UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20429
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
-------------------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------------------------
Commission file number 0-29709
HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-3028464
----------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
271 Main Street, Harleysville, Pennsylvania 19438
--------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(215) 256-8828
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------------ ---------
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date:
Common Stock, $.01 Par Value, 3,921,177 as of May 12, 2006
Harleysville Savings Financial Corporation
and Subsidiary
Index
-----
PAGE(S)
-------
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Statements of Financial Condition as of
March 31, 2006 Unaudited and September 30, 2005 1
Unaudited Condensed Consolidated Statements of Income for the Three and Six
Months Ended March 31, 2006 and 2005 2
Unaudited Condensed Consolidated Statements of Comprehensive Income for the
Three and Six Months Ended March 31, 2006 and 2005 3
Unaudited Condensed Consolidated Statements of Stockholders' Equity for the Six
Months Ended March 31, 2006 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months
Ended March 31, 2006 and 2005 5
Notes to Unaudited Condensed Consolidated Financial Statements 6 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 -17
Item 4. Controls and Procedures 17
Part II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 1A. Risk Factors 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other information
Item 6. Exhibits
Signatures 19
Harleysville Savings Financial Corporation
Unaudited Condensed Consolidated Statements of Financial Condition
March 31, September 30,
2006 2005
------------- -------------
(Unaudited)
Assets
Cash and amounts due from depository institutions $ 1,158,384 $ 1,193,285
Interest bearing deposits in other banks 6,789,049 6,741,695
------------- -------------
Total cash and cash equivalents 7,947,433 7,934,980
Investment securities held to maturity (fair value -
March 31, $106,996,000; September 30, $88,404,000) 107,996,371 87,364,445
Investment securities available-for-sale at fair value 3,042,319 2,835,244
Mortgage-backed securities held to maturity (fair value -
March 31, $232,242,000; September 30, $259,994,000) 240,840,831 263,963,765
Mortgage-backed securities available-for-sale at fair value 791,675 1,045,087
Loans receivable (net of allowance for loan losses -
March 31, $1,960,000; September 30, $1,968,000) 370,257,876 366,006,917
Accrued interest receivable 3,653,503 3,432,054
Federal Home Loan Bank stock - at cost 14,582,700 16,035,900
Office properties and equipment, net 7,128,822 5,829,694
Deferred income taxes 349,448 339,587
Prepaid expenses and other assets 13,333,428 12,202,792
------------- -------------
TOTAL ASSETS $ 769,924,406 $ 766,990,465
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 431,865,902 $ 418,979,655
Advances from Federal Home Loan Bank 284,890,772 297,268,488
Accrued interest payable 1,322,291 1,358,953
Advances from borrowers for taxes and insurance 3,488,043 1,135,429
Accounts payable and accrued expenses 402,585 672,124
------------- -------------
Total liabilities 721,969,593 719,414,649
------------- -------------
Commitments (Note 9)
Stockholders' equity:
Preferred Stock: $.01 par value;
12,500,000 shares authorized; none issued
Common stock: $.01 par value; 15,000,000
shares authorized; issued and outstanding
March 2006, 3,921,177; Sept. 2005, 3,904,136 39,212 39,041
Additional Paid-in capital 7,933,624 7,610,511
Treasury stock, at cost (March 2006, 56,512 shares; Sept. 2005, 3,255) (996,057) (60,107)
Retained earnings - partially restricted 40,988,160 39,995,584
Accumulated other comprehensive loss (10,126) (9,213)
------------- -------------
Total stockholders' equity 47,954,813 47,575,816
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 769,924,406 $ 766,990,465
============= =============
See notes to unaudited condensed consolidated financial statements.
page -1-
Harleysville Savings Financial Corporation
Unaudited Condensed Consolidated Statements of Income
For the Three Months Ended For the Six Months Ended
March 31, March 31,
------------------------- -------------------------
2006 2005 2006 2005
---- ---- ---- ----
INTEREST INCOME:
Interest on mortgage loans $ 3,943,558 $ 3,752,988 $ 7,884,807 $ 7,553,501
Interest on mortgage-backed securities 2,754,221 2,937,716 5,602,480 5,784,003
Interest on consumer and other loans 1,385,364 1,111,828 2,729,369 2,167,557
Interest and dividends on tax-exempt investments 346,478 336,487 692,850 673,067
Interest and dividends on taxable investments 1,205,099 709,526 2,195,901 1,249,346
----------- ----------- ----------- -----------
Total interest income 9,634,720 8,848,545 19,105,407 17,427,474
----------- ----------- ----------- -----------
Interest Expense:
Interest on deposits 3,203,365 2,474,723 6,316,741 4,870,474
Interest on borrowings 3,167,082 3,028,392 6,475,737 5,983,293
----------- ----------- ----------- -----------
Total interest expense 6,370,447 5,503,115 12,792,478 10,853,767
----------- ----------- ----------- -----------
Net Interest Income 3,264,273 3,345,430 6,312,929 6,573,707
Provision for loan losses -- -- -- --
----------- ----------- ----------- -----------
Net Interest Income after Provision
for Loan Losses 3,264,273 3,345,430 6,312,929 6,573,707
----------- ----------- ----------- -----------
Other Income:
Gain on sales of securities 8,914 -- 8,914 63,743
Other income 273,116 341,204 594,971 691,022
----------- ----------- ----------- -----------
Total other income 282,030 341,204 603,885 754,765
----------- ----------- ----------- -----------
Other Expenses:
Salaries and employee benefits 1,129,574 1,054,636 2,167,803 2,071,255
Occupancy and equipment 385,045 392,896 753,018 762,407
Deposit insurance premiums 13,679 14,441 27,476 29,111
Other 502,710 551,195 1,056,030 1,109,338
----------- ----------- ----------- -----------
Total other expenses 2,031,008 2,013,168 4,004,327 3,972,111
----------- ----------- ----------- -----------
Income before Income Taxes 1,515,295 1,673,466 2,912,487 3,356,361
Income tax expense 354,177 431,500 670,177 858,901
----------- ----------- ----------- -----------
Net Income $ 1,161,118 $ 1,241,966 $ 2,242,310 $ 2,497,460
=========== =========== =========== ===========
Basic Earnings Per Share $ 0.30 $ 0.32 $ 0.58 $ 0.65
=========== =========== =========== ===========
Diluted Earnings Per Share $ 0.29 $ 0.32 $ 0.57 $ 0.64
=========== =========== =========== ===========
Dividends Per Share $ 0.16 $ 0.15 $ 0.31 $ 0.28
=========== =========== =========== ===========
See notes to unaudited condensed consolidated financial statements.
