be exchanged for the Merger
Consideration in accordance with the following procedures:
(i) The transfer agent of Harris shall act as agent (the 'Exchange
Agent') in effecting and receiving, promptly after the Effective Date,
the exchange of stock certificates (the 'Certificates'), which
Certificates, immediately prior to the Effective Date, represented
outstanding shares of First Harrisburg Common Stock (other than those
shares excluded by Section 1(c) hereof), in exchange for the Merger
Consideration. Upon surrender of a Certificate for exchange and
cancellation together with a letter of transmittal (as described below)
duly executed, the holder of such Certificate shall be entitled to
receive in exchange therefor, and the Exchange Agent shall pay to such
holder, the Merger Consideration multiplied by the number of shares of
First Harrisburg Common Stock formerly represented by such Certificate,
and the Certificate so surrendered shall forthwith be cancelled.
(ii) At the Effective Date and until so surrendered and exchanged,
each such Certificate shall represent solely the right to receive the
Merger Consideration. If the Merger Consideration (or any portion
thereof) is to be delivered to any person other than the person in whose
name the Certificate representing shares of First Harrisburg Common
Stock
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surrendered and exchanged therefor is registered, it shall be a
condition to such exchange that the Certificate so surrendered shall be
properly endorsed or otherwise be in proper form for transfer, and that
the person requesting such exchange shall pay for the Exchange Agent any
transfer or other taxes required by reason of the payment of such cash
to a person other than the registered holder of the Certificate
surrendered, or shall establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not applicable. Notwithstanding
the foregoing, neither the Exchange Agent nor any party hereto shall be
liable to a holder of First Harrisburg Common Stock for any Merger
Consideration delivered to a public official pursuant to applicable
abandoned property, escheat and similar laws.
(iii) At or prior to the Effective Date, Harris Acquisition shall
deposit in trust with the Exchange Agent cash in an aggregate amount
equal to the product of (i) the number of shares of First Harrisburg
Common Stock (other than any shares held by First Harrisburg as treasury
stock, by any direct or indirect subsidiary of First Harrisburg (other
than shares held pursuant to the Deferred Compensation Trust Agreement
dated October 16, 1992, between First Federal and an independent
trustee, as amended) or by Harris or its parent or subsidiaries in other
than a fiduciary capacity, or any shares known at the Effective Date to
be Dissenting Shares) and (ii) the Merger Consideration (the 'Payment
Fund'); provided, however, that in no such event shall the number of
Eligible Shares entitled to the Merger Consideration exceed 2,768,411
shares or the Aggregate Merger Consideration exceed $40,889,430.
(iv) The Exchange Agent shall, pursuant to irrevocable instructions
by Harris, make the payments referred to in Section 1(f) hereof out of
the Payment Fund. The Payment Fund shall not be used for any purpose
except as provided herein. If any First Harrisburg shareholders who
initially exercised dissenters' rights lose the right to dissent because
of a failure to comply with the Business Corporation Law subsequent to
the Effective Date, Harris shall promptly deposit additional cash in the
Payment Fund in an amount equal to the product of the number of
Dissenting Shares held by such First Harrisburg shareholders multiplied
by the Merger Consideration. Promptly following the date which is two
years after the Effective Date, the Exchange Agent shall return to
Harris all cash, Certificates and other instruments then in its
possession relating to the transactions described in this Agreement, and
the Exchange Agent's duties shall terminate. Thereafter, each holder of
a Certificate entitled to receive therefor Merger Consideration at the
Effective Date may surrender such Certificate to Harris and (subject to
applicable abandoned property, escheat and similar laws), receive in
exchange therefor the Merger Consideration, without interest, and shall
have no greater rights against Harris or Harris Acquisition than may be
accorded to general creditors of Harris under applicable law. Harris
shall have no liability to First Harrisburg shareholders for compliance
with applicable abandoned property, escheat and similar laws.
(v) Within five business days after the Effective Date, the
Exchange Agent shall mail to each record holder of Certificates in a
form reasonably satisfactory to Harris Acquisition and First Harrisburg
a letter of transmittal and instructions for use in surrendering such
Certificates and receiving the Merger Consideration therefor. The letter
of transmittal shall specify that delivery shall be effected, and risk
of loss and title to the Certificates shall pass, only upon delivery of
the Certificates to the Exchange Agent.
(vi) After the Effective Date, there shall be no transfers on the
stock transfer books of First Harrisburg.
(g) Stock Options, Stock Option Plans, and Related
Matters. Immediately prior to or at the Effective Date, each holder of a
then-outstanding option to purchase shares of First Harrisburg Common Stock
heretofore granted under a stock option plan, program or arrangement of
First Harrisburg shall have received (whether such option is then
exercisable or not) in settlement thereof a cash payment from First
Harrisburg in an amount equal to the excess, if any, of the Merger
Consideration over the per share exercise price under such stock option,
multiplied by the
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number of shares of First Harrisburg Common Stock covered by such option.
All such options automatically shall be deemed cancelled and of no further
effect as of the Effective Date. In no event shall the amount paid by First
Harrisburg in settlement of such options exceed $1,408,681 in the
aggregate.
(h) Shareholders' Meetings. First Harrisburg shall, as soon as
practicable, hold a meeting of its shareholders (the 'First Harrisburg
Shareholders' Meeting') to submit for shareholder approval this Agreement
and the transactions contemplated hereby. An affirmative vote of at least a
majority of the votes cast by all holders of First Harrisburg Common Stock
entitled to vote thereon shall be required for such approval and adoption
of this Agreement and the transactions contemplated thereby. First
Harrisburg's directors shall recommend to its shareholders approval of this
Agreement, the Merger Agreement, the Merger, and the transactions
contemplated hereby and thereby, and use their best efforts to obtain such
approval, in each case subject to the fiduciary duties of such directors.
Harris shall, as soon as practicable, hold a meeting of its shareholders
(the 'Harris Shareholders' Meeting') to submit for shareholder approval
this Agreement, the transactions contemplated hereby, and the First Federal
Merger. An affirmative vote of at least 66 2/3% of the outstanding shares
of Harris shall be required for such approval and adoption of this
Agreement, the transactions contemplated hereby and the First Federal
Merger. Harris' Directors shall recommend to Harris' shareholders approval
of this Agreement, the Merger Agreement, the First Federal Merger, and the
transactions contemplated hereby and thereby, and use their best efforts to
obtain such approval, in each case subject to the fiduciary duties of such
directors.
(i) Proxy Statement.
(A) The Parties hereto will cooperate in the preparation and filing
with the Securities and Exchange Commission ('SEC'), the Department of
Banking of the Commonwealth of Pennsylvania ('Banking Department'), and
the Federal Deposit Insurance Corporation ('FDIC'), the proxy statement
to be distributed in connection with the First Harrisburg Shareholders'
Meeting and the Harris Shareholders' Meeting (as amended from time to
time, the 'Proxy Statement') in order to consummate the transactions
contemplated hereby as soon as reasonably practicable and to satisfy all
applicable requirements under the Securities Exchange Act of 1934, as
amended ('Securities Exchange Act'), the rules and regulations
thereunder, and the rules and regulations of the Banking Department and
the FDIC.
(B) Harris and Harris Acquisition will furnish such information
concerning Harris and Harris Acquisition as is necessary in order to
cause the Proxy Statement, insofar as it relates to Harris and Harris
Acquisition, to comply with Section 1(i)(A) above. Harris and Harris
Acquisition agree promptly to advise First Harrisburg if at any time
prior to the First Harrisburg Shareholders' Meeting any information
provided by it in the Proxy Statement becomes incorrect or incomplete in
any material respect and to provide First Harrisburg with the
information needed to correct such inaccuracy or omission. Harris and
Harris Acquisition will furnish First Harrisburg with such supplemental
information as may be necessary in order to cause such Proxy Statement,
insofar as it relates to Harris and Harris Acquisition, to comply with
Section 1(i)(A) above after the mailing thereof to First Harrisburg
shareholders.
(C) First Harrisburg will furnish Harris and Harris Acquisition
with such information concerning First Harrisburg on a consolidated
basis as is necessary in order to cause the Proxy Statement, insofar as
it relates to First Harrisburg on a consolidated basis, to comply with
Section 1(i)(A) above. First Harrisburg agrees promptly to advise Harris
and Harris Acquisition if at any time any information provided by it in
the Proxy Statement becomes incorrect or incomplete in any material
respect and to provide Harris and Harris Acquisition with the
information needed to correct such inaccuracy or omission. First
Harrisburg will furnish Harris with such supplemental information as may
be necessary in order to cause the Proxy Statement, insofar as it
relates to First Harrisburg, to comply with Section 1(i)(A) above after
the mailing thereof to Harris shareholders.
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(j) Cooperation, Regulatory Approvals. The Parties shall cooperate
fully, and shall cause each of their affiliates to cooperate fully, in the
preparation and submission by them, as promptly as reasonably practicable,
of such notices, applications, petitions, and other documents and materials
as may be required or any of them may reasonably deem necessary (or
desirable) to the Board of Governors of the Federal Reserve System (the
'Federal Reserve'), the Banking Department, the SEC, the FDIC, the Office
of Thrift Supervision (the 'OTS'), other regulatory authorities, holders of
the voting shares of capital stock of First Harrisburg and Harris, and any
other persons for the purpose of obtaining any approvals or consents
necessary to consummate the transactions contemplated by this Agreement and
the Reorganization. Prior to the making of any such filings with any
regulatory authority or the making of any written disclosures with respect
to the transactions contemplated hereby to shareholders or any third person
(such as mailings to shareholders or press releases), the Parties shall
submit to each other the materials to be filed, mailed or released. Any
such materials must be acceptable to both Harris and First Harrisburg (such
acceptance not to be unreasonably withheld) prior to the filings with any
regulatory authorities or the disclosures to shareholders or any third
person, except to the extent that any party is legally required to proceed
prior to obtaining the acceptances of the other Parties.
(k) First Harrisburg Liquidation. Immediately following the Merger of
Harris Acquisition with and into First Harrisburg, the Surviving
Corporation, First Harrisburg, shall adopt, undertake and effectuate a
complete liquidation and dissolution under the First Harrisburg Plan of
Liquidation.
(l) First Federal Merger. Immediately following the effectuation of
the First Harrisburg Plan of Liquidation, First Federal shall merge with
and into Harris pursuant to the First Federal Merger.
(m) Dissenting Shares. Notwithstanding anything in this Agreement to
the contrary, Dissenting Shares shall not be converted into or exchangeable
for the right to receive the Merger Consideration provided in Section 1(c)
hereof, unless and until the holder of such Dissenting Shares shall have
lost his right to dissent under the Business Corporation Law. If such
holder shall have lost such right, each of his shares of First Harrisburg
Common Stock shall thereupon be deemed to have been converted into, as of
the Effective Date, the Merger Consideration.
2. REPRESENTATIONS AND WARRANTIES BY HARRIS AND HARRIS ACQUISITION. Harris
and Harris Acquisition, as applicable, represent and warrant to First Harrisburg
as follows:
(a) Organization, Good Standing, Authority, Insurance, Etc. Harris is
a Pennsylvania state-chartered stock savings bank organized, validly
existing and in good standing under the laws of the Commonwealth of
Pennsylvania. Harris has all requisite corporate power and authority to
conduct its business as it is now conducted, to own and operate its
properties and assets and to lease properties used in its business. Harris
has all requisite corporate power and authority to enter into this
Agreement and the Option Agreement, and subject to obtaining any required
regulatory and shareholder approvals, to perform and carry out the
provisions of and all its obligations under this Agreement. Harris is a
member in good standing of the Federal Home Loan Bank of Pittsburgh. All
customer deposits held by Harris are insured by the Savings Association
Insurance Fund ('SAIF') administered by the FDIC in accordance with the
Federal Deposit Insurance Act. Harris has paid all assessments and filed
all reports required by the Federal Deposit Insurance Act.
(b) Agreement, Authority, Absence of Conflicts. The execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated herein have been duly and validly authorized by
the Board of Directors of Harris. Assuming receipt of regulatory approvals,
no other corporate action on the part of Harris (other than approval by the
shareholders of Harris) is necessary for Harris to authorize this Agreement
or to consummate the transactions contemplated herein. This Agreement has
been duly executed and delivered by Harris and, assuming due authorization,
execution and delivery by First Harrisburg and First Federal, constitutes a
valid and binding obligation of Harris, enforceable in accordance with its
terms,
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except as it may be limited by bankruptcy, insolvency, receivership or
similar laws, now or hereafter in effect relating to creditor's rights. The
execution, delivery and consummation of this Agreement will not constitute
a violation or breach or a default under the Articles of Incorporation or
Bylaws of Harris, any agreement, indenture or other instrument to which
Harris is a party, or, to the best knowledge of Harris, any statute, rule,
regulation, order, writ, injunction, decree, or directive applicable to
Harris.
(c) Sufficient Resources. Harris will have available at the Effective
Date, available financial resources to enable it and Harris Acquisition to
lawfully satisfy their obligations pursuant to this Agreement without the
need to borrow funds or to raise additional equity capital, unless
otherwise required after the date hereof by a regulatory agency. Prior to
the Effective Date, Harris shall take all actions necessary to incorporate
Harris Acquisition and to capitalize Harris Acquisition in an amount
sufficient to permit Harris Acquisition to fully perform its duties and
obligations as set forth herein. Harris has and will have sufficient
management and financial resources to obtain the required regulatory and
other approvals for the Merger and the transactions contemplated by this
Agreement. On the date of this Agreement, there is no pending or, to the
knowledge of Harris, threatened legal or governmental proceeding against
Harris or any subsidiary or affiliate thereof, and Harris is not aware of
any fact or circumstance, which would affect Harris' ability to obtain any
of the required regulatory approvals or satisfy any other conditions
required to be satisfied in order to consummate the transactions
contemplated by this Agreement. Until Closing, Harris will promptly notify
First Harrisburg if any of the representations contained in this Section 2
ceases to be true and correct.
(d) Harris Acquisition Representations and Warranties. Prior to the
Effective Date, (i) Harris Acquisition will be a Pennsylvania business
corporation organized, validly existing and in good standing under the laws
of the Commonwealth of Pennsylvania; (ii) Harris Acquisition will have all
requisite corporate power and authority to enter into this Agreement and
the Merger Agreement, and subject to obtaining any required regulatory and
shareholder approvals, to carry out the provisions of and all of its
obligations under this Agreement and the Merger Agreement; and (iii) the
Board of Directors of Harris Acquisition shall duly and validly authorize
the execution, delivery and performance of this Agreement and the Merger
Agreement, which agreements shall be approved by Harris as the sole
stockholder of Harris Acquisition. This Agreement and the Merger Agreement
will constitute a valid and binding obligation of Harris Acquisition
enforceable in accordance with its terms, except as it may be limited by
bankruptcy, insolvency, receivership or similar laws now or hereafter in
effect relating to creditors' rights. The execution, delivery and
consummation of this Agreement will not constitute a violation or breach or
default under the Articles of Incorporation or Bylaws of Harris
Acquisition, any statute, rule, regulation, order, writ, injunction, decree
or other instrument or agreement to which Harris Acquisition is a party at
such time. Prior to the Effective Date of the Merger, Harris Acquisition
will engage only in the transactions contemplated by this Agreement and the
Merger Agreement, and will have no material liabilities and will have
incurred no material obligations except in connection with the performance
of the transactions provided in this Agreement and in the Merger Agreement.
(e) Ownership of First Harrisburg Common Stock. As of the date
hereof, neither Harris nor its parent or any subsidiaries of Harris
directly or indirectly owns, or has any rights to acquire, any shares of
First Harrisburg Common Stock, other than pursuant to this Agreement and
the Option Agreement.
(f) Full Disclosure. None of the information with respect to Harris
or any parent or subsidiary of Harris which has been furnished to First
Harrisburg or First Federal or has been or will be included by Harris in
the Proxy Statement, or any application to, or filing with, any regulatory
authority made in connection with the transactions contemplated hereby
will, at the respective time it is furnished, distributed, mailed or filed,
be false or misleading with respect to any material fact, or omit to state
any material fact necessary in order to make the statements therein not
misleading in light of the circumstances under which they were made.
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(g) CRA Compliance. Harris has a satisfactory Community Reinvestment
Act rating.
(h) Approval by Harris Financial, MHC. Harris represents that the
Board of Trustees of Harris Financial, MHC has approved this Agreement and
has agreed, subject to the fiduciary duty of such trustees, to vote all the
shares of Harris Common Stock held by Harris Financial, MHC in favor of
this Agreement at the Harris Shareholders' Meeting.
3. REPRESENTATIONS AND WARRANTIES BY FIRST HARRISBURG AND FIRST
FEDERAL. First Harrisburg and First Federal, as applicable, represent and
warrant to Harris as set forth below. For purposes of this Section 3, the terms
'Material,' 'material' and 'materially' refer to those items which, in the
aggregate, impact the financial position or results of operations of First
Harrisburg and the First Harrisburg Subsidiaries taken as a whole in an amount
greater than a negative $700,000. In making this calculation, any adverse items
shall be offset by positive items. Such terms shall not include any items due to
changes resulting from or attributable to the items set forth in clauses (a)
through (f) of Section 3(d)(i) of this Agreement. In addition, for purposes of
this Section 3, the results of operations of First Harrisburg on a consolidated
basis for the period from October 1, 1995 through the end of the calendar month
immediately preceding the Effective Date, after excluding the effects of any
changes resulting from or attributable to the items set forth in clauses (a)
through (f) of Section 3(d)(i) of this Agreement, shall be deemed to contain
positive items to the extent such items result in a reduction of expense or an
addition to income and shall be deemed to contain adverse items to the extent
such items result in an addition to expense or a reduction of income. The
Parties also agree that any purchase accounting adjustments related to the
transactions contemplated by this Agreement shall constitute neither positive
nor adverse items and shall be completely disregarded for purposes of this
Section 3.
(a) Organization, Good Standing, Authority, Deposit Insurance,
Etc. First Harrisburg is a corporation organized, validly existing and in
good standing under the laws of the Commonwealth of Pennsylvania. Each of
the subsidiaries of First Harrisburg, including First Federal and any
subsidiary thereof (individually a 'First Harrisburg Subsidiary,'
collectively the 'First Harrisburg Subsidiaries') is an entity of the
respective type set forth on Schedule 3(a) hereto, and is organized,
validly existing and in good standing under the laws of the respective
jurisdiction of incorporation set forth on Schedule 3(a). All subsidiaries
of First Harrisburg are listed on Schedule 3(a). Each of First Harrisburg
and the First Harrisburg Subsidiaries has all requisite corporate power and
authority to conduct its business as it is now conducted, to own and
operate its properties and assets and to lease properties used in its
business. Each of First Harrisburg and First Federal has all requisite
corporate power and authority to enter into this Agreement, the Merger
Agreement, and all exhibits attached hereto, as applicable and, subject to
obtaining any required regulatory and shareholder approvals, to perform and
carry out the provisions of and all of their respective obligations under
this Agreement, the Merger Agreement, and all exhibits hereto. Each of
First Harrisburg and the First Harrisburg Subsidiaries is qualified to do
business as a foreign corporation and is in good standing in each
jurisdiction in which such qualification is necessary under applicable law,
except where the failure to be so qualified and in good standing would not
have a material adverse effect on the business, operations, assets or
financial condition of First Harrisburg and the First Harrisburg
Subsidiaries taken as a whole. First Federal is a member in good standing
of the Federal Home Loan Bank of Pittsburgh. All customer deposits held by
First Federal are insured by the SAIF administered by the FDIC in
accordance with the Federal Deposit Insurance Act. First Federal has paid
all assessments and filed all reports required by the Federal Deposit
Insurance Act.
(b) Capitalization, Investments. As of the date hereof, the
authorized capital stock of First Harrisburg consists of 10,000,000 shares
of common stock, par value $.01 per share, of which 2,337,284 shares are
duly issued and outstanding, fully paid and non-assessable, and 51,878
shares are held in treasury as issued but not outstanding, and 5,000,000
shares of preferred stock, par value $.01 per share, none of which are
issued and outstanding. Except as set forth in Schedule 3(b) hereto and
except as provided for by the Option Agreement, there are no authorized,
issued or outstanding options, convertible securities, warrants or other
rights to
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purchase or acquire any of First Federal's or First Harrisburg's capital
stock from First Federal or First Harrisburg, there is no commitment of
First Federal or First Harrisburg to issue the same, and other than by
operation of law, there are no outstanding agreements, restrictions,
contracts, commitments or demands of any character to which First
Harrisburg or First Federal is a party, which relate to the transfer or
restrict the transfer of any shares of First Harrisburg's or First
Federal's capital stock. Except as disclosed in Schedule 3(b) and except as
set forth in the Option Agreement, to the knowledge of First Harrisburg,
there are no shareholder agreements, understandings or commitments relating
to the right of any shareholder to vote or dispose of shares of First
Harrisburg or shares of First Federal. The authorized capital stock of each
of the First Harrisburg Subsidiaries ('First Harrisburg Subsidiaries'
Capital Stock') consists of the respective number of shares of capital
stock, with the respective par value per share, set forth on Schedule 3(b),
of which the respective number of outstanding shares set forth on Schedule
3(b) have been duly authorized, validly issued, and are fully paid and
non-assessable. Except as set forth on Schedule 3(b), all shares of the
First Harrisburg Subsidiaries' Capital Stock, which are issued and
outstanding, are owned directly or indirectly by First Harrisburg. Except
as set forth on Schedule 3(b), there is no authorized, issued or
outstanding capital stock of any of the First Harrisburg Subsidiaries,
there is no commitment of any of the First Harrisburg Subsidiaries to issue
any of the same and, other than by operation of law, there are no
outstanding agreements, restrictions, contracts, commitments or demands of
any character which relate to the transfer or restrict the transfer of any
shares of the First Harrisburg Subsidiaries' Capital Stock. No share of
First Harrisburg or of a First Harrisburg Subsidiary has been issued in
violation of the preemptive rights of any person.
(c) Financial Statements and Exchange Act Reports. First Harrisburg
has furnished Harris with audited consolidated statements of financial
condition for First Harrisburg and its subsidiaries as of the end of First
Harrisburg's last two fiscal years, and audited consolidated statements of
(i) operations, (ii) stockholders' equity, and (iii) cash flows for each of
the last three fiscal years, including the notes to said audited
consolidated financial statements, together with the reports of First
Harrisburg's independent certified public accountants, pertaining to said
audited consolidated financial statements. First Harrisburg has also
furnished Harris with First Harrisburg's (i) Quarterly Reports on Form 10-Q
for the quarters ended March 31, June 30, and September 30, 1995,
containing unaudited statements of financial condition of First Harrisburg
as of such dates and unaudited statements of operations and cash flows of
First Harrisburg for the interim periods reflected therein, (ii) any
Current Reports on Form 8-K filed by First Harrisburg since December 31,
1994, and (iii) all management letters from First Harrisburg's independent
certified public accountants since January 1, 1992. For purposes of this
Agreement, the 'First Harrisburg Statement' shall mean the unaudited
consolidated statements of financial condition for First Harrisburg and the
First Harrisburg Subsidiaries as of September 30, 1995 (including the notes
thereto). The above audited and unaudited consolidated statements of
financial condition present fairly the financial condition of First
Harrisburg on a consolidated basis at the dates thereof, in accordance with
generally accepted accounting principles consistently applied. The above
audited and unaudited consolidated statements of (i) operations, (ii)
stockholders' equity, and (iii) cash flows present fairly the results of
the operations of First Harrisburg on a consolidated basis for the periods
indicated, in accordance with generally accepted accounting principles
consistently applied. Except as and to the extent reflected or reserved
against in the First Harrisburg Statement, or as otherwise disclosed
pursuant to this Agreement or in First Harrisburg's 1994 Annual Report to
Stockholders or as set forth in Schedule 3(c), neither First Harrisburg nor
any of the First Harrisburg Subsidiaries had, at the date thereof, any
material liabilities or obligations, or any other liabilities or
obligations which in the aggregate would be material, secured or unsecured
(whether accrued, absolute, contingent or otherwise), including, without
limitation, any tax liabilities, which should be reflected in the First
Harrisburg Statement in accordance with generally accepted accounting
principles consistently applied. The books and records of First Harrisburg
and the First Harrisburg Subsidiaries are maintained in accordance with
generally accepted accounting principles consistently applied.
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(d) Absence of Certain Developments. Since September 30, 1995, except
as set forth on Schedule 3(d) hereto, there has been (i) no material
adverse change in the financial condition, business or results of
operations of First Harrisburg and the First Harrisburg Subsidiaries taken
as a whole, excluding changes resulting from or attributable to (a) any
changes since such date in any federal or state law, rule or regulation, in
any policy adopted by any federal or state regulatory authority or in
generally accepted accounting principles that affect savings institutions
or their holding companies generally, including but not limited to any
special or increased assessment applicable to SAIF-insured institutions
generally, provided that such assessment is not in excess of 100 basis
points on the deposit base as of the applicable assessment date, (b) any
changes since such date in market rates of interest, (c) reasonable
expenses incurred since such date in connection with the transactions
contemplated by this Agreement, (d) the payment of cash in settlement of
outstanding stock options pursuant to Section 1(g) hereof, (e) reductions
to net income or stockholders' equity incurred as a result of fully funding
each of the benefit plans or agreements set forth in Schedule 3(q) attached
hereto, provided, however, that the additional amount needed to effect such
full funding does not exceed $922,579 in the aggregate, of which $461,860
has been accrued as of September 30, 1995 or (f) reductions to net income
or stockholders' equity incurred as a result of actions taken at the
request or with the written consent of Harris ('Material Adverse Change');
(ii) no declaration, setting aside or payment of any dividend or other
distribution with respect to the stock of First Harrisburg or a First
Harrisburg Subsidiary other than the 10% stock dividend payable on November
15, 1995 and cash dividends, the timing of which are consistent with those
declared and paid in the prior fiscal year and the amounts of which are
consistent with the cash dividend payable on November 15, 1995; (iii) no
material loss, destruction, or damage to the properties of First Harrisburg
or any of the First Harrisburg Subsidiaries, which loss, destruction, or
damage is not adequately covered by insurance; (iv) no agreement, contract
or commitment entered into or agreed to be entered into except for those in
the ordinary course of business and except for this Agreement, the Merger
Agreement, and the Option Agreement; (v) no amendment or termination of any
material contract, lease, license, or other agreement to which First
Harrisburg or any of the First Harrisburg Subsidiaries is a party except in
the ordinary course of business; and (vi) no change in any of the
accounting methods or practices or revaluation of any of the assets of
First Harrisburg or the First Harrisburg Subsidiaries, except as required
by changes in generally accepted accounting principles, or applicable laws,
rules or regulations. Since such date, each of First Harrisburg and the
First Harrisburg Subsidiaries has conducted its business only in the
ordinary course and is in compliance in all material respects with all laws
which govern the ownership of its property and the conduct of its business.
(e) Taxes. First Federal is a 'domestic building and loan
association' as defined in Section 7701(a)(19) of the Code. Except as set
forth on Schedule 3(e) hereto, (i) each of First Harrisburg and the First
Harrisburg Subsidiaries has filed all tax returns (as described below) that
it is required to file and all taxes (as described below) of First
Harrisburg or any of the First Harrisburg Subsidiaries to be due from First
Harrisburg or any of the First Harrisburg Subsidiaries have been duly paid,
other than taxes or charges which are not as yet due, delinquent or have
not been finally determined, and no extensions for the time of payment have
been requested; (ii) no additional assessments of tax for which adequate
provisions in the First Harrisburg Statement have not been made, have been
proposed, are pending or, to the best knowledge of First Harrisburg,
threatened by any governmental authority; and (iii) no waivers of statutes
of limitation concerning taxes associated with either First Harrisburg or
any of the First Harrisburg Subsidiaries are in effect as of the date
hereof. Except as set forth on Schedule 3(e), the accruals and reserves for
tax liabilities reflected in the First Harrisburg Statement are adequate
for the payment of all of First Harrisburg's and the First Harrisburg
Subsidiaries' respective federal, state, county, municipal, local and
foreign tax liabilities, including interest and penalties, whether
proposed, pending, threatened or disputed, for all periods ended on or
prior to September 30, 1995, and for which First Harrisburg or any of the
First Harrisburg Subsidiaries may, at said date, have been liable, other
than tax liabilities with respect to property acquired after September 30,
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1995, through repossession, foreclosure or purchase under similar
circumstances or as a result of the transactions contemplated by this
Agreement. Internal Revenue Service audits of First Harrisburg and the
First Harrisburg Subsidiaries have been completed (or not commenced)
through the year ended December 31, 1991, and all deficiencies, if any,
resulting from completed audits have been paid. Copies of all material
correspondence and documents relating to federal, state, county, municipal
or local income, capital stock, franchise, or other similar taxes in
respect of the five most recently completed tax years have been made
available to Harris. Except as set forth on Schedule 3(e), neither First
Harrisburg nor any of the First Harrisburg Subsidiaries has executed or
filed with the Internal Revenue Service any agreement that is currently in
effect and extends the period for assessment and collection of any federal
tax.
The Internal Revenue Service has not, to the knowledge of First
Harrisburg, commenced, or given notice of its intention to commence, any
examination or audit of the federal income tax returns of First Harrisburg
or any First Harrisburg Subsidiary for any year subsequent to the year
ended December 31, 1991. Except as disclosed on Schedule 3(e), the accruals
and reserves reflected in the First Harrisburg Statement as of this date
are adequate to cover all taxes, including interest and penalties thereon,
if any, payable or accrued as a result of First Harrisburg's operations for
all prior periods. For purposes of this Section 3(e), 'tax returns' shall
mean all federal, state, county, municipal and local tax returns, reports
and declarations, including, without limitation, consolidated federal
income tax returns of First Harrisburg and the First Harrisburg
Subsidiaries, declarations of estimated tax and tax reports required to be
filed on or before this date with respect to income, properties or
operations, and 'taxes' shall mean all federal, state, county, municipal,
and local or foreign income, gross receipts, windfall profits, severance,
property, production, sales, use, license, excise, franchise, employment,
withholding or similar taxes, together with any interest, additions, or
penalties with respect thereto and any interest in respect of such
additions or penalties.
(f) Litigation. Except as set forth on Schedule 3(f) hereto, no
material action, suit, claim, counterclaim or other litigation or
proceeding, or to the best knowledge of First Harrisburg investigation, is
pending, or is known by the executive officers of First Harrisburg or of
any of the First Harrisburg Subsidiaries to be threatened, against First
Harrisburg or any of the First Harrisburg Subsidiaries before any court or
governmental or administrative agency, domestic or foreign. There are no
outstanding orders, writs, injunctions, judgments, decrees, directives,
consent agreements or memoranda of understanding involving First Harrisburg
or any First Harrisburg subsidiary and any federal regulatory agency, state
or local court or governmental authority or arbitration tribunal that could
materially and adversely affect the condition, financial or otherwise,
assets, liabilities, business or operations of First Harrisburg and the
First Harrisburg Subsidiaries taken as a whole or that in any manner
restrict the right of First Harrisburg and the First Harrisburg
Subsidiaries taken as a whole to conduct their business as presently
conducted. Neither First Harrisburg nor any of the First Harrisburg
Subsidiaries is aware of any fact or condition presently existing that
might give rise to any litigation, investigation, or proceeding which, if
determined adversely to First Harrisburg or any of the First Harrisburg
Subsidiaries, would materially and adversely affect the condition,
financial or otherwise, of the assets, liabilities, business or operations
of First Harrisburg and the First Harrisburg Subsidiaries taken as a whole.
(g) Brokerage. Except as set forth on Schedule 3(g) hereto, there are
no claims for brokerage commissions, finder's fees or similar compensation
arising out of or due to any act of First Harrisburg or any of the First
Harrisburg Subsidiaries in connection with the transactions contemplated by
this Agreement or based on any agreement or arrangement made by or on
behalf of First Harrisburg or any of the First Harrisburg Subsidiaries.
(h) Properties. Except as set forth on Schedule 3(h) hereto, each of
First Harrisburg and the First Harrisburg Subsidiaries has good and
marketable title, free and clear of any mortgage, pledge, lien, charge or
other encumbrance, to all of its real or personal property, loans and other
assets reflected in the First Harrisburg Statement or acquired by it
subsequent to the date thereof,
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except for (i) mortgages, pledges, liens, charges or encumbrances on such
property or assets described or referred to, or reflected, in the First
Harrisburg Statement; (ii) liens for current taxes not yet due; (iii) such
imperfections of title, encumbrances and easements, if any, as are not
individually or in the aggregate substantial or material in character,
amount or extent and do not materially detract from the value, or interfere
with the present or proposed use, of their properties and assets subject
thereto; (iv) dispositions of such property or assets in the ordinary
course of business; (v) mortgages, pledges, liens, charges or encumbrances,
on assets other than real or personal property, incurred in the ordinary
course of business subsequent to September 30, 1995; and (vi) liens or
encumbrances on property acquired through repossession, foreclosure or
purchase under similar circumstances. The structure and other improvements
to real estate, furniture, fixtures and equipment reflected in the First
Harrisburg Statement or acquired subsequent to the date of such statement
are in good operating condition and repair (ordinary wear and tear
excepted) and comply in all material respects with all applicable laws,
ordinances and regulations, including, without limitation, all building
codes, zoning ordinances and other similar laws. Except as set forth on
Schedule 3(h), First Harrisburg and each of the First Harrisburg
Subsidiaries own or have the right to use all real and personal properties
and assets necessary to conduct their respective business as now conducted.
Except as set forth on Schedule 3(h), each lease pursuant to which First
Harrisburg or any of the First Harrisburg Subsidiaries, as lessee, leases
real or personal property is valid and in effect in accordance with its
respective terms, and there is not, under any of such leases, on the part
of the lessee any material existing default or any event which with notice
or lapse of time, or both, would constitute such a default, other than
defaults which would not individually or in the aggregate have a material
adverse effect on the financial condition, business, or operating results
of First Harrisburg and the First Harrisburg Subsidiaries taken as a whole.
Except as set forth on Schedule 3(h), each of such leases is assumable by
Harris or its assigns in connection with the transactions contemplated by
this Agreement and without payment of any penalty or special assessment.
(i) Compliance with Applicable Laws. Except as disclosed on Schedule
3(i) hereto, First Harrisburg and the First Harrisburg Subsidiaries are in
compliance in all material respects with all statutes, laws, ordinances,
rules, regulations, judgments, orders, decrees, directives, consent
agreements, memoranda of understanding, permits, concessions, grants,
franchises, licenses, and other governmental authorizations or approvals
applicable to First Harrisburg and the First Harrisburg Subsidiaries or to
any of their properties, and all permits, concessions, grants, franchises,
licenses, certificates of authority, and other governmental authorizations
and approvals necessary for the conduct of the business of First Harrisburg
and the First Harrisburg Subsidiaries as presently conducted (the absence
of which could have a material adverse effect on the business, prospects,
operations, assets or financial condition of First Harrisburg and the First
Harrisburg Subsidiaries taken as a whole) have been duly obtained and are
in full force and effect and there are no proceedings pending, or to the
knowledge of First Harrisburg and the First Harrisburg Subsidiaries,
threatened, which may result in the revocation, cancellation, suspension or
material adverse modification of any such permits, concessions, grants,
franchises, licenses, and other governmental authorizations and approvals.
(j) Contracts and Commitments, Etc. Each written or oral contract
(other than loans to or contracts with customers incurred by First
Harrisburg in the ordinary course of business) which involves aggregate
payments or receipts in excess of $100,000 per year to which First
Harrisburg or any of the First Harrisburg Subsidiaries is a party, or by
which First Harrisburg or any of the First Harrisburg Subsidiaries is
bound, including without limitation every employment contract, employment
benefit plan, agreement, lease, license and other commitment to which First
Harrisburg is a party or by which First Harrisburg or its properties may be
bound ('Material Contracts'), is identified in Schedule 3(j) hereto. Except
as disclosed on Schedule 3(j), all such Material Contracts are valid and in
full force and effect, and all parties thereto have in all material
respects performed all obligations required to be performed by them to date
and are not in default in any material respect and no event has occurred
which, with the lapse of time or notice by a third party or both could
result in a default by First Harrisburg or a First Harrisburg Subsidiary
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under such Material Contract or under any provision of the Articles of
Incorporation or Bylaws of First Harrisburg or any of the First Harrisburg
Subsidiaries. Schedule 3(j) identifies each such Material Contract that
requires the consent or approval of third parties to the execution and
delivery of this Agreement or to the consummation of the transactions
contemplated herein.
(k) Insurance. First Harrisburg and the First Harrisburg Subsidiaries
have in effect and full force insurance coverage and policies with
reputable insurers, which in respect of amounts, types and risks insured is
customary with industry practices for the businesses conducted by First
Harrisburg and the First Harrisburg Subsidiaries. No notices of
cancellation have been received in connection therewith.
(l) No Guarantees. Except as disclosed in Schedule 3(l) hereto,
neither First Harrisburg nor any of the First Harrisburg Subsidiaries is
obligated as guarantor, co-signor or surety (or otherwise in a secondary
liability capacity) for any obligation of any kind of any other person or
entity (other than First Harrisburg or any of the First Harrisburg
Subsidiaries).
(m) Examination Reports. Neither First Harrisburg nor any of the
First Harrisburg Subsidiaries is subject to any cease and desist order,
written agreement or memorandum of understanding with, or is a party to any
commitment letter or similar undertaking to, or is subject to any order or
directive by, or is a recipient of any extraordinary supervisory letter
from, or has adopted any board resolutions since January 1, 1993 providing
for the taking of corrective measures at the request of or as mandated by
federal or state governmental authorities charged with the supervision or
regulation of savings and loan associations or savings and loan holding
companies or engaged in the insurance of savings deposits (collectively
'Thrift Regulators' and individually 'Thrift Regulator'), nor has it been
advised by any Thrift Regulator that it is contemplating issuing or
requesting (or is considering the appropriateness of issuing or requesting)
any such order, directive, written agreement, memorandum of understanding,
extraordinary supervisory letter, commitment letter, board resolutions (of
the type described above) or similar undertaking.