page -2-
Harleysville Savings Financial Corporation
Unaudited Condensed Consolidated Statement of Comprehensive Income
Three Months Ended
March 31,
2006 2005
----------------------------------------------------------------------------------------------------------------------
Net Income $ 1,161,118 $ 1,241,966
Other Comprehensive Income
Unrealized gain (loss) on securities net of tax
2006, ($9,046); 2005, $29,099 24,855 (1) (79,953)
----------- -----------
Total Comprehensive Income $ 1,185,973 $ 1,162,013
=========== ===========
(1) Disclosure of reclassification amount, net of tax for the three months ended: 2006 2005
---- ----
Net unrealized gain (loss) arising during the three months ended $ 30,738 $ (79,953)
Less: Reclassification adjustment for net gains included in net income
Net of tax expense -2006, $3,031; 2005, $0 5,883 --
----------- -----------
Net unrealized gain (loss) on securities $ 24,855 $ (79,953)
=========== ===========
Six Months Ended
March 31,
2006 2005
----------------------------------------------------------------------------------------------------------------------
Net Income $ 2,242,310 $ 2,497,460
Other Comprehensive Income
Unrealized loss on securities net of tax benefit
2006, $332; 2005, $25,432 (913)(1) (69,886)
----------- -----------
Total Comprehensive Income $ 2,241,397 $ 2,427,574
=========== ===========
(1) Disclosure of reclassification amount, net of tax for the six months ended: 2006 2005
---- ----
Net unrealized gain (loss) arising during the six months ended $ 4,970 $ (27,816)
Less: Reclassification adjustment for net gains included in net income
Net of tax expense -2006, $3,031; 2005, $21,673 5,883 42,070
----------- -----------
Net unrealized loss on securities $ (913) $ (69,886)
=========== ===========
page -3-
Harleysville Savings Financial Corporation
Unaudited Condensed Consolidated Statement of Stockholders' Equity
Retained Accumulated
Common Additional Earnings- Other Total
Stock Common Paid-in Treasury Partially Comprehensive Stockholders'
Shares Stock Capital Stock Restricted Loss Equity
----------------------------------------------------------------------------------------------------------------------------------
Balance at October 1, 2005 3,904,136 $ 39,041 $ 7,610,511 $ (60,107) $ 39,995,584 $ (9,213) $ 47,575,816
Net Income 2,242,310 2,242,310
Issuance of Common Stock 17,041 171 171
Dividends - $.31 per share (1,249,734) (1,249,734)
Option Compensation 35,025 35,025
Treasury stock purchased (1,091,072) (1,091,072)
Stock delivered under
employee stock plans (12,339) 155,122 142,783
Stock delivered under
Dividend Reinvestment Plan 300,427 300,427
Unrealized holding loss on
available - for- sale
securities, net of tax (913) (913)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at March 31, 2006 3,921,177 $ 39,212 $ 7,933,624 $ (996,057) $ 40,988,160 $ (10,126) $ 47,954,813
============ ============ ============ ============ ============ ============ ============
Retained Accumulated
Common Additional Earnings- Other Total
Stock Common Paid-in Treasury Partially Comprehensive Stockholders'
Shares Stock Capital Stock Restricted Loss Equity
----------------------------------------------------------------------------------------------------------------------------------
Balance at October 1, 2004 2,316,490 $ 23,165 $ 7,426,853 $ (414,430) $ 37,244,200 $ 33,124 $ 44,312,912
Net Income 2,497,460 2,497,460
Issuance of Common Stock 24,530 246 155,152 155,398
Stock Split 1,544,327 15,442 (15,442)
Dividends - $.20 per share (1,084,734) (1,084,734)
Treasury stock purchased (204,100) (204,100)
Stock delivered under
employee stock plans (159,703) 419,339 259,636
Stock delivered under
Dividend Reinvestment Plan 19,028 104,356 123,384
Unrealized holding gain on
available - for- sale s
ecurities, net of tax (69,886) (69,886)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at March 31, 2005 3,885,347 $ 38,853 $ 7,425,888 $ (94,835) $ 38,656,926 $ (36,762) $ 45,990,070
============ ============ ============ ============ ============ ============ ============
page -4-
Harleysville Savings Financial Corporation
Unaudited Condensed Consolidated Statements of Cash Flows
Six Months Ended March 31,
2006 2005
---- ----
Operating Activities:
Net Income $ 2,242,310 $ 2,497,460
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 219,793 159,805
Increase (decrese) in deferred income taxes 471 (6,754)
Compensation charge on stock options 35,025
Amortization of deferred loan fees (31,295) (120,257)
Gain on sale of securities (8,914) (63,743)
Increase in cash surrender value (215,000) (222,000)
Net amortization of premiums and discounts 258,300 214,221
Changes in assets and liabilities which provided (used) cash:
(Decrease) increase in accounts payable and accrued
expenses (269,539) 19,060
Increase in prepaid expenses and other assets (915,636) (409,764)
Increase in bank owned life insurance (2,500,000)
Decrease in accrued interest receivable (221,449) (216,871)
(Decrease) increase in accrued interest payable (36,662) 114,851
------------ ------------
Net cash provided by (used in) operating activities 1,057,404 (533,992)
------------ ------------
Investing Activities:
Purchase of investment securities held to maturity (20,795,000) (21,500,000)
Purchase of investment securities available for sale (280,181) (1,804,598)
Purchase of mortgage-backed securities held to maturity (2,011,250) (40,210,279)
Proceeds from maturities of investment securities held to maturity 163,074 11,237,653
Proceeds from sale of investment securities available for sale 73,106 4,539,544
Principal collected on long-term loans & mortgage-backed securities 67,748,680 69,283,279
Proceeds (purchase) of FHLB stock 1,453,200 (547,800)
Long-term loans originated (46,838,255) (49,426,495)
Purchases of premises and equipment (1,522,045) (298,987)
------------ ------------
Net cash used in investing activities (2,008,671) (28,727,683)
------------ ------------
Financing Activities:
Net decrease in demand deposits, NOW accounts
and savings accounts (1,482,196) (1,822,436)
Net increase in certificates of deposit 14,368,443 8,443,845
Cash dividends (1,249,734) (1,084,734)
Net (decrease) increase in FHLB advances (12,377,716) 19,261,254
Treasury stock delivered under employee stock plans 142,783 259,636
Stock delivered under Dividend Reinvestment Plan 300,427 123,384
Purchase of treasury stock (1,091,072) (204,100)
Net proceeds from issuance of stock 171 155,398
Net increase in advances from borrowers for taxes & insurance 2,352,614 2,500,144
------------ ------------
Net cash provided by financing activities 963,720 27,632,391
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,453 (1,629,284)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,934,980 4,718,784
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,947,433 $ 3,089,500
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 670,000 $ 621,112
Interest expense 12,829,140 10,968,618
See notes to unaudited condensed consolidated financial statements.
page -5-
Harleysville Savings Financial Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -The unaudited condensed consolidated financial statements
include the accounts of Harleysville Savings Financial Corporation and its
subsidiary (the "Company"). Harleysville Savings Bank (the "Bank") is the wholly
owned subsidiary of the Company. All significant intercompany balances and
transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and therefore do not
include information or footnotes necessary for a complete presentation of
financial condition, results of operations and cash flows in conformity with
accounting principles generally accepted in the United States of America.