(n) Agreement, Authority, Absence of Conflicts. The execution,
delivery and performance of this Agreement, the Merger Agreement, and the
Option Agreement have been duly and validly authorized by the Boards of
Directors of First Harrisburg and First Federal, as the case may be, and do
not and, subject to obtaining all required authorizations and approvals,
will not violate any of the (i) provisions of, or constitute a default
under or give any person or party the right to accelerate payment or
performance under any Material Contract; or (ii) the Articles of
Incorporation or Bylaws of First Harrisburg or any of the First Harrisburg
Subsidiaries. This Agreement and the Merger Agreement have been duly
executed and delivered by First Harrisburg and constitute, assuming the due
authorization, execution and delivery thereof by Harris or Harris
Acquisition, as the case may be, a valid and binding obligation of First
Harrisburg and First Federal, respectively, enforceable in accordance with
its terms, except as may be limited by (i) bankruptcy, insolvency,
reorganization, moratorium, conservatorship, receivership or other similar
laws now or hereafter in effect relating to or affecting the enforcement of
creditors' rights generally or the rights of creditors of federal savings
institutions or their holding companies, (ii) general equitable principles,
and (iii) laws relating to the safety and soundness of insured depository
institutions, and except that no representation is expressed as to the
effect or availability of equitable remedies or injunctive relief
(regardless of whether such enforceability is considered in a proceeding in
equity or at law). The Option Agreement has been duly executed and
delivered by First Harrisburg and constitutes, assuming the due
authorization, execution and delivery thereof by Harris, a valid and
binding obligation of First Harrisburg.
(o) Reporting. First Harrisburg has timely filed all reports required
to be filed by it pursuant to the Securities Act of 1933 and the Securities
Exchange Act and the rules and regulations promulgated thereunder, and all
such reports are complete and correct in all material respects.
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(p) Full Disclosure. None of the information with respect to First
Harrisburg or any of the First Harrisburg Subsidiaries which has been
furnished to Harris pursuant to this Agreement or has been or will be
included by First Harrisburg in the Proxy Statement, or any application to,
or filing with, any regulatory agency made in connection with the
transactions contemplated hereby will, at the respective time it is
furnished, distributed, mailed or filed, be false or misleading with
respect to any material fact, or omit to state any material fact necessary
in order to make the statements therein not misleading in light of the
circumstances under which they were made.
(q) Employee Benefit Plans. Each 'employee benefit plan,' as defined
in Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ('ERISA'), that now covers any employee of First Harrisburg, its
predecessors or affiliates, or any of the First Harrisburg Subsidiaries,
complies in all material respects with all applicable requirements of
ERISA, the Code and other applicable laws. Neither First Harrisburg nor any
of its predecessors or affiliates or any of the First Harrisburg
Subsidiaries has engaged in any 'prohibited transaction' (as defined in
Section 406 of ERISA or Section 4975 of the Code) or any breach of
fiduciary responsibility under Part 4 of Title I of ERISA, with respect to
any such plan which prohibited transaction is likely to result in any
material penalties or taxes under Section 502 of ERISA or Section 4975 of
the Code, or any material liability to any participant or beneficiary of
such plan. No material liability to the Pension Benefit Guaranty
Corporation has been incurred by First Harrisburg with respect to itself or
its predecessors or affiliates or any of the First Harrisburg Subsidiaries
with respect to any such plan which is subject to Title IV of ERISA, or
with respect to any 'single employer plan' (as defined in Section
4001(a)(15) of ERISA) currently or formerly maintained. No such plan had an
'accumulated funding deficiency' (as defined in Section 302 of ERISA)
(whether or not waived) as of the last day of the end of the most recent
plan year ending prior to the date hereof. The fair market value of the
assets of each such plan exceeds the present value of the 'benefit
liabilities' (as defined in Section 4001(a)(16) of ERISA) under each such
plan as of the end of the most recent plan year, calculated on the basis of
the actuarial assumptions used in the most recent actuarial valuation for
each such plan. No notice of a 'reportable event' (as defined in Section
4043 of ERISA) for which the 30-day reporting requirement has not been
waived has been required to be filed for any of such plans within the
12-month period ending on the date hereof. Neither First Harrisburg, its
predecessors or affiliates nor any of the First Harrisburg Subsidiaries has
provided, or is required to provide, security to any of such plans pursuant
to Section 401(a)(29) of the Code. First Harrisburg, its predecessors and
affiliates and each of the First Harrisburg Subsidiaries have contributed
to no 'multiemployer plan,' as defined in Section 3(37) of ERISA, on or
after September 26, 1980 except as set forth on Schedule 3(q). First
Harrisburg, its predecessors and affiliates and each of the First
Harrisburg Subsidiaries have no obligation for retiree health and life
benefits under any benefit plan, contract or arrangement except as set
forth on Schedule 3(q) hereto. First Harrisburg, its predecessors and
affiliates and each of the First Harrisburg Subsidiaries have no obligation
for any post retirement benefits under any plan, contract or arrangement,
except as set forth on Schedule 3(q) hereto. To the best knowledge of First
Harrisburg, all actuarial valuations and other documents and information
concerning benefit plans delivered or made available in connection with
this Agreement are true and correct as of the date(s) shown thereon, and
all actuarial methods and assumptions are appropriate for such plans, and
are consistent with the methods and assumptions permitted by the Code and
ERISA. Except as set forth on Schedule 3(q), all such plans are funded to
such level as would permit termination without further funding such that,
upon termination, the assets of each such plan would then be sufficient to
pay all vested accrued benefits thereunder, and there would be no employer
liability under Title IV of ERISA. Since 1990, there has been no audit of
any benefit plan of First Harrisburg or of any First Harrisburg Subsidiary
by the Department of Labor, the IRS or the Pension Benefit Guarantee
Corporation.
(r) Labor Matters. Neither First Harrisburg nor any First Harrisburg
Subsidiary is a party to, or is bound by, any collective bargaining
agreement, contract or other agreement or understanding with a labor union
or labor organization, nor is First Harrisburg or any First Harrisburg
Subsidiary the subject of a proceeding asserting that First Harrisburg or
any First
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Harrisburg Subsidiary has committed an unfair labor practice or seeking to
compel First Harrisburg or such First Harrisburg Subsidiary to bargain with
any labor organization as to wages and conditions of employment, nor is
there any strike or other labor dispute involving First Harrisburg or any
First Harrisburg Subsidiary pending, or, to the best knowledge of First
Harrisburg, threatened, that might have a material adverse effect on the
condition, financial or otherwise, assets, liabilities, business or
operations of First Harrisburg and the First Harrisburg Subsidiaries taken
as a whole. Except as set forth on Schedule 3(r) hereto, neither First
Harrisburg nor any First Harrisburg Subsidiary is subject to or a party in
any complaint or action before the Pennsylvania Human Relations Commission,
the Equal Employment Opportunity Commission or the Department of Labor.
(s) Environmental Matters. For purposes of this paragraph (s), the
following terms shall have the indicated meaning:
'Environmental Law' means any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, order, judgment, decree, injunction or agreement with
any governmental entity relating to (1) the protection, preservation or
restoration of the environment (including, without limitation, air,
water vapor, surface water, groundwater, drinking water supply, surface
soil, subsurface soil, plant and animal life or any other natural
resource), and (2) the use, storage, recycling, treatment, generation,
transportation, processing, handling, labeling, production, release or
disposal of Hazardous Substances. The term Environmental Law includes
without limitation (1) the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, 42 U.S.C. Section 9601, et
seq.; the Resource Conservation and Recovery Act, as amended, 42 U.S.C.
Section 6901, et seq.; the Clean Air Act, as amended, 42 U.S.C.
Section 7401, et seq.; the Federal Water Pollution Control Act, as
amended, 33 U.S.C. Section 1251, et seq.,; the Toxic Substances Control
Act, as amended, 15 U.S.C. Section 9601, et seq.; the Emergency Planning
and Community Right to Know Act, 42 U.S.C. Section 11001, et seq.; the
Safe Drinking Water Act, 42 U.S.C. Section 300f, et seq.; and all
comparable state and local laws, and (2) any common law (including
without limitation common law that may impose strict liability) that may
impose liability or obligation for injuries or damages due to, or
threatened as a result of, the presence of or exposure to any Hazardous
Substance.
'Hazardous Substance' means any substance presently listed,
defined, designated or classified as hazardous, toxic, radioactive or
dangerous or otherwise regulated under any Environmental Law, whether by
type or by quantity, including any matter containing any such substance
as a component. Hazardous Substances include without limitation
petroleum or any derivative or by-product thereof, asbestos, radioactive
matter, and polychlorinated biphenyls.
'First Harrisburg Loan Portfolio Properties and Other Properties
Owned' means those properties serving as collateral for loans in First
Harrisburg's loan portfolio, or properties currently owned or operated
by First Harrisburg or any First Harrisburg Subsidiary (including,
without limitation, in a fiduciary capacity).
Except as set forth on Schedule 3(s) hereto:
(1) Neither First Harrisburg nor any First Harrisburg Subsidiary is
in violation of or liable under any Environmental Law, except any such
violations or liabilities which singly or in the aggregate would not
have a material adverse effect on the business, operations, assets or
financial condition of First Harrisburg and the First Harrisburg
Subsidiaries taken as a whole;
(2) To the best knowledge of First Harrisburg, none of the First
Harrisburg Loan Portfolio Properties and Other Properties Owned are in
violation of or liable under any Environmental Law, except any such
violations or liabilities which singly or in the aggregate
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would not have a material adverse effect on the business, operations,
assets or financial condition of First Harrisburg and the First
Harrisburg Subsidiaries taken as a whole;
(3) To the best knowledge of First Harrisburg, none of the First
Harrisburg Loan Portfolio Properties and Other Properties Owned have
Hazardous Substances on or in them; and
(4) There are no actions, suits, demands, notices, claims,
investigations or proceedings pending or, to the best knowledge of First
Harrisburg, threatened relating to the liability of First Harrisburg or
any First Harrisburg Subsidiary in connection with any property that
previously served as collateral for a loan or was previously owned or
leased or that relates to the First Harrisburg Loan Portfolio Properties
and Other Properties Owned under any Environmental Law, including
without limitation any notices, demand letters or requests for
information from any federal or state environmental agency relating to
any such liabilities under or violations of Environmental Law, except
such which would not have or result in a material adverse effect on the
business, operations, assets, prospects or financial condition of First
Harrisburg and the First Harrisburg Subsidiaries taken as a whole.
(t) Proceedings. As of the date of this Agreement, there is no
pending or, to the best knowledge of First Harrisburg or First Federal,
threatened, legal or governmental proceeding against First Harrisburg or
any First Harrisburg Subsidiary, and First Harrisburg and First Federal are
not aware of any fact or circumstance which would adversely affect First
Harrisburg's or First Federal's ability to obtain any of the required
regulatory approvals or satisfy any of the other conditions required to be
satisfied in order to consummate the transactions contemplated by this
Agreement.
(u) Undisclosed Liabilities. Since September 30, 1995, neither First
Harrisburg nor any First Harrisburg Subsidiary has incurred any liabilities
or obligations (whether absolute, accrued, contingent or otherwise) of any
nature, except liabilities or obligations incurred in the ordinary course
of business or which would not have a material adverse effect on the
financial condition, business, prospects or operating results of First
Harrisburg and the First Harrisburg Subsidiaries taken as a whole.
(v) Financial Institutions Bond. Since January 1, 1994, First
Harrisburg and the First Harrisburg Subsidiaries have continuously
maintained in full force and effect a financial institutions bond insuring
against acts of dishonesty by each of its employees. Except as disclosed on
Schedule 3(v) hereto, no claim has been made under any such bond since
January 1, 1994, and First Federal is unaware of any fact or condition
presently existing which might form the basis of a claim under any such
bond. First Federal has no reason to believe that its present financial
institutions bond will not be renewed by its carrier on substantially the
same basis and terms (other than an immaterial premium rate increase) as
those now in effect.
(w) Repurchase Agreements. With respect to any agreement pursuant to
which First Harrisburg or any First Harrisburg Subsidiary has purchased
securities subject to an agreement to resell, First Harrisburg or the First
Harrisburg Subsidiary has a valid, perfected first lien or security
interest in the government securities or other collateral securing the
repurchase agreement, and the value of such collateral equals or exceeds
the amount of the debt secured thereby. Except as disclosed on Schedule
3(w) which identifies location and type of securities, First Harrisburg
maintains physical possession of purchased securities that are subject to
an agreement to resell.
(x) Assumability of Leases and Contracts. Except as disclosed on
Schedule 3(x) hereto, all Material Contracts are assumable and assignable
and do not contain any term or provision that would accelerate or increase
payments that would otherwise be due by First Harrisburg or the First
Harrisburg Subsidiary to such person or entity or change or modify the
provisions or terms of such contract by reason of this Agreement or the
transactions contemplated hereby.
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(y) Loans. Except as disclosed on Schedule 3(y) hereto, the loans
reflected as assets on the First Harrisburg Statement, or acquired since
that date, are, in all material respects, the legal, valid and binding
obligations of the respective obligors named therein, enforceable in
accordance with their terms, subject to bankruptcy, insolvency and other
laws of general applicability relating to or affecting creditors' rights
and to general equity principles. All such loans, and the collateral and
other security therefor, and the documentation for and administration of
the same, satisfy in all material respects the rules, regulations or
directives of the OTS, FDIC, or other applicable governmental authorities
and are in accordance with their terms in all material respects.
(z) Loan Portfolio. Except as disclosed on Schedule 3(z) hereto, all
evidences of indebtedness reflected as assets of First Harrisburg or any
First Harrisburg Subsidiary in the First Harrisburg Statement are in all
material respects binding obligations of the respective primary obligors
associated therewith, and no material amount thereof is subject to any
defenses known to First Harrisburg or any First Harrisburg Subsidiary which
may be asserted against First Harrisburg or any First Harrisburg
Subsidiary. Except as set forth in Schedule 3(z), First Harrisburg has
delivered to Harris a true and correct list and brief description of all
real property (other than personal residences) in which First Harrisburg or
any First Harrisburg Subsidiary has an interest as creditor or mortgagee
securing an amount or amounts greater than $250,000 to one borrower, or a
series of related borrowers. Except as set forth in such list (i) there are
no outstanding loans held by First Harrisburg with an unpaid balance of
$25,000 or more on which a default has occurred and (ii) First Federal has
no loans reflected as assets in such financial statements which have
principal balances in excess of $20,000 except for fully-secured mortgage
loans. For purposes hereof, 'default' shall include but not be limited to a
failure of an obligor to make payments with respect to any loans for 60
days or more past the due date for such payment.
(aa) Trademarks, Trade Names. First Harrisburg owns, or has the right
to use, all trademarks, trade names and copyrights used in or necessary for
the ordinary conduct of its existing business as heretofore conducted, and
the consummation of the transactions contemplated hereby will not alter or
impair any such rights. Except as set forth in Schedule 3(aa), no claims
are pending for the use of any trademarks, trade names or copyrights or
challenging or questioning the validity or effectiveness of any license or
agreement relating to the same nor is there any valid basis for any such
claim, challenge or question, and, to the best knowledge of First
Harrisburg, the use of such trademarks, trade names and copyrights by First
Harrisburg or any First Harrisburg Subsidiary does not infringe on the
rights of any person.
(bb) Accuracy of Representations. Until Closing, First Harrisburg
will promptly notify Harris if any of the representations contained in this
Section 3 ceases to be true and correct subsequent to the date hereof.
(cc) Absence of Questionable Payments. From and after July 1, 1991,
First Harrisburg has not, nor, to the best knowledge of First Harrisburg,
has any director, officer, agent, employee, consultant or other person
associated with, or acting on behalf of, First Harrisburg, (i) used any
First Harrisburg or First Harrisburg Subsidiary corporate funds for
unlawful contributions, gifts, entertainment or unlawful expenses relating
to political activity; or (ii) made any direct or indirect unlawful
payments to governmental officials from any First Harrisburg corporate
funds, or established or maintained any unlawful or unrecorded accounts
with funds received from First Harrisburg or any First Harrisburg
Subsidiary.
(dd) Powers of Attorney, Guarantees. Except as set forth on Schedule
3(dd), neither First Harrisburg nor any First Harrisburg Subsidiary has any
power of attorney outstanding, or any obligation or liability, either
actual, accruing or contingent, as guarantor, surety, cosigner, endorser,
comaker or indemnitor in respect of the obligation of any person,
corporation, partnership, joint venture, association, organization or other
entity, except for letters of credit issued in the ordinary course of
business which are listed on Schedule 3(dd).
(ee) Mortgage Banking Operations and Activities. Except as set forth
in Schedule 3(ee) hereto:
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(1) Avstar Mortgage Corporation (or 'Mortgage Bank') (i) has all
certifications, authorizations, licenses, permits and other
approvals ('Licenses') necessary to conduct its current mortgage
banking business and is in compliance therewith in all material
respects, (ii) is in compliance in all material respects with all
applicable investor requirements, federal and state statutes and
regulations and with the underwriting and servicing guidelines of
the Federal Home Loan Mortgage Corporation ('FHLMC'), and the
Federal National Mortgage Association ('FNMA'), the Department of
Veteran's Affairs ('VA') and the Federal Housing Administration
('FHA'), including but not limited to those statutes, regulations
and guidelines governing the origination, recordation or servicing
of mortgage loans closed, originated or serviced by Avstar
Mortgage Corporation ('Mortgage Loans'), the obtaining of
appropriate loan documentation and insurance policies, the
calculation of interest rate adjustments, the maintenance of
escrow accounts and filing of all documents required by the
Internal Revenue Code of 1986, as amended, (iii) is in compliance
in all material respects with all mortgage servicing agreements to
which it is currently a party (true and complete copies of which
First Harrisburg previously made available to Harris), and such
agreements are valid and binding obligations of Avstar Mortgage
Corporation, are in full force and effect and are enforceable in
accordance with their terms, except as enforcement thereof may be
limited by bankruptcy, insolvency or other similar laws affecting
the enforcement of creditors' rights generally and by general
principles of equity (whether applied in a proceeding in equity or
at law), and (iv) is in compliance in all material respects with
all FHA insurance certificates, VA guaranty certificates or
policies of private mortgage insurance covering the loans in its
loan portfolio or loan servicing portfolio, in each case except
where the failure to do so would not have a material adverse
effect on the business, financial condition or results of
operations of First Harrisburg or the First Harrisburg
Subsidiaries taken as a whole. Except as set forth in Schedule
3(ee), neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will
affect the validity of any License currently possessed by Avstar
Mortgage Corporation, constitute a default (or an event which with
the passage of time or the giving of notice or both would
constitute a default) under any mortgage servicing agreement to
which Avstar Mortgage Corporation is currently a party, or result
in any such mortgage servicing agreement being terminable by any
party thereto, in each case except where such invalidity, default
or termination would not have a material adverse effect on the
business, financial condition or results of operations of First
Harrisburg and the First Harrisburg Subsidiaries taken as a whole.
(2) All of the servicing rights owned by Avstar Mortgage Corporation
are owned free and clear of any lien, pledge, security interest,
claim, restriction or encumbrance.
(3) Mortgage Bank is not a party to (i) any agreement or arrangement
with any person to repurchase from any such person any Mortgage
Loan, mortgaged property serviced for others, mortgage loans sold
by Mortgage Bank with servicing released ('Servicing Released
Loans') or any mortgage loan and or the servicing rights related
thereto which were sold by Mortgage Bank ('Previously Disposed
Loans') or (ii) any agreement, arrangement or understanding to
reimburse, indemnify or hold harmless any person or otherwise
assume any liability with respect to any loss suffered or incurred
as a result of any default under or the foreclosure or sale of any
such Mortgage Loan, mortgaged property, Servicing Released Loans,
or Previously Disposed Loans except insofar as (a) such recourse
is based upon a breach by Mortgage Bank of a customary
representation, warranty or undertaking, or (b) Mortgage Bank
incurs expenses such as legal fees in excess of the customary
reimbursement limits, if any, set forth in the applicable Mortgage
Servicing Agreement. For purposes of this Agreement, the term
'Recourse Loan' means any Mortgage Loan, mortgaged property,
Servicing Released Loan or Previously Disposed Loan with respect
to which Mortgage Bank bears the risk of loss as described in the
preceding sentence.
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(4)Investor Commitments. First Harrisburg has previously provided to
Harris complete and correct copies of all commitments to purchase
Mortgage Loans ('Investor Commitments') in effect on the date
hereof. Each Investor Commitment constitutes a valid and binding
obligation of Mortgage Bank, and, to the best knowledge of First
Harrisburg, all of the other Parties thereto, enforceable in
accordance with its terms, subject to bankruptcy, insolvency or
other similar laws affecting the enforcement of creditors' rights
generally and by general principles of equity (whether applied in a
proceeding in equity or at law). Each Mortgage Loan owned by
Mortgage Bank and currently held for sale which is subject to an
Investor Commitment is a loan eligible to be either an FHA or VA
loan or sold to FNMA ('Conforming Loans') or is otherwise readily
saleable in the secondary market.
(5)Physical Damage. To the best knowledge of First Harrisburg, there
exists no physical damage to any collateral for a Mortgage Loan,
which physical damage is not insured against in compliance with
regulations and which would have a material adverse effect on the
value or marketability of any Mortgage Loan, or on the underlying
collateral.
(6)Advances. There are no pooling, participation, servicing or other
agreements to which Mortgage Bank is a party which obligate it to
make advances with respect to defaulted or delinquent Mortgage
Loans other than as provided in FNMA or FHLMC pooling and servicing
agreements.
(7)Pool Certification. In all material respects, all pools relating
to the Mortgage Loans have been certified in accordance with
applicable regulations, and the securities backed by such pools
have been issued on uniform documents, in accordance with the
applicable investor guide without any material deviations
therefrom. The principal balance outstanding and owing on the
Mortgage Loans in each pool equals or exceeds the amount owing to
the corresponding security holders of such pool. No event has
occurred or failed to occur which would require Mortgage Bank to
repurchase any Mortgage Loan from any pool, except with respect to
the obligation to repurchase Conforming Loans that are in
foreclosure.
(8)Payoff Statements. All payoff and assumption statements with
respect to each Mortgage Loan provided by Mortgage Bank to
borrowers or their agents were, at the time they were provided,
complete and adequate in all material respects.
(ff) CRA Compliance. First Federal has a satisfactory Community
Reinvestment Act rating.
(gg) Derivatives. Except as set forth in Schedule 3(gg), neither
First Harrisburg nor any First Harrisburg Subsidiary owns or holds any
derivatives, 'caps' or 'floors' in their investment portfolio in an amount
of $100,000 in the aggregate.
(hh) Loan Loss Reserves. The loan loss reserves of First Federal are
and shall remain adequate in light of generally accepted accounting
principles, directives of governmental authorities, and all regulations,
rules and directives of the FDIC and the OTS.
4. ACCESS TO AND INFORMATION CONCERNING PROPERTIES, RECORDS, ETC. First
Harrisburg and First Federal shall, to the extent permitted by law, give to
Harris, its counsel, accountants, financial advisors and other representatives
full access, at reasonable times and upon reasonable notice (so as not to
interfere unreasonably with the ordinary course and conduct of business of First
Harrisburg or any of the First Harrisburg Subsidiaries), throughout the period
prior to the Closing, access to all of their respective properties, books,
contracts, commitments and records, including, but not limited to, minute books,
Charters, Articles of Incorporation and Bylaws, and shall furnish to Harris
during such period all such information concerning First Harrisburg and the
First Harrisburg Subsidiaries and their respective affairs as Harris may
reasonably request. Without limiting the effect of the foregoing, such access
shall in no event be more limited than that granted by a public company to its
independent accountants in the course of their conduct of an audit of its
financial
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statements (to the extent such access is permitted by applicable law, regulation
or order). In addition, First Harrisburg and the First Harrisburg Subsidiaries
shall make their respective officers available at reasonable times and upon
reasonable notice to discuss with Harris' designated representatives the
substance of all documents, financial statements and other information provided
by First Harrisburg and the First Harrisburg Subsidiaries, and other matters as
Harris shall reasonably deem pertinent to the transactions contemplated under
this Agreement. All information disclosed by any party hereto or any subsidiary
thereof to another party pursuant to this Section 4 shall be subject to Section
13 hereof (regarding confidential treatment of confidential or non-public
information).
5. AFFIRMATIVE COVENANTS OF HARRIS. Harris covenants and agrees that,
throughout the period commencing on the date hereof and ending on the date of
Closing, except for specific proposed actions or inaction as shall be consented
to by First Harrisburg, which consent shall not be unreasonably withheld and
shall be deemed to have been given upon the passage of ten (10) days following
written notice of the proposed action or inaction by Harris to First Harrisburg
unless First Harrisburg shall reasonably and in good faith object in writing to
Harris within said period, Harris will for its own part:
(a) Conduct of Business. Conduct its business in a manner that will
not adversely affect Harris' ability to obtain all necessary regulatory
approvals for the transactions contemplated hereby or Harris' ability to
perform its obligations under this Agreement and conduct its business in
the ordinary course; provided that Harris may undertake activities which
are not in the ordinary course on the condition that such activities will
not result in a material adverse change in the business, operations, assets
or financial condition of Harris taken as a whole;
(b) Preservation of Business. Use its best efforts to maintain and
preserve its business;
(c) Insurance. Maintain in full force and effect insurance customary
with industry practices for the businesses conducted by Harris;
(d) Laws, Rules, Etc. Comply with and perform all material
obligations and duties imposed upon it by all federal and state laws and
all rules, regulations and orders imposed by federal or state governmental
authorities, except in respects not materially adverse to the business,
operations, assets or financial condition of Harris or which would not
materially impair the ability of Harris to consummate the transactions
contemplated hereby;
(e) Best Efforts. Use its best efforts to assure, to the extent
reasonably within its control, as soon as it is reasonably practicable, the
satisfaction of the conditions to the effectiveness of the transactions
contemplated hereunder and the transactions contemplated by this Agreement;
and
(f) Notices. Notify First Harrisburg of (i) any fact or circumstance
of which the executive officers of Harris have knowledge which would,
absent disclosure by Harris to First Harrisburg and First Harrisburg's
subsequent consent to such fact or circumstance, not permit Harris to
satisfy the conditions set forth in Section 10(a)(i) of this Agreement,
(ii) any material breach of any of its covenants and agreements contained
herein, and (iii) any material adverse change in its financial condition,
business or operating results on a consolidated basis.
(g) Regulatory Applications. Harris agrees to use its best efforts to
file all requisite regulatory applications with respect to the transactions
contemplated by this Agreement no later than December 31, 1995 and to
thereafter use its best efforts to file any necessary amendments promptly.
Copies of such applications and all correspondence to and from the
regulatory authorities shall be promptly provided to First Harrisburg and
its counsel.
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6. AFFIRMATIVE COVENANTS OF FIRST HARRISBURG AND FIRST FEDERAL. First
Harrisburg and First Federal covenant and agree that, throughout the period
commencing on the date hereof and ending on the date of Closing, except for
specific proposed actions or inaction as shall otherwise be consented to in
writing by Harris, First Harrisburg will for its own part, and it will cause the
First Harrisburg Subsidiaries to:
(a) Conduct of Business. Conduct their businesses, including
extensions of credit and mortgage banking operations, only in the ordinary
course consistent with past practices and written policies, and there will
be no Material Adverse Change (as defined in Section 3 hereof) in the
business, operations, assets or financial condition of First Harrisburg and
the First Harrisburg Subsidiaries taken as a whole between the date hereof
and the Effective Date;
(b) Preservation of Business. Use their best efforts to maintain and
preserve their businesses and business organizations intact, including, but
not limited to, maintaining goodwill and relationships with customers and
others having business dealings with First Harrisburg and the First
Harrisburg Subsidiaries, preserving and collecting all material claims and
causes of action belonging to First Harrisburg and the First Harrisburg
Subsidiaries, and maintaining their books of account and other records;
(c) Properties. Maintain and keep their properties, both real
property and tangible personal property, in as good repair and condition in
all material respects as they presently exist, except for depreciation due
to ordinary wear and tear and damage due to unavoidable casualty;
(d) Insurance. Maintain in full force and effect all insurances
customary with industry practices for the businesses conducted by First
Harrisburg and the First Harrisburg Subsidiaries;
(e) Contracts, Etc. Perform all its material obligations under
agreements, contracts, leases, documents and instruments relating to or
affecting their assets, properties and businesses;
(f) Financial Statements. Furnish to Harris:
(i) As soon as practicable and in any event within forty-five (45)
days after the end of each of the first three quarters in each fiscal
year, consolidated statements of operations of First Harrisburg and the
First Harrisburg Subsidiaries for such period and for the period
beginning at the commencement of the fiscal year and ending at the end
of such quarterly period, and a consolidated balance sheet of First
Harrisburg and the First Harrisburg Subsidiaries as of the end of such
quarterly period, setting forth in each case in comparative form figures
for the corresponding periods ending in the preceding fiscal year,
subject to changes resulting from year-end adjustments;
(ii) Within ninety days of the end of the period being audited,
copies of all audit reports submitted to First Harrisburg by independent
auditors in connection with each annual, interim or special audit of the
books of First Harrisburg and the First Harrisburg Subsidiaries made by
such accountants;
(iii) As soon as practicable, copies of all such financial
statements and reports as it shall send to its shareholders and of such
regular and periodic reports as First Harrisburg or the First Harrisburg
Subsidiaries may file with the SEC, the OTS, or any other regulatory
authority;
(iv) Promptly upon any executive officer of First Harrisburg
obtaining knowledge of any condition or event which would constitute a
material violation of the terms and conditions of this Agreement or the
Merger Agreement or which would constitute a material default under any
material indenture, mortgage, agreement or other instrument securing or
relating to any indebtedness of First Harrisburg or the First Harrisburg
Subsidiaries for borrowed money, a certificate of the President of First
Harrisburg, specifying the nature of such material violation or default
and what action First Harrisburg has taken or is taking or proposes to
take with respect thereto;
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(v) Promptly upon becoming aware that any person has given notice
to First Harrisburg or any First Harrisburg Subsidiary or taken any
other action with respect to a claimed violation or default of the type
referred to in subsection (iv) of this Subsection (f), a written notice
describing the notice given or action taken by such person, the nature
of such violation or default and what action First Harrisburg has taken
or is taking or proposes to take with respect thereto; and
(vi) With reasonable promptness, such additional financial data as
Harris may reasonably request.
(g) Laws, Rules, Etc. Comply with and perform all material
obligations and duties imposed upon it by all federal, state, county, local
and municipal laws and all rules, regulations, directives, decrees, orders,
and ordinances imposed by federal, state, county, local or municipal
governmental authorities, including, but not by way of limitation of the
above, compliance with examination reports, regulations and rulings of the
OTS;
(h) Corporate Existence. Maintain its existence, in the case of First
Harrisburg, as a corporation validly existing in good standing under the
laws of the Commonwealth of Pennsylvania, and in the case of the First
Harrisburg Subsidiaries, as an entity of the respective type set forth on
Schedule 3(a) in good standing under the laws of the respective
jurisdictions set forth on Schedule 3(a);
(i) Notices. Notify Harris of (i) any fact or circumstance of which
the executive officers of First Harrisburg have knowledge which would,
absent disclosure by First Harrisburg to Harris and Harris' subsequent
consent to such fact or circumstance, not permit First Harrisburg to
satisfy the conditions set forth in Section 9(a)(i) of this Agreement, (ii)
any material breach of any of its covenants and agreements contained
herein, and (iii) any Material Adverse Change (as defined in Section 3
hereof) in its financial condition, business, operations, assets, prospects
or operating results on a consolidated basis;
(j) Best Efforts. Use its best efforts to assure, to the extent
reasonably within its control, as soon as it is reasonably practicable, the
satisfaction of the conditions to the effectiveness of the transactions
contemplated by this Agreement. First Harrisburg and the First Harrisburg
Subsidiaries shall cooperate with Harris and shall use their best efforts
to do or cause to be done all things necessary or appropriate on their part
in order to fulfill the conditions precedent set forth in this Agreement
and to consummate this Agreement and the Merger Agreement. In particular,
without limiting the generality of the foregoing, First Harrisburg and the
First Harrisburg Subsidiaries shall:
(i) cooperate with Harris in the preparation of all required
applications for regulatory approval of the transactions contemplated by
this Agreement;
(ii) in the case of First Harrisburg, call a special or annual
meeting of its shareholders and take, in good faith, all actions which
are necessary or appropriate on its part in order to secure the approval
and adoption of this Agreement and the Merger Agreement by its
shareholders at that meeting;
(iii) cooperate with Harris in making the employees of First
Harrisburg and the First Harrisburg Subsidiaries reasonably available
for training by Harris prior to the Effective Date, to the extent such
training is deemed reasonably necessary by Harris;
(iv) make additions to loan loss reserves and make loan writeoffs,
writedowns and other adjustments that reasonably should be made by First
Federal in light of generally accepted accounting principles, directives
of governmental authorities, and all regulations, rules and directives
of the FDIC and the OTS for the period until the Effective Date;
(v) use its best efforts to assure that the directors of First
Harrisburg shall have executed and delivered the Support Agreement
referred to in Section 9(g) hereof and in a form acceptable to Harris;
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(vi) execute and deliver the Investment Agreement in the form set
forth in Exhibit 4 hereto; and
(vii) use its best efforts to assure that persons who currently
hold outstanding stock options of First Harrisburg agree to surrender
same in accordance with the terms of this Agreement.
(k) Amend Corporate Documents. Amend or modify the articles of
incorporation or bylaws or any other documents of First Harrisburg or the
First Harrisburg Subsidiaries in a manner reasonably requested by Harris if
necessary to effectuate the transactions contemplated hereby; and
(l) Suspend Stock and Dividend Reinvestment Plans. Suspend its
Dividend Reinvestment Plan as of the date hereof and all other plans
involving the issuance of First Harrisburg Common Stock (other than its
stock option plans) as of the date hereof and amend or terminate the
outstanding First Harrisburg stock option plans by the Effective Date.
(m) First Harrisburg Benefit Plans. All First Harrisburg employee
benefit plans, except the directors' retirement plan, shall be terminated
prior to or as of the Effective Date. For those plans subject to ERISA,
benefits payable upon termination shall not be in excess of the minimum
amounts required to be paid under the provisions of ERISA and the
underlying plan document.
(n) Good Faith Cooperative Effort to Revise Structure. First
Harrisburg and First Federal hereby agree to cooperate with Harris to
approve any revision to this Agreement, or to the attached Exhibits,
involving a structural change to the Merger and the transactions
contemplated thereunder provided that such cooperation and approval does
not impact upon the amount of consideration to be received by the
shareholders of First Harrisburg or otherwise impact the conditions to the
obligations of any of the Parties in any materially burdensome manner.
(o) Non-permitted Activities Divestiture. First Harrisburg, First
Federal and the First Harrisburg Subsidiaries shall divest any
non-permitted activity that could not be undertaken or any entity that
could not be operated or owned by Harris after the Effective Date, unless
the appropriate regulatory agencies permit the retention, ownership,
operation and non-divestiture of such activities or entities by Harris. If
the appropriate regulatory agencies permit such activities or entities to
be conducted, operated or owned by Harris as of the Effective Date and only
require that such activities or entities be discontinued or divested within
a specified period of time following the Effective Date, then First
Harrisburg, First Federal and the First Harrisburg Subsidiaries shall have
no obligation to discontinue or divest such activities or entities prior to
the Effective Date.
7. NEGATIVE COVENANTS OF FIRST HARRISBURG AND FIRST FEDERAL. First
Harrisburg and First Federal covenant and agree that, throughout the period
commencing on the date hereof and ending on the date of Closing, except for
proposed specific actions as shall otherwise be consented to in writing by
Harris, they will not for their own part, nor will they cause or permit any of
the First Harrisburg Subsidiaries or affiliates to:
(a) Amend its charter, articles of incorporation or bylaws;
(b) Issue, sell or otherwise dispose of (or authorize or agree to
issue, sell or dispose of) any shares of its capital stock (other than
pursuant to the outstanding stock options set forth in Schedule 3(b)
hereto, the Option Agreement and the 10% stock dividend payable on November
15, 1995) or any securities or documents convertible into or representing a
right or option to purchase any such shares, or enter into any other
agreements to issue or sell any shares of capital stock or change the
presently outstanding shares of capital stock into a greater or lesser
number of shares either by way of a recapitalization, reclassification,
reorganization, consolidation of shares or the like, or by a stock split,
stock dividend, or by way of a merger or consolidation;
(c) Purchase, redeem, retire or otherwise acquire, or hypothecate,
pledge or otherwise encumber, any shares of capital stock;
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(d) Merge into, consolidate with, or be purchased or acquired by, any
other corporation, entity or person (or agree to any such merger,
consolidation, affiliation, purchase or acquisition), or permit (or agree
to permit) any other corporation, entity or person to be merged,
consolidated or affiliated with it or be purchased or acquired by it, or,
except to realize upon collateral and except for purchases or sales of
loans in the ordinary course of its business, acquire (or agree to acquire)
all or substantially all of the assets of any other corporation, entity or
person or sell or dispose (or agree to sell or dispose) all or any
substantial part of its assets, in each case unless after written notice to
Harris and following receipt by First Harrisburg of written advice of
counsel, the First Harrisburg Board of Directors determines that the
failure to take such action is likely to be deemed to constitute a breach
of their fiduciary duties under applicable Pennsylvania law;
(e) Make, declare or pay any dividend other than regular quarterly
cash dividends in an amount not to exceed $.055 per share per quarter on
the First Harrisburg Common Stock or declare or make any distribution on
any shares of its capital stock other than the 10% stock dividend payable
on November 15, 1995;
(f) Enter into any employment contracts, deferred compensation
arrangements, or other agreements or arrangements affecting compensation or
benefits, or pay any bonus to, or increase the rate of compensation of any
director, officer, employee or consultant of First Harrisburg or any First
Harrisburg Subsidiary, other than bonuses and increases in the rate of
compensation of employees of First Harrisburg or any First Harrisburg
Subsidiary in the ordinary course of business consistent with past practice
in an amount not to exceed $50,000 in the aggregate or bonuses accrued as
of the date hereof;
(g) Enter into or modify (except as may be required by applicable law
or to effect the transactions contemplated by this Agreement) any pension,
retirement, stock option, stock purchase, severance, profit sharing,
deferred compensation, consulting, bonus, group insurance or other employee
benefit, incentive or welfare contract, plan or arrangement, or any trust
agreement related thereto, in respect of any current or former directors,
officers or other employees;
(h) Except for indebtedness and contingent liabilities incurred in the
ordinary course of business (e.g., deposit liabilities, Federal Home Loan
Bank advances by First Federal, and non-material reverse repurchase
agreements), incur any indebtedness or liability for borrowed money
evidenced by notes, bonds, debentures or other similar obligations;
(i) Solicit or encourage inquiries or proposals with respect to, or
furnish any information relating to, or participate in any negotiations or
discussions concerning, any acquisition or purchase of all or a material
portion of its assets (whether owned by it directly or owned by any First
Harrisburg Subsidiary), or of a substantial equity interest in it or any
business combination with it or any First Harrisburg Subsidiary, and First
Harrisburg shall notify Harris immediately if any such inquiries or
proposals are received by, any such information is requested from, or any
such negotiations or discussions are sought to be initiated with, First
Harrisburg or any First Harrisburg Subsidiary; and First Harrisburg and the
First Harrisburg Subsidiaries shall not permit any officer, director,
agent, advisor, or affiliate to do any of the above and shall instruct its
and each First Harrisburg Subsidiary's officers, directors, agents,
advisors and affiliates to comply with the above. Notwithstanding the
foregoing, First Harrisburg, after written notice to Harris, may respond to
unsolicited inquiries from third parties and/or engage in discussions or
negotiations with third parties if, in each case, following receipt of
written advice of counsel, the First Harrisburg Board of Directors
determines that failure to respond to such unsolicited inquiries and/or
engage in such discussions or negotiations is likely to be deemed to
constitute a breach of their fiduciary duties under applicable Pennsylvania
law;
(j) Except in the ordinary course of business, enter into or assume
any material contract, incur any material liability or obligation, make any
material commitment, acquire or dispose of any property or asset or engage
in a transaction or subject any of First Harrisburg's or First
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Harrisburg Subsidiaries' properties or assets to any material lien, claim,
charge, or encumbrance of any kind whatsoever;
(k) Take or permit to be taken any action which would constitute a
breach of any representation, warranty or covenant set forth in this
Agreement;
(l) Enter into any related party transaction except such related party
transactions relating to extensions of credit made in accordance with
applicable laws, regulations and rules and in the ordinary course of
business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable arm's length
transactions with other persons that do not involve more than the normal
risk of collectibility or present other unfavorable features;
(m) Sell or otherwise dispose of any capital stock of any First
Harrisburg Subsidiary;
(n) Change any method, practice or principle of accounting except as
may be required by generally accepted accounting principles or any
applicable regulator;
(o) Waive, release, grant or transfer any rights of value or modify or
change in any material respect any existing agreement to which First
Harrisburg or any First Harrisburg Subsidiary is a party, other than the
ordinary course of business, consistent with past practice;
(p) Make any loan or other credit facility commitment in excess of
$250,000 (including without limitation, lines of credit and letters of
credit) to any affiliate other than Avstar Mortgage Corporation in the
ordinary course of business or compromise, expend, renew or modify any such
commitment outstanding;
(q) Except consistent with past practice, enter into, renew, extend or
modify any other transaction with any affiliate;
(r) Enter into any swap or similar commitment, agreement or
arrangement which is not consistent with past practice and which increases
the credit or interest rate risk over the levels existing at September 30,
1995;
(s) Enter into any derivative, cap or floor or similar commitment,
agreement or arrangement, except in the ordinary course of business and
consistent with past practices;
(t) Knowingly take any action that would, under any statute,
regulation or administrative practice of the Federal Reserve, the FDIC, the
Department of Banking, the SEC, or the OTS, materially or adversely affect
the ability of either party to obtain any required approvals for
consummation of the transaction;
(u) Sell, transfer, lease or encumber any servicing rights or other
assets except for mortgage loans and related servicing rights in the
ordinary course of business, which ordinary course of business shall not
include, however, the present servicing portfolio on closed loans
maintained by First Harrisburg and the First Harrisburg Subsidiaries, or
purchase any assets except for mortgage loans and servicing rights related
thereto from third party mortgage loan originators with respect to which
Mortgage Bank is a party to an existing contract;
(v) Materially alter or vary its methods or policies of (i)
underwriting, pricing, originating, warehousing, selling and servicing, or
buying or selling rights to service mortgage loans, (ii) hedging (which
term includes both buying futures and forward commitments from financial
institutions) its mortgage loan positions or commitments, and (iii)
obtaining financing and credit;
(w) Incur any debt other than debt incurred to fund or purchase
mortgage loans from First Harrisburg or a First Harrisburg Subsidiary;
(x) Directly or indirectly agree to take any of the foregoing actions
specified in subsections (a) through (w) above.
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8. CONDITIONS TO THE OBLIGATIONS OF HARRIS, HARRIS ACQUISITION, FIRST
HARRISBURG, AND FIRST FEDERAL. The Closing shall be expressly conditioned upon
the following:
(a) Approval of Shareholders. Approval and adoption of this Agreement
and the transactions and agreements contemplated hereby by a vote of the
shareholders of First Harrisburg, as required by applicable law and by
First Harrisburg's Articles of Incorporation, shall have been obtained and
certified. Approval and adoption of this Agreement and the transactions and
agreements contemplated hereby by a vote of the shareholders of Harris, as
required by applicable law and by the Harris Articles of Incorporation,
shall have been obtained and certified;
(b) Approval of Regulatory Agencies. All required consents and
approvals of all regulatory agencies and other authorities having
jurisdiction over the transactions contemplated by this Agreement, the
Merger Agreement, the First Harrisburg Plan of Liquidation and the First
Federal Merger, including without limitation the SEC, OTS, Department of
Banking, FDIC and Federal Reserve, shall have been granted and obtained,
without the imposition of any non-standard term or condition which would
materially impair the value of First Harrisburg and the First Harrisburg
Subsidiaries to Harris or otherwise impact Harris in a materially adverse
way and all applicable notice and waiting periods shall have expired or
passed;
(c) Dissenters' Rights. Holders of no more than twenty percent (20%)
of outstanding shares of First Harrisburg shall have exercised their
statutory appraisal or dissenters' rights;
(d) Antitrust Laws. The pre-merger notification provisions of Section
7A of the Clayton Act shall have been complied with by the Parties hereto,
and no other statutory or regulatory requirements with respect to the
Clayton Act shall be applicable;
(e) Suits, Actions. No party hereto shall be subject to any action,
suit, proceeding, order, decree or injunction of a court or agency of
competent jurisdiction which enjoins or prohibits the consummation of the
transactions contemplated by this Agreement;
(f) Statutes, Orders. No statute, rule, regulation, order, injunction
or decree shall have been enacted, entered, promulgated or enforced by any
governmental authority which prohibits or makes illegal the consummation of
the transactions contemplated by this Agreement; and
(g) Other Requirements. All other requirements prescribed by law
which are necessary to the consummation of the transactions contemplated by
this Agreement shall have been satisfied.
9. CONDITIONS TO THE OBLIGATIONS OF HARRIS AND HARRIS ACQUISITION.
Consummation by Harris and Harris Acquisition of the transactions contemplated
hereby is subject to the following conditions precedent, any of which, however,
may be waived, to the extent permitted by applicable law or regulation, by the
consent in writing of Harris and Harris Acquisition.
(a) Representations, Warranties and Covenants.
(i) The representations and warranties of First Harrisburg (both on
its own behalf and on behalf of the First Harrisburg Subsidiaries)
contained herein (A) shall have been true and correct in all material
respects on the date hereof, and (B) other than as disclosed by First
Harrisburg to, and approved by, Harris in writing prior to or at the
Closing, shall be true and correct in all material respects as of the
Closing, except as otherwise provided or permitted by this Agreement and
except as to any representation or warranty which specifically relates
to an earlier date.
(ii) First Harrisburg and the First Harrisburg Subsidiaries shall
have duly performed or complied in all material respects with all
covenants, not otherwise waived by Harris and Harris Acquisition in
writing, required by this Agreement to be performed by First Harrisburg
and the First Harrisburg Subsidiaries prior to or at the Closing.
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(iii) Harris shall have received a certificate of First Harrisburg
dated as of the Closing, signed by the President and the Chief Financial
Officer of First Harrisburg, certifying in such detail as Harris may
reasonably request the fulfillment of the conditions set forth in
Sections 9(a)(i) and (ii) above.
(b) Opinion of Special Counsel. All proceedings and legal details
incident to this Agreement shall be satisfactory to Shumaker Williams, P.C.
as special counsel for Harris and Harris Acquisition, and Harris shall have
received an opinion reasonably satisfactory to it from Elias, Matz, Tiernan
& Herrick L.L.P. as special counsel for First Harrisburg and First Federal,
dated as of the date of the Closing and addressed to Harris, to the effect
that:
(i) First Harrisburg is a corporation organized and validly
existing under the laws of the Commonwealth of Pennsylvania and has the
corporate power and authority to execute, deliver and perform all
transactions contemplated by the Agreement and has the corporate power
and authority to own and hold its properties and to carry on its
business immediately prior to Closing as previously described in the
Proxy Statement.
(ii) The authorized capital stock of First Harrisburg consists of
10,000,000 shares of common stock, par value $.01 per share, and
5,000,000 shares of preferred stock, par value $.01 per share, of which
[the number of shares of First Harrisburg Common Stock specified in the
opinion] are issued and outstanding on the Effective Date and [number
specified in opinion] shares are held in treasury. Each of the
outstanding shares of First Harrisburg Common Stock has been validly
issued and is fully paid and non-assessable. None of such outstanding
shares of First Harrisburg Common Stock have been issued in violation of
any preemptive rights. To such counsel's Actual Knowledge, as defined
below, no unissued shares of First Harrisburg Common Stock or any other
securities of First Harrisburg are subject to any warrants, options,
commitments, preemptive or other rights of any kind or nature, and First
Harrisburg is not obligated to issue any additional shares of capital
stock or any other securities of any kind or nature, except for [number
specified in opinion] options outstanding which were granted pursuant to
stock option plans of First Harrisburg and First Federal and except
pursuant to the Option Agreement.
(iii) First Federal is an entity of the type set forth on Schedule
3(a) hereto, and is organized and validly existing under the laws of the
jurisdiction set forth on said Schedule 3(a). First Federal has the
corporate power and authority to execute, deliver and perform all
transactions contemplated by the Agreement. First Federal has the
corporate power and authority to own and hold its properties and to
carry on its business immediately prior to Closing as previously
described in the Proxy Statement.
(iv) All of the issued and outstanding capital stock of First
Federal is validly issued, fully paid and non-assessable and, to such
counsel's Actual Knowledge, owned directly by First Harrisburg.
(v) The execution, delivery and performance as of the date of such
opinion of all transactions contemplated by the Agreement have been duly
authorized by the Boards of Directors of First Harrisburg and First
Federal, and as to the Option Agreement by the Board of Directors of
First Harrisburg, and do not violate any of the provisions of, or
constitute a default under or give any person or party the right to
accelerate payment or performance under, the articles of incorporation
or bylaws of First Harrisburg or First Federal or to such counsel's
Actual Knowledge any material agreement, document or instrument to which
either First Harrisburg or First Federal is a party and which was either
included as an exhibit to any filing made by First Harrisburg under
either the Securities Act of 1933 or the Securities Exchange Act of 1934
or which is identified in Schedule 3(j) to the Agreement.
(vi) The Agreement (other than the Option Agreement, as to which no
opinion need be rendered pursuant to this clause) has been duly
authorized, executed and delivered by First Harrisburg and First Federal
and constitutes a valid and binding obligation of First
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Harrisburg and First Federal, enforceable against First Harrisburg and
First Federal in accordance with its terms, except as may be limited by
(i) bankruptcy, insolvency, reorganization, moratorium, conservatorship,
receivership or other similar laws now or hereafter in effect relating
to or affecting the enforcement of creditors' rights generally or the
rights of creditors of federal savings institutions or their holding
companies, (ii) general equitable principles, and (iii) laws relating to
the safety and soundness of insured depository institutions, and except
that no opinion need be expressed as to the effect or availability of
equitable remedies or injunctive relief (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
(vii) The Option Agreement has been duly authorized, executed and
delivered by First Harrisburg.
(viii) To the Actual Knowledge of such counsel the execution,
delivery and performance of the Agreement and the transactions
contemplated thereunder by First Harrisburg and First Federal do not
violate any provision of law, regulation, rule, order, or decree
applicable to First Harrisburg or First Federal.
(ix) All consents and approvals of (and filings with) the FDIC and
the OTS required by law to have been obtained or made by First
Harrisburg and First Federal in order to permit First Harrisburg and
First Federal to perform their obligations under the Agreement have been
obtained or made.
(x) To the Actual Knowledge of such counsel, there is no action,
suit or proceeding pending or threatened before any federal, state or
local court or governmental authority or before any arbitration tribunal
which seeks to modify, enjoin or prohibit or otherwise adversely and
materially affect the transactions contemplated by the Agreement that,
if determined adversely to First Harrisburg and the First Harrisburg
Subsidiaries, would have a material and adverse effect upon the
condition (financial or otherwise), assets, liabilities, business or
operations of First Harrisburg and the First Harrisburg Subsidiaries
taken as a whole.
(xi) First Federal is a member of the Federal Home Loan Bank of
Pittsburgh and the deposits of First Federal are insured by the SAIF
administered by the FDIC.
The opinion of First Harrisburg's special counsel shall be governed by the
Legal Opinion Accord ('Accord') of the American Bar Association Section of
Business Law (1991). The term 'Actual Knowledge' as used herein shall have the
meaning set forth in the Accord. In addition, such opinion may be limited to
present statutes, regulations, rulings, and formal agency and judicial
interpretations and to facts as they presently exist; in rendering such opinion,
such counsel need assume no obligation to revise or supplement it should the
present laws be changed by legislative or regulatory action, judicial decision
or otherwise after such opinion is rendered. Such counsel may assume that any
agreement is the valid and binding obligation of any Parties to such agreement
other than First Harrisburg or First Federal. In giving such opinion, such
counsel may rely as to all matters of fact on certificates of officers or
directors of First Harrisburg and First Federal and certificates of public
officials. Such counsel's opinion shall be limited to matters governed by
federal laws and by the Business Corporation Law. With respect to matters
involving the application of Pennsylvania law, such counsel may rely, to the
extent it deems proper and as specified in its opinion, upon the opinion of
local counsel. Such counsel may also indicate that it is expressing no opinion
as to the fairness of the transactions contemplated by this Agreement or of the
Merger Consideration to be received by the holders of First Harrisburg Common
Stock from a financial point view or as to the business judgement of the Board
of Directors of First Harrisburg and First Federal in connection with their
adoption of the Agreement.
(c) Opinion of Local Counsel. Harris shall have received an opinion
reasonably satisfactory to it from First Harrisburg's local counsel as
local counsel for the First Harrisburg Subsidiaries dated as of the date of
the Closing and addressed to Harris, to the effect that:
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(i) Each of the First Harrisburg Subsidiaries (other than First
Federal) is an entity of the respective type set forth on Schedule 3(a)
hereto and is organized and validly existing under the laws of the
respective jurisdiction set forth on said Schedule 3(a). Each of the
First Harrisburg Subsidiaries has the corporate power and authority to
own and hold its properties and to carry on its present business.
(ii) All of the issued and outstanding First Harrisburg
Subsidiaries' Capital Stock is validly issued, fully paid and
non-assessable and, to such counsel's Actual Knowledge, is owned
directly or indirectly by First Harrisburg.
(iii) The execution, delivery and performance as of the date of
such opinion of all transactions contemplated by the Agreement do not
violate any of the provisions of, or constitute a default under or give
any person or party the right to accelerate payment or performance
under, the articles of incorporation or bylaws of any of the First
Harrisburg Subsidiaries or to such counsel's Actual Knowledge, any other
material agreement, document or instrument to which any of the first
Harrisburg Subsidiaries is a party or by which it or any of its
properties or assets is bound.
In giving such opinion, such counsel may rely as to all matters of
fact on certificates of officers or directors of the First Harrisburg
Subsidiaries and certificates of public officials. Such opinion shall be
governed by the Accord, and the term 'Actual Knowledge' as used herein
shall have the meaning set forth in the Accord.
(d) Suit, Action, Etc. No suit, action or other proceeding shall be
pending or directly threatened by any federal, state or other governmental
agency, commission or authority having jurisdiction or authority over First
Harrisburg, any First Harrisburg Subsidiary, Harris or Harris Acquisition
or by any other person, in which it is sought to restrain or prohibit
consummation of the transactions contemplated by this Agreement and which
in the reasonable and good faith judgment of the management of Harris,
based upon the written advice of its counsel, is meritorious and adversely
affects the prospects of such consummation.
(e) Accountants' Comfort Letter. Harris and Harris Acquisition shall
have received 'comfort' letters from First Harrisburg's independent
certified public accountants dated (i) within five business days of the
date of mailing of the Proxy Statement and (ii) the Effective Date, in each
case substantially to the effect that:
(A) it is a firm of independent public accountants with respect to
First Harrisburg and the First Harrisburg Subsidiaries within the rules
and regulations of the SEC;
(B) in its opinion the audited consolidated financial statements of
First Harrisburg and the First Harrisburg Subsidiaries examined by it
and included in the Proxy Statement comply as to form in all material
respects with the applicable rules and regulations of the SEC; and
(C) on the basis of specified procedures (which do not constitute
an examination in accordance with generally accepted auditing
standards), nothing has come to its attention which causes it to
believe: (i) that the consolidated financial statements, if any, of
First Harrisburg included in such Proxy Statement do not comply in all
material respects with the applicable accounting requirements and of the
rules and regulations of the SEC and (ii) that any such unaudited
consolidated financial statements of First Harrisburg from which
unaudited quarterly financial information set forth in such Proxy
Statement has been derived, are not fairly presented in conformity with
generally accepted accounting principles applied on a basis consistent
with that of the audited consolidated financial statements.
(f) Accountants' Letter. Harris and Harris Acquisition shall have
received a letter dated as of the Effective Date from its independent
certified public accountants to the effect that the Merger will be
accounted for under the purchase method of accounting.
(g) Support Agreement. Each of the directors of First Harrisburg
shall have executed and delivered to Harris a 'Support Agreement' in a form
that is acceptable to Harris.
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(h) Investment Agreement. First Harrisburg shall have executed and
delivered to Harris an Investment Agreement, 'the Option Agreement,' in the
form set forth in Exhibit 4 hereto.
(i) Tax Ruling or Opinion. Harris shall have received at the Closing,
a ruling from the Internal Revenue Service or an opinion of KPMG Peat
Marwick, L.L.P., that the transactions contemplated by this Agreement, the
Merger Agreement, the First Harrisburg Plan of Liquidation and the First
Federal Merger will not be taxable transactions to the Parties, will
qualify for treatment under Section 338 of the Internal Revenue Code of
1986, as amended, and will not have adverse tax consequences or result in
adverse tax attributes to the Parties. Such ruling or opinion shall be in a
form and of content reasonably satisfactory to Harris.
(j) Closing Documents. First Harrisburg and First Federal shall have
delivered to Harris and Harris Acquisition (i) all consents and
authorizations of landlords and other persons that are necessary to permit
this Agreement to be consummated without violation of any lease or other
agreement to which First Harrisburg or a First Harrisburg Subsidiary is a
party or by which First Harrisburg or a First Harrisburg Subsidiary or any
of their properties are bound; and (ii) such other certificates and
documents as Harris and Harris Acquisition and their counsel may reasonably
request (all of the foregoing certificates and other documents being herein
referred to as 'First Harrisburg Closing Documents').
(k) Outstanding Stock Options. All unexercised stock options,
derivatives or other instruments of First Harrisburg that are issuable by
First Harrisburg or issued and outstanding of First Harrisburg shall have
been retired, redeemed, surrendered, exercised or otherwise satisfied or
settled prior to the Effective Date.
(l) Effectiveness of Transactions. All transactions contemplated by
and provided for in this Agreement, the Merger Agreement, the First
Harrisburg Plan of Liquidation, and the First Federal Merger Agreement
shall be imminent and there shall be no impediment existing that would
materially impair the Parties' ability to effectuate same.
(m) Non-permitted Activities. First Harrisburg, First Federal and the
other First Harrisburg Subsidiaries shall have divested of all activities
or entities, that if they were to be conducted, operated or owned by
Harris, would constitute a non-permitted activity or entity of Harris,
unless the appropriate regulatory agencies permit the retention, ownership,
operation and non-divestiture of such activities or entities by Harris as
of the Effective Date. If the appropriate regulatory agencies permit such
activities or entities to be conducted, operated or owned by Harris as of
the Effective Date and only require that such activities or entities be
discontinued or divested within a specified period of time following the
Effective Date, then First Harrisburg, First Federal and the First
Harrisburg Subsidiaries shall have no obligation to discontinue or divest
such activities or entities prior to the Effective Date.
(n) Harris Fairness Opinion. Harris shall have obtained from its
independent financial advisors an opinion dated within five business days
of the date of the Proxy Statement for the Harris Shareholders' Meeting,
stating that the Merger Consideration to be paid by Harris is fair, from a
financial point of view, to Harris and its shareholders.
10. CONDITIONS TO THE OBLIGATIONS OF FIRST HARRISBURG AND FIRST
FEDERAL. Consummation by First Harrisburg and First Federal of the transactions
contemplated hereby is subject to the following conditions precedent, any of
which, however, may be waived, to the extent permitted by applicable law or
regulation, by the consent in writing of First Harrisburg and First Federal.
(a) Representations and Warranties.
(i) The representations and warranties of Harris and Harris
Acquisition contained herein (A) shall have been true and correct in all
material respects on the date hereof, and (B) other than as disclosed by
Harris to, and approved by, First Harrisburg and First Federal in
writing prior to or at the Closing, shall be true and correct in all
material respects as of the
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Closing, except as otherwise permitted by this Agreement and except as
to any representation or warranty which specifically relates to an
earlier date.
(ii) Harris and Harris Acquisition shall have duly performed or
complied in all material respects with all covenants, not otherwise
waived by First Harrisburg and First Federal in writing, required by
this Agreement to be performed by Harris and Harris Acquisition prior to
or at the Closing.
(iii) First Harrisburg shall have received a certificate of Harris
dated as of the Closing, signed by the President and the Chief Financial
Officer of Harris, certifying in such detail as First Harrisburg may
reasonably request the fulfillment of the conditions set forth in
Sections 10(a)(i) and (ii) above.
(b) Opinion of Counsel. All proceedings and legal details incident to
this Agreement shall be satisfactory to Elias, Matz, Tiernan & Herrick
L.L.P. as special counsel for First Harrisburg, and First Harrisburg shall
have received an opinion reasonably satisfactory to it from Shumaker
Williams, P.C. as special counsel for Harris, dated as of the date of the
Closing and addressed to First Harrisburg to the effect that:
(i) Harris is a Pennsylvania state-chartered stock savings bank and
is organized and validly existing under the laws of the Commonwealth of
Pennsylvania and has the corporate power and authority to execute,
deliver and perform all transactions contemplated by this Agreement.
(ii) The execution, delivery and performance of all transactions
contemplated by the Agreement have been duly authorized by the Board of
Directors of Harris and Harris Acquisition, and do not and will not
violate any of the provisions of, or constitute a default under, or give
any person or party the right to accelerate payment or performance under
the Articles of Incorporation or Bylaws of Harris or Harris Acquisition,
or to such counsel's Actual Knowledge, as defined below, any other
material agreement, document or instrument to which Harris is a party or
by which it or any of its properties or assets is bound.
(iii) The Agreement has been duly authorized, executed and
delivered by Harris and Harris Acquisition and constitutes a valid and
binding obligation of Harris and Harris Acquisition, enforceable against
Harris and Harris Acquisition in accordance with its terms, except as
may be limited by bankruptcy, insolvency, reorganization, moratorium,
conservatorship, receivership or other similar laws now or hereafter in
effect relating to or affecting the enforcement of creditors' rights
generally or the rights of creditors of state chartered savings banks
generally or their holding companies, general equitable principles, and
laws relating to the safety and soundness of insured depository
institutions, and except that no opinion need be expressed as to the
effect or availability of equitable remedies or injunctive relief
(regardless of whether such enforceability is considered in a proceeding
in equity or at law).
(iv) To the Actual Knowledge of such counsel, the execution,
delivery and performance of the Agreement and the transactions
contemplated thereunder by Harris and Harris Acquisition do not violate
any provision of law, regulation, rule, order or decree applicable to
Harris or Harris Acquisition.
(v) All consents and approvals of (and filings with) all federal or
state regulatory agencies or other authorities having jurisdiction over
the transactions contemplated by the Agreement required by law for
Harris and Harris Acquisition to have been obtained or made have been
obtained or made; such opinion to express those agencies or authorities
whose approvals have been obtained or accomplished.
(vi) To the Actual Knowledge of such counsel, there is no action,
suit or proceeding pending or threatened before any federal, state or
local court or government authority or before any arbitration tribunal
which seeks to modify, enjoin or prohibit or otherwise
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adversely and materially affect the transactions contemplated by the
Agreement that, if determined adversely to Harris and Harris
Acquisition, would have a material and adverse effect upon the ability
of Harris and Harris Acquisition to consummate the Merger.
The opinion of Shumaker Williams, P.C. shall be governed by the Legal
Opinion Accord ('Accord') of the American Bar Association Section of Business
Law (1991). The term 'Actual Knowledge' as used herein shall have the meaning
set forth in the Accord. In addition, such opinion may be limited to present
statutes, regulation, rulings, and formal agency and judicial interpretations
and to facts as they presently exist; in rendering such opinion, such counsel
need assume no obligation to revise or supplement it should the present laws be
changed by legislation or regulatory action, judicial decision or otherwise,
after such opinion has been rendered. Such counsel may assume that any agreement
is the valid and binding obligation of any Parties to such agreement, other than
Harris or Harris Acquisition. In giving such opinion, such counsel may rely as
to all matters of fact on certificates of officers or directors of Harris and
Harris Acquisition and certificates of public officials. Such counsel's opinion
shall be limited to matters governed by federal laws and by the laws of the
Commonwealth of Pennsylvania.
(c) Suit, Action, Etc. No suit, action or other proceeding shall be
pending or directly threatened by any federal, state or other governmental
agency, commission or authority having jurisdiction or authority over First
Harrisburg, any First Harrisburg Subsidiary, Harris or Harris Acquisition,
or by any other person, in which it is sought to restrain or prohibit
consummation of the transactions contemplated by this Agreement.
(d) Deposit into Payment Fund. On or prior to the Effective Date,
Harris Acquisition shall have deposited cash into the Payment Fund in an
amount sufficient to enable Harris and Harris Acquisition to satisfy their
obligations to pay the Aggregate Merger Consideration under this Agreement.
(e) First Harrisburg Fairness Opinion. First Harrisburg shall have
obtained from its independent financial advisors an opinion dated within
five business days of the date of the Proxy Statement for the First
Harrisburg Shareholders' Meeting stating that the Merger Consideration to
be received by the holders of First Harrisburg Common Stock is fair from a
financial point of view.
11. TERMINATION OF AGREEMENT. This Agreement may be terminated at any time
prior to the Effective Date, whether before or after its approval and adoption
by the shareholders of First Harrisburg and Harris, only if one or more of the
following events shall occur:
(a) By any party to the Agreement, if the Closing shall not have
occurred on or before October 31, 1996, unless the failure to so consummate
by such time is due to the breach of this Agreement by the Party seeking to
terminate, or such later date as shall have been agreed to by the Parties
hereto (the 'Termination Date').
(b) At any time by the mutual written agreement of the Parties hereto.
(c) Immediately upon the expiration of thirty (30) days from the date
that Harris or Harris Acquisition has given notice to First Harrisburg of
First Harrisburg's or First Federal's material misrepresentation or breach
of any warranty or representation or breach in any material respect,
individually or collectively, of any covenant or agreement herein;
provided, however, that no such termination shall take effect unless it is
reasonably evident that First Harrisburg or First Federal cannot or will
not fully and completely correct the grounds for termination as specified
in the aforementioned notice on or before the date of Closing.
(d) Immediately upon the expiration of thirty (30) days from the date
that First Harrisburg or First Federal has given notice to Harris of
Harris' or Harris Acquisition's material misrepresentation or breach of any
warranty or representation or breach in any material respect, individually
or collectively, of any covenant or agreement herein; provided, however,
that no such termination shall take effect unless it is reasonably evident
that Harris or Harris Acquisition
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cannot or will not fully and completely correct the grounds for termination
as specified in the aforementioned notice on or before the date of Closing.
(e) By Harris and Harris Acquisition or First Harrisburg and First
Federal, by a vote of a majority of the members of their respective Boards
of Directors, if the shareholders of First Harrisburg or Harris fail to
approve this Agreement.
(f) If any Party has been informed in writing by the OTS, the FDIC,
the Banking Department, the Federal Reserve or any other required
regulatory authority that a required approval or consent will not be
granted and the time period for all appeals and reconsideration has
expired.
12. EXPENSES.
(a) Each Party hereto will bear all expenses incurred by it in
connection with this Agreement and the transactions contemplated hereby,
except printing expenses which shall be shared, based on each Party's
proportionate cost associated with the solicitation of each Party's
respective shareholders. In the event of termination of this Agreement
pursuant to Section 11, this Agreement shall thereafter become void and
there shall be no liability on the part of any Party hereto or on their
respective officers or directors, except as provided in Sections 12(b) and
13 hereof, and except that any such termination shall be without prejudice
to the rights of any Party hereto arising out of the willful breach of any
covenant or willful misrepresentation contained in this Agreement by any
other Party hereto.
(b) In the event any Party shall willfully default in its obligations
hereunder, any non-defaulting Party may pursue any remedy available at law
or in equity to enforce its rights and shall be paid by the defaulting
Party for all damages (except consequential damages), costs and expenses,
including legal, accounting, investment banking, printing and mailing
expenses, incurred or suffered by the non-defaulting Party in connection
herewith or in the enforcement of its rights hereunder. Negligent
misrepresentations or omissions of information that are immaterial to this
Agreement shall provide no basis for terminating or rescinding this
Agreement.
13. CONFIDENTIALITY. Any non-public or confidential information disclosed
by either First Harrisburg (including any First Harrisburg Subsidiary) or by
Harris to the other Parties pursuant to this Agreement or as a result of the
discussions and negotiations leading to this Agreement or otherwise, or to which
any Party has acquired or may acquire access pursuant to which the disclosing
Party indicates (either expressly, in writing or orally, or by the context of
the disclosure or access) that such information is non-public or confidential
shall be kept strictly confidential and shall not be used in any manner by the
recipient except in connection with the transactions contemplated by this
Agreement. To that end, the Parties hereto will each, to the maximum extent
practicable, restrict knowledge of and access to non-public or confidential
information of the other Party to its officers, directors, employees and
professional advisors who are directly involved in the transactions contemplated
hereby and who reasonably need to know such information. Further to that end,
all non-public or confidential documents (including all copies thereof) obtained
hereunder by any Party shall be returned as soon as practicable after receiving
a request from the other Party following any termination of this Agreement.
14. SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ETC. Except for the
provisions of Sections 1, 13 and 15 hereof, no representation, warranty or
covenant of any Party contained in this Agreement, or in any exhibit,
certificate or other instrument referred to in this Agreement and which is
delivered or made pursuant to this Agreement (or in connection with any
transaction contemplated by this Agreement) shall survive the Closing.
15. CERTAIN POST-MERGER AGREEMENTS. The Parties hereto agree that:
(a) Employees.
(i) Immediately prior to or as of the Effective Date, First
Harrisburg shall terminate all qualified employee pension, profit
sharing and stock bonus plans (including its Employee Stock Ownership
Plan) and all employees of First Harrisburg and the First Harrisburg
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Subsidiaries will, to the extent provided by the relevant plan and by
law, become fully vested in and eligible to receive benefits under all
such plans of First Harrisburg and the First Harrisburg Subsidiaries and
such plans will be fully funded prior to termination. First Harrisburg
shall distribute all vested accrued benefits as soon as reasonably
practicable following such termination and shall obtain such regulatory
determinations as may be appropriate to ensure the qualified status of
such plans pursuant to Section 401(a) of the Code upon termination.
Harris and Harris Acquisition shall have no liability under such plans.
(ii) Former First Harrisburg, First Federal or First Harrisburg
subsidiary employees who become employed by Harris immediately following
the Effective Date, shall be entitled to participate in those
hospitalization, medical, life and disability benefit plans provided by
Harris for its employees in accordance with the terms of those plans.
Former employees of First Harrisburg or any of the First Harrisburg
Subsidiaries who become employed by Harris on the Effective Date shall,
to the extent permissible in accordance with the provisions of the
applicable plan, insurance policies, contract and underlying law,
receive service credit from their hire date for employment at First
Harrisburg or the First Harrisburg Subsidiaries for purposes of
eligibility to participate in the above plans provided by Harris.
(iii) Upon the Effective Date, former First Harrisburg or First
Harrisburg Subsidiary employees who become employed by Harris will be
entitled to participate, pursuant to the terms of the applicable plan,
in the qualified pension, profit sharing and stock bonus plans in effect
at such time for employees of Harris. Former employees of First
Harrisburg and the First Harrisburg Subsidiaries who become employed by
Harris on the Effective Date shall receive service credit from their
hire date for employment at First Harrisburg or the First Harrisburg
Subsidiaries for purposes of eligibility and vesting requirements under
Harris' retirement savings plan and defined benefit pension plan and
service credit from the Effective Date for purposes of benefit
calculation under Harris' defined benefit pension plan.
(iv) Pre-existing condition requirements for health, life,
disability and other benefits and any insurance waiting period will be
waived only for those former First Harrisburg or First Harrisburg
Subsidiary employees offered employment with Harris to the extent that
Harris' benefit plans, insurance policies or programs would permit the
same without a material increase in Harris' premiums or costs associated
therewith.
(v) Nothing in this Agreement shall obligate or require Harris to
hire or employ any First Harrisburg, First Federal, or First Harrisburg
Subsidiary employee on or after the Effective Date.
(vi) As provided herein, Harris will provide or allow severance
payments to employees of First Harrisburg and the First Harrisburg
Subsidiaries (other than employees whose severance benefits are provided
for in written employment agreements) whose employment is terminated
(other than for cause) on or after the Effective Date and before the
expiration of six months following the Effective Date, in the amount
equal to one week's pay for each year of service with First Harrisburg
or a First Harrisburg Subsidiary, up to a maximum of 26 weeks. In
computing such severance payments for non-exempt, full time employees,
overtime and bonus are excluded. In computing such severance payments
for non-exempt regular part-time employees, the weekly compensation
shall be based on one-fifty-second ( 1/52) of the employee's total
salary, excluding overtime and bonus, paid in 1995. For full time exempt
employees, weekly compensation is calculated by taking 1/52 of the
employee's 1995 annual salary, excluding bonus.
(b) Existing Employment Agreements. Harris will allow First
Harrisburg to honor the termination provisions of the employment contracts
with the following persons: J. Frederick Redslob and Stephen J. Carroll.
(c) Board of Directors of Harris. Upon consummation of all of the
transactions contemplated by this Agreement, and subject to receipt of any
required regulatory approvals,
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Harris will appoint Bruce S. Isaacman to its Board of Directors for a
term expiring at the annual shareholders' meeting to be held in April
1997.
(d) Directors' Retirement Plan. Harris will honor the terms of First
Federal's Non-Employee Directors' Retirement Plan. However, under no
circumstances shall Harris' obligations under such Plan exceed $470,000.
(e) Deferred Compensation Agreements. Harris will honor the terms of
First Federal's Deferred Compensation Agreements with Messrs. Trewhella,
Aronson, Isaacman and Kessler and Mrs. Graham and First Federal's Deferred
Compensation Trust Agreement with an independent trustee dated October 16,
1992, as amended. However, under no circumstances shall Harris' obligations
under such agreements exceed the amounts deferred on or prior to the
Effective Date and the investment returns on such amounts deferred.
(f) Indemnification and Insurance. On and after the Effective Date
and for a period ending six years thereafter, Harris shall indemnify,
defend and hold harmless all former and then-existing directors, officers,
employees and agents of First Harrisburg or of any of First Harrisburg
Subsidiary against all losses, claims, damages, costs, expenses,
liabilities or judgments or amounts that are paid in settlement (with the
approval of Harris, which approval shall not be unreasonably withheld) or
in connection with any claim, action, suit, proceeding or investigation
based in whole or in part on or arising in whole or in part out of the fact
that such person is or was a director, officer, employee or agent of First
Harrisburg or any First Harrisburg Subsidiary, whether pertaining to any
matter existing or occurring at or prior to the Effective Date and whether
asserted or claimed prior to, or at or after, the Effective Date to the
same extent as such officer, director, employee or agent would be entitled
to indemnification by First Harrisburg or any First Harrisburg Subsidiary
as of the date hereof including the right to advancement of expenses,
provided, however, that any such officer, director, employee or agent of
First Harrisburg may be indemnified by Harris only to the extent permitted
by applicable law and to the extent permitted by Harris' Articles of
Incorporation and By-laws. In addition, Harris shall use commercially
reasonable efforts to obtain and maintain a directors' and officers'
liability insurance tail coverage policy with respect to the directors and
officers of First Harrisburg and the First Harrisburg Subsidiaries relating
to periods prior to the Effective Date and for a period ending two years
thereafter.
(g) After approval of this Agreement, the Merger Agreement and the
transactions contemplated hereby by the First Harrisburg Shareholders at
the First Harrisburg Shareholders Meeting and at or immediately prior to
the Effective Date, First Harrisburg and First Federal shall make
reasonable writedowns, charge offs, adjustments and expense payments that
Harris may reasonably request.
16. ENTIRE AGREEMENT. This Agreement, the Merger Agreement, and all
exhibits, agreements and schedules attached hereto, as well as any other
document if signed by the Parties hereto and specifically providing that it is
an exception to the limitations contained in this Section, embody the entire
agreement among the Parties hereto with respect to the matters agreed to herein,
and, except as expressly provided herein, this Agreement shall not be affected
by reference to any other document except for any such document (an 'Addendum')
signed by the duly authorized representatives of the Parties hereto and
specifically providing that it is an exception to the limitations contained in
this Section 16. All prior negotiations, discussions and agreements by and among
the Parties hereto with respect to matters agreed to in this Agreement, the
Merger Agreement, the First Harrisburg Plan of Liquidation and the First Federal
Merger or the exhibits or schedules hereto, are hereby superseded and shall have
no force or effect.