However, all adjustments (consisting only of normal recurring adjustments)
which, in the opinion of management, are necessary for a fair presentation of
the consolidated financial statements have been included. The results of
operations for the three and six months ended March 31, 2006 are not necessarily
indicative of the results which may be expected for the entire fiscal year
ending September 30, 2006 or any other period. The financial information should
be read in conjunction with the Annual Report on Form 10-K for the period ended
September 30, 2005.
Use of Estimates in Preparation of Consolidated Financial Statements - The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. The most significant of these estimates is
the allowance for loan losses. Actual results could differ from those estimates.
Accounting for Stock Options - In December 2004, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 123R (revised 2004), "Share-Based Payment", which revises SFAS No.
123, "Accounting for Stock-Based Compensation", and supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees". This Statement requires an
entity to recognize the cost of employee services received in exchange for an
award of equity investment based on grant-date fair value of the award. That
cost will be recognized over the period during which an employee is required to
provide service in exchange for the award. The Company adopted the modified
prospective method provisions of SFAS No. 123R. Effective October 1, 2005, the
Company was required to recognize compensation expense for the fair value of
stock options that were granted or vest after that date. Upon adoption of SFAS
No. 123R, the Company was required to recognize through earnings, the fair value
of the remaining unvested portion of options granted prior to January 1, 2002.
For fiscal year 2006, the Company expects to recognize approximately $113,000 of
pre-tax expense relating to the options. The following table illustrates the
effect on net income and earnings per share if the Company had applied the fair
value recognition provisions of SFAS No. 123, using Binomial Option Pricing
Model, to stock-based employee compensation for the six months ended March 2005
and the actual impact for the six months ended March 2006.
For the Six Months Ended
March 31, 2006 March 31, 2005
-------------- --------------
Net income available to shareholders $ 2,242,310 $ 2,497,460
Add: Total stock-based employee compensation
expense included in reported net income (net
of tax) 26,966
Deduct: Total stock-based employee compensation
expensed determined under fair value method ( net
of tax) (26,966) (37,773)
------------- -------------
Proforma net income $ 2,242,310 $ 2,459,687
Earnings per share:
Basic - as reported $ 0.58 $ 0.65
Basic - pro forma $ 0.57 $ 0.64
Diluted - as reported $ 0.58 $ 0.64
Diluted - pro forma $ 0.57 $ 0.63
In June 2005, the FASB has issued Statement No. 154, "Accounting Changes and
Error Corrections", a replacement of APB Opinion No. 20 and FASB Statement No.3.
The Statement applies to all voluntary changes in accounting principle, and
changes the requirements for accounting for and reporting of a change in
accounting principle. Statement 154 requires retrospective application to prior
periods' financial statements of a voluntary change in accounting principle
unless it is impracticable. APB Opinion 20 previously required that most
voluntary changes in accounting principle be recognized by including in net
income of the period of the change the cumulative effect of changing to the new
accounting principle. Statement 154 improves financial reporting because its
requirements enhance the consistency of financial information between periods.
Statement 154 is effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005. The impact of this new
pronouncement will depend on the Company changing an accounting principle and
will be evaluated at that time.
In November 2005, the FASB issued FASB Staff Position (FSP) 115-1/124-1, "The
Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments". This FSP provides additional guidance on when an investment in a
debt or equity security should be considered impaired and when that impairment
should be considered other-than-temporary and recognized as a loss in earnings.
Specifically, the guidance clarifies that an investor should recognize an
impairment loss no later than when the impairment is deemed
other-than-temporary, even if a decision to sell has not been made. The FSP also
requires certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. The Company is applying the
guidance in this FSP in fiscal 2006 and there was no material affect to the
results of operations or the statement of financial position.
On December 19, 2005, the FASB issued FSP 94-6-1, "Terms of Loan Products That
May Give Rise to a Concentration of Credit Risk". FSP 94-6-1 addresses whether,
under existing guidance, non-traditional loan products represent a concentration
of credit risk and what disclosures are required for entities that originate,
hold, guarantee, service, or invest in loan products whose terms may give rise
to a concentration of credit risk. Non-traditional loan products expose the
originator, holder, investor, guarantor, or servicer to higher credit risk than
traditional loan products. Typical features of non-traditional loan products may
include high loan-to-value ratios and interest or principal repayments that are
less than the repayments for fully amortizing loans of an equivalent term. FSP
94-6-1 was effective upon its issuance and it did not have a material impact on
the Company's financial position or disclosures.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments. This statement amends FASB Statements No. 133, Accounting
for Derivative Instruments and Hedging Activities, and No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
This statement resolves issues addressed in Statement 133 Implementation Issue
No. D1, Application of Statement 133 to Beneficial Interest in Securitized
Financial Assets. This Statement is effective for all financial instruments
acquired or issued after the beginning of an entity's first fiscal year that
begins after September 15, 2006. The Company is still continuing to evaluate the
impact of this pronouncement and does not expect that the guidance will have a
material effect on the Company's financial position or results of operations.
In March 2006, the FASB issued SFAS No. 156 Accounting for Servicing of
Financial Assets an amendment of FASB Statement No. 140 ("SFAS 140" and "SFAS
156"). SFAS 140 establishes, among other things, the accounting for all
separately recognized servicing assets and servicing liabilities. SFAS 156
amends SFAS 140 to require that all separately recognized servicing assets and
servicing liabilities be initially measured at fair value, if practicable. This
Statement permits, but does not require, the subsequent measurement of
separately recognized servicing assets and servicing liabilities at fair value.
Under this Statement, an entity can elect subsequent fair value measurement to
account for its separately recognized servicing assets and servicing
liabilities. Adoption of this Statement is required as of the beginning of the
first fiscal year that begins after September 15, 2006. Upon adoption, the
Company will apply the requirements for recognition and initial measurement of
servicing assets and servicing liabilities prospectively to all transactions.
The Company will adopt SFAS 156 for the fiscal year beginning October 1, 2006
and is evaluating the impact of this pronouncement.