17. PUBLICITY. The content and timing of all publicity and announcements
concerning this Agreement, and all transactions contemplated by this Agreement,
shall be subject to joint consultation and approval of the Parties hereto,
subject, however, to the legal obligations applicable to public companies.
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<PAGE>
18. AMENDMENT AND WAIVER. Neither this Agreement, nor any term, covenant,
condition or other provision hereof, may be amended, modified, supplemented,
waived, discharged or terminated except by a document in writing signed by
responsible officers and duly authorized by the respective boards of directors
of the Parties hereto; provided, however, that after approval and adoption of
this Agreement, the Merger Agreement and the transactions contemplated thereby
by the shareholders of First Harrisburg, no amendment, modification or
supplement shall reduce the amount of Merger Consideration to be delivered to
shareholders of First Harrisburg as contemplated by this Agreement, except in
each case to the extent that the First Harrisburg shareholders consent to such
amendment, modification or supplement in accordance with applicable federal and
state law.
19. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania except to the
extent that federal law is controlling.
20. COMMUNICATIONS. All notices, claims, requests, demands, consents and
other communications which are required or permitted to be given hereunder shall
be in writing and shall be deemed to have been duly given if hand delivered,
sent by recognized overnight delivery service, sent by certified or registered
mail, postage prepaid, return receipt requested, or by confirmed telecopy as
follows:
(a)If to Harris, to:
Mr. William J. McLaughlin
President and CEO
HARRIS SAVINGS BANK
Second and Pine Streets
Harrisburg, Pennsylvania 17101
or to such other person or place as shall be designated to First Harrisburg in
writing, and with a copy to:
Nicholas Bybel, Jr., Esquire
SHUMAKER WILLIAMS, P.C.
3425 Simpson Ferry Road
Camp Hill, Pennsylvania 17011
(b) If to First Harrisburg or First
Federal, to:
Mr. Patrick J. Aritz
President
FIRST HARRISBURG BANCOR, INC.
234 N. 2nd Street
P. O. Box 1111
Harrisburg, Pennsylvania 17108-1111
or to such other person or place as shall be designated to Harris in writing,
and with a copy to:
Gerald F. Heupel, Jr., Esquire
ELIAS, MATZ, TIERNAN & HERRICK L.L.P.
734 15th Street, N.W., 12th Floor
Washington, DC 20005
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<PAGE>
Any such notice or other communication so addressed shall be deemed to have been
received by the addressee (i) if hand-delivered or sent by overnight delivery,
on the next business day following the date so delivered or sent, (ii) if sent
by registered or certified mail, five (5) business days following the date sent,
or (iii) if sent by telecopy, upon verbal telephone confirmation of receipt
thereof by an individual authorized to accept telecopy communications at the
above-specified telecopy number as of the date of such receipt or confirmation.
21. SUCCESSORS AND ASSIGNS. The rights and obligations of the Parties
hereto shall inure to the benefit of and shall be binding upon the successors
and assigns of each of them; provided, however, that neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by any
Party hereto without the prior written consent of the other Party.
22. HEADINGS, ETC. The headings of the Sections and Subsections of this
Agreement have been inserted for convenience only and shall not be deemed to be
a part of this Agreement.
23. SEVERABILITY. In the event that any one or more provisions of this
Agreement shall for any reason be held invalid, illegal or unenforceable in any
respect, by any court of competent jurisdiction, such invalidity, illegality or
unenforceability shall not affect any other provisions of this Agreement and the
Parties shall use their best efforts to substitute a valid, legal and
enforceable provision which, insofar as practicable, implements the purposes and
intents of this Agreement.
24. NO THIRD PARTY BENEFICIARY. Except as expressly provided for herein,
including but not limited to Section 15 hereof, nothing in this Agreement is
intended to confer upon any person who is not a Party hereto any rights or
remedies of any nature whatsoever under or by reason of this Agreement.
25. COUNTERPARTS. To facilitate execution, this Agreement may be executed
in as many counterparts as may be required; and it shall not be necessary that
the signatures of, or on behalf of, each Party, or that the signatures of all
persons required to bind any Party, appear on each counterpart; but it shall be
sufficient that the signature of, or on behalf of, each Party, or that the
signatures of the persons required to bind any Party, appear on one or more of
the counterparts. All counterparts shall collectively constitute a single
agreement. It shall not be necessary in making proof of this Agreement to
produce or account for more than a number of counterparts containing the
respective signatures of, or on behalf of, all of the Parties hereto.
26. FURTHER ASSURANCES. Each Party will execute and deliver such
instruments and take such other actions as the other Party hereto may reasonably
request in order to carry out the intent and purposes of this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the Parties hereto, intending to be legally bound
hereby, have caused this Agreement to be duly executed, as of the date set forth
above.
<TABLE>
<S> <C>
ATTEST: HARRIS SAVINGS BANK
By: /s/BERNARD H. SARFERT, SR. By: /s/WILLIAM J. MCLAUGHLIN
---------------------------------- --------------------------------
Bernard H. Sarfert, Sr., Secretary William J. McLaughlin, President
and Chief Executive Officer
ATTEST: HARRIS ACQUISITION CORPORATION
By: By:
---------------------------------- --------------------------------
Bernard H. Sarfert, Sr., Secretary William J. McLaughlin, President
and Chief Executive Officer
ATTEST: FIRST HARRISBURG BANCOR, INC.
By: /s/J. FREDERIC REDSLOB By: /s/PATRICK J. ARITZ
---------------------------------- --------------------------------
J. Frederic Redslob, Secretary Patrick J. Aritz, President and
and Chief Executive Officer
</TABLE>
A-38
<PAGE>
LIST OF EXHIBITS
<TABLE>
<S> <C>
EXHIBIT 1 AGREEMENT AND PLAN OF MERGER OF HARRIS ACQUISITION CORPORATION WITH AND INTO FIRST HARRISBURG
BANCOR, INC.
EXHIBIT 2 FIRST HARRISBURG BANCOR, INC. PLAN OF LIQUIDATION AND DISSOLUTION
EXHIBIT 3 AGREEMENT AND PLAN OF MERGER OF FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF HARRISBURG WITH
AND INTO HARRIS SAVINGS BANK
EXHIBIT 4 INVESTMENT AGREEMENT
</TABLE>
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<PAGE>
EXHIBIT 1
AGREEMENT AND PLAN OF MERGER
OF
HARRIS ACQUISITION CORPORATION
WITH AND INTO
FIRST HARRISBURG BANCOR, INC.
THIS AGREEMENT AND PLAN OF MERGER is dated as of November 12, 1995, between
HARRIS ACQUISITION CORPORATION ('Harris Acquisition'), a Pennsylvania
corporation recently formed pursuant to the Pennsylvania Business Corporation
Law of 1988, as amended (the 'BCL') and the authority granted under the
Pennsylvania Banking Code of 1965, as amended, for the sole purpose of effecting
the Merger, as defined below, and FIRST HARRISBURG BANCOR, INC., a Pennsylvania
corporation ('First Harrisburg').
WITNESSETH:
WHEREAS, Harris Acquisition and First Harrisburg are parties to an
Agreement and Plan of Reorganization of even date herewith (the 'Reorganization
Agreement') which provides, among other things, for the merger of Harris
Acquisition and First Harrisburg (the 'Merger');
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and in the Reorganization Agreement, and for the purpose of
stating the method, terms and conditions of the Merger, including the rights of
the shareholders of First Harrisburg, and such other details and provisions as
are deemed desirable, the parties hereto, intending to be legally bound hereby,
agree as follows:
1. The Merger. Subject to the terms and conditions of this Agreement
and the Reorganization Agreement, on the Effective Date (which term, as
used herein, is defined in Section 1(b) of the Reorganization Agreement),
Harris Acquisition shall be merged with and into First Harrisburg, which
shall survive the Merger (the 'Surviving Corporation').
2. Articles of Incorporation. The Articles of Incorporation of First
Harrisburg as in effect immediately prior to the Effective Date shall be
the Articles of Incorporation of the Surviving Corporation.
3. Bylaws. The Bylaws of First Harrisburg as in effect immediately
prior to the Effective Date shall be the Bylaws of the Surviving
Corporation.
4. Conversion of Shares. The shares of First Harrisburg common stock,
$.01 par value per share (collectively the 'Shares'), shall be converted in
accordance with the terms set forth in Section 1(c) of the Reorganization
Agreement.
5. Surrender and Exchange of First Harrisburg Certificates. The
certificates underlying the Shares shall be surrendered and exchanged for
consideration in the manner set forth in Section 1(f) of the Reorganization
Agreement.
6. Board of Directors and Officers. The Directors and Officers of
Harris Acquisition as in effect immediately prior to the Effective Date
shall constitute the Directors and Officers of the Surviving Corporation on
and immediately after the Effective Date.
7. Dissenters' Rights of First Harrisburg Shareholders. The rights
and remedies of a dissenting shareholder as set forth in Subchapter D of
Chapter 15 of the BCL shall be afforded to any holder of First Harrisburg
Common Stock who objects to the Merger and who takes the necessary steps to
perfect the rights of a dissenting shareholder.
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<PAGE>
8. Termination and Amendment. Notwithstanding prior approval by the
shareholders of First Harrisburg, this Agreement may be modified or
terminated including for the reason that the Reorganization Agreement is
modified or terminated as provided for therein. In the event there is a
termination after the delivery of Articles of Merger to the Pennsylvania
Department of State, the parties shall execute and file with the
Pennsylvania Department of State, prior to the Effective Date, a statement
of termination pursuant to Section 1902 of the BCL.
9. Agreement Conditional Upon Consummation of Reorganization
Agreement. This Agreement and the transactions contemplated hereunder are
conditioned upon the consummation of the Reorganization Agreement.
10. Counterparts; Headings. This Agreement may be executed in several
counterparts, and by the parties hereto on separate counterparts, each of
which will constitute an original. The headings and captions contained
herein are for reference purposes only and do not constitute a part hereof.
11. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, by their officers thereunto duly authorized, have executed this
Agreement as of the day and year first above written.
<TABLE>
<S> <C>
[CORPORATE SEAL]
ATTEST: FIRST HARRISBURG BANCOR, INC.
By: /s/J. FREDERIC REDSLOB By: /s/PATRICK J. ARITZ
---------------------------------- --------------------------------
J. Frederic Redslob, Secretary Patrick J. Aritz, President and
Chief Executive Officer
[CORPORATE SEAL]
ATTEST: HARRIS ACQUISITION CORPORATION
By: By:
---------------------------------- --------------------------------
Bernard H. Sarfert, Sr., Secretary William J. McLaughlin, President
and Chief Executive Officer
</TABLE>
1-2
<PAGE>
EXHIBIT 2
(FORM OF)
FIRST HARRISBURG BANCOR, INC.
PLAN OF LIQUIDATION AND DISSOLUTION
THIS PLAN OF LIQUIDATION AND DISSOLUTION is made as of this 12th day of
November, 1995, by and between FIRST HARRISBURG BANCOR, INC., a Pennsylvania
corporation ('First Harrisburg'), and its parent and sole shareholder, HARRIS
SAVINGS BANK, a Pennsylvania stock savings bank ('Harris').
WHEREAS, First Harrisburg and Harris desire and intend to voluntarily
effectuate the complete liquidation and dissolution (including making adequate
provisions for the liabilities of First Harrisburg) of First Harrisburg pursuant
to Chapter 19, Subchapter F of the Pennsylvania Business Corporation Law of
1988, as amended (the 'BCL') and Section 332 of the Internal Revenue Code, as
amended (the 'Code'), on the terms and conditions set forth herein;
WHEREAS, Harris is the sole shareholder of First Harrisburg; and
WHEREAS, as the sole shareholder of First Harrisburg, Harris wishes to
approve, authorize and consent to the voluntary dissolution of First Harrisburg
in accordance with the requirements set forth in the BCL and the provisions
hereof.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and intending to be legally bound hereby, the parties agree as
follows:
1. Harris hereby:
(a) approves, authorizes and consents to the voluntary dissolution
of First Harrisburg, such dissolution to be effected in accordance with
the terms and conditions of this Plan and as promptly as possible after,
but conditioned upon effectiveness of, the merger (the 'Merger') of
Harris Acquisition Corporation, a former Pennsylvania corporation and
former wholly owned subsidiary of Harris, with and into First
Harrisburg;
(b) authorizes the officers of First Harrisburg to file on behalf
of First Harrisburg and its sole shareholder a Consent of Shareholder to
Dissolution, with the Commonwealth of Pennsylvania, Department of State;
and
(c) resolves that after the payment of or other provision for the
debts and other obligations of First Harrisburg, the officers of First
Harrisburg shall distribute all of the remaining assets of First
Harrisburg to Harris, or as otherwise directed by Harris, in complete
cancellation or redemption of all of the First Harrisburg capital stock
issued and outstanding, such distribution to be made as promptly as
practicable after the Merger.
2. As soon as practicable after the Merger but in no event later than
thirty (30) days following the Merger, the officers and directors of First
Harrisburg shall ensure that First Harrisburg:
(a) ceases doing business as a going concern;
(b) proceeds to collect its assets and conveys and disposes of such
of its remaining assets not otherwise distributed in kind to Harris as
the sole shareholder of First Harrisburg;
(c) proceeds to pay, satisfy or discharge First Harrisburg's
liabilities and obligations or makes and does all other acts required to
wind up the business affairs of First Harrisburg pursuant to Chapter 19
of the BCL and all other applicable law; and
(d) distributes to Harris, or as otherwise directed by Harris as
the sole shareholder of First Harrisburg, after the satisfaction of its
debts and other obligations, all of the remaining
2-1
<PAGE>
assets, surplus and properties of First Harrisburg, if any, in complete
liquidation of First Harrisburg pursuant to Chapter 19 of the BCL, and
all other applicable laws, within the time period specified herein and
in accordance with the terms and conditions set forth herein.
3. All appropriate, necessary and proper officers of First Harrisburg
are authorized, empowered and directed to draft, execute and file all
documents, forms, papers, notifications, and applications which are
necessary, proper and otherwise required by law to effectuate the complete
liquidation and dissolution of First Harrisburg, including but not limited
to Articles of Dissolution, informational returns on U.S. Treasury
Department Forms 966, 1096 and 1099L, and any final federal, state and
local income tax returns for First Harrisburg as may be required and to
conform with the provisions of the BCL and the Code.
4. All appropriate, necessary and proper officers of First Harrisburg
are authorized, empowered and directed to approve and adopt all
resolutions, and to undertake all necessary, desirable, and proper actions
for the purposes of carrying out the intent of this Plan and effectuating
the complete liquidation and dissolution of the assets, and winding up of
the business and affairs of First Harrisburg, including such acts as, in
the opinion of counsel for Harris, may be necessary and proper to conform
with the provisions of Chapter 19 of the BCL and Section 332 of the Code.
5. This Plan contains the entire agreement between the parties with
respect to the subject matter hereof and supersedes all prior agreements,
written or oral, with respect hereto.
6. This Plan shall be governed by the laws of the Commonwealth of
Pennsylvania.
7. This Plan may be executed in any number of counterparts, and each
such counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.
IN WITNESS WHEREOF, this Plan has been executed by the duly authorized
officers as of the day and year first above written.
<TABLE>
<S> <C>
[SEAL]
ATTEST: FIRST HARRISBURG BANCOR, INC.
By: /s/J. FREDERIC REDSLOB By: /s/PATRICK J. ARITZ
---------------------------------- --------------------------------
J. Frederic Redslob, Secretary Patrick J. Aritz, President and
Chief Executive Officer
[SEAL]
ATTEST: HARRIS SAVINGS BANK
By: /s/BERNARD H. SARFERT, SR. By: /s/WILLIAM J. MCLAUGHLIN
---------------------------------- --------------------------------
Bernard H. Sarfert, Sr., Secretary William J. McLaughlin, President
and Chief Executive Officer
</TABLE>
2-2
<PAGE>
EXHIBIT 3
AGREEMENT AND PLAN OF MERGER
OF
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF HARRISBURG
WITH AND INTO
HARRIS SAVINGS BANK
THIS AGREEMENT AND PLAN OF MERGER is dated as of November 12, 1995, between
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF HARRISBURG, a federal savings and
loan association ('First Federal') and HARRIS SAVINGS BANK, a Pennsylvania
state-chartered stock savings bank ('Harris') (the 'Agreement').
WITNESSETH:
WHEREAS, First Federal and Harris are parties to an Agreement and Plan of
Reorganization dated November 12, 1995 (the 'Reorganization Agreement'), which
contemplates, among other things, the merger of First Federal with and into
Harris;
WHEREAS, First Harrisburg Bancor, Inc., a former Pennsylvania corporation
and the former parent holding company of First Federal ('First Harrisburg') has,
pursuant to the Reorganization Agreement, entered into an Agreement and Plan of
Merger of Harris Acquisition Corporation with and into First Harrisburg in which
Harris Acquisition Corporation, a Pennsylvania corporation and wholly owned
subsidiary of Harris ('Harris Acquisition'), was merged with and into First
Harrisburg (the 'Merger');
WHEREAS, First Harrisburg has, pursuant to the Reorganization Agreement,
entered into the First Harrisburg Bancor, Inc. Plan of Liquidation and
Dissolution pursuant to which, immediately following the Merger, First
Harrisburg will be liquidated and dissolved (the 'First Harrisburg Plan of
Liquidation').
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and in the Reorganization Agreement and for the purpose of
stating the method, terms and conditions of the merger of First Federal with and
into Harris, the parties hereto, intending to be legally bound hereby, agree as
follows:
1. The First Federal Merger. Subject to the terms and conditions of
this Agreement, the Reorganization Agreement, the provisions of the
Pennsylvania Business Corporation Law of 1988, as amended and the
Pennsylvania Banking Code of 1965, as amended and as soon as practicable
after effectiveness of the Merger and the First Harrisburg Plan of
Liquidation, First Federal shall be merged with and into Harris with Harris
surviving such merger (the 'First Federal Merger').
2. Articles of Incorporation. The Articles of Incorporation of Harris
as in effect immediately prior to the First Federal Merger shall be the
Articles of Incorporation of Harris following the First Federal Merger.
3. Bylaws. The Bylaws of Harris as in effect immediately prior to the
First Federal Merger shall be the Bylaws of Harris following the First
Federal Merger.
4. Conversion of Shares. Upon effectiveness of the First Federal
Merger, all of the shares of First Federal common stock outstanding shall
be immediately thereafter cancelled.
5. Effect of First Federal Merger. Upon effectiveness of the First
Federal Merger, Harris shall succeed without further act or deed, to all of
the remaining property, rights, powers, duties and obligations of First
Federal then remaining.
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<PAGE>
6. Board of Directors and Officers. The directors and officers of
Harris as in office immediately prior to effectiveness of the First Federal
Merger shall be the directors and officers of Harris immediately after
effectiveness of the First Federal Merger.
7. Agreement Conditional Upon Consummation of Reorganization
Agreement. This Agreement and the transactions contemplated hereunder are
conditioned upon the consummation of the Reorganization Agreement.
8. Further Assurances. If at any time Harris shall consider or be
advised that any further assignment, conveyance or assurance is necessary
or desirable to vest, perfect or confirm in Harris following effectiveness
of the First Federal Merger title to any property or rights of First
Federal, the proper officers and directors of First Federal immediately
prior to effectiveness of the First Federal Merger shall execute and
deliver on behalf of Harris any and all proper assignment, conveyance or
assurance and do all things necessary or desirable to vest, perfect or
confirm title to such property or rights in Harris upon effectiveness of
the First Federal Merger.
9. Shareholder Approval. This Agreement shall be approved and adopted
by Harris as the sole shareholder of First Federal and by the shareholders
of Harris which latter approval shall be an integral part of the approval
of the Merger by the shareholders of Harris.
10. Termination and Amendment. Notwithstanding prior approval by the
shareholders of First Federal and Harris, this Agreement may be modified or
terminated, including for the reason that the Reorganization Agreement is
modified or terminated as provided for therein. In the event there is a
termination after the delivery of Articles of Merger to the Pennsylvania
Department of State, the parties shall execute and file with the
Pennsylvania Department of State prior to effectiveness of the First
Federal Merger, a statement of termination pursuant to the provisions of
the Pennsylvania Business Corporation Law of 1988, as amended.
11. Counterparts; Headings. This Agreement may be executed in several
counterparts, and by the parties hereto on separate counterparts, each of
which shall constitute an original. The headings and captions contained
herein are for reference purposes only and do not constitute a part hereof.
12. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby by their officers thereunto duly authorized, have executed this Agreement
as of the day and year first above written.
<TABLE>
<S> <C>
[SEAL]
ATTEST: FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HARRISBURG
By: ---------------------------------- By: -------------------------------
J. Frederic Redslob, Secretary Patrick J. Aritz, President and
Chief Executive Officer
[SEAL]
ATTEST: HARRIS SAVINGS BANK
By: ---------------------------------- By: -------------------------------
Bernard H. Sarfert, Sr., Secretary William J. McLaughlin, President
and Chief Executive Officer
</TABLE>
3-2
<PAGE>
EXHIBIT 4
INVESTMENT AGREEMENT
THIS AGREEMENT is dated as of November 12, 1995 (the 'Agreement') between
HARRIS SAVINGS BANK ('Harris') and FIRST HARRISBURG BANCOR, INC. (the
'Corporation'),
WITNESSETH:
WHEREAS, Harris and the Corporation have, simultaneously with executing
this Agreement, entered into an Agreement and Plan of Reorganization dated as of
the date hereof (the 'Plan'); and
WHEREAS, as a condition to Harris' entry into the Plan and in consideration
of such entry, the Corporation has agreed to issue to Harris, on the terms and
conditions set forth herein, warrants entitling Harris to purchase up to an
aggregate of 580,674 shares (the 'Shares') of the Corporation's common stock,
par value $.01 per share (the 'Common Stock');
NOW, THEREFORE, in consideration of the execution of the Plan and the
agreements herein contained, Harris and the Corporation agree as follows:
1. Concurrently with the execution of the Plan and this Agreement, the
Corporation shall issue to Harris a warrant or warrants in the form of
Attachment A hereto (the 'Warrant', which term as used herein shall include
any warrants issued upon transfer or exchange of the original Warrant or
pursuant to Section 7 of this Agreement) to purchase up to 580,674 shares
of Common Stock. Each Warrant shall be exercisable at a price per Share of
$11.875, subject to adjustment as therein provided (the 'Exercise Price').
So long as the Warrant is outstanding and unexercised, the Corporation
shall at all times maintain and reserve, free from preemptive rights, such
number of authorized but unissued or treasury shares of Common Stock as may
be necessary so that the Warrant may be exercised without additional
authorization of Common Stock after giving effect to all other options,
warrants, convertible securities and other rights to acquire shares of
Common Stock at the time outstanding. The Corporation represents and
warrants that it has duly authorized the issuance of the Shares upon
exercise of the Warrant and covenants that the Shares issued upon exercise
of the Warrant shall be duly authorized, validly issued, and upon payment
of the Exercise Price, fully paid and nonassessable and subject to no
preemptive rights. The Warrant and the Shares are hereinafter collectively
referred to, from time to time, as the 'Securities'.
So long as the Warrant is owned by Harris, in no event shall Harris
exercise the Warrant for a number of shares of Common Stock which, when
added to the number of shares of Common Stock owned or controlled by Harris
(otherwise than in a fiduciary capacity), would result in Harris owning or
controlling (otherwise than in a fiduciary capacity) more than 19.9 percent
of the shares of Common Stock issued and outstanding immediately after
giving effect to such exercise.
2. Subject to the terms and conditions hereof, Harris may exercise the
Warrant, in whole or in part, upon: (i) a willful breach of the Plan by the
Corporation which would permit termination of the Plan by Harris, provided
that such breach shall not have been cured prior to an exercise of the
Warrant; (ii) the failure of the Corporation's shareholders to approve the
Plan at a meeting called for such purpose after the announcement by any
person (other than Harris or any of its subsidiaries or affiliates) of an
offer or proposal to acquire 15 percent or more of the Common Stock, or to
acquire, merge or consolidate with the Corporation or First Federal Savings
and Loan Association of Harrisburg (the 'Association') or to purchase or
acquire all or substantially all of the Corporation's assets, or all or
substantially all of the Association's assets; (iii) the acquisition by any
person (other than Harris or any of its subsidiaries or affiliates) of
beneficial ownership of 15 percent or more of the Common Stock, exclusive
of shares of Common Stock sold directly or indirectly to such person by
Harris; (iv) any person (other than Harris or any of its subsidiaries or
affiliates) shall have commenced a tender or exchange offer, or shall have
filed an application
4-1
<PAGE>
with an appropriate bank regulatory authority with respect to a publicly
announced offer, to purchase or acquire securities of the Corporation such
that, upon consummation of such offer, such person would own, control or
have the right to acquire 15 percent or more of the Common Stock (before
giving effect to any exercise of the Warrant); or (v) the Corporation shall
have entered into an agreement or other understanding with a person (other
than Harris or any of its subsidiaries or affiliates) for such person to
acquire, merge or consolidate with the Corporation or to purchase or
acquire all or substantially all of the Association's assets. This
Agreement and Harris' right to exercise the Warrant shall terminate and be
of no further effect, except as to notices of exercise given prior thereto,
upon termination of the Warrant as provided in Section 7 thereof. As used
in this Section 2, 'person' and 'beneficial ownership' shall have the same
meanings conferred thereon by Section 13(d) of the Securities Exchange Act
of 1934, as amended, and the regulations promulgated thereunder.
Notwithstanding the foregoing, the Corporation shall not be obligated to
issue shares upon exercise of the Warrant (i) in the absence of any
required governmental, regulatory or stockholder approval or consent
necessary for the Corporation to issue the Shares or for Harris to exercise
the Warrant or prior to the expiration or termination of any waiting period
required by law or (ii) so long as any injunction or other order, decree or
ruling issued by any federal or state court of competent jurisdiction is in
effect which prohibits the sale or delivery of the Shares. Any sale of any
of the Shares by Harris, other than a registered public offering pursuant
to Section 3 hereof or a sale to a majority-owned subsidiary of Harris,
shall be subject to the right of first refusal of the Corporation (or any
assignee or assignees of the Corporation the identity of whom or which
prior to the date thereof has been given to Harris) at a price equal to the
written offer price which Harris receives from a third party (other than a
majority-owned subsidiary of Harris) and intends to accept. The right of
first refusal shall terminate 15 days after notice of Harris' intention to
sell has been delivered to the Corporation. If an offer is made for
consideration which in whole or in part consists of other than cash, the
value of the non-cash portion of the consideration shall be determined by a
recognized investment banking firm selected jointly by Harris and the
Corporation, and such determination shall in no event be made later than
the fifth day after notice of Harris' intention to sell has been delivered
to the Corporation. In the event of the failure or refusal of the
Corporation to purchase the Shares covered by Harris' notice to sell,
Harris may, within 30 days from the date of such notice, unless additional
time is needed to give notification to or to obtain approval from any
governmental or regulatory authority and, if so required, within five days
after the date on which the required notification period has expired or
been terminated or such approval has been obtained and any requisite
waiting period with respect thereto has passed, sell all, but not less than
all, of such Shares covered by such notice to such proposed transferee at
no less than the price specified and on terms no more favorable to the
buyer than those set forth in the notice.
3. If, at any time after the Warrant has been exercised and on or
before the Termination Date (as defined in Section 7 of the Warrant), the
Corporation shall receive a written request therefor from Harris, the
Corporation shall prepare, file and keep current a shelf registration
statement under the Securities Act of 1933, as amended (the 'Securities
Act'), covering the Shares, and shall use its best efforts to cause such
registration statement to become effective and remain current for a period
of not more than 180 days. Without the written consent of Harris, neither
the Corporation nor any other holder of securities of the Corporation
(other than any other holder who as of the date hereof has contractual
right to do so) may include securities in such registration statement. The
Corporation shall in no way be restricted from registering and selling
other equity or debt securities, nor shall the Corporation be obligated to
make effective more than one registration statement pursuant to this
Section 3. Additionally, the Corporation shall be required to provide
notice to Harris prior to filing any registration statement under the
Securities Act concerning any securities of the Corporation, for its own
account or for the account of others, so that Harris can elect to include
information in such registration statement to permit Harris to offer the
Shares for sale.
4. If and whenever the Corporation is required by the provisions of
Section 3 hereof to effect the registration of any of the Shares under the
Securities Act, the Corporation will:
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<PAGE>
(a) prepare and file with the Securities and Exchange Commission
(the 'SEC') such amendments to such registration statement and
supplements to the prospectus contained therein as may be necessary to
keep such registration statement current for a period of not more than
180 days;
(b) furnish to Harris and to Harris' underwriters of the Shares
being registered such reasonable number of copies of the registration
statement, preliminary prospectus, final prospectus and such other
documents as Harris or such underwriters may reasonably request in order
to facilitate the public offering of the Shares;
(c) use its best efforts to register or qualify the Shares covered
by such registration statement under such state securities or blue sky
laws of such jurisdictions as Harris or such underwriters may reasonably
request; provided that the Corporation shall not be required by virtue
hereof to submit to jurisdiction or to furnish a general consent to
service of process in any state;
(d) notify Harris, promptly after the Corporation shall receive
notice thereof, of the time when such registration statement has become
effective or any supplemental amendment to any prospectus forming a part
of such registration statement has been filed;
(e) notify Harris promptly of any request by the SEC for the
amending or supplementing of such registration statement or prospectus
or for additional information;
(f) prepare and file with the SEC, promptly upon the request of
Harris, any amendments or supplements to such registration statement or
prospectus which, in the opinion of counsel for Harris and the
Corporation, are required under the Securities Act or the rules and
regulations promulgated thereunder in connection with the distribution
of the Shares by Harris;
(g) prepare and promptly file with the SEC such amendment or
supplement to such registration statement or prospectus as may be
necessary to correct any statements or omission if, at the time when a
prospectus relating to such Shares is required to be delivered under the
Securities Act, any event shall have occurred as a result of which such
prospectus as then in effect would include an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading;
(h) advise Harris, promptly after it shall receive notice or obtain
knowledge, of the issuance of any stop order by the SEC suspending the
effectiveness of such registration statement or the initiation or
threatening of any proceeding for that purpose and promptly use its best
efforts to prevent the issuance of any stop order or to obtain its
withdrawal if such stop order should be issued; and
(i) at the request of Harris, furnish on the date or dates provided
for in the underwriting agreement: (i) an opinion or opinions of counsel
to the Corporation for the purposes of such registration, addressed to
the underwriters and to Harris, covering such matters as such
underwriters and Harris may reasonably request and as are customarily
covered by issuer's counsel at that time; and (ii) a letter or letters
from the independent certified public accountants of the Corporation,
addressed to the underwriters and to Harris, covering such matters as
such underwriters or Harris may reasonably request, in which letters
such accountants shall state (without limiting the generality of the
foregoing) that they are independent certified public accountants within
the meaning of the Securities Act and that, in the opinion of such
accountants, the financial statements and other financial data of the
Corporation included in the registration statement or any amendment or
supplement thereto comply in all material respects with the applicable
accounting requirements of the Securities Act.
4-3
<PAGE>
5. With respect to the registration requested pursuant to Section 3
hereof, the Corporation shall bear the following fees, costs and expenses:
All registration, filing and NASD fees, printing and engraving expenses,
fees and disbursements of its counsel and accountants and all legal fees
and disbursements and other expenses of the Corporation to comply with
state securities or blue sky laws of any jurisdictions in which the Shares
to be offered are to be registered or qualified. Fees and disbursements of
counsel and accountants for Harris, underwriting discounts and commissions
and transfer taxes for Harris and any other expenses incurred by Harris
shall be borne by Harris.
6. In connection with any registration statement:
(a) The Corporation will indemnify and hold harmless Harris, any
underwriter (as defined in the Securities Act) for Harris, and each
person, if any, who controls Harris or such underwriter (within the
meaning of the Securities Act) from and against any and all loss,
damage, liability, cost or expense to which Harris or any such
underwriter or controlling person may become subject under the
Securities Act or otherwise, insofar as such loss, damage, liability,
cost or expense arises out of or is caused by any untrue statement or
alleged untrue statement of any material fact contained in such
registration statement, any prospectus or supplement thereto, or arises
out of or is based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that the
Corporation will not be liable in any such case to the extent that any
such loss, damage, liability, cost or expense arises out of or is based
upon an untrue statement or alleged untrue statement or omission or
alleged omission regarding Harris, any underwriter for Harris or the
manner of offering the Shares or is made in conformity with information
furnished by Harris, such underwriter or such controlling person in
writing specifically for use in the preparation of such registration
statement, prospectus or supplement.
(b) Harris will indemnify and hold harmless the Corporation, any
underwriter (as defined in the Securities Act), each person, if any, who
controls the Corporation or such underwriter (within the meaning of the
Securities Act) and each person who signed the registration statement
from and against any and all loss, damage, liability, cost or expense to
which the Corporation or any such underwriter or controlling person may
become subject under the Securities Act or otherwise, insofar as such
loss, damage, liability, cost or expense arises out of or is caused by
any untrue or alleged untrue statement of any material fact contained in
such registration statement, any prospectus or preliminary prospectus
contained therein or any amendment or supplement thereto, or arises out
of or is based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading, in each case to the extent that
such untrue statement or alleged untrue statement or omission or alleged
omission related to Harris, any underwriter for Harris or the manner of
offering the Shares or was made in reliance upon and in conformity with
written information furnished by Harris specifically for use in the
preparation of such registration statement, prospectus or supplement.
(c) Promptly after receipt by an indemnified party pursuant to the
provisions of subparagraph (a) or (b) of this Section 6 of any claim in
writing or of notice of the commencement of any action involving the
subject matter of the foregoing indemnity provisions, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party pursuant to the provisions of said subparagraph (a)
or (b), promptly notify the indemnifying party of the receipt of such
claim or notice of the commencement of such action, but the omission to
so notify the indemnifying party will not relieve the indemnifying party
from any liability which it may otherwise have to any indemnified party
hereunder. In case such action is brought against any indemnified party,
the indemnifying party shall have the right to participate in, and, to
the extent that it may wish, jointly with any
4-4
<PAGE>
other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party; provided,
however, that if the defendants in any action include both the
indemnified party and the indemnifying party and there is a conflict of
interest which would prevent counsel for the indemnifying party from
also representing the indemnified party, the indemnified party or
parties shall have the right to select one separate counsel to
participate in the defense of such indemnified party or parties.After
notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will
not be liable to such indemnified party pursuant to the provisions of
said subparagraph (a) or (b) for any legal or other expenses
subsequently incurred by such indemnified party other than reasonable
costs of investigation, unless (i) the indemnified party shall have
employed counsel in accordance with the provisions of the preceding
sentence, (ii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after the notice of the
commencement of the action, or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party.
(d) If recovery is not available under the foregoing
indemnification provisions, for any reason other than as specified
therein, the parties entitled to indemnification by the terms thereof
shall be entitled to contribution for liabilities and expenses, except
to the extent that contribution is not permitted under Section 11(f) of
the Securities Act. In determining the amount of contribution to which
the respective parties are entitled, there shall be considered the
parties' relative knowledge and access to information concerning the
matter with respect to which the claim was asserted, the opportunity to
correct and/or prevent any statement or omission, and any other
equitable considerations appropriate under the circumstances. Harris and
the Corporation agree that it would not be equitable if the amount of
such contribution were determined by pro rata or per capita allocation
even if the underwriters and Harris as a group were considered a single
entity for such purpose.
7. In the event that the Corporation issues any additional Shares of
Common Stock after the date of this Agreement pursuant to stock dividends,
splits and other issuances described in Section 5(A) of the Warrant, the
Corporation shall issue additional warrants to Harris, such that, after
such issuance, the number of Shares of Common Stock subject to all warrants
hereunder, together with any Shares of Common Stock subject to Warrants
previously issued pursuant hereto, equals 19.9 percent of the Shares of
Common Stock issued and outstanding on a pro forma basis after giving
effect to the exercise of the Warrant. Such additional warrants shall be
identical to the Warrant.
8. If Harris acquires Shares and, during the period ending on the
later of (i) six months after the date of such acquisition or (ii) October
31, 1996, the merger contemplated by the Plan has not been consummated,
then, during the thirty-day period commencing at the expiration of such
period the Corporation shall have the right to repurchase all (but not less
than all) of such Shares of Common Stock so acquired by Harris and held by
Harris at the time of such repurchase at a price equal to the sum of (i)
the greater of the current market price or the Exercise Price paid for such
Shares, multiplied by (ii) the number of such Shares so acquired. For the
purposes of this calculation, the 'current market price' shall mean the
average of the closing prices for the Common Stock for the 25 trading days
immediately preceding the repurchase, as quoted on the Nasdaq National
Market System.
9. To the extent that Harris acquires Shares, and until the
Corporation's rights (if any) to redeem such Shares pursuant to Section 8
of this Agreement have expired, Harris agrees to vote such Shares in
accordance with the recommendation of the Board of Directors of the
Corporation so long as at least a majority of such Board of Directors is
the same as on the date hereof, except as to voting in connection with
mergers, acquisitions, liquidations or sales or other dispositions of
assets involving the Corporation or the Association, in which instance no
such restrictions shall apply, provided, however, that the covenant
contained in this Section 9 shall not apply to any holder other than Harris
or one of its subsidiaries and affiliates.
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<PAGE>
10. Without limiting the foregoing or any remedies available to
Harris, it is specifically acknowledged that Harris would not have an
adequate remedy at law for any breach of this Agreement and will be
entitled to specific performance of the obligations under, and injunctive
relief against actual or threatened violations of the obligations of any
person subject to this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed in counterparts by their duly authorized officers and their corporate
seals to be hereunto affixed, all as of the day and year first above written.
<TABLE>
<S> <C>
[CORPORATE SEAL]
ATTEST: FIRST HARRISBURG BANCOR, INC.
By: /s/J. FREDERIC REDSLOB By: /s/PATRICK J. ARITZ
---------------------------------- --------------------------------
J. Frederic Redslob, Secretary Patrick J. Aritz, President and
Chief Executive Officer
[CORPORATE SEAL]
ATTEST: HARRIS SAVINGS BANK
By: /s/BERNARD H. SARFERT, SR. By: /s/WILLIAM J. MCLAUGHLIN
---------------------------------- --------------------------------
Bernard H. Sarfert, Sr., Secretary William J. McLaughlin, President
and Chief Executive Officer
</TABLE>
4-6
<PAGE>
ATTACHMENT A
WARRANT
TO PURCHASE UP TO 580,674 SHARES OF
COMMON STOCK
OF
FIRST HARRISBURG BANCOR, INC.