Reclassification - Certain items in the 2005 financial statements have been
reclassified to conform with the presentation in the 2006 consolidated financial
statements.
page -6-
2. INVESTMENT SECURITIES HELD TO MATURITY
A comparison of amortized cost and approximate fair value of investment
securities with gross unrealized gains and losses, by maturities, is as follows:
March 31, 2006
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
------------------------------------------------------------------------------------------------------
U.S. Government Agencies
Due after 1 years through 5 years $ 12,000,000 $ (320,000) $ 11,680,000
Due after 5 years through 10 years 26,487,638 $ 11,978 (656,616) 25,843,000
Due after 10 years through 15 years 44,664,734 (1,511,734) 43,153,000
Tax-Exempt Obligations
Due after 15 years 24,843,999 1,421,001 26,265,000
------------ ------------ ------------ ------------
Total Investment Securities $107,996,371 $ 1,432,979 $ (2,488,350) $106,941,000
============ ============ ============ ============
A summary of investment with unrealized losses, aggregated by category, at March
31, 2006 is as follows:
Less than 12 Months 12 Months or Longer Total Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
---------- ----------------- ---------- ----------------- ---------- -----------------
US Government agencies $ 50,304,465 $ (1,242,866) $ 27,723,410 $ (1,245,484) $ 78,027,875 $ (2,488,350
------------ ------------ ------------ ------------- ------------ ------------
Total $ 50,304,465 $ (1,242,866) $ 27,723,410 $ (1,245,484) $ 78,027,875 $ (2,488,350)
============ ============ ============ ============= ============ ============
At March 31, 2006, investment securities in a gross unrealized loss position for
twelve months or longer consisted of 10 US Government Agency Securities that at
such date had an aggregate depreciation of 4.3% from the Company's amortized
cost basis. Management believes that the estimated fair value of the securities
disclosed above is primarily dependent upon the movement in market interest
rates. Management evaluated the length of time and the extent to which the
market value has been less than cost; the financial condition and near term
prospects of the issuers, including any specific events which may influence the
operations of the issuers such as changes in technology that may impair the
earnings potential of the issuers. The Company has the ability and intent to
hold these securities until the anticipated recovery of fair value occurs.
Management does not believe any individual unrealized loss as of March 31, 2006
represents an other-than-temporary impairment.
September 30, 2005
Gross Gross
Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
--------------------------------------------------------------------------------------------------
U.S. Government Agencies
Due after 1 years through 5 years $12,000,000 $ (197,000) $11,803,000
Due after 5 years through 10 years 25,703,340 $ 77,445 (207,785) 25,573,000
Due after 10 years through 15 years 24,862,533 5,200 (497,733) 24,370,000
Tax-Exempt Obligations
Due after 10 years through 15 years 13,050,956 949,044 14,000,000
Due after 15 years 11,747,616 910,384 12,658,000
----------- ----------- ----------- -----------
Total Investment Securities $87,364,445 $ 1,942,073 $ (902,518) $88,404,000
=========== =========== =========== ===========
A summary of investment with unrealized losses, aggregated by category, at
September 30, 2005 is as follows:
Less than 12 Months 12 Months or Longer Total Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
---------- ----------------- ---------- ----------------- ---------- -----------------
US Government agencies $31,567,124 $ (284,269) $ 21,339,33 $ (618,249) $52,906,455 $ (902,518)
----------- ----------- ----------- ----------- ----------- -----------
Total $31,567,124 $ (284,269) $ 21,339,33 $ (618,249) $52,906,455 $ (902,518)
=========== =========== =========== =========== =========== ===========
At September 30, 2005, investment securities in a gross unrealized loss position
for twelve months or longer consisted of 8 US Government Agency Securities that
at such date had an aggregate depreciation of 2.8% from the Company's amortized
cost basis. Management believes that the estimated fair value of the securities
disclosed above is primarily dependent upon the movement in market interest
rates. Management evaluated the length of time and the extent to which the
market value has been less than cost; the financial condition and near term
prospects of the issuers, including any specific events which may influence the
operations of the issuers such as changes in technology that may impair the
earnings potential of the issuers. The Company has the ability and intent to
hold these securities until the anticipated recovery of fair value occurs.
Management does not believe any individual unrealized loss as of September 30,
2005 represented an other-than-temporary impairment.
page -7-
3. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
A comparison of amortized cost and approximate fair value of investment
securities with gross unrealized gains and losses is as follows:
March 31, 2006
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
--------------------------------------------------------------------------------
Equity Securities $1,009,735 $ 12,875 $ (34,705) $ 987,905
Mutual Funds 2,054,414 2,054,414
---------- ---------- ---------- ----------
Total Investment Securities $3,064,149 $ 12,875 $ (34,705) $3,042,319
========== ========== ========== ==========
A summary of investment with unrealized losses, aggregated by category, at March
31, 2006 is as follows:
Less than 12 Months 12 Months or Longer Total Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
---------- ----------------- ---------- ----------------- ---------- -----------------
Equity Securities $ 637,650 $ (34,705) $ -- $ -- $ 637,650 $ (34,705)
------------- ------------- ------------- ------------- ------------- -------------
Total $ 637,650 $ (34,705) $ -- $ -- $ 637,650 $ (34,705)
============= ============= ============= ============= ============= =============
There were no securities in a loss position greater than twelve months. For
securities in an unrealized loss position, management evaluated the length of
time and the extent to which the market value has been less than cost; the
financial condition and near term prospects of the issuers, including any
specific events which may influence the operations of the issuers such as
changes in technology that may impair the earnings potential of the issuers or
the discontinuance of a segment of the business that may effect the future
earnings potential. The Company has the ability and intent to hold these
securities until the anticipated recovery of fair value occurs. Management does
not believe any individual unrealized loss as of March 31, 2006 represents an
other-than-temporary impairment.
September 30, 2005
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
--------------------------------------------------------------------------------
Equity Securities $ 906,113 $ 9,830 $ (56,723) $ 859,220
Money Market Mutual Funds 1,976,024 1,976,024
---------- ---------- ---------- ----------
Total Investment Securities $2,882,137 $ 9,830 $ (56,723) $2,835,244
========== ========== ========== ==========
There were no securities in a loss position greater than twelve months. For
securities in an unrealized loss position, management evaluated the length of
time and the extent to which the market value has been less than cost; the
financial condition and near term prospects of the issuers, including any
specific events which may influence the operations of the issuers such as
changes in technology that may impair the earnings potential of the issuers or
the discontinuance of a segment of the business that may effect the future
earnings potential. The Company has the ability and intent to hold these
securities until the anticipated recovery of fair value occurs. Management does
not believe any individual unrealized loss as of September 30, 2005 represented
an other-than-temporary impairment.
page -8-
4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
A comparison of amortized cost and approximate fair value of mortgage-backed
securities with gross unrealized gains and losses is as follows:
March 31,2006
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
------------------------------------------------------------------------------------------------
Collateralized mortgage obligations $ 16,006,461 $ 55,926 $ (487,387) $ 15,575,000
FHLMC pass-through certificates 108,398,106 72,435 (3,402,541) 105,068,000
FNMA pass-through certificates 111,005,340 97,157 (5,080,497) 106,022,000
GNMA pass-through certificates 5,430,924 146,076 -- 5,577,000
------------ ------------ ------------ ------------
Total Mortgage-Backed Securities $240,840,831 $ 371,594 $ (8,970,425) $232,242,000
============ ============ ============ ============
A summary of investment with unrealized losses, aggregated by category, at March
31, 2006 is as follows:
Less than 12 Months 12 Months or Longer Total Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
---------- ----------------- ---------- ----------------- ---------- -----------------
Mortgage-backed securities
held to maturity $ 75,572,303 $ (2,419,758) $140,664,983 $ (6,550,667) $216,237,286 $ (8,970,425)
------------ ------------ ------------ ------------ ------------ ------------
Total $ 75,572,303 $ (2,419,758) $140,664,983 $ (6,550,667) $216,237,286 $ (8,970,425)
============ ============ ============ ============ ============ ============
At March 31, 2006, mortgage-related securities in a gross unrealized loss
position for twelve months or longer consisted of 60 securities that at such
date had an aggregate depreciation of 4.4% from the Company's amortized cost
basis. For securities in an unrealized loss position, management evaluated the
length of time and the extent to which the market value has been less than cost;
the financial condition and near term prospects of the issuers, including any
specific events which may influence the operations of the issuers such as
changes in technology that may impair the earnings potential of the issuers. The
Company has the ability and intent to hold these securities until the
anticipated recovery of fair value occurs. Management does not believe any
individual unrealized loss as of March 31, 2006 represents an
other-than-temporary impairment.
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
------------------------------------------------------------------------------------------------
Collateralized mortgage obligations $ 17,089,874 $ 36,738 $ (278,612) $ 16,848,000
FHLMC pass-through certificates 118,663,486 128,502 (2,047,988) 116,744,000
FNMA pass-through certificates 121,596,729 161,648 (2,216,377) 119,542,000
GNMA pass-through certificates 6,613,676 246,324 6,860,000
------------ ------------ ------------ ------------
Total Mortgage-Backed Securities $263,963,765 $ 573,212 $ (4,542,977) $259,994,000
============ ============ ============ ============
A summary of investment with unrealized losses, aggregated by category, at
September 30, 2005 is as follows:
Less than 12 Months 12 Months or Longer Total Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
---------- ----------------- ---------- ----------------- ---------- -----------------
Mortgage-backed securities
held to maturity $ 178,406,095 $ (2,751,178) $ 58,493,074 $ (1,791,799) $ 236,899,169 $ (4,542,977)
------------- ------------- ------------- ------------- ------------- -------------
Total $ 178,406,095 $ (2,751,178) $ 58,493,074 $ (1,791,799) $ 236,899,169 $ (4,542,977)
============= ============= ============= ============= ============= =============
At September 30, 2005, mortgage-related securities in a gross unrealized loss
position for twelve months or longer consisted of 27 securities that at such
date had an aggregate depreciation of 3.0% from the Company's amortized cost
basis. For securities in an unrealized loss position, management evaluated the
length of time and the extent to which the market value has been less than cost;
the financial condition and near term prospects of the issuers, including any
specific events which may influence the operations of the issuers such as
changes in technology that may impair the earnings potential of the issuers. The
Company has the ability and intent to hold these securities until the
anticipated recovery of fair value occurs. Management does not believe any
individual unrealized loss as of September 30, 2005 represented an
other-than-temporary impairment.
page -9-
5. MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE
A comparison of amortized cost and approximate fair value of mortgage-backed
securities with gross unrealized gains and losses is as follows:
March 31,2006
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------------------------------------------------------------------------------
FNMA pass-through certificates $ 785,187 $ 6,488 $ -- $ 791,675
---------- ---------- ---------- ----------
Total Mortgage-Backed Securities $ 785,187 $ 6,488 $ -- $ 791,675
========== ========== ========== ==========
September 30,2005
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------------------------------------------------------------------------------
FNMA pass-through certificates $1,012,154 $ 32,933 $ -- $1,045,087
---------- ---------- ---------- ----------
Total Mortgage-Backed Securities $1,012,154 $ 32,933 $ -- $1,045,087
========== ========== ========== ==========
6. LOANS RECEIVABLE
Loans receivable consist of the following:
March 31, 2006 September 30, 2005
-------------- ------------------
Residential Mortgages $ 273,358,353 $ 270,940,562
Commercial Mortgages 2,093,613 2,003,219
Construction 6,781,993 7,639,300
Savings Account 956,072 921,400
Home Equity 64,897,304 59,724,004
Automobile and other 725,785 771,538
Line of Credit 28,319,081 31,579,680
------------- -------------
Total 377,132,201 373,579,703
Undisbursed portion of loans in process (4,324,211) (4,933,753)
Deferred loan fees (589,810) (671,426)
Allowance for loan losses (1,960,304) (1,967,607)
------------- -------------
Loans receivable - net $ 370,257,876 $ 366,006,917
============= =============
The total amount of loans being serviced for the benefit of others was
approximately $4.1 million and $4.7 million at March 31, 2006 and September 30,
2005, respectively. Commercial mortgage loans consist of five or more units.
The following schedule summarizes the changes in the allowance for loan losses:
Six Months Ended Year Ended
March 31, 2006 September 30, 2005
-------------- ------------------
Balance, beginning of period $ 1,967,607 $ 1,976,849
Amounts charged-off (10,164) (92,949)
Loan recoveries 2,861 83,707
------------- -------------
Balance, end of period $ 1,960,304 $ 1,967,607
============= =============
The activity in the recoveries and charge off accounts was primarily the result
of the Company's Bounce protection program. This program extends credit
automatically to our depositors. If the account is not brought current by the
depositor the loan is charged off. If the customer subsequently brings the
account current, a recovery is recognized.
page -10-
7. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classification as
follows:
March 31, 2006 September 30, 2005
-------------- ------------------
Land $ 184,788 $ 184,788
Buildings 7,693,338 6,383,356
Furniture, fixtures and equipment 3,464,490 3,433,247
Automobiles 24,896 24,896
------------- -------------
Total 11,367,512 10,026,287
Less accumulated depreciation (4,238,690) (4,196,593)
------------- -------------
Net $ 7,128,822 $ 5,829,694
============= =============
8. DEPOSITS
Deposits are summarized as follows:
March 31, 2006 September 30, 2005
-------------- ------------------
Non-interest bearing checking $ 11,245,359 $ 9,618,764
NOW accounts 17,441,582 18,282,489
Checking accounts 16,067,471 9,102,649
Money Market Demand accounts 67,626,456 76,581,019
Passbook and Club accounts 3,528,458 3,806,599
Certificate accounts 315,956,576 301,588,135
------------- -------------
Total deposits $ 431,865,902 $ 418,979,655
============= =============
The aggregate amount of certificate accounts in denominations of more than
$100,000 at March 31, 2006 and September 30, 2005 amounted to approximately
$42.4 million and $39.7 million, respectively. Amounts in excess of $100,000 may
not be federally insured.