This is to certify that, for value received, HARRIS SAVINGS BANK ('Harris'
or the 'Holder') is entitled to purchase, subject to the provisions of this
Warrant and of the Agreement (as hereinafter defined), from FIRST HARRISBURG
BANCOR, INC. (the 'Corporation'), at any time on or after the date hereof, an
aggregate of up to 580,674 fully paid and nonassessable shares of common stock,
par value $.01 per share (the 'Common Stock') of the Corporation at a price per
share equal to $11.875, subject to adjustment as herein provided (the 'Exercise
Price').
1. Exercise of Warrant. Subject to the provisions hereof and the
limitations set forth in Section 2 of an Investment Agreement dated as of
November 12, 1995 by and between Harris and the Corporation (the 'Agreement')
executed and delivered in connection with an Agreement and Plan of
Reorganization dated as of November 12, 1995 between Harris and the Corporation
(the 'Plan'), this Warrant may be exercised at such times as set forth in the
Agreement. This Warrant shall be exercised by presentation and surrender hereof
to the Corporation at the principal office of the Corporation, accompanied by
(i) a written notice of exercise, (ii) payment to the Corporation, for the
account of the Corporation, of the Exercise Price for the number of shares of
Common Stock specified in such notice and (iii) a certificate of the Holder
specifying the event or events which have occurred which entitle the Holder to
exercise the Warrant. The Exercise Price for the number of shares of Common
Stock specified in the notice shall be payable in immediately available funds.
This Warrant may not be exercised in part for less than 250,000 shares, except
(i) for an initial exercise resulting in ownership of approximately 5 percent of
the outstanding shares of Common Stock after giving effect to the exercise, (ii)
as limited by applicable law, regulation or regulatory order or (iii) when this
Warrant becomes exercisable for less than 250,000 shares, the remaining shares
for which it is then exercisable.
Upon such presentation and surrender, the Corporation shall issue promptly
(and within no later than five business days if requested by the Holder) to the
Holder or its assignee, transferee or designee the shares of Common Stock to
which the Holder is entitled hereunder.
If this Warrant should be exercised in part only, the Corporation shall,
upon surrender of this Warrant for cancellation, execute and deliver a new
Warrant evidencing the rights of the Holder thereof to purchase the balance of
the shares of Common Stock purchasable hereunder. Upon issuance of Common Stock
by the Corporation, the Holder shall be deemed to be the holder of record of the
shares of Common Stock so issued. The Corporation shall pay all expenses, and
any and all United States federal, state and local taxes and other charges, that
may be payable in connection with the preparation, issue and delivery of stock
certificates pursuant to this Section 1 in the name of the Holder.
2. Preservation of Rights of Holder. The Corporation agrees (i) that it
will not, by charter amendment or through reorganization, consolidation, merger,
dissolution or sale of assets, or by any other voluntary act, avoid or seek to
avoid the observance or performance of any of the covenants, stipulations or
conditions to be observed or performed hereunder or under the Agreement by the
Corporation, (ii) that it will use its best efforts to take all action
(including (A) complying with all premerger notification, reporting and waiting
period requirements specified in 15 U.S.C. Section18a and the regulations
promulgated thereunder and applicable to the Corporation, and (B) in the event
that under the Bank Holding Company Act of 1956, the Savings and Loan Holding
Company Act or the Change in Bank Control Act, prior approval of the Board of
Governors of the Federal Reserve System (the 'Board') and/or the Office of
Thrift Supervision ('OTS') is necessary before this Warrant may be exercised,
cooperating fully with the Holder in preparing any and all such applications and
providing
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<PAGE>
such information to the Board and/or the OTS as such agencies may require at
the Holder's expense) in order to permit the Holder to exercise this Warrant
and the Corporation duly and effectively to issue shares of its Common Stock
hereunder, and (iii) that it will promptly take all action necessary to
protect the rights of the Holder against dilution as provided herein.
3. Fractional Shares. The Corporation shall not be required to issue
fractional shares of Common Stock upon exercise of this Warrant but shall pay
for such fraction of a share in cash or by certified or official bank check at
the Exercise Price.
4. Exchange, Transfer or Loss of Warrant. This Warrant is exchangeable
without expense, at the option of the Holder, upon presentation and surrender
hereof at the principal office of the Corporation for other Warrants of
different denominations entitling the Holder to purchase in the aggregate the
same number of shares of Common Stock purchasable hereunder. The term 'Warrant'
as used herein includes any Warrants for which this Warrant may be exchanged.
Upon receipt by the Corporation of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant, and (in the case of
loss, theft or destruction) of reasonably satisfactory indemnification, and upon
surrender and cancellation of this Warrant, if mutilated, the Corporation will
execute and deliver a new Warrant of like tenor and date.
This Warrant may not be exercised except in accordance with the terms of
the Agreement.
5. Adjustment. The number of shares of Common Stock purchasable upon the
exercise of this Warrant and the Exercise Price shall be subject to adjustment
from time to time as provided in this Section 5:
(A)(1) In case the Corporation shall pay or make a dividend or other
distribution on any class of capital stock of the Corporation in Common
Stock (including the ten percent (10%) dividend payable in Common Stock on
November 15, 1995) or shall issue shares of Common Stock pursuant to
exercises of outstanding stock options, the number of shares of Common
Stock purchasable upon exercise of this Warrant shall be increased by
multiplying such number of shares by a fraction of which the denominator
shall be the number of shares of Common Stock outstanding at the close of
business on the day immediately preceding the date of such distribution and
the numerator shall be the sum of such number of shares and the total
number of shares constituting such dividend, issuance or other
distribution, such increase to become effective immediately after the
opening of business on the day following such distribution, provided,
however, that in no event shall the Warrant be exercised for more than 19.9
percent of the shares of Common Stock issued and outstanding after exercise
of the Warrant.
(2) In case outstanding shares of Common Stock shall be subdivided
into a greater number of shares of Common Stock, the number of shares of
Common Stock purchasable upon exercise of this Warrant at the opening of
business on the day following the day upon which such subdivision becomes
effective shall be proportionately increased, and, conversely, in case
outstanding shares of Common Stock shall each be combined into a smaller
number of shares of Common Stock, the number of shares of Common Stock
purchasable upon exercise of this Warrant at the opening of business on the
day following the day upon which such combination becomes effective shall
be proportionately decreased, such increase or decrease, as the case may
be, to become effective immediately after the opening of business on the
day following the day upon which such subdivision or combination becomes
effective, provided, however, that in no event shall the Warrant be
exercised for more than 19.9 percent of the shares of Common Stock issued
and outstanding after exercise of the Warrant.
(3) The reclassification of Common Stock into securities (other than
Common Stock) and/or cash and/or other consideration shall be deemed to
involve a subdivision or combination, as the case may be, of the number of
shares of Common Stock outstanding immediately prior to such
reclassification into the number or amount of securities and/or cash and/or
other consideration outstanding immediately thereafter and the effective
date of such reclassification shall be deemed
2
<PAGE>
to be 'the day upon which such subdivision becomes effective,' or 'the day
upon which such combination becomes effective,' as the case may be, within
the meaning of clause (2) above.
(4) The Corporation may make such increases in the number of shares of
Common Stock purchasable upon exercise of this Warrant, in addition to
those required by this subparagraph (A), as shall be determined by its
Board of Directors to be advisable in order to avoid taxation so far as
practicable of any dividend of stock or stock rights or any event treated
as such for federal income tax purposes to the recipients.
(B) Whenever the number of shares of Common Stock purchasable upon
exercise of this Warrant is adjusted as herein provided, the Exercise Price
shall be adjusted by a fraction in which the numerator is equal to the
number of shares of Common Stock purchaseable prior to the adjustment and
the denominator is equal to the number of shares of Common Stock
purchaseable after the adjustment; provided, however, that no adjustment
shall be made to the Exercise Price in connection with or as a result of
the ten percent (10%) stock dividend payable on November 15, 1995.
(C) For the purpose of this Section 5, the term 'Common Stock' shall
include any shares of the Corporation of any class or series which has no
preference or priority in the payment of dividends or in the distribution
of assets upon any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation and which is not subject to redemption by the
Corporation.
(D) Whenever the number of shares for which this Warrant is
exercisable is adjusted as provided in this Section 5, the Corporation
shall promptly compute such adjustment and mail to the Holder a
certificate, signed by a principal financial officer of the Corporation,
setting forth the number of shares of Common Stock for which this Warrant
is exercisable as a result of such adjustment, a brief statement of the
facts requiring such adjustment and the computation thereof and when such
adjustment will become effective; provided, however, that no such notice
shall be required in connection with the ten percent (10%) stock dividend
payable on November 15, 1995 upon payment of which the number of shares of
Common Stock purchasable upon the exercise of the Warrant shall
automatically, without any further action of the Holder or the Corporation,
be adjusted in accordance with the provisions of Section 5(A)(1) hereof.
6. Rights of Holder.
(A) Without limiting the foregoing or any remedies available to the Holder,
it is specifically acknowledged that the Holder would not have an adequate
remedy at law for any breach of the provision of this Warrant and will be
entitled to specific performance of the obligations under, and injunctive relief
against actual or threatened violations of the obligations of any Person subject
to, this Warrant.
(B) Except as provided in the third paragraph of Section I hereof, the
Holder shall not, by virtue hereof, be entitled to any rights of a shareholder
in the Corporation.
7. Termination. This Warrant and the rights conferred hereby shall
terminate on the Termination Date, which shall be the date on which occurs the
earliest of (i) a willful breach of the Plan by Harris, (ii) the Effective Time
of the Merger pursuant to the Plan, (iii) a valid termination of the Plan prior
to the occurrence of an event described in Section 2 of the Agreement, (iv) the
failure of the shareholders of the Corporation to approve the Merger by the
required vote at a meeting duly called and held in accordance with the
requirements of Section 1(h) of the Plan prior to the occurrence of an event
described in Section 2 of the Agreement and (v) to the extent this Warrant has
not previously been exercised, 12 months after the occurrence of an event
described in Section 2 of the Agreement.
8. Securities Act Representation. The Holder, by acceptance hereof, agrees
that, unless the shares of Common Stock issuable upon exercise hereof have been
registered under the Securities Act of 1933, as amended (the 'Securities Act'),
and any other applicable securities laws for sale or other disposition by the
Holder, it will deliver to the Corporation upon the exercise hereof a written
representation that it is acquiring the shares of Common Stock issuable upon the
exercise hereof solely
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<PAGE>
for its own account and not with a view to the distribution thereof within the
meaning of the Securities Act and that any certificate or certificates
representing such shares may bear a legend to the effect that such shares may
not be sold except pursuant to an effective registration thereunder and
registration or qualification under any other applicable securities laws or
exemptions therefrom. Harris hereby represents that it is acquiring the Warrant
solely for its own account in order to increase the likelihood that the
transactions contemplated by the Plan will be consummated and not with a view to
the distribution of the Warrant within the meaning of the Securities Act. In
addition, Harris acknowledges that the Warrant has not been registered under the
Securities Act or any other applicable securities registration requirements.
9. Assignment; Sale. Harris may assign this Warrant to any wholly-owned
subsidiary of Harris. Harris may not, without the prior written consent of the
Corporation, assign, transfer or sell this Warrant to any other person in whole
or in part. In the case of any permitted sale, transfer, assignment or
disposition in whole or in part of this Warrant, the Corporation shall do all
things necessary to facilitate the same and the person to whom this Warrant is
sold, transferred, assigned or disposed of shall agree in writing to the terms
and conditions hereof. Subject to the foregoing, this Warrant shall be binding
upon, inure to the benefit of and be enforceable by the parties and their
respective successors and assigns.
10. Governing Law. This Warrant shall be governed by, and interpreted in
accordance with, the substantive laws of the Commonwealth of Pennsylvania.
Dated: November 12, 1995
<TABLE>
<S> <C>
[CORPORATE SEAL]
ATTEST: FIRST HARRISBURG BANCOR, INC.
By: /s/J. FREDERIC REDSLOB By: /s/PATRICK J. ARITZ
---------------------------------- --------------------------------
J. Frederic Redslob, Secretary Patrick J. Aritz, President and
Chief Executive Officer
</TABLE>
4
<PAGE>
APPENDIX B
[LETTERHEAD OF RYAN, BECK & CO.]
Corporate Finance Department Tel: (610) 617-0700
January 19, 1996
Board of Directors
Harris Savings Bank
Second and Pine Streets
Harrisburg, PA 17107
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to Harris Savings Bank ('Harris') and its shareholders of the proposed
acquisition of First Harrisburg Bancor, Inc. ('First Harrisburg') by Harris (the
'Merger'). In rendering this opinion with respect to the Merger, we have assumed
that Harris Financial, MHC will continue to be the majority shareholder of
Harris.
The Agreement and Plan of Reorganization dated November 12, 1995 concerning the
Merger (the 'Merger Agreement'), by and between Harris, Harris Acquisition
Corporation, First Harrisburg, and First Federal Savings & Loan Association of
Harrisburg, in addition to providing the terms of the Merger, indicates that the
consummation of the Merger is subject to receipt of approvals from the
shareholders of Harris and First Harrisburg and from various regulatory
agencies, and is further subject to the satisfaction of certain other
conditions. The Merger Agreement provides that (i) Harris will organize a
wholly-owned subsidiary, Harris Acquisition Corporation, a Pennsylvania business
corporation ('Harris Acquisition'); (ii) Harris Acquisition will be merged with
and into First Harrisburg (the 'Merger'); (iii) subsequent to and immediately
after the consummation of the Merger, First Harrisburg will liquidate and
dissolve in a non-taxable transaction (the 'Liquidation'); (iv) subsequent to
and immediately after the Liquidation, First Federal Savings & Loan Association
of Harrisburg, the wholly-owned subsidiary of First Harrisburg, will merge with
and into Harris in a non-taxable transaction; and (v) each outstanding share of
First Harrisburg Common Stock will be converted into the right to receive $14.77
in cash from Harris.
Ryan, Beck & Co., Inc. as a customary part of its investment banking business,
is engaged in the valuation of banking and savings institutions and their
securities in connection with mergers and acquisitions. In conducting our
investigation and analysis of this transaction, we have met with certain members
of First Harrisburg's senior management to discuss First Harrisburg's past and
current business operations, financial condition, strategic plan and future
prospects. We have reviewed and analyzed material prepared in connection with
the Merger, including, but not limited to, the following: (1) the Merger
Agreement; (2) drafts of the Joint Proxy Statement prepared in connection with
the Merger; (3) First Harrisburg's Annual Report to Shareholders and Annual
Report on Form 10-K for the years ended December 31, 1992 through 1994, and
First Harrisburg's Quarterly Reports on Form 10-Q for the periods ended March
31, 1995, June 30, 1995 and September 30, 1995; (4) Harris' Annual Report to
Shareholders and Annual Report on Form F-2 for the year ended December 31,
1994, and
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Harris' Quarterly Reports on Form F-4 for the periods ended March 31, 1995,
June 30, 1995 and September 30, 1995; (5) certain operating and financial
information provided to us by the management of First Harrisburg relating to its
business and prospects; (6) certain operating and financial information provided
to us by the management of Harris relating to its business and prospects; (7)
the historical stock prices and trading volume of First Harrisburg's common
stock; (8) the terms of recent acquisitions of thrift institutions which we
deemed generally comparable to First Harrisburg; (9) the publicly-available
financial data of thrift organizations which we deemed generally comparable to
First Harrisburg; and (10) other such studies, analyses, inquiries and
examinations as we deemed appropriate.
While we have taken care in our investigation and analyses, we have relied upon
and assumed the accuracy, completeness and fairness of the financial and other
information provided to us by the respective institutions or which was publicly
available, and have not attempted to verify such information. We have also
relied upon the respective managements of Harris and First Harrisburg as to the
reasonableness and achievability of the respective financial and operating
forecasts and projections (and the assumptions and bases therefor) provided to
us, and we have assumed that such forecasts and projections reflect the best
currently available estimates and judgments of the respective managements of
Harris and First Harrisburg. We also did not independently verify and have
relied on and assumed that the allowance for loan losses set forth in the
balance sheet of First Harrisburg at September 30, 1995 was adequate and
complied fully with applicable law, regulatory policy and sound banking practice
as of the date of such financial statements. We also assumed that the Merger in
all respects is, and will be in compliance with all laws and regulations
applicable to Harris and First Harrisburg. We have not made or obtained any
independent evaluations or appraisals of the assets or liabilities of either
Harris or First Harrisburg or their respective subsidiaries.
In conducting our analysis and arriving at our opinion as expressed herein, we
have considered such financial and other factors as we have deemed appropriate
in the circumstances. In rendering our opinion, we have assumed that in the
course of obtaining the necessary regulatory approvals for the Merger, no
conditions will be imposed that will have a material adverse effect on the
contemplated benefits of the Merger to Harris or its shareholders. Our opinion
is based upon conditions and projections as they exist and can be evaluated on
the date hereof.
Based upon and subject to the foregoing it is our opinion as investment bankers
that the terms of the Merger as provided and described in the Merger Agreement
are fair, from a financial point of view, to Harris and its shareholders.
Very truly yours,
/s/ Ryan, Beck & Co., Inc.
RYAN, BECK & CO., INC.
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APPENDIX C
[LETTERHEAD OF NATIONAL CAPITAL GROUP, INC.]
January 19, 1996
Board of Directors
First Harrisburg Bancor, Inc.
234 N. Second St.
Harrisburg, PA 17108-1111
Attention: Mr. Patrick J. Aritz, President and Chief Executive Officer
To the members of the Board of Directors:
You have requested our opinion (the 'Opinion'), from a financial point of view,
regarding the fairness of the consideration to the shareholders of First
Harrisburg Bancor, Inc. ('FHBI') as set forth in the Agreement and Plan of
Reorganization among Harris Savings Bank ('HSB'), Harris Acquisition Corporation
('HAC'), FHBI and First Federal Savings & Loan Association of Harrisburg
('FFSLA'); the Agreement and Plan of Merger of HAC with and into FHBI; the FHBI
Plan of Liquidation and Dissolution; and the Agreement and Plan of Merger of
FFSLA with and into HSB dated November 12, 1995 (collectively the 'Agreements').
Pursuant to the Agreements, among other matters, and subject to the terms and
conditions of the Agreements, on the effective date: HAC shall merge with and
into FHBI; FHBI shall liquidate and dissolve; FFSLA shall merge with and into
HSB; and the separate existence of HAC, FHBI and FSSLA shall cease. Each share
of FHBI common stock issued and outstanding immediately prior to the effective
date as defined and subject to the terms as set forth in the Agreements shall be
canceled and converted into the right to receive Fourteen Dollars and
Seventy-Seven Cents ($14.77) in cash and without interest. The aggregate amount
paid for all shares, including shares issuable upon the exercise of all
outstanding stock options, shall not exceed $40,889,430.
National Capital Group, Inc. ('National Capital') is a financial advisory
services company that specializes in financial valuations and analyses of
operations. National Capital advises financial services companies on mergers,
acquisitions and capital strategies. Our experience in these transactions has
been applied in the rendering of this Opinion, including our expertise in the
application of current regulations and legislative matters affecting the
financial services industry. National Capital was not retained by FHBI to
solicit indications of interest from other companies that may have an interest
in acquiring FHBI. Accordingly, had FHBI undertaken such solicitations of
interest, matters may have come to our attention that may have caused us to
reach a different Opinion.
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In connection with the rendering of our Opinion, we reviewed, among other
matters with respect to FHBI and FFSLA, unless otherwise noted: (1) the
Agreements; (2) the Proxy Statement related to the proposed Merger; (3) audited
financial statements as of December 31, 1994 and December 31, 1993 and the years
then ended, interim financial statements as of September 30, 1995 and the nine
month period then ended, and financial reports filed with the appropriate
regulatory agencies through September 30, 1995; (4) regulatory examinations
performed during the preceding two years by the Federal Deposit Insurance
Corporation and the Office of Thrift Supervision; (5) inquiries of members of
management, and FHBI's special legal counsel, the firm of Elias, Matz, Tiernan
and Herrick, LLP; (6) economic conditions in the market area; (7) the financial
performance of FHBI as compared to selected comparable publicly held companies;
(8) conditions in the securities market in general and the market for thrift and
banking institutions specifically; (9) merger and acquisition transactions with
similar terms and conditions; and (10) analyses and such other documents and
matters as we deemed appropriate. In addition, we used information from publicly
available published sources that we believe is reliable. However, we have not
examined and otherwise tested this information and therefore cannot and do not
express an opinion as to its accuracy.
Our opinion is based upon the representations contained in the Agreements, other
evidential matter and documents provided to us by First Harrisburg Bancor, Inc.
and its subsidiaries and its representatives are accurate and complete. We did
not examine or otherwise test the information provided to us and therefore
cannot and do not express an opinion as to the accuracy of this information nor
did we independently value the assets or liabilities of First Harrisburg Bancor,
Inc. and subsidiaries.
On the basis of and subject to the foregoing, it is our Opinion that as of
January 19, 1996 the consideration, as described in the first paragraph above,
is fair to the shareholders of FHBI from a financial point of view.
Yours truly,
NATIONAL CAPITAL GROUP, INC.
/s/ Louis M. Mayberg
Louis M. Mayberg
Executive Vice President
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APPENDIX D
Pennsylvania Business Corporation Law of 1988, as Amended,
Provisions for Dissenting Shareholders
1930 DISSENTERS RIGHTS.--(a) General rule.--If any shareholder of a
domestic business corporation that is to be a party to a merger or consolidation
pursuant to a plan of merger or consolidation objects to the plan of merger or
consolidation and complies with the provisions of Subchapter D of Chapter 15
(relating to dissenters rights), the shareholder shall be entitled to the rights
and remedies of dissenting shareholders therein provided, if any. See also
section 1906(c) (relating to dissenters rights upon special treatment).
(b) Plans adopted by directors only.--Except as otherwise provided pursuant
to section 1571(c) (relating to grant of optional dissenters rights), Subchapter
D of Chapter 15 shall not apply to any of the shares of a corporation that is a
party to a merger or consolidation pursuant to section 1924(b)(1)(i) (relating
to adoption by board of directors).
(c) Cross references.--See sections 1571(b) (relating to exceptions) and
1904 (relating to de facto transaction doctrine abolished).
SUBCHAPTER D. DISSENTERS RIGHTS
1571 APPLICATION AND EFFECT OF SUBCHAPTER--(a) General rule.--Except as
otherwise provided in subsection (b), any shareholder of a business corporation
shall have the right to dissent from and to obtain payment of the fair value of
his shares in the event of, any corporate action, or to otherwise obtain fair
value for his shares, where this part expressly provides that a shareholder
shall have the rights and remedies provided in this subchapter. See:
Section 1906(c) (relating to dissenters rights upon special treatment).
Section 1930 (relating to dissenters rights).
Section 1931(d) (relating to dissenters rights in share exchanges).
Section 1932(c) (relating to dissenters rights in asset transfers).
Section 1952(d) (relating to dissenters rights in division).
Section 1962(c) (relating to dissenters rights in conversion).
Section 2104(b) (relating to procedure).
Section 2324 (relating to corporation option where a restriction on
transfer of a security is
held invalid).
Section 2325(b) (relating to minimum vote requirement).
Section 2704(c) (relating to dissenters rights upon election).
Section 2705(d) (relating to dissenters rights upon renewal of
election).
Section 2907(a) (relating to proceedings to terminate breach of
qualifying conditions).
Section 7104(b)(3) (relating to procedure).
(b) Exceptions.--(1) Except as otherwise provided in paragraph (2), the
holders of the shares of any class or series of shares that, at the record date
fixed to determine the shareholders entitled to notice of and to vote at the
meeting at which a plan specified in any of section 1930, 1931(d), 1932(c) or
1952(d) is to be voted on, are either:
(i) listed on a national securities exchange; or
(ii) held of record by more than 2,000 shareholders;
shall not have the right to obtain payment of the fair value of any such shares
under this subchapter.
(2) Paragraph (1) shall not apply to and dissenters rights shall be
available without regard to the exception provided in that paragraph in the
case of:
(i) Shares converted by a plan if the shares are not converted
solely into shares of the acquiring, surviving, new or other corporation
or solely into such shares and money in lieu of fractional shares.
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(ii) Shares of any preferred or special class unless the articles,
the plan or the terms of the transaction entitle all shareholders of the
class to vote thereon and require for the adoption of the plan or the
effectuation of the transaction the affirmative vote of a majority of
the votes cast by all shareholders of the class.
(iii) Shares entitled to dissenters rights under section 1906(c)
(relating to dissenters rights upon special treatment).
(3) The shareholders of a corporation that acquires by purchase,
lease, exchange or other disposition all or substantially all of the
shares, property or assets of another corporation by the issuance of
shares, obligations or otherwise, with or without assuming the liabilities
of the other corporation and with or without the intervention of another
corporation or other person, shall not be entitled to the rights and
remedies of dissenting shareholders provided in this subchapter regardless
of the fact, if it be the case, that the acquisition was accomplished by
the issuance of voting shares of the corporation to be outstanding
immediately after the acquisition sufficient to elect a majority or more of
the directors of the corporation.
(c) Grant of optional dissenters rights.--The bylaws or a resolution of the
board of directors may direct that all or a part of the shareholders shall have
dissenters rights in connection with any corporate action or other transaction
that would otherwise not entitle such shareholders to dissenters rights.
(d) Notice of dissenters rights.--Unless otherwise provided by statute, if
a proposed corporate action that would give rise to dissenters rights under this
subpart is submitted to a vote at a meeting of shareholders, there shall be
included in or enclosed with the notice of meeting:
(1) A statement of the proposed action and a statement that the
shareholders have a right to dissent and obtain payment of the fair value
of their shares by complying with the terms of this subchapter; and
(2) A copy of this subchapter.
(e) Other statutes.--The procedures of this subchapter shall also be
applicable to any transaction described in any statute other than this part that
makes reference to this subchapter for the purpose of granting dissenters
rights.
(f) Certain provisions of articles ineffective.--This subchapter may not be
relaxed by any provision of the articles.
(g) Cross references.--See sections 1105 (relating to restriction on
equitable relief), 1904 (relating to de facto transaction doctrine abolished)
and 2512 (relating to dissenters rights procedure).
1572 DEFINITIONS.--The following words and phrases when used in this
subchapter shall have the meanings given to them in this section unless the
context clearly indicates otherwise:
'Corporation.' The issuer of the shares held or owned by the dissenter
before the corporate action or the successor by merger, consolidation, division,
conversion or otherwise of that issuer. A plan of division may designate which
of the resulting corporations is the successor corporation for the purposes of
this subchapter. The successor corporation in a division shall have sole
responsibility for payments to dissenters and other liabilities under this
subchapter except as otherwise provided in the plan of division.
'Dissenter.' A shareholder or beneficial owner who is entitled to and does
assert dissenters rights under this subchapter and who has performed every act
required up to the time involved for the assertion of those rights.
'Fair value.' The fair value of shares immediately before the effectuation
of the corporate action to which the dissenter objects, taking into account all
relevant factors, but excluding any appreciation or depreciation in anticipation
of the corporate action.
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'Interest.' Interest from the effective date of the corporate action until
the date of payment at such rate as is fair and equitable under all of the
circumstances, taking into account all relevant factors including the average
rate currently paid by the corporation on its principal bank loans.
1573 RECORD AND BENEFICIAL HOLDERS AND OWNERS.--(a) Record holders and
shares.--A record holder of shares of a business corporation may assert
dissenters rights as to fewer than all of the shares registered in his name only
if he dissents with respect to all the shares of the same class or series
beneficially owned by any one person and discloses the name and address of the
person or persons on whose behalf he dissents. In that event, his rights shall
be determined as if the shares as to which he has dissented and his other shares
were registered in the names of different shareholders.
(b) Beneficial owners of shares.--A beneficial owner of shares of a
business corporation who is not the record holder may assert dissenters rights
with respect to shares held on his behalf and shall be treated as a dissenting
shareholder under the terms of this subchapter if he submits to the corporation
not later than the time of the assertion of dissenters rights a written consent
of the record holder. A beneficial owner may not dissent with respect to some
but less than all shares of the same class or series owned by the owner, whether
or not the shares so owned by him are registered in his name.
1574 NOTICE OF INTENTION TO DISSENT.--If the proposed corporate action is
submitted to a vote at a meeting of shareholders of a business corporation, any
person who wishes to dissent and obtain payment of the fair value of his shares
must file with the corporation, prior to the vote, a written notice of intention
to demand that he be paid the fair value for his shares if the proposed action
is effectuated, must effect no change in the beneficial ownership of his shares
from the date of such filing continuously through the effective date of the
proposed action and must refrain from voting his shares in approval of such
action. A dissenter who fails in any respect shall not acquire any right to
payment of the fair value of his shares under this subchapter. Neither a proxy
nor a vote against the proposed corporate action shall constitute the written
notice required by this section.
1575 NOTICE TO DEMAND PAYMENT.--(a) General rule.--If the proposed
corporate action is approved by the required vote at a meeting of shareholders
of a business corporation, the corporation shall mail a further notice to all
dissenters who gave due notice of intention to demand payment of the fair value
of their shares and who refrained from voting in favor of the proposed action.
If the proposed corporate action is to be taken without a vote of shareholders,
the corporation shall send to all shareholders who are entitled to dissent and
demand payment of the fair value of their shares a notice of the adoption of the
plan or other corporate action. In either case, the notice shall:
(1) State where and when a demand of payment must be sent and
certificates for certificated shares must be deposited in order to obtain
payment.
(2) Inform holders of uncertificated shares to what extent transfer of
shares will be restricted from the time that demand for payment is
received.
(3) Supply a form for demanding payment that includes a request for
certification of the date on which the shareholder, or the person on whose
behalf the shareholder dissents, acquired beneficial ownership of the
shares.
(4) Be accompanied by a copy of this subchapter.
(b) Time for receipt of demand for payment.--The time set for receipt of
the demand and deposit of certificated shares shall be not less than 30 days
from the mailing of the notice.
1576 FAILURE TO COMPLY WITH NOTICE TO DEMAND PAYMENT, ETC.-- (a) Effect of
failure of shareholder to act.--A shareholder who fails to timely demand
payment, or fails (in the case of certificated shares) to timely deposit
certificates, as required by a notice pursuant to section 1575 (relating to
notice to demand payment) shall not have any right under this subchapter to
receive payment of the fair value of his shares.
(b) Restriction on uncertificated shares.--If the shares are not
represented by certificates, the business corporation may restrict their
transfer from the time of receipt of demand for payment until
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effectuation of the proposed corporate action or the release of restrictions
under the terms of section 1577(a) (relating to failure to effectuate corporate
action).
(c) Rights retained by shareholder.--The dissenter shall retain all other
rights of a shareholder until those rights are modified by effectuation of the
proposed corporate action.
1577 RELEASE OF RESTRICTIONS OR PAYMENT FOR SHARES.--(a) Failure to
effectuate corporate action.--Within 60 days after the date set for demanding
payment and depositing certificates, if the business corporation has not
effectuated the proposed corporate action, it shall return any certificates that
have been deposited and release uncertificated shares from any transfer
restrictions imposed by reason of the demand for payment.
(b) Renewal of notice to demand payment.--When uncertificated shares have
been released from transfer restrictions and deposit certificates have been
returned, the corporation may at any later time send a new notice conforming to
the requirements of section 1575 (relating to notice to demand payment), with
like effect.
(c) Payment of fair value of shares.--Promptly after effectuation of the
proposed corporate action, or upon timely receipt of demand for payment if the
corporate action has already been effectuated, the corporation shall either
remit to dissenters who have made demand and (if their shares are certificated)
have deposited their certificates the amount that the corporation estimates to
be the fair value of the shares, or give written notice that no remittance under
this section will be made. The remittance or notice shall be accompanied by:
(1) The closing balance sheet and statement of income of the issuer of
the shares held or owned by the dissenter for a fiscal year ending not more
than 16 months before the date of remittance or notice together with the
latest available interim financial statements.
(2) A statement of the corporation's estimate of the fair value of the
shares.
(3) A notice of the right of the dissenter to demand payment or
supplemental payment, as the case may be, accompanied by a copy of this
subchapter.
(d) Failure to make payment.--If the corporation does not remit the amount
of its estimate of the fair value of the shares as provided by subsection (c),
it shall return any certificates that have been deposited and release
uncertificated shares from any transfer restrictions imposed by reason of the
demand for payment. The corporation may make a notation on any such certificate
or on the records of the corporation relating to any such uncertificated shares
that such demand has been made. If shares with respect to which notation has
been so made shall be transferred, each new certificate issued therefor or the
records relating to any transferred uncertificated shares shall bear a similar
notation, together with the name of the original dissenting holder or owner of
such shares. A transferee of such shares shall not acquire by such transfer any
rights in the corporation other than those that the original dissenters had
after making demand for payment of their fair value.
1578 ESTIMATE BY DISSENTER OF FAIR VALUE OF SHARES.--(a) General rule.--If
the business corporation gives notice of its estimate of the fair value of the
shares, without remitting such amount, or remits payment of its estimate of the
fair value of a dissenter's shares as permitted by section 1577(c) (relating to
payment of fair value of shares) and the dissenter believes that the amount
stated or remitted is less than the fair value of his shares, he may send to the
corporation his own estimate of the fair value of the shares, which shall be
deemed a demand for payment of the amount or the deficiency.
(b) Effect of failure to file estimate.--Where the dissenter does not file
his own estimate under subsection (a) within 30 days after the mailing by the
corporation of its remittance or notice, the dissenter shall be entitled to no
more than the amount stated in the notice or remitted to him by the corporation.
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1579 VALUATION PROCEEDINGS GENERALLY.--(a) General rule.--Within 60 days
after the latest of:
(1) Effectuation of the proposed corporate action;
(2) Timely receipt of any demands for payment under section 1575
(relating to notice to demand payment); or
(3) Timely receipt of any estimates pursuant to section 1578 (relating
to estimate by dissenter of fair value of shares);
If any demands for payment remain unsettled, the business corporation may
file in court an application for relief requesting that the fair value of the
shares be determined by the court.
(b) Mandatory joinder of dissenters.--All dissenters, wherever residing,
whose demands have not been settled shall be made parties to the proceeding as
in an action against their shares. A copy of the application shall be served on
each such dissenter. If a dissenter is a nonresident, the copy may be served on
him in the manner provided or prescribed by or pursuant to 42 Pa.C.S. Ch. 53
(relating to bases of jurisdiction and interstate and international procedure).
(c) Jurisdiction of the court.--The jurisdiction of the court shall be
plenary and exclusive. The court may appoint an appraiser to receive evidence
and recommend a decision on the issue of fair value. The appraiser shall have
such power and authority as may be specified in the order of appointment or in
any amendment thereof.
(d) Measure of recovery.--Each dissenter who is made a party shall be
entitled to recover the amount by which the fair value of his shares is found to
exceed the amount, if any, previously remitted, plus interest.
(e) Effect of corporation's failure to file application.--If the
corporation fails to file an application as provided in subsection (a), any
dissenter who made a demand and who has not already settled his claim against
the corporation may do so in the name of the corporation at any time within 30
days after the expiration of the 60-day period. If a dissenter does not file an
application within the 30-day period, each dissenter entitled to file an
application shall be paid the corporation's estimate of the fair value of the
shares and no more, and may bring an action to recover any amount not previously
remitted.
1580 COSTS AND EXPENSES OF VALUATION PROCEEDINGS.--(a) General rule.-- The
costs and expenses of any proceeding under section 1579 (relating to valuation
proceedings generally), including the reasonable compensation and expenses of
the appraiser appointed by the court, shall be determined by the court and
assessed against the business corporation except that any part of the costs and
expenses may be apportioned and assessed as the court deems appropriate against
all or some of the dissenters who are parties and whose action in demanding
supplemental payment under section 1578 (relating to estimate by dissenter of
fair value of shares) the court finds to be dilatory, obdurate, arbitrary,
vexatious or in bad faith.
(b) Assessment of counsel fees and expert fees where lack of good faith
appears.--Fees and expenses of counsel and of experts for the respective parties
may be assessed as the court deems appropriate against the corporation and in
favor of any or all dissenters if the corporation failed to comply substantially
with the requirements of this subchapter and may be assessed against either the
corporation or a dissenter, in favor of any other party, if the court finds that
the party against whom the fees and expenses are assessed acted in bad faith or
in a dilatory, obdurate, arbitrary or vexatious manner in respect to the rights
provided by this subchapter.
(c) Award of fees for benefits to other dissenters.--If the court finds
that the services of counsel for any dissenter were of substantial benefit to
other dissenters similarly situated and should not be assessed against the
corporation, it may award to those counsel reasonable fees to be paid out of the
amounts awarded to the dissenters who were benefited.
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ADDITIONAL PROVISIONS
APPLICABLE TO HARRIS
STOCKHOLDERS ONLY:
PENNSYLVANIA BANKING CODE OF 1965, AS AMENDED,
PROVISIONS FOR DISSENTING SHAREHOLDERS
SECTION 1222. RIGHTS OF DISSENTING SHAREHOLDERS
If a shareholder of an institution shall object to a proposed plan of
action of the institution authorized under a section of this act and such
section provides that the shareholder shall be entitled to the rights and
remedies of a dissenting shareholder, the rights and remedies of such
shareholder shall be governed by the provisions of the Business Corporation
Law(1) applicable to dissenting shareholders and shall be subject to the
limitations on such rights and remedies under those provisions. Shares acquired
by an institution as a result of the exercise of such rights by a dissenting
shareholder may be held and disposed of as treasury shares, or, in the case of a
merger or consolidation as otherwise provided in the plan of merger or
consolidation.
1965, Nov. 30, P.L. 847, No. 356, Section 1222.
(1)15 Pa.C.S.A. Section 1001 et seq.
SECTION 1607. RIGHTS OF DISSENTING SHAREHOLDERS
(a) A shareholder of an institution which is a party to a plan in which the
proposed merger or consolidation will result in an institution subject to this
act who objects to the plan shall be entitled to the, rights and remedies of a
dissenting shareholder provided under, an subject to compliance with, the
provisions of section 1222 of this act.
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FIRST HARRISBURG BANCOR, INC.