9. COMMITMENTS
At March 31, 2006, the following commitments were outstanding:
Origination of mortgage loans $ 9,223,861
Unused line of credit loans 41,402,895
Loans in process 4,324,211
-----------
Total $54,950,967
===========
10. DIVIDENDS
On April 19, 2006, the Company's Board of Directors declared a cash dividend of
$.16 per share payable on May 24, 2006 to the stockholders of record at the
close of business on May 10, 2006.
page -11-
11. EARNINGS PER SHARE
The following shares were used for the computation of earnings per share:
For the Three Months Ended For the Six Months Ended
March 31, March 31,
----------------------- ----------------------
2006 2005 2006 2005
---- ---- ---- ----
Basic 3,893,428 3,854,294 3,898,099 3,857,206
Diluted 3,953,751 3,926,205 3,949,506 3,915,365
The difference between the number of shares used for computation of basic
earnings per share and diluted earnings per share represents the dilutive effect
of stock options.
12. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consists of the following:
March 31, September 30,
2006 2005
Weighted Weighted
Interest Interest
Maturing Period Amount Rate Amount Rate
-------------------------------------------------------------------------
1 to 12 months $ 52,739,787 4.27% $ 36,043,911 3.73%
13 to 24 months 31,505,628 4.45% 25,446,061 3.66%
25 to 36 months 59,398,215 4.45% 69,114,248 4.83%
37 to 48 months 16,326,985 4.42% 31,484,966 3.89%
49 to 60 months 30,000,000 5.67% 9,302,331 3.97%
61 to 72 months 31,500,223 4.43% 40,208,732 5.35%
73 to 84 months 43,419,934 4.42% 60,668,239 4.47%
85 to 120 months 20,000,000 3.80% 25,000,000 3.80%
--------------------------------------------------
Total $284,890,772 4.49% $297,268,488 4.38%
==================================================
The advances are collateralized by Federal Home Loan Bank ("FHLB") stock and
substantially all first mortgage loans. The Company has a line of credit with
the FHLB of which $23.0 million out of $40.0 million was used at March 31, 2006
and $21.0 million was used as of September 30, 2005, for general purposes.
Included in the table above at March 31, 2006 and September 30, 2005 are
convertible advances whereby the FHLB has the option at a predetermined strike
rate to convert the fixed interest rate to an adjustable rate tied to London
Interbank Offered Rate ("LIBOR"). The Company then has the option to repay these
advances if the FHLB converts the interest rate. These advances are included in
the periods in which they mature. The Company has a total FHLB borrowing
capacity of $563.8 million of which $284.9 million was used as of March 31,
2006.
13. REGULATORY CAPITAL REQUIREMENTS
Harleysville Savings Bank (the "Bank") is subject to various regulatory capital
requirements administered by the federal Banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Bank's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Quantitative measures
established by regulation to ensure capital adequacy require the Bank to
maintain minimum amounts and ratios (set forth in the table below) of total Tier
1 capital (as defined in the regulations) to risk weighted assets (as defined),
and of Tier 1 capital (as defined) to assets (as defined). Management believes,
as of March 31, 2006, that the Bank meets all capital adequacy requirements to
which it is subject.
As of March 31, 2006, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
The Bank's actual capital amounts and ratios are also presented in the table.
To Be Considered Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------------------------------------------------------------
As of March 31, 2006
Tier 1 Capital (to assets) $ 47,804,526 6.25% $30,597,440 4.00% $ 38,246,800 5.00%
Tier 1 Capital (to risk weighted assets) 47,804,526 13.23% 14,454,080 4.00% 21,681,120 6.00%
Total Capital (to risk weighted assets) 49,764,625 13.77% 28,908,160 8.00% 36,135,200 10.00%
As of September 30, 2005
Tier 1 Capital (to assets) $ 47,524,213 6.26% $30,376,680 4.00% $ 37,970,850 5.00%
Tier 1 Capital (to risk weighted assets) 47,524,213 13.31% 14,283,160 4.00% 21,424,740 6.00%
Total Capital (to risk weighted assets) 49,491,820 13.86% 28,566,320 8.00% 35,707,900 10.00%
page -12-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains certain forward-looking statements and information relating
to the Company that are based on the beliefs of management as well as
assumptions made by and information currently available to management. In
addition, in those and other portions of this document, the words "anticipate,"
"believe," "estimate," "intend," "should" and similar expressions, or the
negative thereof, as they relate to the Company or the Company's management, are
intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future-looking events and are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected or intended. The Company does not
intend to update these forward-looking statements.
The Company's primary business consists of attracting deposits from the general
public through a variety of deposit programs and investing such deposits
principally in first mortgage loans secured by residential properties in the
Company's primary market area. The Company also originates a variety of consumer
loans, predominately home equity loans and lines of credit also secured by
residential properties in the Company's primary lending area. The Company serves
its customers through its full-service branch network as well as through remote
ATM locations, the internet and telephone banking.
Critical Accounting Policies and Judgments
------------------------------------------
The Company's consolidated financial statements are prepared based on the
application of certain accounting policies. Certain of these policies require
numerous estimates and strategic or economic assumptions that may prove
inaccurate or subject to variations and may significantly affect the Company's
reported results and financial position for the period or in future periods.
Changes in underlying factors, assumptions, or estimates in any of these areas
could have a material impact on the Company's future financial condition and
results of operations.
Analysis and Determination of the Allowance for Loan Losses - The allowance for
loan losses is a valuation allowance for probable losses inherent in the loan
portfolio. The Company evaluates the need to establish allowances against losses
on loans on a monthly basis. When additional allowances are necessary, a
provision for loan losses is charged to earnings.
Our methodology for assessing the appropriateness of the allowance for loan
losses consists of three key elements: (1) specific allowances for certain
impaired or collateral-dependent loans; (2) a general valuation allowance on
certain identified problem loans; and (3) a general valuation allowance on the
remainder of the loan portfolio. Although we determine the amount of each
element of the allowance separately, the entire allowance for loan losses is
available for the entire portfolio.
Specific Allowance Required for Certain Impaired or Collateral-Dependent Loans:
We establish an allowance for certain impaired loans for the amounts by which
the collateral value or observable market price are lower than the carrying
value of the loan. Under current accounting guidelines, a loan is defined as
impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due under the contractual terms
of the loan agreement. At March 31, 2006, no loans were considered impaired.
General Valuation Allowance on Certain Identified Problem Loans - We also
establish a general allowance for classified loans that do not have an
individual allowance. We segregate these loans by loan category and assign
allowance percentages to each category based on inherent losses associated with
each type of lending and consideration that these loans, in the aggregate,
represent an above-average credit risk and that more of these loans will prove
to be uncollectible compared to loans in the general portfolio.
General Valuation Allowance on the Remainder of the Loan Portfolio - We
establish another general allowance for loans that are not classified to
recognize the inherent losses associated with lending activities, but which,
unlike specific allowances, has not been allocated to particular problem assets.
This general valuation allowance is determined by segregating the loans by loan
category and assigning allowance percentages based on our historical loss
experience, delinquency trends and management's evaluation of the collectibility
of the loan portfolio. The allowance may be adjusted for significant factors
that, in management's judgment, affect the collectibility of the portfolio as of
the evaluation date. These significant factors may include changes in lending
policies and procedures,
page -13-
changes in existing general economic and business conditions affecting our
primary lending areas, credit quality trends, collateral value, loan volumes and
concentrations, seasoning of the loan portfolio, recent loss experience in
particular segments of the portfolio, duration of the current business cycle and
bank regulatory examination results. The applied loss factors are reevaluated
monthly to ensure their relevance in the current economic environment.
Changes in Financial Position for the Six-Month Period Ended March 31, 2006
---------------------------------------------------------------------------
Total assets at March 31, 2006 were $769.9 million, an increase of $2.9 million
for the six-month period then ended. The increase was primarily the result of an
increase in investment securities held to maturity of $20.6 million, loans
receivable of $4.3 million, office property and equipment of $1.3 million and
prepaid expense and other assets of $1.1 million. These increases were partially
offset by a decrease in mortgage-backed securities of $23.1 million and Federal
Home Loan Bank stock of $1.5 million.
As of March 31, 2006, total deposits increased by $12.9 million to $431.9
million. Advances from borrowers for taxes and insurance also increased by $2.4
million. There was also a decrease in advances from Federal Home Loan Bank of
$12.4 million due to the growth of deposits and normal cash flows.
Comparisons of Results of Operations for the Three and Six Month Period Ended
-----------------------------------------------------------------------------
March 31, 2006 with the Three and Six Month Period Ended March 31, 2005.
------------------------------------------------------------------------
Net Interest Income
-------------------
Net interest income was $3.26 million for the three-month period ended March 31,
2006 compared to $3.35 million for the comparable period in 2005. The decrease
in the net interest income for the three-month period ended March 31, 2006 when
compared to the same period in 2005 is attributed to the decrease in interest
rate spread to 1.56% in 2006 from 1.71% in 2005. The decrease in net interest
income was also a result of an increase in the average rate paid on interest-
bearing liabilities to 3.62% in 2006 from 3.24% in 2005 and an increase in the
average balance to $704.6 million in 2006 from $678.6 million in 2005. This was
partially offset by an increase in the yield earned on assets to 5.18% in 2006
from 4.95% in 2005 along with an increase in the average balance to $743.4
million in 2006 from $715.0 million in 2005.
Total interest income was $9.6 million for the three-month period ended March
31, 2006 compared to $8.8 million for the comparable period in 2005. For the six
month period ended March 31, 2006, total interest income was $19.1 million
compared to $17.4 million for the comparable period in 2005. The increase is the
result of the increased average yield for the interest-earning assets to 5.18%
and 5.14% for the three and six-month period ended March 31, 2006, respectively,
from 4.95% and 4.92% for the comparable periods in 2005.
Total interest expense increased to $6.4 million for the three-month period
ended March 31, 2006 from $5.5 million for the comparable period in 2005. For
the six-month period ended March 31, 2006, total interest expense increased to
$12.8 million from $10.9 million for the comparable period in 2005. These
increases occurred as a result of a increase in the average balance and a
increase in the average rate paid on interest-bearing liabilities to 3.62% and
3.63% for the three and six month periods ended March 31, 2006, respectively,
from 3.24% and 3.22% for the comparable period ended March 31, 2005.
Other Income
------------
Other income decreased to $282,000 for the three-month period ended March 31,
2006 from $341,000 for the comparable period in 2005. For the six-month period
ended March 31, 2005, other income decreased to $604,000 from $755,000 for the
comparable period in 2005. The three month decrease was due to a decrease in
bank owned life insurance income, non-deposit product income and less
non-sufficient funds fee income. The six-month decrease was due to the fact that
the Company had a $9,000 gain on investments available for sale in 2006 compared
to $64,000 in 2005 and a decrease in non-sufficient funds fee to $146,000 in
2006 from $163,000 in 2005.
Other Expenses
--------------
During the quarter ended March 31, 2006, other expenses increased by $18,000 or
0.9% to $2.03 million when compared to the same period in 2005. For the six
month period ended March 31, 2006, other expenses increased by $32,000 or 0.8%
compared to the comparable period in 2005. Management believes these are normal
increases in the cost of operations after considering the effects of inflation
and the impact of the 2.9% growth in the assets of the Company when compared to
the same periods in 2005. The annualized ratio of expenses to average assets for
page -14-
the three and six month periods ended March 31, 2006 were 1.06% and 1.04%,
respectively.
Income Taxes
------------
The Company made provisions for income taxes of $354,000 and $670,000 for the
three and six-month periods ended March 31, 2006, respectively, compared to
$432,000 and $859,000 for the comparable periods in 2005. These provisions are
based on the levels of taxable income.
Liquidity and Capital Recourses
-------------------------------
As of March 31, 2006, the Company had $55.0 million in commitments to fund loan
originations, disburse loans in process and meet other obligations. Management
anticipates that the majority of these commitments will be funded within the
next six months by means of normal cash flows, FHLB borrowings and new deposits.
The amount of certificate accounts, which are scheduled to mature during the 12
months ending March 31, 2007, is $184.8 million. Management expects that a
substantial portion of these maturing deposits will remain as accounts in the
Company. The Company invests excess funds in overnight deposits and other
short-term interest-earning assets, which provide liquidity to meet lending
requirements. The Company also has available borrowings with the Federal Home
Loan Bank of Pittsburgh up to the Company's maximum borrowing capacity, which
was $563.8 million at March 31, 2006 of which $284.9 million was outstanding at
March 31, 2006.