REVOCABLE PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF FIRST
HARRISBURG BANCOR, INC. ("FIRST HARRISBURG") FOR USE AT THE SPECIAL MEETING OF
STOCKHOLDERS TO BE HELD ON FEBRUARY 23, 1996, AND AT ANY ADJOURNMENT OR
POSTPONEMENT THEREOF.
The undersigned, being a stockholder of First Harrisburg as of January 16,
1996, hereby authorizes the Board of Directors of First Harrisburg or any
successors thereto as proxies with full powers of substitution, to represent the
undersigned at the Special Meeting of Stockholders of First Harrisburg to be
held at The Ramada Inn on Market Square, 23 South Second Street, Harrisburg,
Pennsylvania, on Friday, February 23, 1996 at 10:00 a.m., local time, and at any
adjournment or postponement of said meeting, and thereat to act with respect to
all votes that the undersigned would be entitled to cast, if then personally
present, as indicated on the reverse side.
(Continued and to be signed on the reverse side)
FOLD AND DETACH HERE
<PAGE>
Please mark
your votes as /X/
indicated in
this example
1. PROPOSAL TO APPROVE AND ADOPT THE AGREEMENT AND PLAN OF REORGANIZATION AND
RELATED AGREEMENT AND PLAN OF MERGER.
FOR AGAINST ABSTAIN
/ / / / / /
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting and any adjournment or
postponement thereof.
[INDICIA] THIS PROXY, WHEN PROPERLY SIGNED, WILL BE VOTED IN
THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED
STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSAL 1.
Dated: ___________________________________________, 1996
________________________________________________________
Signature of Stockholder
________________________________________________________
Signature of Stockholder
Number of Shares Held of Record on January 16, 1996
________________________________________________________
THIS PROXY MUST BE DATED, SIGNED BY THE STOCKHOLDER
AND RETURNED PROMPTLY TO FIRST HARRISBURG IN THE
ENCLOSED ENVELOPE. WHEN SIGNING AS ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL
TITLE. IF MORE THAN ONE TRUSTEE, ALL SHOULD SIGN. IF
STOCK IS HELD JOINTLY, EACH OWNER SHOULD SIGN.
FOLD AND DETACH HERE
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
First Harrisburg Bancor, Inc.
We have audited the accompanying consolidated statements of financial
condition of First Harrisburg Bancor, Inc. and subsidiary as of December 31,
1994 and 1993, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Harrisburg Bancor, Inc. and subsidiary as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1994 in conformity with generally accepted
accounting principles.
As discussed in note 1 to the consolidated financial statements, the
Company changed its method of accounting for investment and mortgage-backed
securities in 1994 to adopt the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". As discussed in notes 1
and 13, the Company changed its method of accounting for income taxes in 1993 to
adopt the provisions of the Financial Accounting Standards Board's SFAS No. 109,
"Accounting for Income Taxes".
KPMG Peat Marwick
January 27, 1995
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
1994 1993
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and amounts due from banks $ 6,608 $ 6,096
Interest-bearing deposits 1,898 3,776
-------- --------
Total cash and cash equivalents 8,506 9,872
Securities held for sale -- 5,939
Investment securities (fair value: 1994,
$15,806; 1993, $11,202) 16,385 11,147
Mortgage-backed securities (fair value:
1994, $36,593; 1993, $45,805) 38,074 45,216
Loans receivable, net 170,130 133,178
Loans held for sale 26,104 50,075
Accrued interest receivable 1,471 1,119
Real estate:
Acquired in settlement of loans, net 1,154 1,841
Acquired for development, net 249 462
Property and equipment, net 1,772 1,853
Federal Home Loan Bank stock, at cost 4,306 3,869
Deferred tax asset, net 535 1,012
Servicing rights and premiums on sale of
loans, net 250 175
Prepaid expenses and other assets 1,049 659
-------- --------
Total assets $269,985 $266,417
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $151,460 $164,404
Short-term borrowings 64,980 46,295
Advances from Federal Home Loan Bank 22,011 24,600
Funds due remittance service and other 1,578 3,180
Advances from borrowers for taxes and
insurance 3,836 3,149
Long-term debt 278 458
Other liabilities 2,043 2,826
Income taxes payable 400 482
-------- --------
Total liabilities 246,586 245,394
-------- --------
Stockholders' equity:
Preferred stock: 5,000,000 shares
authorized; none issued
Common stock: $.01 par; 10,000,000
shares authorized; 2,357,464 and
1,168,284 shares issued and outstanding
in 1994 and 1993, respectively 24 12
Capital in excess of par 15,197 15,074
Retained earnings, partially restricted 8,531 6,395
Unrealized loss on securities available
for sale, net of tax of $(48) (75) --
Employee stock ownership plan obligation (278) (458)
-------- --------
Total stockholders' equity 23,399 21,023
-------- --------
Total liabilities and stockholders'
equity $269,985 $266,417
-------- --------
</TABLE>
Common stock issued and outstanding at December 31, 1994 has been adjusted to
reflect the recognition of the two for one stock split effective January 1995.
See accompanying notes to consolidated financial statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
12 Months Ended December 31,
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable $12,784 $12,184 $14,765
Loans held for sale 2,272 1,558 951
Investment securities available for sale 55 -- --
Investment securities held to maturity and other 1,047 1,889 2,116
Mortgage-backed securities available for sale 981 -- --
Mortgage-backed securities held to maturity 1,454 1,622 1,216
------- ------- -------
Total interest income 18,593 17,253 19,048
------- ------- -------
INTEREST EXPENSE:
Deposits 6,070 7,333 10,578
FHLB advances 1,070 1,185 811
Short-term borrowings 2,134 417 99
------- ------- -------
Total interest expense 9,274 8,935 11,488
------- ------- -------
Net interest income 9,319 8,318 7,560
Provision for loan losses -- -- 105
------- ------- -------
Net interest income after provision for loan losses 9,319 8,318 7,455
------- ------- -------
NONINTEREST INCOME:
Other fees and charges 896 958 774
Servicing fee income 536 469 411
Gain (loss) on sale of:
Investment and trading securities (11) -- (17)
Unrealized losses on securities held for sale -- (16) --
Mortgages 1,338 2,173 1,450
Property and equipment, net (7) 17 --
Servicing 114 -- 22
Income (loss) from real estate operations 176 (35) 156
Income from IRS claim -- 250 --
Other 8 12 11
------- ------- -------
Total noninterest income 3,050 3,828 2,807
------- ------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits 4,178 4,078 3,503
Occupancy, net 1,268 1,191 1,092
Data processing services 202 225 271
Federal insurance premiums 441 380 540
Marketing 387 253 179
Professional fees 355 290 236
Provision for real estate losses (200) 135 130
Other 1,219 1,186 1,012
------- ------- -------
Total noninterest expense 7,850 7,738 6,963
------- ------- -------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING FOR INCOME TAXES 4,519 4,408 3,299
Income taxes 1,913 1,517 1,290
------- ------- -------
Income before cumulative effect of change in
accounting for income taxes 2,606 2,891 2,009
Cumulative effect of change in accounting for
income taxes -- 717 --
------- ------- -------
NET INCOME $2,606 $ 3,608 $ 2,009
======= ======= =======
Earnings per common and common equivalent share:
Income before cumulative effect of change in
accounting for income taxes $1.08 $1.21 $.86
Cumulative effect of change in accounting for
income taxes -- .30 --
------- ------- -------
Net income $1.08 $1.51 $.86
======= ======= =======
Cash dividends paid per share $.20 $.175 $.155
======= ======= =======
</TABLE>
Cash dividends paid per share and earnings per share have been adjusted
retroactively to reflect the recognition of the two for one stock split
effective January 1995, the 20% stock dividend in November 1993 and the 10%
stock dividend in November 1992.
See accompanying notes to consolidated financial statements.
5
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share data)
<TABLE>
<CAPTION>
Unrealized
loss on
securities
Capital available
Common in excess Retained for sale, ESOP
stock of par earnings net of tax obligation Total
------ --------- -------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1991 $ 9 $ 8,377 $ 8,032 $ -- ($766) $15,652
Stock options exercised -- 42 -- -- -- 42
Employee stock ownership
plan obligation -- -- -- -- 108 108
Net income for year ended
December 31, 1992 -- -- 2,009 -- -- 2,009
Dividends paid ($.155 per share) -- -- (355) -- -- (355)
10% stock dividend 1 1,432 (1,433) -- -- --
--- ------- ------ ---- ----- -------
Balance December 31, 1992 10 9,851 8,253 -- (658) 17,456
Stock options exercised -- 145 -- -- -- 145
Dividend reinvestment shares issued -- 18 -- -- -- 18
Employee stock ownership
plan obligation -- -- -- -- 200 200
Net income for year ended
December 31, 1993 -- -- 3,608 -- -- 3,608
Dividends paid ($.175 per share) -- -- (404) -- -- (404)
20% stock dividend 2 5,060 (5,062) -- -- --
--- ------- ------ ---- ----- -------
Balance December 31, 1993 12 15,074 6,395 -- (458) 21,023
Implementation of change in
accounting for marketable debt
and equity securities, net of tax
of $158 -- -- -- 251 -- 251
Stock options exercised -- 52 -- -- -- 52
Dividend reinvestment shares
issued -- 83 -- -- -- 83
Employee stock ownership
plan obligation -- -- -- -- 180 180
Net income for year ended
December 31, 1994 -- -- 2,606 -- -- 2,606
Dividends paid ($.20 per share) -- -- (470) -- -- (470)
Two for one stock split 12 (12) -- -- -- --
Change in net unrealized gain
(loss) on available-for-sale
securities -- -- -- (326) -- (326)
--- ------- ------ ---- ----- -------
Balance December 31, 1994 $24 $15,197 $8,531 ($75) ($278) $23,399
=== ======= ====== ==== ===== =======
</TABLE>
Dividends paid per share have been adjusted retroactively to reflect the
recognition of the two for one stock split effective January 1995, the 20%
stock dividend in November 1993 and the 10% stock dividend in November 1992.
See accompanying notes to consolidated financial statements.
6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
12 Months Ended December 31,
Cash flows from operating activities: 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Net income $ 2,606 $ 3,608 $ 2,009
--------- --------- ---------
Adjustments:
Depreciation 349 310 268
Interest credited on deposits 6,072 7,340 10,627
Provision for loan losses -- -- 105
Provision for real estate losses (200) 135 130
Purchase of investment securities in trading account (1,497) -- (1,990)
Proceeds from sale of investment securities held in trading account 1,486 -- 1,973
(Gain) loss on sale of:
Investment securities held in trading account 11 -- 17
Mortgages (1,338) (2,173) (1,450)
Servicing (114) -- (22)
Real estate acquired:
In settlement of loans (105) (17) (120)
For development (67) (88) (191)
Property and equipment 1 (32) --
Unrealized losses on securities held for sale -- 16 --
Loss on abandonment of property and equipment 6 16 --
(Increase) decrease in deferred income taxes 525 (507) 156
Loans held for sale, sold 437,476 364,311 130,351
Proceeds from sale of servicing 114 -- 22
Investment in loans held for sale (113,474) (158,318) (112,463)
Loans held for sale, purchased (298,823) (240,571) (20,497)
Amortization of loan fees (191) (277) (113)
Amortization of servicing rights and premiums on sale of loans 51 56 56
Increase in servicing rights and premiums on sale of loans (126) (15) (7)
(Increase) decrease in accrued interest receivable (352) 427 (15)
(Increase) decrease in prepaid expenses and other assets (390) 397 (485)
(Decrease) increase in other liabilities (783) 226 (468)
Decrease in income taxes payable (82) (11) (44)
--------- --------- ---------
Total adjustments 28,549 (28,775) 5,840
--------- --------- ---------
Net cash provided by (used in) operating activities 31,155 (25,167) 7,849
--------- --------- ---------
Cash flows from investing activities:
Loans receivable sold -- 1,857 --
Principal payments on loans 40,831 52,804 65,624
Investment in loans (69,162) (53,207) (34,911)
Loans purchased (8,105) -- --
Fees deferred on loans and mortgages 456 241 66
Change in undisbursed loans in process (1,057) 1,601 (127)
Purchase of:
Investment securities held for sale -- (5,956) --
Investment and mortgage-backed securities held to maturity (11,095) (33,964) (36,958)
Property and equipment (276) (342) (454)
FHLB stock, net $ (437) $ (2,080) $ (626)
</TABLE>
(continued)
7
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
<TABLE>
<CAPTION>
12 Months Ended December 31,
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Proceeds from:
Maturities and principal reductions of investment and
mortgage-backed securities available for sale $ 2,892 $ -- $ --
Maturities and principal reductions of investment and
mortgage-backed securities held to maturity 9,984 29,370 9,557
Sales of investment securities held to maturity -- 500 --
Sales of investment and mortgage-backed securities available
for sale 5,939 -- --
Sales of real estate acquired:
In settlement of loans 1,114 250 520
For development 504 272 764
Sales of property and equipment 1 51 --
Investment in real estate acquired for development
and in settlement of loans 60 9 (66)
--------- --------- ---------
Net cash (used in) provided by investing activities (28,351) (8,594) 3,389
--------- --------- ---------
Cash flows from financing activities:
Net decrease in deposits (19,016) (25,629) (39,086)
Net increase (decrease) in:
Federal Home Loan Bank advances (2,589) 5,600 18,000
Short-term borrowings 18,685 40,578 5,717
Funds due remittance service and other (1,602) 2,329 112
Advance payments by borrowers for taxes and insurance 687 606 627
Proceeds from issuance of stock 135 162 42
Cash dividends (470) (404) (355)
--------- --------- ---------
Net cash (used in) provided by financing activities (4,170) 23,242 (14,943)
--------- --------- ---------
Net decrease in cash and cash equivalents (1,366) (10,519) (3,705)
Cash and cash equivalents, beginning of period 9,872 20,391 24,096
--------- --------- ---------
Cash and cash equivalents, end of period $ 8,506 $ 9,872 $ 20,391
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest on deposits, FHLB advances and other
short-term borrowings $ 4,102 $ 2,761 $ 2,726
Income taxes 1,483 1,768 1,136
</TABLE>
Supplemental schedule of noncash investing and financing activities:
Real estate in settlement of loans has been acquired without the use of
cash or cash equivalents. Such additions to real estate acquired in
settlement of loans amounted to $406,000, $520,900, and $422,300 in 1994,
1993, and 1992, respectively.
See accompanying notes to consolidated financial statements.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
Basis of Financial Statement Presentation:
The accompanying consolidated financial statements include the accounts of
First Harrisburg Bancor, Inc. (the "Company") and its wholly-owned subsidiary,
First Federal Savings and Loan Association of Harrisburg (the "Association").
All significant intercompany transactions and balances are eliminated in
consolidation.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and prevailing practices within the
industry. In preparing the consolidated 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 sheets and revenues and
expenses for the periods presented. Actual results could differ significantly
from those estimates.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowances for loan and real
estate losses. In connection with the determination of the allowances for loan
and real estate losses, management obtains independent appraisals for
significant properties.
Management believes that the allowances for loan and real estate losses are
adequate. While management uses available information to recognize losses on
loans and real estate, future additions to the allowances may be necessary based
on changes in economic conditions. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the
Association's allowances for loan and real estate losses. Such agencies may
require the Association to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
Cash Equivalents:
For purposes of the statements of cash flows, the Company considers cash
amounts due from banks and interest bearing deposits in banks to be cash
equivalents.
Investment and Mortgage-backed Securities:
The Company adopted the provisions of the Financial Accounting Standards
Board's (FASB) Statement of financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" (SFAS 115) on January 1,
1994. Under SFAS 115, the Company classifies its debt and marketable securities
in one of three categories: trading, available-for-sale, or held-to-maturity.
Trading securities are bought and held principally for the purpose of selling
them in the near term. Held-to-maturity securities are those debt securities for
which the Company has the ability and intent to hold the security until
maturity. All other securities not included in trading or held-to-maturity are
classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains and
losses on trading securities are included in earnings. Unrealized holding gains
and losses on available-for-sale securities, net of the related tax effect, are
excluded from earnings and are reported as a separate component of stockholders'
equity until realized.
A decline in the market value of any available-for-sale or held
- -to-maturity security below cost that is deemed other than temporary is charged
to earnings, resulting in the establishment of a new cost basis for the
security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective interest method.
Dividend and interest income are recognized when earned. Realized gains and
losses are included in earnings and are derived using the specific
identification method for determining the cost of securities sold.
Investment and mortgage-backed securities at December 31, 1993 for which
the Company had both the intent and ability to hold to maturity were carried at
amortized cost. Equity securities that were nonmarketable were stated at cost.
All other equity securities were carried at the lower of aggregate cost or fair
value. Securities held for sale were carried at the lower of cost or fair value.
The effect of adopting SFAS 115 at January 1, 1994 resulted in an increase
to investment and mortgage-backed securities of $409,300 and an after-tax
increase to stockholders' equity of $250,900. At December 31, 1994, SFAS 115
resulted in a decrease to investment and mortgage-backed securities of $123,000
and an after-tax decrease to stockholders' equity of $75,000.
Federal law requires a member institution of the Federal Home Loan Bank
("FHLB") System to hold common stock of its district FHLB according to
predetermined formulas. This stock is carried at cost and may be pledged to
secure FHLB advances.
9
<PAGE>
Loans Held for Sale:
Loans held for sale are reported at the lower of aggregate cost or market,
determined as of the balance sheet date. The amount by which cost exceeds market
value in the aggregate is accounted for as a valuation allowance. Changes in the
valuation allowance are included in the determination of net income of the
period in which the change occurs. Gains and losses on the sale of loans are
determined using the specific identification method.
Loans Receivable:
Loans receivable are stated at the unpaid principal balances, less the
allowance for loan losses, and net deferred loan origination fees and costs.
Provisions for losses on loans are charged to operations based upon
management's evaluation of potential losses. Specific provisions are established
on assets where a decline in value has been identified. In addition, general
provisions are established for losses based upon the overall portfolio
composition and general market conditions. Collection efforts on charged-off
consumer loans are pursued through professional collection agencies. Resulting
proceeds of such efforts are recorded in the allowance for loan losses as
recoveries.
Recognition of interest income on loans is computed using the interest
method. An allowance for uncollected interest is established for loans that are
past due based on management's periodic evaluation. The allowance is established
by a charge to interest income equal to all interest previously accrued. Loans
are returned to accrual status when the collectibility of past due principal and
interest is reasonably assured.
Loan Origination and Commitment Fees and Related Costs:
All loan origination and commitment fees and certain related direct costs
are offset and the net deferred amount is recognized as an adjustment to
interest income, based on the interest method over the life of the loans.
Real Estate:
Real estate acquired in settlement of loans is recorded at the lower of
cost or estimated fair value minus estimated costs to sell at the date of
foreclosure. At the time of foreclosure the excess, if any, of cost over the
estimated fair value of the property minus estimated costs to sell is charged to
the allowance for loan losses. Fair values are determined by independent
appraisals or by discounting cash flows for income producing properties. Real
estate acquired for development is carried at the lower of cost, including cost
of improvements and amenities incurred subsequent to acquisition, or estimated
net realizable value. Costs relating to development and improvement of property
are capitalized, whereas costs relating to holding property are expensed.
Valuations are performed periodically by management on both real estate
acquired for development and real estate acquired in settlement of loans. An
allowance for losses is established by a charge to operations if the carrying
value of real estate acquired for development exceeds its estimated net
realizable value, or the carrying value of real estate acquired in settlement of
loans exceeds its estimated fair value.
Income Taxes:
Effective January 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109), on a prospective basis. SFAS 109 changed the Company's method of
accounting for income taxes from the deferred method to the asset and liability
method. The objective of the asset and liability method is to establish deferred
tax assets and liabilities for temporary differences between the financial
reporting and tax bases of the Company's assets and liabilities at enacted tax
rates expected to be in effect when such amounts are realized or settled. Under
SFAS 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Property and Equipment:
Land is carried at cost. Buildings, leasehold improvements, and furniture
and equipment are carried at cost, less accumulated depreciation. Depreciation
is based on the straight-line method over the estimated useful lives of the
assets of 25-33 years for buildings, 20 years for land improvements, 5-7 years
for furniture and equipment and over the lesser of the terms of the related
lease or estimated useful life for leasehold improvements.
Loan Servicing Rights:
The cost of loan servicing rights acquired is amortized in proportion to,
and over the period of, estimated net servicing revenues. The cost of loan
servicing rights acquired, and the amortization thereof is periodically
evaluated in relation to estimated future net servicing revenues based on
management's best estimate of remaining loan lives.
Fees earned for servicing loans for others are reported as income when the
related loan payments are collected. Loan servicing costs are charged to expense
as incurred.
Derivatives:
Premiums paid for interest rate cap agreements are amortized into interest
expense over the term of the agreements. Interest expense is reduced on a
current basis when the index rate exceeds the interest
10
<PAGE>
rate cap specified under the agreement on a purchased cap. Unamortized premiums
are included in prepaid expenses in the statement of financial condition.
Earnings Per Share:
Earnings per share have been computed on the basis of the weighted-average
number of common and common equivalent shares outstanding adjusted retroactively
for all periods presented to reflect the two for one stock split effective
January 1995 (see note 14), the 20% stock dividend of November 1993 and the 10%
stock dividend of November 1992. Stock options are regarded as common stock
equivalents and their potential dilution is computed using the treasury stock
method. The adjusted weighted-average number of common and common equivalent
shares outstanding were 2,413,927, 2,389,218 and 2,340,950 in 1994, 1993 and
1992, respectively. The potential dilution from the exercise of stock options
and stock appreciation rights is not material.
Postretirement Benefits:
In December 1990, the FASB issued Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions" (SFAS 106). Currently, the Association does not provide postretirement
benefits, and therefore is not impacted by the provisions of SFAS 106.
Postemployment Benefits:
In December 1992, the FASB issued Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits" (SFAS
112). SFAS 112 is effective for fiscal years beginning after December 15, 1993.
The only postemployment benefits provided by the Company are severance for
certain officers that are payable in the event of certain specific circumstances
such as a change in control. Accordingly, at the present time, the Company is
not impacted by the provisions of SFAS 112.
2. NEW ACCOUNTING STANDARDS:
In May 1993, the FASB issued Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114) and in
October 1994, Statement of Financial Accounting Standards No. 118, "Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosure" (SFAS
118).
SFAS 114, as amended by SFAS 118, addresses the accounting by creditors for
impairment of certain loans. SFAS 114 requires that impaired loans that are
within the scope of the Statement be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
alternatively, at the loan's market price or the fair value of the collateral if
the loan is collateral dependent.
SFAS 114 is effective for fiscal years beginning after December 15, 1994
and earlier adoption is permitted. Effective January 1, 1995, the Company will
implement the provisions of SFAS 114 and SFAS 118. Based on the present
composition of the Company's loan portfolio and present economic conditions in
the Company's market area, management expects that the implementation of SFAS
114 and SFAS 118 will not have a material effect on the Company's financial
position or results of operations.
In November 1993, the American Institute of Certified Public Accountants
issued Statement of Position No. 93-6, "Employers' Accounting for Employee Stock
Option Plans" (SOP 93-6). SOP 93-6 is effective for fiscal years beginning after
December 15, 1993 and its accounting provisions are only required for shares
purchased by Employee Stock Option Plans after December 31, 1992. Accordingly,
the Company does not anticipate any impact of the SOP on its consolidated
financial statements.
11
<PAGE>
3. INVESTMENT SECURITIES:
The amortized cost and fair values of investment securities
available-for-sale and held-to-maturity at December 31, 1994 and the amortized
cost and fair values of investment securities and securities held-for-sale at
December 31, 1993 are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1994
Gross Gross
(In thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ----- -----
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. government securities $ 1,000 $ -- $ (2) $ 998
U.S. government agency securities 14 -- 14
Equity securities:
FNMA & SallieMae common stock 12 37 -- 49
------- ------- ------ -------
$ 1,026 $37 $ (2) $ 1,061
------- ------- ------ -------
Held-to-maturity:
Domestic corporate securities 5,229 -- (284) 4,945
U.S. government securities 616 2 -- 618
U.S. government agency securities 9,479 -- (297) 9,182
------- ------- ------ -------
15,324 2 (581) 14,745
------- ------- ------ -------
$16,350 $39 ($583) $15,806
======= ======= ------ -------
</TABLE>
The amortized cost and fair value of securities available-for-sale and
held-to-maturity at December 31, 1994, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Available-for-sale Held-to-maturity
(In thousands) Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $1,026 $1,061 $ 616 $ 618
Due after 1 year through 5 years -- -- 6,239 5,969
Due after 5 years through 10 years -- -- 8,469 8,158
------ ------ ------- -------
$1,026 $1,061 $15,324 $14,745
====== ======= ======= =======
</TABLE>
Proceeds from sales of available-for-sale investment securities during 1994
were $5,939,000. No gains or losses were realized on the sale of these
securities.
At December 31, 1994, there were no securities held in the trading account.
Proceeds from sales of trading account securities during 1994 were $1,486,000.
Gross losses of $11,000 were realized on those sales.
<TABLE>
<CAPTION>
December 31, 1993
Gross Gross
(In thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Domestic corporate securities $ 5,148 $ 2 ($36) $ 5,114
U.S. government securities 2,969 6 -- 2,975
U.S. government agency securities 3,018 28 -- 3,046
Equity securities 12 55 -- 67
------- --- --- -------
$11,147 $91 ($36) $11,202
======= === ==== =======
</TABLE>
Proceeds from the sale of an investment security during 1993 was $500,000.
No gain or loss was realized on the sale of this security. This security was
sold due to deterioration in the issuer's creditworthiness.
At December 31, 1993, there were no securities held in the trading account
as well as no activity during 1993. Securities held for sale at December 1993
had a carrying value of $5,939,300 which represents the cost basis of such
securities reduced by $16,200, which represented the unrealized losses on such
securities.
There were no sales of investment securities during 1992. Proceeds from
sales of trading account securities during 1992 were $1,972,600. Gross losses of
$17,400 were realized on those sales.
12
<PAGE>
4. MORTGAGE-BACKED AND RELATED SECURITIES:
The amortized cost and fair values of mortgage-backed securities
available-for-sale and held-to-maturity at December 31, 1994 and the amortized
cost and estimated fair values of mortgage-backed securities at December 31,
1993 are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1994
Gross Gross
(In thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ----------- ---------- -----
<S> <C> <C> <C> <C>
Available-for-sale:
GNMA certificates $ 1,256 $ -- ($53) $ 1,203
FHLMC certificates 6,674 -- (105) 6,569
------- ---- ------- -------
7,930 -- (158) 7,772
------- ---- ------- -------
Held-to-maturity:
GNMA certificates 2,688 -- (115) 2,573
FHLMC certificates 14,076 10 (807) 13,279
FNMA certificates 2,901 -- (69) 2,832
Collateralized mortgage obligations 6,318 -- (188) 6,130
Other certificates 4,319 -- (312) 4,007
------- ---- ------- -------
30,302 10 (1,491) 28,821
------- ---- ------- -------
$38,232 $10 ($1,649) $36,593
======= ==== ======= =======
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
December 31, 1993
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
GNMA certificates $ 4,269 $ 93 $ -- $ 4,362
FHLMC certificates 24,842 476 (12) 25,306
FNMA certificates 3,956 58 -- 4,014
FNMA collateralized mortgage obligations 6,567 -- (32) 6,535
Other mortgage-backed securities 5,582 6 -- 5,588
------- ---- ---- -------
$45,216 $633 ($44) $45,805
======= ==== ===== =======
</TABLE>
There were no sales of mortgage-backed securities during 1994, 1993 or 1992.
13
<PAGE>
5. LOANS RECEIVABLE:
Loans receivable at December 31 are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
1994 1993
---- ----
<S> <C> <C>
First Mortgage Loans:
Principal balances:
Secured by one-to-four family residences $ 84,913 $ 57,750
Secured by multi-family residences 986 1,091
Secured by nonresidential properties 3,318 4,319
Construction loans:
Secured by one-to-four family residences 2,126 3,017
Secured by multi-family residences 989 1,000
Land loans 3,653 2,225
------ ------
95,985 69,402
Less:
Undisbursed portion of construction and land loans:
Secured by one-to-four family residences (504) (889)
Secured by multi-family residences (241) (822)
Secured by land (29) (88)
Unearned discounts (396) (34)
Net deferred loan origination fees (1,178) (829)
------- ------
Total first mortgage loans 93,637 66,740
------- ------
Consumer and other loans:
Principal balances:
Home equity and second mortgages 50,473 44,016
Home equity lines of credit 17,967 19,587
Other 7,821 3,539
------- ------
76,261 67,142
Plus:
Unearned premiums 1,077 285
Net deferred loan origination costs 253 235
------- ------
Total consumer and other loans 77,591 67,662
------- ------
Less allowance for loan losses (1,098) (1,224)
$ 170,130 $133,178
======= ======
</TABLE>
14
<PAGE>
Activity in the allowance for loan losses is summarized as follows for the years
ended December 31:
<TABLE>
<CAPTION>
(In thousands)
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $1,224 $1,493 $1,501
Provisions charged to income:
Residential real estate loans (29) (26) (61)
Commercial real estate (344) (34) 84
Consumer loans -- (15) 61
Unallocated 373 75 21
------ ------ ------
0 0 105
------ ------ ------
Recoveries:
Residential real estate loans -- -- --
Consumer loans 20 52 16
------ ------ ------
20 52 16
------ ------ ------
Charge-offs:
Residential real estate loans -- (2) (4)
Commercial real estate -- -- --
Consumer loans (146) (319) (125)
------ ------ ------
(146) (321) (129)
------ ------ ------
Balance at end of year $1,098 $1,224 $1,493
====== ====== ======
</TABLE>
Included within the loan portfolio are loans which the Association has
ceased accrual of interest. Such loans amounted to $1.1 million, $2.0 million
and $4.0 million at December 31, 1994, 1993 and 1992, respectively. If interest
income had been recorded on all nonaccrual loans outstanding during the year,
interest income would have increased by approximately $57,000, $55,600 and
$223,500 during 1994, 1993 and 1992, respectively.
As discussed in Note 2, the Company will adopt SFAS 114, as amended by
SFAS 118, in the first quarter of 1995. Upon review of the loan portfolio, no
loans were identified as impaired as of December 31, 1994.
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 serviced loans at December 31 are summarized as follows:
(In thousands)
1994 1993 1992
---- ---- ----
FNMA $148,170 $126,922 $ 84,770
FHLMC 22,328 25,864 35,670
Other investors 49,422 40,826 36,556
-------- -------- --------
$219,920 $193,612 $156,996
======== ======== ========
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $3.0 million, $3.6 million and $2.6 million at
December 31, 1994, 1993 and 1992, respectively.
During 1994, 1993 and 1992 the Association capitalized costs to acquire
loan servicing rights of $126,300, $15,500 and $7,300, respectively. The
Association recognized amortization on the cost of acquired loan servicing, loan
servicing rights purchased and premiums on loans sold of $51,000, $55,700 and
$55,900 for the years ended December 31, 1994, 1993 and 1992, respectively,
which is reflected in servicing fee income in the consolidated statements of
operations. The recorded value of servicing rights does not exceed the present
value of the future net servicing income.
7. ACCRUED INTEREST RECEIVABLE:
Accrued interest receivable at December 31 is summarized as follows:
(In thousands)
1994 1993
---- ----
Investment securities $ 339 $ 126
Mortgage-backed securities 261 302
Loans receivable 871 691
------ ------
$1,471 $1,119
====== ======
15
<PAGE>
8. REAL ESTATE:
Real estate acquired for development at December 31 is summarized as
follows:
(In thousands) 1994 1993
---- ----
Investment in real estate partnerships $157 $462
Investment in real estate development 152 283
---- ----
309 745
Less allowance for real estate losses (60) (283)
---- ----
$249 $462
==== ====
Income from real estate operations for the years ended December 31 is as
follows:
<TABLE>
<CAPTION>
(In thousands) 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Equity in income of partnerships $ 55 $ 66 $ 76
Income from real estate development 105 21 116
Gain from the sale of real estate acquired in settlement of loans 105 17 120
Income (loss) from the operation of real estate acquired in
settlement of loans (89) (139) (156)
---- ----- -----
$176 $ (35) $ 156
==== ===== =====
</TABLE>
Income of $93,000 that had previously been deferred on the sale of real
estate held for development was recognized in 1994. Capitalized interest on real
estate development for the years ended December 31, 1994, 1993 and 1992 amounted
to $0, $2,000 and $0, respectively. Depreciation expense for real estate
acquired in settlement of loans for the years ended December 31, 1994, 1993 and
1992 amounted to $0, $0 and $33,700, respectively.
Summaries of assets, liabilities, and partners' equity of the partnerships
at December 31, 1994 and 1993, and operations for the years ended December 31,
1994, 1993 and 1992 are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C> <C> <C>
Assets: 1994 1993 1992
---- ---- ----
Cash $ -- 1
Land, buildings, and construction in progress 761 $ 2,369
Other assets -- 56
------ -------- --------
$761 $2,426
====== ========
Liabilities and partners' equity:
Liabilities:
Loans payable $233 $ 920
Other liabilities 61 $ 146
---- ------
294 1,066
---- ------
Partners' equity:
First Harrisburg Bancor, Inc. 157 462
Other partners 310 898
---- ------
467 1,360
---- ------
$761 2,426
==== ======
Operations of partnerships:
Real estate sales $793 $ 793 $ 1,233
Other income 1 $ 2 5
---- ------- --------
794 795 1,238
Cost of sales 615 601 953
Selling and other expenses 5 4 26
---- ------ -------
Net earnings $174 $ 190 $ 259
==== ====== =======
</TABLE>
16
<PAGE>
Activity in the allowance for losses for real estate foreclosed and held
for investment for the years ended December 31 is as follows:
Real estate acquired in settlement of loans
(In thousands) 1994 1993 1992
---- ---- ----
Balance at beginning of year $176 $322 $440
Provision charged to income 23 65 155
Recoveries -- 20 --
Charge-offs (186) (231) (273)
---- ---- ----
Balance at end of year $ 13 $176 $322
==== ===== ====
Real estate acquired for development
(In thousands) 1994 1993 1992
---- ---- ----
Balance at beginning of year $283 $213 $238
Provision charged to income (223) 70 (25)
---- ---- ----
Balance at end of year $ 60 $283 $213
==== ==== ====
9. PROPERTY AND EQUIPMENT:
Property and equipment at December 31 are summarized as follows:
(In thousands)
1994 1993
---- ----
Land and improvements $ 410 $ 410
Buildings 1,611 1,607
Leasehold improvements 509 509
Furniture, fixtures, and equipment 1,855 2,019
------- ------
4,385 4,545
Less accumulated depreciation (2,613) (2,692)
------- ------
$1,772 $1,853
======== ======
Depreciation expense for property and equipment amounted to $349,300,
$310,100 and $234,500 for the years ended December 31, 1994, 1993 and 1992,
respectively.
The Association currently leases four of its branch locations and office
space for a subsidiary. Rental expense for the years ended December 31, 1994,
1993 and 1992 was $285,100, $245,800 and $225,700, respectively. Future lease
payments as of December 31, 1994 are as follows:
(In thousands)
1995 $264
1996 226
1997 167
1998 37
1999 28
Later years, through 2003 100
17
<PAGE>
10. DEPOSITS:
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
Weighted-
average rate 1994 1993
at December
31, 1994 Amount Percent Amount Percent
------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
NOW accounts 0.00% $ 4,380 2.89% $ 4,466 2.72%
Money market 3.11% 30,793 20.33% 38,250 23.26%
Passbook savings and
club accounts 2.53% 20,583 13.59% 20,663 12.57%
--------- ------- --------- --------
55,756 36.81% 63,379 38.55%
--------- ------- --------- --------
Certificates of deposit:
2.00% to 4.00% 3.48% 14,787 9.76% 43,968 26.74%
4.01% to 6.00% 4.78% 58,378 38.55% 39,041 23.75%
6.01% to 8.00% 6.56% 20,192 13.33% 7,736 4.70%
8.01% to 10.00% 8.41% 2,337 1.54% 9,317 5.67%
10.01% to 10.25% 10.25% 10 0.01% 963 0.59%
--------- ------- --------- --------
95,704 63.19% 101,025 61.45%
--------- ------- --------- --------
4.16% $151,460 100.00% $164,404 100.00%
========= ======= ========= ========
</TABLE>
At December 31,1994, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
(In thousands)
1995 1996 1997 1998 1999 Thereafter Total
---- ---- ---- ---- ---- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
2.00% to 4.00% $13,580 $ 1,149 $ 16 $ 42 $ -- $ -- $14,787
4.01% to 6.00% 29,943 14,561 6,556 4,276 2,949 93 58,378
6.01% to 8.00% 1,900 3,032 13,983 47 1,174 56 20,192
8.01% to 10.00% 1,619 190 -- 307 141 80 2,337
10.01% to 10.25% 10 -- -- -- -- -- 10
------- ------- --------- ------- ------- -------- -------
$47,052 $18,932 $20,555 $4,672 $ 4,264 $ 229 $95,704
======= ======= ========= ======= ======= ======== =======
</TABLE>
Interest expense on deposits for the years ended December 31 is summarized as
follows:
(In thousands)
1994 1993 1992
NOW accounts $ -- $ -- $ --
Money market 1,085 1,198 1,552
Passbook savings and clubs 558 622 805
Certificates of deposit 4,427 5,513 8,221
------- -------- ---------
$6,070 $7,333 $10,578
======= ======== =========
At December 31, 1994 and 1993, accrued interest payable on deposits totaled
$8,600 and $11,000, respectively, and the aggregate amount of time deposits of
$100,000 or more totaled $11.0 million and $11.8 million, respectively.
11. BORROWED FUNDS:
Borrowed funds at December 31 are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
1994 1993
---- ----
<S> <C> <C>
Short-term borrowings:
Securities sold under agreements to repurchase $19,608 $ --
Other short-term borrowings 45,372 46,295
Advances from the Federal Home Loan Bank 22,011 24,600
------- --------
$86,991 $ 70,895
======= ========
</TABLE>
18
<PAGE>
Interest expense on borrowed funds for the years ended December 31 is
summarized as follows:
(In thousands)
1994 1993 1992
---- ---- ----
Advances from the FHLB $1,070 $1,185 $811
Reverse repurchase agreements 472 -- --
Other short-term borrowings 1,662 417 99
------ ------ ----
$3,204 $1,602 $910
====== ====== ====
The Association enters into sales of securities under agreements to
repurchase (reverse repurchase agreements). Reverse repurchase agreements are
treated as financings, and the obligation to repurchase securities sold are
reflected as a liability in the statement of financial condition. The dollar
amount of securities underlying the agreements remains in the asset accounts.
The securities underlying the agreements are book entry securities. During the
period, the securities were delivered to the counterparties' accounts. The
counterparties have agreed to resell to the Association the identical securities
at the maturities of the agreements. At December 31, 1994 these agreements have
a weighted average interest rate of 6.27% and mature within three months. All
reverse repurchase agreements at December 31, 1994 are with the Federal Home
Loan Bank.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
(In thousands)
1994 1993
---- ----
Average balance during the year $ 9,187 $ --
Average interest rate during the year 5.14% --
Maximum month-end balance during the year $20,743 $ --
Mortgage-backed and debt securities underlying the agreements at December 31,
1994:
Carrying value including accrued interest $21,239 $ --
Estimated fair value $20,314 $ --
Pursuant to a master agreement with the FHLB, the Association granted the FHLB a
security interest in all FHLB stock, mortgage collateral and other collateral
owned by the Association. Advances at December 31, 1994 have calendar-year
maturity dates in 1995 of $12.8 million at rates ranging from 3.96% to 6.16%, in
1996 of $1.8 million at a rate of 4.23%, in 1998 of $5.0 million at a rate of
6.31% and in 1999 of $2.4 million at a rate of 6.79%. The Association also has a
$27.5 million line of credit with the FHLB of which $18.5 million has been drawn
at a rate of 6.14%. In addition, the Association has a $75.0 million line of
credit with the FHLB in connection with the "FundLine" program of which $26.9
million has been drawn at a rate of 6.44%. Through the FundLine program, the
Association borrows funds from the FHLB for the purchase of loans to be sold to
investors in the secondary market. The collateral for those borrowings is the
underlying mortgages.
12. EMPLOYEE BENEFIT PLANS:
Pension:
All eligible employees are covered by the Financial Institutions Retirement
Fund. Payments, if required, are made each year to fund normal pension costs
accrued plus a portion of the unfunded prior service costs which are amortized
over a 40-year period. The multi-employer fund is a defined benefit plan
providing for retirement, death, and disability benefits. Employees who have
completed one- year of service, are 21 years of age, and are expected to
complete 1,000 hours of service in twelve consecutive months are eligible for
active status. The fund neither makes separate actuarial valuations nor
segregates the assets for each employer. Contributions into the fund for 1994
and 1993 were $51,800 and $32,900, respectively. In 1992, contributions were not
required.
In 1992, the Company adopted a retirement plan ("Plan") for directors who
serve more than five years. The Plan provides retirement benefits equal to
director fees earned for a period equal
19
<PAGE>
to the number of years served as a director, but not to exceed ten years. The
Plan also provides a death benefit equal to 50% of the retirement benefit.
A reconciliation of the funded status is summarized as follows:
(In thousands) 1994 1993
---- ----
Accumulated and projected benefit
plan obligation (all vested) ($293) ($268)
Fair value of plan assets -- --
------ -----
Plan assets below projected
obligation (293) (268)
Unrecognized prior service costs 178 176
Unrecognized net gain (28) --
Additional minimum liability (150) --
------ -----
Accrued pension costs ($293) ($ 92)
====== ======
A discount rate of 7.5% and 7.0% was used in determining the actuarial
present value of the projected benefit obligation at December 31, 1994 and 1993,
respectively.
The net pension costs for the years ended December 31 are summarized as
follows:
(In thousands) 1994 1993 1992
---- ---- ----
Service cost $ 8 $ 7 $ 7
Interest costs 20 17 17
Net amortization and deferral 22 22 22
---- ---- ----
Net periodic pension costs $50 $46 $46
=== === ===
The net amortization and deferral consists of the amortization of unrecognized
prior service costs.
Stock Compensation Program:
During 1987, the stockholders of the Company approved a stock compensation
program ("1986 Program") for the benefit of directors, officers and other
selected key employees. The 1986 Program provides that a total of 227,312 shares
be reserved for the granting of performance shares or the exercise of options
and any related stock appreciation rights.
The options granted, which may either be "incentive" or "compensatory," are
exercisable for a term no longer than ten years at a price not less than the
fair market price on the date the option is granted.
Changes in options outstanding under the 1986 program are as follows:
Shares Under Option Price
Option Per Share
------ ---------
Outstanding at 12/31/91 42,499 $ 8.26-11.77
Exercised during year (1,996) $ 8.26-11.77
Stock dividend of 10% 4,045 $(.75)-(1.07)
-------- -------------
Outstanding at 12/31/92 44,548 $ 7.51-10.70
Exercised during year (14,609) $ 6.26-10.70
Stock Dividend of 20% 8,048 $(1.25)-(1.78)
-------- --------------
Outstanding at 12/31/93 37,987 $ 6.26-8.92
Granted during the year 10,000 $ 22.25
Exercised during year (6,924) $ 6.26-8.92
Two for one stock split 41,063 $ (3.13)-(11.13)
--------- ----------------
Outstanding at 12/31/94 82,126 $ 3.13-11.12
========= =============
During 1990, the stockholders of the Company approved a stock option plan
("1990 Program") for the benefit of officers and other key employees. The 1990
Program provides that a total of 227,694 shares be reserved for the granting of
shares or the exercise of options and any related stock appreciation rights. No
options had been granted at December 31, 1994.
During 1990, the stockholders of the Company approved a compensatory stock
option plan ("Directors' Plan") for the benefit of directors. The Directors'
Plan provides that a total of 227,694 shares be reserved for the granting of
shares or the exercise of options.
Changes in options outstanding under the Directors' Plan are as follows:
Shares Under Option Price
Option Per Share
------ ---------
Outstanding at 12/31/91 15,703 $ 10.63-11.02
Exercised during year (2,200) $ 11.02
Stock dividend of 10% 1,350 $(.97)-(1.00)
------- -------------
Outstanding at 12/31/92 14,853 $ 9.66-10.02
Granted during year 50 $ 17.00
Exercised during year (4,840) $ 9.71-10.02
Stock Dividend of 20% 2,012 $(1.62)-(2.83)
------- --------------
Outstanding at 12/31/93 12,075 $ 8.04-14.17
Two for one stock split 12,075 $(4.02)-(7.09)
-------- --------------
Outstanding at 12/31/94 24,150 $ 4.02-7.08
======= ===========
Profit Sharing Plan:
All eligible employees with more than 1,000 hours of service in a year are
covered by the profit sharing plan. Contributions to the plan are at the
discretion of the Board of Directors, but cannot exceed the maximum allowable
under the Internal Revenue Code. No contributions were made during 1994, 1993
and 1992.
Employee Stock Ownership Plan:
The Company's Employee Stock Ownership Plan ("ESOP") may acquire shares up
to 10% of the Company's common stock for the benefit of the employee
participants. All eligible employees with at least one year of credited service
are covered by the ESOP. The Association's contributions to the ESOP are not
fixed, so benefits payable under the ESOP cannot be estimated. Dividends on
allocated and unallocated shares are distributed to the employee participants. A
term note from a bank provided the funding to acquire the shares. At December
31, 1994, 211,012 shares have been
20
<PAGE>
acquired; 56,110 of these shares are pledged as collateral for the ESOP's debt
and are held in a suspense account. The remaining 154,902 shares have been
released from the suspense account, based on principal repayment of the debt,
and allocated among participants.
The Company has presented the outstanding loan amount of $277,700 as
long-term debt and as a reduction of stockholder's equity in the accompanying
consolidated statement of financial condition at December 31, 1994. During 1994,
the Association refinanced the ESOP debt with another bank at a lower rate of
interest. Interest on the unpaid principal balance is due monthly based on a
rate of three quarters percent over the prime rate. The principal of $277,700 is
to be repaid in 16 quarterly installments ending December 31, 1998 and allows
for prepayments of principal over the same period. Payments of principal and
interest have been included as part of salaries and benefits expense in the
financial statements.
For the year ended December 31, 1994 the Association paid a total of
$92,000 in quarterly principal repayments, $88,600 in prepayment of principal,
$19,400 directly to the ESOP to fund distributions to former employees and
$32,500 in interest.
For the year ended December 31, 1993 the Association paid a total of
$114,500 in quarterly principal repayments, $85,500 in prepayment of principal
and $50,800 in interest. At December 31, 1993, there were 58,459 shares of the
Company's stock allocated to employee participants.
For the year ended December 31, 1992 the ESOP repaid $66,700 of funds
borrowed but not used. For the same period the Association paid $25,000 directly
to the ESOP to purchase stock, paid a total of $104,300 in quarterly principal
repayments, $70,700 in prepayment of principal and $48,600 in interest. In
addition, $5,300 in interest was accrued but not paid at December 31, 1992. At
December 31, 1992 there were 30,359 shares of the Company's stock allocated to
employee participants.
13. INCOME TAXES:
As discussed in note 1, the Company adopted SFAS 109 as of January 1, 1993.
The cumulative effect of this change in accounting for income taxes amounted to
an increase to income of $717,200 for the year ended December 31, 1993. Prior
years' financial statements were not restated to apply the provisions of SFAS
109.
The provision for income taxes consists of:
<TABLE>
<CAPTION>
(In thousands)
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
Year ended December 31, 1994:
Federal $1,032 $504 $1,536
State 356 21 377
------ ---- ------
$1,388 $525 $1,913
====== ==== ======
Year ended December 31, 1993:
Federal $ 797 $170 $ 967
State 508 42 550
------ ---- ------
$1,305 $212 $1,517
====== ==== ======
Year ended December 31, 1992:
Federal $ 907 $ 88 $ 995
State 286 9 295
------ ---- ------
$1,193 $ 97 $1,290
====== ==== ======
</TABLE>
21
<PAGE>
A reconciliation between the Federal statutory income tax rate and the
effective income tax rate for the years ended December 31, 1994, 1993 and 1992
is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate 34.0% 34.0% 34.0%
Federal tax claim refund -- (10.3) --
Statutory bad debt deduction -- -- (2.0)
Provision for loan losses not deductible -- -- 0.4
Tax exempt interest and dividends (.3) (0.4) (0.5)
Change in valuation allowance for deferred
tax assets allocated to income tax expense (2.1) 2.1 --
State income tax, net of Federal tax benefit 7.3 7.6 5.9
Other 3.4 1.4 1.3
---- ---- ----
Effective tax rate 42.3% 34.4% 39.1%
==== ==== ====
</TABLE>
Deferred income tax expense consisted of the following components for
the year ended December 31, 1992:
(In thousands)
1992
Deferred tax components at effective rate: ----
Reserve for uncollectible interest $ 13
Reserve for loan loss-subsidiary (63)
Charge-off (recovery) for loan loss-subsidiary 84
Deferred compensation and retirement plans 7
Deferred loan fees 31
Accrued interest on savings 17
Other 8
---
$97
===
The significant components of deferred income tax expense attributable to income
from continuing operations for the years ended December 31 are as follows:
(In thousands)
1994 1993
---- ----
Deferred tax expense exclusive of valuation $ 617 $120
allowance
Increase (decrease) in beginning of-the-year
balance of the valuation allowance for
deferred tax assets (92) 92
---- ----
$525 $212
==== ====
22
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1994 and
1993 are as follows:
<TABLE>
<CAPTION>
(In thousands)
1994 1993
----- ----
<S> <C> <C>
Deferred tax assets:
Reserve for uncollectible interest $ 38 $ 49
Reserve for book loan and real estate losses 413 618
Deferred compensation and retirement plans 196 163
Deferred loan fees 51 312
Deferred income from real estate 4 58
Capitalized REO interest/costs -- 40
Fixed assets 6 --
Unrealized loss on securities available-for
sale 48 --
Other 5 8
----- ------
Deferred asset before valuation allowance 761 1,248
Valuation allowance -- (92)
----- ------
Deferred asset after valuation allowance 761 1,156
----- ------
Deferred tax liabilities:
Tax bad debt reserve 178 104
Mark to market adjustment 5 11
Prepaid costs 43 22
Fixed assets -- 7
----- ------
Total deferred liabilities 226 144
----- ------
Net deferred tax asset $ 535 $1,012
===== ======
</TABLE>
Included in the table above is the recognition of unrealized gains and
losses on certain investments in debt and equity securities accounted for under
SFAS 115 for which no deferred tax expense or benefit was recognized.
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company has
determined that it is not required to establish a valuation allowance for the
deferred tax asset of $761,000 since it is more likely than not that the
deferred tax asset will be realized through carryback to taxable income in prior
years, reversal of existing temporary differences, future taxable income and
potential tax planning strategies. The Company will continue to review the tax
criteria related to the recognition of deferred tax assets on a quarterly basis.
The net change in the total valuation allowance for the year ended December 31,
1994 was a decrease of $92,000.
The Company is allowed a special bad debt deduction, limited generally to
8% of otherwise taxable income and subject to certain limitations based on
aggregate loans and deposit account balances at the end of the year. If the
amounts that qualify as deductions for federal income tax purposes are later
used for purposes other than for bad debt losses, they will be subject to
federal income tax at the then current corporate rate. Retained earnings at
December 31, 1994 included approximately $4.0 million for which no deferred
Federal income tax liability has been provided. This represents the tax bad debt
reserve accumulated under the percentage of taxable income method.
23
<PAGE>
14. STOCKHOLDERS' EQUITY:
On December 21, 1994, the Company's Board of Directors declared and
approved a two-for-one split on the Company's common stock. This action became
effective on January 17, 1995 to shareholders of record on January 3, 1995. The
stated par value per share of common stock remains unchanged at $.01. All
weighted average share and per share amounts have been adjusted retroactively
for all periods presented to reflect the stock split. A total of 1,178,732
shares of common stock were issued in connection with the split. A total of
$12,000 was reclassified from capital in excess of par to common stock.
The Association converted in 1986 from a federally chartered mutual
association to a federally chartered stock association. Concurrent with the
completion of the conversion, a "Liquidation Account" was established in an
amount equal to the $2,065,000 in retained earnings of the Association as of
June 30, 1986. The Liquidation Account was established to provide a limited
priority claim to the assets of the Association to qualifying depositors
("Eligible Account Holders") at December 31, 1985 who continue to maintain
qualifying deposits in the Association after conversion. In the unlikely event
of a complete liquidation of the Association, and only in such event, each
Eligible Account Holder would receive from the Liquidation Account a liquidation
distribution based on his proportionate share of the then total remaining
qualifying deposits. The amount of the Liquidation Account decreases as the
deposit balances of the Eligible Account Holders decrease on annual closing
dates.
On August 9, 1989, the Financial Institutions Reform, Recovery, and
Enforcement Act ("FIRREA") of 1989 was enacted into law in order to restructure
the regulation of the thrift industry and to establish a new deposit insurance
system. The legislation affects the thrift industry in several ways, including
higher deposit insurance premiums beginning in 1991, more stringent capital
requirements, and new investment limitations and restrictions and a likely
reduction in dividends received on FHLB stock as all or a significant portion of
the earnings of the FHLB System are used to partially fund the resolution of
troubled institutions. On November 8, 1989, the Office of Thrift Supervision
published a final rule implementing the new capital standards. The regulations
require institutions to have a minimum regulatory tangible capital equal to 1.5%
of total assets, a minimum 3.0% core capital ratio and an 8% risk-based capital
ratio.
The Association, at December 31, 1994, exceeds the regulatory tangible,
core capital and risk-based requirements as defined by FIRREA.
In addition, savings institutions are also subject to the provisions of the
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), which
was signed into law on December 19, 1991. Regulations implementing the prompt
corrective action provisions of FDICIA became effective on December 19, 1992. In
addition to the prompt corrective action requirements, FDICIA includes
significant changes to the legal and regulatory environment for insured
depository institutions, including reductions in insurance coverage for certain
kinds of deposits, increased supervision by the federal regulatory agencies,
increased reporting requirements for insured institutions, and new regulations
concerning internal controls, accounting, and operations.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in declining
order, are "well capitalized," "adequately capitalized," and "undercapitalized."
Institutions categorized as "undercapitalized" are subject to certain
restrictions, including the requirement to file a capital plan with the OTS,
prohibitions on the payment of dividends and management fees, restrictions on
executive compensation, and increased supervisory monitoring, among other
things. Other restrictions may be imposed on the institution either by the OTS
or by the FDIC, including requirements to raise additional capital, sell assets,
or sell the entire institution. Once an institution becomes "undercapitalized"
it is generally placed in receivership or conservatorship within 90 days.
To be considered "well capitalized," a savings institution must generally
have a core capital ratio of at least 5%, a Tier I risk-based capital ratio of
at least 6%, and a total risk-based capital ratio of at least 10%. An
institution is deemed to be "undercapitalized" if it does not qualify as well
capitalized or adequately capitalized. At December 31, 1994, the Association is
in the "well capitalized" category.
Certain restrictions exist regarding the ability of the Association to
transfer funds to the Company in the form of cash dividends. In addition, the
Company and the Association are required to maintain minimum amounts of capital
to total risk-weighted assets as defined by the Office of Thrift Supervision. As
of December
24
<PAGE>
31, 1994, under the most restrictive coonditions, the Association
cannot pay dividends to the Company in an amount that would exceed $6.5 million
without prior regulatory approval.
15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS
OF CREDIT:
The Company 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.
These financial instruments include commitments to extend credit, standby
letters of credit, recourse on loans sold, purchased servicing, and interest
rate exchange agreements known as caps. These instruments involve, to varying
degrees, elements of credit and interest rate risk that are not recognized in
the consolidated statements of financial condition.
Exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit, standby letters of
credit, and loans sold or serviced with recourse is represented by the
contractual amount of those instruments. The Association uses the same credit
policies in making commitments and recourse agreements as it does for
on-balance-sheet instruments. Exposure to credit loss on cap agreements is only
to the streams of payments by the counterparty and not the notional principal
amount used to express the transaction.
Financial instruments with off-balance-sheet risk
at December 31 are summarized as follows:
1994 1993
(In thousands) ---- ----
Commitments to extend credit:
Loan origination
commitments $12,536 $ 15,818
Unused home equity
lines of credit 15,914 16,404
Unused unsecured
lines of credit 168 180
Standby letters of credit 2,169 1,858
Loans sold with recourse 4,249 5,715
Purchased servicing with recourse 1,441 1,810
Interest rate cap 5,000 --
At December 31, 1994, the Association and a subsidiary had mortgage loan
origination and purchase commitments of approximately $9.7 million in fixed rate
loans at interest rates ranging from 7.0% to 12.3% and approximately $2.8
million in variable-rate loans currently at interest rates ranging from 5.5% to
10.0%, unused home equity lines of credit loans of approximately $4.7 million in
fixed-rate loans at interest rates ranging from 8.0% to 12.5% and approximately
$11.2 million in variable rate loans at interest rates ranging from 10.0% to
10.5%, and unused unsecured lines of credit of approximately $168,000 at
interest rates ranging from 15.0% to 18.0%.
Commitments generally have fixed expiration dates or termination clauses
and may require payment of a fee. Since a portion of the commitments are
expected to expire without being used, the total commitment amounts do not
necessarily represent future cash requirements. The Association evaluates each
customer's creditworthiness on a case-by-case basis. 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.
Loans sold with recourse consists of approximately $3.6 million of mortgage
loans serviced for FHLMC, approximately $563,000 of mortgage loans serviced for
FNMA, and approximately $108,000 of home improvement loans serviced for a local
governmental authority. The recourse on loans serviced for FHLMC resulted from
the subsequent sale of FHLMC mortgage-backed securities that were acquired in
1985 in exchange for fixed rate mortgage loans originated by the Association.
The Association currently holds $6.5 million of FHLMC mortgage-backed securities
that were acquired in the same transaction in 1985. All of the loans sold to the
local governmental authority are insured by the Federal Housing Administration.
The underlying mortgages for the purchased servicing rights with recourse
are secured by real estate primarily in Massachusetts. The mortgages are
variable rate loans. There is a $36,900 reserve on this portfolio.
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate risks. During 1994, the Association purchased an
interest rate cap agreement to reduce the potential impact of increases in
interest rates on floating rate short-term debt. At December 31,
25
<PAGE>
1994, the Association was a party to an interest rate cap agreement with a
remaining term of two and one half years. The agreement entitles the Association
to receive from a counterparty on a quarterly basis the amounts, if any, by
which the Association's interest payments on $5.0 million of floating rate
short-term debt exceeds 6.0%.
The Association does not obtain collateral or other security to support the
credit risk of the interest rate cap agreement but monitors the credit standing
of the counterparty.
The Association originates primarily residential and commercial real estate
loans as well as consumer loans to customers principally in southcentral and
southeastern Pennsylvania.
At December 31, 1994, approximately 91% of the loans receivable portfolio
is backed by collateral on one-to-four family residences.
Since the majority of the Association's loan portfolio is located in
Southcentral and Southeastern Pennsylvania, a substantial portion of the
Association'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 these areas.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments" (SFAS 107) requires all entities to disclose the
fair value of its financial instruments. For the Association, as for most
financial institutions, the majority of its assets and liabilities are
considered financial instruments as defined in SFAS 107. Many of the
Association's financial instruments, however, lack an available trading market
as characterized by a willing buyer and willing seller engaging in an exchange
transaction. Since it is the Association's general practice not to engage in
trading or sales activities, significant assumptions and estimations were used
in calculating present values in discounted cash flow models.
Estimated fair values have been determined by the Association using the
best available data, as generally provided in the Association's thrift financial
report as submitted to the Office of Thrift Supervision with an estimation
methodology suitable for each category of financial instrument.
Fair value estimates, methods, and assumptions are set forth below for the
Association's instruments.
The carrying amounts for cash and cash equivalents approximate fair value
because of the short maturity of those instruments and they do not present
unanticipated credit concerns.
<TABLE>
<CAPTION>
(In thousands)
December 31, 1994 December 31, 1993
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 8,506 $ 8,506 $ 9,872 $ 9,872
======= ======= ======= =======
</TABLE>
Investments and mortgage-backed securities are actively traded by others in
the secondary market and fair values have been based on quotations received from
security dealers:
<TABLE>
<CAPTION>
(In thousands)
December 31, 1994 December 31, 1993
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ---------- -------- ----------
<S> <C> <C> <C> <C>
U.S. government and agency securities:
Available-for-sale $ 1,012 $ 1,012 $ -- $ --
Held-to-maturity 10,095 9,800 5,987 6,021
Mortgage-backed securities:
Available-for-sale 7,772 7,772 -- --
Held-to-maturity 30,302 28,821 45,216 45,805
Domestic corporate securities held-
to-maturity 5,229 4,945 5,148 5,114
Domestic equity securities
available-for-sale 49 49 5,951 6,006
------- ------- ------- -------
$54,459 $52,399 $62,302 $62,946
======= ======= ======= =======
</TABLE>
26
<PAGE>
Fair values of all loans are estimated for portfolios with similar
characteristics by discounting the future cash flows using current rates at
which similar loans would be made to borrowers with similar credit ratings.
Residential mortgages make up a substantial percentage of the Association's loan
portfolio. These residential loans, as well as loans held for sale, are
generally underwritten to standards in conformity with Federal Home Loan
Mortgage Corporation or Federal National Mortgage Association standards.
Construction loans are of a relatively short maturity and have an estimated fair
value equal to the carrying value.
<TABLE>
<CAPTION>
(In thousands)
December 31, 1994 December 31, 1993
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- -------- ----------
<S> <C> <C> <C> <C>
First mortgage loans:
Secured by one-to-four family residences:
Fixed rate $ 64,464 $ 59,113 $ 32,890 $ 33,594
Variable rate 19,863 19,590 23,779 24,265
Construction 1,622 1,622 2,128 2,135
Nonaccrual 586 498 1,081 919
Secured by multi-family and nonresidential properties:
Fixed rate 3,012 3,074 3,705 3,667
Variable rate 1,292 1,311 1,705 1,688
Construction 748 748 178 176
Land 3,624 3,679 2,137 2,116
Deferred items (net) (1,574) -- (863) --
-------- -------- -------- --------
Total first mortgages 93,637 89,635 66,740 68,560
-------- -------- -------- --------
Consumer and other loans:
Fixed rate 59,780 60,655 46,331 47,468
Variable rate 15,944 16,400 19,871 20,144
Nonaccrual 537 456 940 799
Deferred items (net) 1,330 -- 520 --
-------- -------- -------- --------
Total consumer 77,591 77,511 67,662 68,411
-------- -------- -------- --------
Loan loss reserves (1,098) -- (1,224) --
-------- -------- -------- --------
Total loans receivable 170,130 167,146 133,178 136,971
Loans held for sale 26,104 26,456 50,075 50,214
-------- -------- -------- --------
$196,234 $193,602 $183,253 $187,185
======== ======== ======== ========
</TABLE>
Under SFAS 107, the fair value of deposits with no stated maturity, such as
demand deposit accounts, NOW accounts, money market accounts, savings accounts,
and advances from borrowers for taxes and insurance is equal to the amount
payable on demand. The fair value of certificates of deposit is calculated using
discounted cash flows. Contractual cash flows are discounted using the
Association's internal certificate of deposit curve, which was utilized to
represent the replacement cost of funds.
<TABLE>
<CAPTION>
(In thousands)
December 31, 1994 December 31, 1993
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- -------- ----------
<S> <C> <C> <C> <C>
NOW accounts $ 4,380 $ 4,380 $ 4,466 $ 4,466
Money market accounts 30,793 30,793 38,250 38,250
Passbook savings and club accounts 20,583 20,583 20,663 20,663
Certificates of deposit 95,704 94,899 101,025 102,616
-------- -------- -------- ----------
$151,460 $150,655 $164,404 $165,994
======== ======== ========= ==========
Advances from borrowers for taxes and insurance $ 3,836 $ 3,836 $ 3,149 $ 3,149
======== ======== ========= ==========
</TABLE>
27
<PAGE>
The fair value of advances from the FHLB is estimated using discounted cash
flows. The estimated discount rate was based on the FHLB advance curve.
Short-term borrowings and long-term debt are market rate loans that reprice
sufficiently such that their fair value equals their carrying value.
<TABLE>
<CAPTION>
(In thousands)
December 31, 1994 December 31, 1993
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ----------- ------- ----------
<S> <C> <C> <C> <C>
Short-term borrowings $ 64,980 $ 64,980 $ 46,295 $ 46,295
Term advances 22,011 21,733 24,600 24,683
Long-term debt 278 278 458 458
-------- -------- -------- --------
$ 87,269 $ 86,991 $ 71,353 $ 71,436
======== ======== ======== ========
</TABLE>
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, loans sold and servicing
purchased with recourse is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparties. The fair value of interest rate caps is
obtained from dealer quotes.
<TABLE>
<CAPTION>
(In thousands)
December 31, 1994 December 31, 1993
Contract Carrying Estimated Contract Carrying Estimated
Amount Amount (1) Fair Value Amount Amount (1) Fair Value
-------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Commitments to extend credit:
Loan origination commitments $12,536 $ 51 $ 51 $15,818 $ 82 $82
Unused home equity lines of credit 15,914 -- -- 16,404 -- --
Unused unsecured lines of credit 168 -- -- 180 -- --
Standby letters of credit 2,169 10 10 1,858 13 13
Loans sold with recourse 4,249 -- (15) 5,715 -- (20)
Purchased servicing with recourse 1,441 37 (1) 1,810 37 (10)
Interest rate cap 5,000 152 161 -- -- --
------- ----- ---- ------- ---- ---
$41,477 $ 250 $206 $41,785 $132 $65
======= ===== ==== ======= ==== ===
</TABLE>
(1) The amounts shown under "carrying amount" represent accruals or deferred
income arising from these unrecognized financial instruments.
Limitations:
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instruments.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Association's entire holdings or of a
particular financial instrument. Because no market exists for a significant
portion of the Association's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Management is concerned that reasonable comparability between financial
institutions may not be likely due to the wide range of permitted valuation
techniques and the estimates and assumptions that must be made.
28
<PAGE>
17. SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
Quarterly financial data for the years ended December 31, 1994 and 1993 is
summarized by quarter as follows:
<TABLE>
<CAPTION>
($ in thousands except earnings per share & March June September December
market range) 31, 1994 30, 1994 30, 1994 31, 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial institution interest income $4,118 4,426 $4,846 $5,123
Mortgage banking interest income 241 195 155 170
Financial institution interest expense (2,008) (2,133) (2,385) (2,771)
Mortgage banking interest expense (202) (176) (127) (153)
Eliminations -- -- -- --
------ ------ ------ ------
Net interest income 2,149 2,312 2,489 2,369
Provision for loan losses -- -- -- --
------ ------ ------ ------
Net interest income after
provision for loan losses 2,149 2,312 2,489 2,369
Financial institution noninterest income 787 973 1,358 528
Mortgage banking noninterest income 837 719 603 620
Financial institution noninterest expense (1,425) (1,422) (1,247) (1,337)
Mortgage banking noninterest expense (698) (625) (543) (563)
Eliminations (716) (787) (1,267) (595)
------ ------ ------ ------
Income before income taxes 934 1,170 1,393 1,022
Income taxes (400) (512) (567) (434)
------ ------ ------ ------
Net income $ 534 $ 658 $ 826 $ 588
====== ====== ====== ======
Earnings per share: $0.22 $0.28 $0.34 $0.24
====== ====== ====== ======
Market range:(1)
High $12.00 $12.00 $16.00 $15.75
------ ------ ------ ------
Low $11.00 $10.38 $10.25 $10.00
------ ------ ------ ------
<CAPTION>
March June September December
31, 1993 30, 1993 30, 1993 31, 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial institution interest income $4,271 $4,223 $4,221 $4,538
Mortgage banking interest income 116 221 263 300
Financial institution interest expense (2,458) (2,251) (2,086) (2,199)
Mortgage banking interest expense (91) (205) (241) (304)
Eliminations 5 5 5 (15)
------ ------ ------ ------
Net interest income 1,843 1,993 2,162 2,320
Provision for loan losses -- -- -- --
------ ------ ------ ------
Net interest income after
provision for loan losses 1,843 1,993 2,162 2,320
Financial institution noninterest income 1,399 1,929 848 1,038
Mortgage banking noninterest income 502 691 872 930
Financial institution noninterest expense (1,428) (1,263) (1,445) (1,559)
Mortgage banking noninterest expense (460) (469) (523) (600)
Eliminations (1,262) (1,484) (745) (881)
------ ------ ------ ------
Income before income taxes and
cumulative effect of change in
accounting principle 594 1,397 1,169 1,248
Income taxes (241) (112) (568) (596)
Cumulative effect of change in
accounting principle 717 -- -- --
------ ------ ------ ------
Net income $1,070 $1,285 $ 601 $ 652
====== ====== ====== ======
Earnings per share:
Income before accounting change $0.15 $0.54 $0.25 $0.27
Change in accounting principle 0.30 -- -- --
------ ------ ------ ------
Net income $0.45 $0.54 $0.25 $0.27
====== ====== ====== ======
Market range:(1)
High $7.68 $8.51 $12.04 $12.00
------ ------ ------ ------
Low $6.02 $6.85 $ 7.68 $10.83
------ ------ ------ ------
</TABLE>
(1) Provided by NASDAQ
29
<PAGE>
18. FINANCIAL INFORMATION OF FIRST HARRISBURG BANCOR, INC. (PARENT ONLY)
at December 31 is summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
Statements of Financial Condition 1994 1993
---- ----
<S> <C> <C>
Assets:
Cash $ 103 $ 166
Investment securities 617 971
Investment in subsidiary 22,944 20,295
Other assets -- 10
------- -------
$23,664 $21,442
======= =======
Liabilities and stockholders' equity:
Liabilities:
Accounts payable - subsidiary $ 3 $ --
Long-term debt 278 458
Other liabilities 22 15
Income taxes payable (38) (54)
------- -------
Total liabilities 265 419
------- -------
Stockholders' equity:
Capital stock 24 12
Additional paid-in capital 15,197 15,074
Retained earnings 8,456 6,395
ESOP obligation (278) (458)
------- -------
Total stockholders' equity 23,399 21,023
------- -------
Total liabilities and stockholders' equity $23,664 $21,442
======= =======
<CAPTION>
Statements of Operations 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Interest income $ 31 $ 39 $ 37
Noninterest expense 211 122 116
Income tax benefit (61) (27) (36)
------- ------ ------
Loss before equity in income of subsidiary (119) (56) (43)
------- ------ ------
Equity in income of subsidiary:
Distributed -- -- 1,000
Undistributed 2,725 3,664 1,052
------- ------ ------
2,725 3,664 2,052
------- ------ ------
Net income $2,606 $3,608 $2,009
======= ====== ======
<CAPTION>
Statements of Cash Flows 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $2,606 $3,608 $2,009
------ ------ ------
Adjustments:
Equity in income of subsidiary (2,725) (3,664) (2,052)
Increase (decrease) in other, net 37 31 (151)
------ ------ ------
Total adjustments (2,688) (3,633) (2,203)
------ ------ ------
Net cash used in operating activities (82) (25) (194)
------ ------ ------
Cash flows from investing activities:
Purchase of investment securities (1,231) (971) --
Maturities of investment securities 1,585 -- --
Dividends received from subsidiary -- -- 1,000
------ ------ ------
Net cash provided by (used in) investing
activities 354 (971) 1,000
------ ------ ------
Cash flows from financing activities:
Proceeds from issuance of stock 135 163 42
Cash dividends paid (470) (404) (355)
------ ------ ------
Net cash used in financing activities (335) (241) (313)
------ ------ ------
Increase (decrease) in cash & cash equivalents (63) (1,237) 493
Cash, beginning of period 166 1,404 911
------ ------ ------
Cash, end of period $ 103 $ 167 $1,404
====== ====== ======
</TABLE>
No interest or income taxes were paid for the years ended December 31, 1994,
1993 and 1992.
30
<PAGE>
19. BUSINESS SEGMENTS:
Financial data for the Company's business segments at
December 31, is summarized as follows:
(In thousands)
1994 1993
Identifiable assets:
Financial institution $290,311 $282,297
Mortgage banking activity 12,320 24,123
Eliminations (32,646) (40,003)
------- --------
$269,985 $266,417
======= ========
(In thousands)
12 Months Ended December 31,
1994 1993 1992
---- ---- ----
Revenues (1):
Financial Institution $22,159 $22,467 $22,194
Mortgage banking activity 3,540 3,895 2,994
Eliminations (4,056) (5,281) (3,333)
------- ------- -------
21,643 21,081 21,855
------- ------- -------
Expenses (2):
Financial institution 14,728 14,689 16,777
Mortgage banking activity 3,087 2,893 2,585
Eliminations (691) (909) (806)
------- ------- -------
17,124 16,673 18,556
------- ------- -------
Income before income taxes
and cumulative effect of
change in accounting principle:
Financial institution 7,431 7,778 5,417
Mortgage banking activity 453 1,002 409
Eliminations (3,365) (4,372) (2,527)
------- ------- -------
$ 4,519 $ 4,408 $ 3,299
======= ======= =======
(1) Includes interest income and noninterest income.
(2) Includes interest expense and noninterest expense.
The cumulative effect of the change in accounting principle which resulted
from the adoption of SFAS 109 in 1993 increased net income of the financial
institution and the mortgage banking company by $690,000 and $27,000,
respectively in 1993.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -----------------------------------------------------------------------------
General
The assets of First Harrisburg Bancor, Inc. (the "Company") primarily
consist of the stock of its wholly-owned subsidiary, First Federal Savings and
Loan Association of Harrisburg ("First Federal" or the "Association"). All
references to the Company herein include First Federal, unless otherwise
indicated. The Company's results of operations are thus substantially dependent
upon the Association's results of operations, which reflect the fundamental
changes that have occurred in the regulatory, economic and competitive
environment in which savings institutions operate. First Federal is primarily
engaged in attracting deposits from the general public and applying these funds,
together with borrowings, to the origination and purchase of first mortgage
loans on single-family residences and consumer loans, which bear adjustable
interest rates and/or have short maturities.
First Federal's revenue is primarily derived from interest and fees on real
estate and other loans. The Association's principal expenses are interest on
deposits and borrowings and general and administrative expenses. The principal
sources of funds available for First Federal's lending activities are its
deposits, amortization and prepayments of outstanding loans, sales of mortgage
loans, short-term borrowings and advances from the Federal Home Loan Bank
("FHLB") of Pittsburgh.
The Company also engages in real estate development activities, through
joint ventures and wholly-owned projects, and in mortgage banking activities
through its wholly-owned subsidiaries, First Harrisburg Service Corporation
("FHSC"), Second Harrisburg Service Corporation ("SHSC"), and AVSTAR Mortgage
Corporation ("AMC"). The Company's investment in real estate acquired for
development aggregated $249,000 at December 31, 1994. The Company also provides
financial services (including brokerage services) and insurance products.
The Company, as a registered savings and loan holding company, is subject
to examination and regulation by the Office of Thrift Supervision ("OTS"), a
department of the U.S. Treasury, and is subject to various reporting and other
requirements of the Securities and Exchange Commission ("SEC"). First Federal,
as a federally chartered savings and loan association, is subject to examination
and comprehensive regulation by the OTS, and by the Federal Deposit Insurance
Corporation ("FDIC"). Customer deposits with the Company are insured to the
maximum extent provided by law through the Savings Association Insurance Fund
("SAIF"), which is administered by the FDIC. First Federal is a member of the
FHLB of Pittsburgh, which is one of 12 regional banks comprising the Federal
Home Loan Bank System ("FHLB System"). First Federal also is subject to
regulations administered by the Board of Governors of the Federal Reserve System
("Federal Reserve Board") regarding reserves required to be maintained against
deposits and certain other matters.
The Company's results of operations continue to be primarily dependent on
its net interest income (which is the difference between interest income and
interest expense), provisions for loan and real estate losses and gains on the
sale of mortgages. Net interest income increased $1.0 million in 1994 over 1993,
provision for real estate losses declined $335,000 and gains on the sale of
mortgages decreased $835,000. For the year ended December 31, 1994, the Company
earned $2.6 million or $1.08 per share, a decrease of $.43 per share over 1993.
For the year ended December 31, 1993, the Company earned $3.6 million or $1.51
per share, including the cumulative effect of a change in accounting principle
and an income tax refund and the interest thereon. Income before cumulative
effect of change in accounting principle was $2.9 million or $1.21 per share.
Earnings per share for the years ended December 31, 1994 and 1993 were adjusted
for the two for one stock split effective January 1995.
For the year ended December 31, 1994, net interest income increased largely
due to increases in the average balances of the loans receivable and held for
sale portfolios while interest expense increased only slightly. Noninterest
income declined primarily due to decreased gains on the sale of mortgages by
AMC, and interest received on an Internal Revenue Service ("IRS") claim refund
in the prior year, which was partially offset by an increase in gains on the
sale of real estate owned in 1994. Noninterest expense increased due to higher
wages and benefits, professional fees, federal insurance premiums, occupancy and
marketing expenses. These increases were partially offset by a reduction in real
estate reserves on land development projects.
The Company's asset and liability management policies are designed to
minimize the adverse effects of increases in interest rates on the Company's
results of operations. The Company emphasizes the origination of installment
loans, purchase and origination of fixed and variable rate mortgages that
32
<PAGE>
meet strict underwriting standards, and investment in corporate notes, U.S.
Government and Agency securities and mortgage-backed securities with emphasis on
short-term maturities of five years or less. However, this emphasis has not
fully compensated for the increased sensitivity of the cost of its deposits and
other sources of funds to changes in market interest rates.
Asset and Liability Management
The principal determinant of the exposure of the Company's earnings to
interest rate risk is the timing difference between the repricing or maturity of
the Company's interest-earning assets and the repricing or maturity of its
interest-bearing liabilities. If the maturities of the Company's assets and
liabilities were matched, and if the interest rates borne by its assets and
liabilities were equally flexible and moved concurrently, neither of which is
likely to occur, the impact on net interest income of rapid increases or
decreases in interest rates would be minimized. The Company's asset and
liability management policies seek to decrease the interest rate sensitivity and
shorten the maturities of its interest-earning assets and extend the maturities
of its interest-bearing liabilities. Although management believes that the steps
it has taken have reduced the Company's overall vulnerability to increases in
interest rates, the Company continues to remain vulnerable to material and
prolonged increases in interest rates because its interest-bearing liabilities
exceed its interest-earning assets within one- to three-year maturities.
A significant part of First Federal's program of asset and liability
management has been the increased emphasis on the origination of short-term
loans, which primarily includes consumer loans. The origination of consumer
loans, the purchase of residential mortgages originated by the Association's
mortgage banking subsidiary, and the origination of adjustable-rate and/or
short-term commercial mortgages and construction loans have accounted for the
majority of total loan originations and purchases during each of the last three
years. At December 31, 1994, approximately 65.3% of the loan portfolio,
including mortgage-backed securities and loans held for sale, had adjustable
rates or short-term maturities compared to 71.4% at December 31, 1993 and 67.6%
at December 31, 1992.
There were $1.9 million of fixed-rate, fixed-term mortgage sales from the
Company's existing portfolio in 1993. These loans were sold for yield
enhancement in response to rising interest rates. There were no sales from the
existing mortgage portfolio in 1994 and 1992. Fixed-rate mortgage loans have
increased as a percentage of the loan portfolio (including mortgage-backed
securities and loans held for sale) as a result of efforts to enhance the loan
portfolio yield as well as to grow the loan portfolio, to 38.2% at December 31,
1994 from 28.6% at December 31, 1993 and 32.4% at December 31, 1992. All of the
fixed and variable rate mortgage loan originations of AMC are being sold,
excluding those purchased by the Association for its own portfolio.
To lengthen the terms of the Company's liabilities and thereby decrease the
interest rate sensitivity of its deposits, management has maintained competitive
long-term rates to retain long-term certificates of deposit where possible. In
addition, the Company utilizes tiered and option deposit pricing, whereby higher
rates or rate adjustment options are offered on accounts with longer terms and
with higher minimum balance requirements. The Company has also made use of
various Federal Home Loan Bank advance programs to lengthen its liabilities.
Results of Operations
The results of operations of the Company depend substantially on its net
interest income, which is the largest component of the Company's net income. Net
interest income is affected by the difference or spread between yields earned on
its loan (including mortgage-backed securities) and investment portfolios and
the rates of interest paid for its deposits and borrowings. Interest income is a
function of the average balances of loans and investments outstanding during the
period and the average yields earned on such loans and investments. Interest
expense is a function of the average amounts of deposits and borrowings
outstanding during the period and the average rates paid on such deposits and
borrowings. The following table sets forth, as of and for the periods indicated,
the average balances, the average yields and rates, and certain other
information.
33
<PAGE>
<TABLE>
<CAPTION>
As of
Dec. 31,
1994 1994 1993 1992
------------------------------ ------- ----------------------------- -----------------------------
Average Average Average Average Average Average Average
Balance(2) Interest(4) Rate Rate Balance(2) Interest(4) Rate Balance(2) Interest(4) Rate
---------- ----------- ------- ------ ---------- ----------- ------- ---------- ----------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans(3) $149,643 $12,784 8.54% 9.49% $130,333 $12,184 9.35% $152,898 $14,765 9.66%
Loans held for sale 31,209 2,272 7.28% 8.90% 24,702 1,558 6.31% 11,065 951 8.59%
Mortgage-backed securities 41,155 2,435 5.92% 6.50% 26,245 1,622 6.18% 15,215 1,216 7.99%
Investment securities and other 19,307 1,102 5.71% 6.45% 40,950 1,889 4.61% 46,026 2,116 4.60%
-------- ------- ----- ----- -------- ------- ----- -------- ------- -----
Total Interest-Earning Assets 241,314 18,593 7.70% 8.72% 222,230 17,253 7.76% 225,204 19,048 8.46%
-------- ------- ----- ----- -------- ------- ----- -------- ------- -----
Interest-Bearing Liabilities:
Now and Money market accounts 40,507 1,085 2.68% 2.72% 43,460 1,198 2.76% 42,326 1,552 3.67%
Passbook accounts 21,263 558 2.62% 2.53% 21,172 622 2.94% 20,389 805 3.95%
Certificates of deposit 94,102 4,427 4.70% 5.04% 108,601 5,513 5.08% 134,281 8,221 6.12%
FHLB advances 22,220 1,070 4.82% 5.75% 21,319 1,185 5.56% 12,601 811 6.44%
Short-term borrowings 43,494 2,134 4.91% 6.31% 12,253 417 3.40% 2,343 99 4.23%
-------- ------- ----- ----- -------- --------- ----- --------- -------- -----
Total Interest-Bearing
Liabilities(5) 221,586 9,274 4.19% 4.89% 206,805 8,935 4.32% 211,940 11,488 5.42%
-------- ------- ----- ----- -------- ------ ----- -------- ------- -----
Net Interest Income and Average
Interest Rate Spread $ 9,319 3.51% 3.83% $ 8,318 3.44% $ 7,560 3.04%
======= ===== ===== ======= ===== ======= =====
Net Earning Assets and Net Yield
on Earning Assets(1) $ 19,728 3.86% $ 15,425 3.74% $ 13,264 3.36%
======== ===== ======== ===== ======== =====
Average Interest Earning Assets
as a Percent of Average
Interest-Bearing Liabilities 108.9% 107.5% 106.3%
====== ====== ======
</TABLE>
(1) Net yield on earning assets is net interest income divided by total
interest-earning assets.
(2) All average balances are daily average balances.
(3) Includes nonaccrual loans in the average balances.
(4) Loan fees which are an adjustment to yield are included in interest income.
(5) Excludes long-term debt.
The following table sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in rates (change
in rate multiplied by old volume), (2) changes in volume (change in volume
multiplied by old rate), and (3) changes in rate-volume (change in rate
multiplied by the change in volume).
<TABLE>
<CAPTION>
Year Ended December 31,
1994 vs. 1993 1993 vs. 1992
------------------------------- -----------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ --- ---- ------ ------ ---
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $(1,056) $1,806 $(150) $600 $(474) $(2,180) $ 73 $(2,581)
Loans held for sale 240 411 63 714 (252) 1,171 (312) 607
Mortgage-backed securities (68) 921 (40) 813 (275) 881 (200) 406
Investment securities and other 450 (998) (239) (787) 5 (233) 1 (227)
------- ------ ----- ----- ----- ------- ----- -------
Total interest income (434) 2,140 (366) 1,340 (996) (361) (438) (1,795)
------- ------ ----- ----- ----- ------- ----- -------
Interest expense:
NOW and Money market accounts (35) (82) 4 (113) (385) 42 (11) (354)
Passbook accounts (68) 3 1 (64) (206) 31 (8) (183)
Certificates of deposit (413) (737) 64 (1,086) (1,397) (1,572) 261 (2,708)
FHLB advances (158) 50 (7) (115) (111) 561 (76) 374
Short-term borrowings 185 1,062 470 1,717 (19) 418 (81) 318
------- ------ ----- ----- ----- ------- ----- -------
Total interest expense(1) (489) 296 532 339 (2,118) (520) 85 (2,553)
------- ------ ----- ----- ----- ------- ----- -------
Net change in net interest income
(expense) $ 55 $1,844 $(898) $1,001 $1,122 $ 159 $(523) $ 758
======= ====== ===== ====== ====== ======= ===== =======
</TABLE>
(1) Excludes interest on long-term debt.
34
<PAGE>
Primarily as a result of decreases in the cost of deposits during 1994, the
Company's average cost of interest bearing-liabilities declined to 4.19% in 1994
from 4.32% in 1993. The average interest rate spread increased to 3.51% in 1994
from 3.44% in 1993. Net earning assets increased to $19.7 million in 1994 from
$15.4 million in 1993, due to an increased emphasis growing the loan portfolio
and the Association's participation in the FHLB Fund Line program. The result of
these changes was an increase in net interest income of $1.0 million.
The increase in net interest income in 1994 was partially offset by a
decline in gains from the sale of mortgages. In addition, the results for 1993
included $717,000 for the cumulative effect of a change in accounting for income
taxes resulting from the adoption of SFAS 109 and receipt of a $452,000 federal
income tax claim refund plus interest of $250,000 from the IRS. As a result, net
income decreased $1.0 million in 1994 and increased $1.6 million in 1993
compared to the respective prior years.
Interest Income
Interest on loans receivable increased by $600,000 or 4.9% in 1994 and
decreased $2.6 million or 17.5% in 1993 over the respective prior years. The
average loan portfolio yield decreased to 8.54% in 1994 from 9.35% in 1993 and
9.66% in 1992. The decreases in 1994 and 1993 were due to the decreases in
interest rates on loans, the repayment of higher yielding fixed rate loans and
normal index rate adjustments for adjustable rate mortgages and adjustable lines
of credit. However, the average balance of the loan portfolio increased $19.3
million or 14.8%, more than offsetting the interest rate decrease. The average
balance decreased $22.6 million or 14.8 in 1993 due to principal repayments and
paydowns in the mortgage loan portfolio.
Interest on loans held for sale increased $714,000 or 45.8% in 1994 and
$607,000 or 63.8% in 1993 over the respective prior years. The increases
resulted from an increase in the average balance of the loans held for sale
portfolio of $6.5 million or 26.3% in 1994 and $13.6 million or 123.2% in 1993
due to the Association's participation in the FHLB MortgageVest and Fund Line
programs in both periods and, in 1993, higher loan origination volume at AMC. In
addition, the increase in 1994 was also due to higher interest rates.
Interest on mortgage-backed securities increased $813,000 or 50.1% in 1994
and $406,000 or 33.4% in 1993 over the respective prior years. The increase in
1994 and 1993 was attributable to a $14.9 million or 56.8% and a $11.0 million
or 72.5% respective increase in the average mortgage-backed portfolio due to
redeployment of interest bearing deposits to mortgage-backed securities which
was partially offset by a decrease in the average portfolio yield to 5.92% and
6.18% in 1994 and 1993, respectively from 7.99% in 1992.
Interest on investment securities decreased $787,000 or 41.7% in 1994 and
$227,000 or 10.7% in 1993 over the respective prior years. The average yield of
the investment portfolio was 5.71% in 1994, 4.61% in 1993 and 4.60% in 1992.
However, the average balance of the investment portfolio decreased significantly
by $21.6 million or 52.9% during 1994 and $5.1 million or 11.0% during 1993. The
decline in the investment portfolio resulted from management's intention to grow
the loan and mortgage-backed portfolios.
Interest Expense
Interest on deposits decreased by $1.3 million or 17.2% in 1994 and $3.2
million or 30.7% in 1993 over the respective prior years. The decreases in 1994
and 1993 were due primarily to the average cost of deposits declining to 3.89%
in 1994 from 4.23% in 1993 and from 5.37% in 1992, as well as a decrease of
$17.4 million or 10.0% and $23.8 million or 12.1% in average savings deposits in
1994 and 1993, respectively. The decrease in deposits was attributable to using
short-term borrowings to replace deposits because short-term borrowings were
less expensive than the incremental cost of growing retail deposits.
Interest on FHLB advances decreased $115,000 or 9.7% and increased $374,000
or 46.1% in 1994 and 1993 over the respective prior years. Average advances
increased $901,000 or 4.2% in 1994 and $8.7 million or 69.2% in 1993. The
increase in 1993 was primarily due to various FHLB advance programs which were
used to lengthen the Company's liability maturities. The average rate paid on
advances decreased to 4.82% in 1994 from 5.56% in 1993 and 6.44% in 1992.
Interest on short-term borrowings increased $1.7 million or 411.8% and
$318,000 or 321.2% in 1994 and 1993 over the respective prior years. Average
short- term borrowings increased $31.2 million in 1994 and $9.9 million in 1993.
The average rate paid on short- term borrowings increased to 4.91% in 1994 from
3.40% in 1993 and 4.23% in 1992. These increases resulted from the Association's
participation in the FHLB MortgageVest and Fundline programs, use of the FHLB
line of credit, and reverse repurchase agreements.
Net Interest Income
As a result of the changes discussed under Interest Income and Interest
Expense, net interest
35
<PAGE>
income increased $1.0 million or 12.0% in 1994 and $758,000 or 10.0%
in 1993 over the respective prior years.
Provision for Loan Losses
The Association maintains an allowance for loan losses to provide for
possible future losses in the loan portfolio. There were no net additions to the
allowance for loan losses in 1994 and 1993. This was primarily due to decreasing
loan balances as compared to 1992 and prior years, improved credit quality and
the general improvement in economic conditions in both the Association's market
and nationally.
The following table summarizes activity in the Company's allowance for loan
losses during the periods indicated:
<TABLE>
<CAPTION>
At December 31,
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,224 $1,493 $1,501 $1,772 $ 779
------- ------- ------- ------- -----
Charge-offs:
Residential real estate loans -- (2) (4) (83) --
Commercial real estate loans -- -- -- (532) (624)
Consumer loans (146) (319) (125) (31) (13)
-------- ------- -------- -------- -------
Total charge-offs (146) (321) (129) (646) (637)
-------- ------- -------- -------- ------
Recoveries:
Residential real estate loans -- -- -- 6 --
Commercial real estate loans -- -- -- -- --
Consumer loans 20 52 16 3 --
-------- -------- --------- -------- -----
Total recoveries 20 52 16 9 --
-------- -------- --------- -------- -----
Provisions for losses:
Residential real estate loans (29) (26) (61) 22 186
Commercial real estate loans (344) (34) 84 14 898
Consumer loans -- (15) 61 556 287
Unallocated 373 75 21 (226) 259
-------- -------- -------- ------- ------
Total provisions -- -- 105 366 1,630
------- ------- -------- ------- ------
Balance at end of period $1,098 $1,224 $1,493 $1,501 $1,772
======= ======= ======= ======= ======
Net charge-offs as a percentage of average
loans outstanding .09% .21% .07% .37% .35%
==== ==== ==== ==== ====
</TABLE>
36
<PAGE>
The following table shows the amount of the Company's allowance for
loan losses attributable to each category of loan indicated and the percent of
loans in each category to total loans, at each of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
1994 1993 1992 1991 1990
----------- ------------ -------------- ------------- -------------
Amount % Amount % Amount % Amount % Amount %
------ --- ------ --- ------ --- ------- --- ------- ---
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real
estate loans $ 37 49.6% $ 66 44.2% $ 94 45.7% $ 159 46.0% $ 214 48.6%
Commercial real
estate loans 150 5.0% 494 5.4% 527 6.7% 443 5.7% 961 5.6%
Consumer loans 409 45.4% 535 50.4% 818 47.6% 866 48.3% 338 45.8%
Unallocated 502 n/a 129 n/a 54 n/a 33 n/a 259 n/a
------ ------- ------- ------- ------- -------- ------- -------- ------ --------
Total $1,098 100.0% $1,224 100.0% $1,493 100.0% $1,501 100.0% $1,772 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
When loans become delinquent as to principal and interest by 90 days or
more, they are placed on nonaccrual status; at that point, a reserve for
uncollected interest is established for 100% of the interest previously accrued
and is charged against interest income.
The following table presents information concerning the Company's
nonperforming assets at the date indicated:
<TABLE>
<CAPTION>
At December 31,
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Residential Real Estate Loans:
Nonaccrual $ 586 $1,081 $1,884 $1,610 $ 793
Accruing loans 90 days or more delinquent -- -- -- -- 124
Loans serviced with recourse 90 days or more delinquent 173 59 121 358 --
------ ------- -------- ------- -----
Total 759 1,140 2,005 1,968 917
------ ------ ------ ------- -----
Commercial Real Estate Loans:
Nonaccrual -- -- -- 203 764
Restructured -- 567 570 -- 1,371
Accruing loans 90 days or more delinquent -- -- -- -- --
------ ------ ------ ----- -----
Total -- 567 570 203 2,135
------ ------- ------- ------ ------
Consumer Loans:
Nonaccrual 537 940 2,128 2,567 1,453
Accruing loans 90 days or more delinquent -- -- -- 13 28
------- ------ ------ -------- -------
Total 537 940 2,128 2,580 1,481
------ ---- ------ ------ -------
Total nonperforming loans:
Nonaccrual 1,123 2,021 4,012 4,380 3,010
Restructured -- 567 570 -- 1,371
Accruing loans 90 days or more delinquent -- -- -- 13 152
Loans serviced with recourse 90 days or more delinquent 173 59 121 358 --
------- ------- ------ ------ ------
Total 1,296 2,647 4,703 4,751 4,533
------- ------- ------ ------ ------
Real estate owned, net 1,154 1,841 1,860 2,049 2,672
------ ------- ------ ------ ------
Total nonperforming assets $2,450 $4,488 $6,563 $6,800 $7,205
====== ====== ====== ====== ======
Total nonperforming loans as a percent of total loans .8% 2.0% 3.4% 2.8% 2.5%
=== ==== ==== ==== ====
Total nonperforming assets as a percent of total assets .9% 1.7% 2.8% 2.9% 3.0%
=== ==== ==== ==== ====
</TABLE>
At December 31, 1994, the Company's loan portfolio contained $1.3 million
in nonperforming loans. Nonperforming residential loans amounting to $759,000
consisted of 10 single-family residential loans ranging in balance up to
$389,000.
Nonperforming consumer loans totalled $537,000 at December 31, 1994 and
consisted of 48 loans ranging in balance up to $81,000.
If interest income had been recorded on all nonaccrual loans outstanding
at December 31, 1994, interest income would have increased by approximately
$57,000, $56,000, and $224,000 during 1994, 1993 and 1992, respectively.
Real estate owned properties with a net carrying value of $1.2 million at
December 31, 1994 include the following:
37
<PAGE>
o A shopping center in DeSoto, TX with a net carrying value of
$871,000 at December 31, 1994. The property was sold in January
1995. Based on the terms of the sale, the Company did not incur any
losses on the sale of this property;
o Nine local and one out-of-state single-family residences with a net
carrying value of $265,000 at December 31, 1994. Management believes
adequate reserves have been established on these properties.
There were no nonperforming loans in the southwest at December 31, 1994.
Performing loans in the southwest, which included one apartment building and two
commercial buildings, had an aggregate net carrying value of $970,000, net of
$150,000 in reserves at December 31, 1994.
The aggregate loan concentrations in states and areas bordering the
Company's normal lending area of southcentral and southeastern Pennsylvania as
well as the southern and southwestern United States comprise less than 10% of
total loans receivable.
The Company intends to continue to monitor the adequacy of the allowances
for loan and real estate losses and make provisions as actual experience or
economic conditions warrant. Management believes that the allowances for loan
and real estate losses are adequate. While management uses available information
to recognize losses on loans and real estate, future additions to the allowances
may be necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowances for loan and real estate losses.
Such agencies may require the Company to recognize additions to the allowances
based on their judgements about information available to them at the time of
their examination.
Noninterest Income
In 1988, FHSC reactivated its grandfathered insurance license and began
offering a full line of insurance products. This full line of insurance products
rounds out other financial products offered through INVEST, which is a
nationally marketed investment advisory and securities brokerage program to
which FHSC subscribes.
At December 31, 1994, SHSC was involved in one real estate joint venture
and one real estate project with local builders and developers.
Other fees and charges decreased $62,000 or 6.5% in 1994 and increased
$184,000 or 23.8% in 1993 over the respective prior years. The changes were
primarily due to fluctuations in fees earned by INVEST and the title insurance
agency.
Loan servicing fee income increased $67,000 or 14.3% and $58,000 or 14.3%
in 1994 and 1993, respectively, due to an increase in the loan servicing
portfolio at AMC. The loan servicing portfolio increased to $220 million at the
end of 1994 from $157 million at the end of 1992.
The losses in 1994 and 1992 on the sale of investment and trading
securities resulted primarily from trading activity in U.S. government and U.S.
government agency securities.
Gain on the sale of mortgages decreased $835,000 or 38.4% in 1994 and
increased $723,000 or 49.9% in 1993 over the respective prior years. These gains
almost exclusively resulted from gains on sales of mortgages at AMC. The
decrease in 1994 was due to lower volume of loan refinancings and originations
in response to higher interest rates and a $237,000 charge for the decline in
market value of loans transferred from the held-for-sale portfolio to the
permanent portfolio. The increase in 1993 was due to higher loan originations
attributable to strong refinancing activity and the sales of such loans due to
declining interest rates. During 1994, AMC sold approximately $129 million of
loans compared with $160 million and $130 million in 1993 and 1992,
respectively. At December 31, 1994, AMC had $7.3 million in loans held for sale
compared to $19.3 million and $13.5 million at December 31, 1993 and 1992,
respectively.
Gain on the sale of servicing in 1994 and 1992 resulted from the sale of
a portion of the AMC servicing portfolio.
Income from real estate operations increased $211,000 and decreased
$191,000 in 1994 and 1993, respectively. The increase in 1994 resulted primarily
from the recognition of a previously deferred gain on the sale of real estate
held for development and gains from the sale of real estate acquired in
settlement of loans. The decrease in 1993 resulted from fewer gains on the sale
of real estate acquired in settlement of loans and lower income from real estate
development.
The $250,000 income from IRS claim in 1993 was for interest received in
conjunction with the $452,000 tax refund.
Noninterest Expenses
Salaries and employee benefits increased $100,000 or 2.5% in 1994 and
$575,000 or 16.4% in 1993 over the respective prior years. The increase in 1994
was primarily due to increased retirement and ESOP benefits as a result of AMC
employees becoming participants in the Company's retirement and ESOP programs,
payment to two AMC officers for the termination of an employment agreement based
on the net value of the mortgage servicing
38
<PAGE>
portfolio, the addition of staff appraisers by AMC and higher employee group
benefits all of which were partially offset by a decrease in accrued bonuses to
officers of $450,000. The increase in 1993 was primarily due to increased
accrued bonuses to officers of $400,000, as well as increased salaries and
benefits, and increased retirement expenses.
The Financial Accounting Standards Board's (FASB) Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions" (SFAS 106), was issued in December 1990. Currently, the
Company does not provide postretirement benefits, and therefore is not impacted
by the provisions of SFAS 106.
In December 1992, the FASB issued Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits" (SFAS
112). SFAS 112 is effective for fiscal years beginning after December 15, 1993.
The only postemployment benefits provided by the Company are severance payments
for certain officers that are payable in the event of certain specific
circumstances such as a change in control. Accordingly, at the present time, the
Company is not impacted by the provisions of SFAS 112.
Net occupancy expense increased $77,000 or 6.5% in 1994 and $99,000 or
9.1% in 1993 over the respective prior years. The increase in 1994 and 1993 was
due to increases in office rent, depreciation, system upgrades, maintenance and,
in 1993, costs connected with the addition of a new branch.
Data processing expense decreased $23,000 or 10.2% and $46,000 or 17.0%
in 1994 and 1993 over the respective prior years. The decreases were due to the
renegotiation of the contract with the Association's service bureau in 1993.
Federal insurance premiums are a function of the size of the savings
deposit portfolio and the premiums charged. The increase of $61,000 or 16.1% in
1994 and the decrease of $160,000 or 29.6% in 1993 reflected primarily FDIC
credits which amounted to $138,000 received in 1993 for required prepayments
made in the early 1970's to the FSLIC and a lower deposit base.
Marketing expense increased $134,000 or 53.0% in 1994 due to advertising
campaigns for consumer loans and for a new savings product and increased $74,000
or 41.3% in 1993 due to the opening of a new branch office.
Professional fees increased $65,000 or 22.4% and $54,000 or 22.9% in 1994
and 1993 over the respective prior years. The increase in 1994 was due to costs
connected with the review of acquisition proposals. The increase in 1993 was due
to interest rate risk and human resources consulting fees and fees associated
with the settlement of the IRS claim.
The $200,000 credit for provision for real estate losses in 1994 was
primarily due to a reduction in real estate reserves on SHSC's land development
projects. The reductions were made possible by SHSC's sale of its interest in a
joint venture and reductions in land development projects. The $135,000
provision for real estate losses in 1993 included provisions for a local real
estate development project and four single-family real estate owned properties.
The $130,000 provision for real estate losses in 1992 related to four
single-family real estate owned properties. Total real estate owned decreased to
$1.2 million at December 31, 1994 from $1.8 million at December 31, 1993. At
December 31, 1994, the net carrying value of the commercial real estate owned
properties was $871,000 and the net carrying value of real estate projects and
joint ventures was $249,000.
Other noninterest expense increased $33,000 or 2.8% and $174,000 or 17.2%
in 1994 and 1993 over the respective prior years. The increase in 1994 was due
to an increased commitment to employee training. The increase in 1993 was due to
an increase in directors' fees, miscellaneous taxes and office expenses
associated with the increased volume of loan originations at AMC.
Income Taxes
In 1994, 1993 and 1992, the Company had combined federal and state income
taxes of approximately $1.9 million, $1.5 million, and $1.3 million,
respectively. The effective federal tax rates were 42.3% for 1994, 34.4% for
1993, and 39.1% for 1992. The lower effective Federal tax rate for 1993 was due
to a receipt in 1993 of an Internal Revenue Service claim refund of $452,000.
The Tax Reform Act of 1986 reduced the availability and extent of the
special tax treatment afforded savings institutions through a variety of changes
to existing tax laws. The two major changes were the reduction in the maximum
corporate tax rate to 34% for taxable years beginning on or after July 1, 1987,
and a reduction in the maximum bad debt deduction under the percentage method
from 40% of taxable income to 8% of taxable income (effective for taxable years
beginning after December 31, 1986). In February 1992, the FASB issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109), which changed the Company's method of accounting for income taxes from the
deferred method to the asset and liability method. The Company adopted SFAS 109
effective January 1, 1993 on a prospective basis, with the cumulative effect of
this accounting change amounting to an increase to the financial statement
deferred tax asset of $717,000, with a
39
<PAGE>
corresponding credit to income.
Net Income
The $1.0 million decrease in net income in 1994 was attributable
primarily to decreased gains on the sale of mortgages, the implementation of
SFAS 109 in the prior period and the receipt of a federal income tax claim
refund and related interest from the IRS in the prior period, which were
partially offset by an increase in net interest income and a reduction of real
estate reserves on land development projects. The $1.6 million increase in net
income in 1993 was attributable primarily to an increase in net interest income,
reduced additions to the provisions for loan and real estate losses, increased
gains on the sale of mortgages, the implementation of SFAS 109 and receipt of
the tax claim refund plus interest from the IRS, which were partially offset by
higher salaries and employee benefits.
Liquidity and Capital Resources
The increase in total loans during 1994 was primarily due to loan
originations, the sources of funding for which were primarily FHLB advances.
The Company, like many other financial institutions, has experienced a
decline in deposit accounts as declining interest rates have further increased
the competition for depositors' funds. This has resulted in many depositors
placing funds in non-traditional financial institutions such as brokerage houses
and mutual funds. The Company has diversified its products and has the ability
to offer alternative investment products through INVEST Financial Corporation;
therefore many of the Company's customers have been retained, albeit with
different products and services. Customers in search of higher yields are made
aware of alternative products and management believes they will return as
deposit customers when deposit rates become more acceptable to them. In
addition, as previously discussed, the Company has maintained competitive
long-term rates to retain long-term certificates of deposits and has utilized
various Federal Home Loan Bank advance programs to lengthen its liabilities.
Management continues to monitor such trends through its asset/liability
committee and believes that, despite the decrease in interest rates and deposit
balances over the past several years, the Company will continue to have adequate
liquidity and its results of operations will not be significantly impacted by
the decline in deposit balances.
The Association is required by regulation to maintain average daily
balances of liquid assets and short-term liquid assets (as defined) in amounts
equal to 5% and 1%, respectively, of net withdrawable deposits and borrowings
payable in one year or less, to assure its ability to meet demands for
withdrawals and repayment of short-term borrowings. The Association's principal
sources of liquidity are deposits, principal and interest payments on loans, and
FHLB advances. The Association's average daily liquidity for 1994 ranged from
9.5% to 13.4% on a monthly basis.
First Federal's available sources of funds consist of deposits bearing
market rates of interest, loan repayments, advances from the FHLB of Pittsburgh
and other short-term borrowings.
First Federal uses its capital resources principally to meet ongoing
commitments to fund maturing certificates of deposit and deposit withdrawals,
repay borrowings, fund existing and continuing loan commitments, develop real
estate, maintain liquidity and meet operating expenses. At December 31, 1994,
the Company had mortgage loan commitments of approximately $12.5 million
primarily through AMC and approximately $16.1 million in unused home equity and
unsecured lines of credit.
At December 31, 1994 First Federal had time deposits maturing within
one-year aggregating $47.1 million. Management believes that a substantial
portion of First Federal's maturing time deposits will be redeposited in First
Federal.
Under regulations adopted by the OTS, which became effective December 7,
1989, each savings institution is required to maintain tangible and core capital
equal to at least 1.5% and 3.0%, respectively, of its total adjusted assets and,
risk-based capital equal to at least 8.0% of its risk-adjusted assets. At
December 31, 1994, the Association exceeded each requirement, with tangible,
core and risk-based capital ratios of 8.42%, 8.42% and 12.96%, respectively.
The investments in and extensions of credit to FHSC and SHSC (which
amounted to $254,000 at December 31, 1994) are deducted from capital because
real estate development activities are impermissible for national banks. The
Association's $7.6 million extension of credit to and investment in AMC, which
engages solely in activities permissible for national banks, is not subject to
the same deduction requirements as the real estate developments and therefore
the Association believes that it will continue to exceed all three of its
capital requirements on an ongoing basis.
The following table sets forth the various components of the
Association's regulatory capital at December 31, 1994:
40
<PAGE>
<TABLE>
<CAPTION>
Regulatory
-------------------------------
Tangible Core Risk-Based
Capital Capital Capital
-------- ------- ----------
(In Thousands)
<S> <C> <C> <C>
GAAP capital $23,399 $23,399 $23,399
Nonallowable Assets:
Assets of parent (720) (720) (720)
Equity in nonincludable
subsidiaries (254) (254) (254)
Purchased servicing
rights--excess (24) (24) (24)
Nonallowable Liabilities:
Liabilities of parent 265 265 265
Additional capital items:
General valuation
allowances -- -- 1,098
------- ------- -------
Regulatory capital--
computed 22,666 22,666 23,764
Minimum capital
requirement 4,037 8,074 14,664
------- ------- -------
Regulatory capital--
excess $18,629 $14,592 $ 9,100
======= ======= =======
</TABLE>
Impact of Inflation and Changing Prices
The financial statements and related 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 the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, substantially all
of the assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation. Over
short periods of time, interest rates may not necessarily move in the same
direction or in the same magnitude as the prices of goods and services as
measured by the consumer price index.
New Accounting Standards
In May 1993, the FASB issued Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114) and in
October 1994, Statement of Financial Accounting Standards No. 118, "Accounting
by Creditors for Impairment of a Loan-Income Recognition and Disclosure" (SFAS
118).
SFAS 114, as amended by SFAS 118, addresses the accounting by creditors
for impairment of certain loans. SFAS 114 requires that impaired loans that are
within the scope of the Statement be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
alternatively, at the loan's market price or the fair value of the collateral if
the loan is collateral dependent.
SFAS 114 is effective for fiscal years beginning after December 15, 1994
and earlier adoption is permitted. Effective January 1, 1995, the Company will
implement the provisions of SFAS 114 and SFAS 118. Based on the present
composition of the Company's loan portfolio and present economic conditions in
the Company's market area, management expects that the implementation of SFAS
114 and SFAS 118 will not have a material effect on the Company's financial
position or results of operations.
In November 1993, the American Institute of Certified Public Accountants
issued Statement of Position No. 93-6 "Employers' Accounting for Employee Stock
Option Plans" (SOP 93-6). SOP 93-6 is effective for fiscal years beginning after
December 15, 1993 and its accounting provisions are only required for shares
purchased by Employee Stock Option Plans after December 31, 1992. Accordingly,
the Company does not anticipate any impact of the SOP on the consolidated
financial statements.
Market and Dividend Information
The common stock of the Company is quoted and traded on NASDAQ National
Market System under the FFHP symbol. As of December 31, 1994, there were
approximately 1,100 stockholders of record.
The Company has paid a quarterly cash dividend since the third quarter of
1987. In addition, in December 1994, the Company declared a two for one stock
split payable on January 17, 1995, to shareholders of record at the close of
business on January 3, 1995. The following table summarizes the common stock
price ranges, as provided by NASDAQ, and dividends paid for each quarter. The
prices per share and the dividends per share have been retroactively adjusted to
give effect to the two for one stock split effective January 1995 and the 20%
stock dividend paid in November 1993.
<TABLE>
<CAPTION>
Cash Dividend
1994 High Low Per Share
- ---- ---- --- -------------
<S> <C> <C> <C>
First quarter $12.00 $11.00 $.050
Second quarter 12.00 10.38 .050
Third quarter 16.00 10.25 .050
Fourth quarter 15.75 10.00 .050
1993
- ----
First quarter $ 7.68 $ 6.02 $.041
Second quarter 8.51 6.85 .042
Third quarter 12.04 7.68 .042
Fourth quarter 12.00 10.83 .050
</TABLE>
41
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Selected Balance Sheet Data: December 31,
-------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Total Assets $269,985 $266,417 $232,011 $234,830 $237,456
Loans receivable, net(1) 234,308 228,468 175,381 194,935 209,168
Investment securities and interest-bearing
deposits(2) 22,589 24,731 44,348 28,915 15,991
Deposits 151,460 164,404 182,693 211,151 205,226
FHLB advances 22,011 24,600 19,000 1,000 10,000
Short-term borrowings 64,980 46,295 5,717 -- 3,148
Stockholders' equity 23,399 21,023 17,456 15,652 15,110
<CAPTION>
Selected Operating Data: Year Ended December 31,
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(In Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total interest income $18,593 $17,253 $19,048 $22,046 $23,788
Total interest expense 9,274 8,935 11,488 15,040 16,934
-------- ------- -------- ------- -------
Net interest income 9,319 8,318 7,560 7,006 6,854
Provision for loan losses -- -- 105 366 1,630
-------- ------- -------- ------- -------
Net interest income after provision for loan
losses 9,319 8,318 7,455 6,640 5,224
Gain (loss) on sale of investment and trading
securities (11) -- (17) 8 1,746
Unrealized losses on securities held for sale -- (16) -- -- --
Gain on sale of mortgage-backed securities -- -- -- 6 --
Gain on sale of mortgages 1,338 2,173 1,450 773 502
Gain (loss) on sale of property and equipment (7) 17 -- -- --
Gain on sale of servicing 114 -- 22 -- --
Income (loss) from real estate operations 176 (35) 156 615 128
Other income excluding gains (losses)
on above sales 1,440 1,689 1,196 1,110 1,108
Noninterest expenses 7,850 7,738 6,963 6,373 6,522
-------- --------- --------- -------- --------
Income before income taxes and cumulative effect
of change in accounting for income taxes 4,519 4,408 3,299 2,779 2,186
Income taxes 1,913 1,517 1,290 1,149 1,644
-------- --------- --------- -------- --------
Income before cumulative effect of change in
accounting for income taxes 2,606 2,891 2,009 1,630 542
Cumulative effect of change in accounting for
income taxes -- 717 -- -- --
-------- --------- --------- -------- --------
Net income $ 2,606 $ 3,608 $ 2,009 $ 1,630 $ 542
======== ========= ======== ======= =======
Earnings per share(3) $1.08 $1.51 $ .86 $ .71 $ .24
====== ====== ====== ===== =====
<CAPTION>
Other Selected Data: Year Ended December 31,
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average yield earned on all interest-earning assets 7.70% 7.76% 8.46% 9.86% 10.31%
Average rate paid on interest-bearing liabilities 4.19 4.32 5.42 6.98 7.63
Average interest rate spread:
During period 3.51 3.44 3.04 2.88 2.68
At end of period 3.83 3.54 3.47 2.79 2.94
Ratio of noninterest expense to average total assets 3.02 3.25 2.95 2.68 2.67
Return on average assets 1.00 1.52 .85 .68 .22
Return on average equity 11.73 18.59 12.12 10.50 3.66
Average equity to average assets 8.54 8.16 7.03 6.52 6.08
Dividend payout ratio 18.52 11.59 17.96 19.58 49.22
Number of full service offices at end of period 8 8 8 7 7
</TABLE>
- ----------------------
(1) Includes mortgage-backed securities and loans held for sale.
(2) Includes securities held for sale, stock in the Federal Home Loan Bank
("FHLB") of Pittsburgh and interest-bearing accounts. At December 31, 1994,
the interest-bearing accounts amounted to $1.9 million.
(3) Earnings per share were adjusted retroactively to reflect the two for one
stock split effective January 1995, the 20% stock dividend paid in November
of 1993 and the 10% stock dividends paid in November 1992 and November
1991.
42