The Bank's net income for the six months ended March 31, 2006 of $2.2 million
increased the Bank's stockholders' equity to $48.0 million or 6.2% of total
assets. This amount is well in excess of the Bank's minimum regulatory capital
requirement.
Recent Accounting Pronouncements
--------------------------------
In June 2005, the FASB has issued Statement No. 154, "Accounting Changes and
Error Corrections", a replacement of APB Opinion No. 20 and FASB Statement No.3.
The Statement applies to all voluntary changes in accounting principle, and
changes the requirements for accounting for and reporting of a change in
accounting principle. Statement 154 requires retrospective application to prior
periods' financial statements of a voluntary change in accounting principle
unless it is impracticable. APB Opinion 20 previously required that most
voluntary changes in accounting principle be recognized by including in net
income of the period of the change the cumulative effect of changing to the new
accounting principle. Statement 154 improves financial reporting because its
requirements enhance the consistency of financial information between periods.
Statement 154 is effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005. The impact of this new
pronouncement will depend on the Company changing an accounting principle and
will be evaluated at that time.
In November 2005, the FASB issued FASB Staff Position (FSP) 115-1/124-1, "The
Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments". This FSP provides additional guidance on when an investment in a
debt or equity security should be considered impaired and when that impairment
should be considered other-than-temporary and recognized as a loss in earnings.
Specifically, the guidance clarifies that an investor should recognize an
impairment loss no later than when the impairment is deemed
other-than-temporary, even if a decision to sell has not been made. The FSP also
requires certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. The Company is applying the
guidance in this FSP in fiscal 2005 and there was no material affect to the
results of operations or the statement of financial position. On December 19,
2005, the FASB issued FSP 94-6-1, "Terms of Loan Products That May Give Rise to
a Concentration of Credit Risk". FSP 94-6-1 addresses whether, under existing
guidance, non-traditional loan products represent a concentration of credit risk
and what disclosures are required for entities that originate, hold, guarantee,
service, or invest in loan products whose terms may give rise to a concentration
of credit risk. Non-traditional loan products expose the originator, holder,
investor, guarantor, or servicer to higher credit risk than traditional loan
products. Typical features of non-traditional loan products may include high
loan-to-value ratios and interest or principal repayments that are less than the
repayments for fully amortizing loans of an equivalent term. FSP 94-6-1 was
effective upon its issuance and it did not have a material impact on the
Company's financial position or disclosures.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments. This statement amends FASB Statements No. 133, Accounting
for Derivative Instruments and Hedging Activities, and No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
This statement resolves issues addressed in Statement 133 Implementation Issue
No. D1, Application of Statement 133 to Beneficial Interest in Securitized
Financial Assets. This Statement is effective for all financial instruments
acquired or
page -15-
issued after the beginning of an entity's first fiscal year that begins after
September 15, 2006. The Company is still continuing to evaluate the impact of
this pronouncement and does not expect that the guidance will have a material
effect on the Company's financial position or results of operations. In March
2006, the FASB issued SFAS No. 156 Accounting for Servicing of Financial Assets
an amendment of FASB Statement No. 140 ("SFAS 140" and "SFAS 156"). SFAS 140
establishes, among other things, the accounting for all separately recognized
servicing assets and servicing liabilities. SFAS 156 amends SFAS 140 to require
that all separately recognized servicing assets and servicing liabilities be
initially measured at fair value, if practicable. This Statement permits, but
does not require, the subsequent measurement of separately recognized servicing
assets and servicing liabilities at fair value. Under this Statement, an entity
can elect subsequent fair value measurement to account for its separately
recognized servicing assets and servicing liabilities. Adoption of this
Statement is required as of the beginning of the first fiscal year that begins
after September 15, 2006. Upon adoption, the Company will apply the requirements
for recognition and initial measurement of servicing assets and servicing
liabilities prospectively to all transactions. The Company will adopt SFAS 156
for the fiscal year beginning October 1, 2006 and is evaluating the impact of
this pronouncement.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
The Company has instituted programs designed to decrease the sensitivity of its
earnings to material and prolonged increases in interest rates. 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 such assets and liabilities were perfectly
matched, and if the interest rates borne by its assets and liabilities were
equally flexible and moved concurrently, neither of which is the case, 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 increase the interest rate sensitivity by shortening the repricing intervals
and the maturities of the Company's interest-earning assets. Although management
of the Company believes that the steps taken have reduced the Company's overall
vulnerability to increases in interest rates, the Company remains vulnerable to
material and prolonged increases in interest rates during periods in which its
interest rate sensitive liabilities exceed its interest rate sensitive assets.
The authority and responsibility for interest rate management is vested in the
Company's Board of Directors. The Chief Executive Officer implements the Board
of Directors' policies during the day-to-day operations of the Company. Each
month, the Chief Financial Officer ("CFO") presents the Board of Directors with
a report, which outlines the Company's asset and liability "gap" position in
various time periods. The "gap" is the difference between interest- earning
assets and interest-bearing liabilities which mature or reprice over a given
time period.
The CFO also meets weekly with the Company's other senior officers to review and
establish policies and strategies designed to regulate the Company's flow of
funds and coordinate the sources, uses and pricing of such funds. The first
priority in structuring and pricing the Company's assets and liabilities is to
maintain an acceptable interest rate spread while reducing the effects of
changes in interest rates and maintaining the quality of the Company's assets.
The following table summarizes the amount of interest-earning assets and
interest-bearing liabilities outstanding as of March 31, 2006, which are
expected to mature, prepay or reprice in each of the future time periods shown.
Except as stated below, the amounts of assets or liabilities shown which mature
or reprice during a particular period were determined in accordance with the
contractual terms of the asset or liability. Adjustable and floating-rate assets
are included in the period in which interest rates are next scheduled to adjust
rather than in the period in which they are due, and fixed-rate loans and
mortgage-backed securities are included in the periods in which they are
anticipated to be repaid.
The passbook accounts, negotiable order of withdrawal ("NOW") accounts, interest
bearing accounts, and money market deposit accounts, are included in the "Over 5
Years" categories based on management's beliefs that these funds are core
deposits having significantly longer effective maturities based on the Company's
retention of such deposits in changing interest rate environments.
Generally, during a period of rising interest rates, a positive gap would result
in an increase in net interest income while a negative gap would adversely
affect net interest income. Conversely, during a period of falling interest
rates, a positive gap would result in a decrease in net interest income while a
negative gap would positively affect net
page -16-
interest income. However, the following table does not necessarily indicate the
impact of general interest rate movements on the Company's' net interest income
because the repricing of certain categories of assets and liabilities is
discretionary and is subject to competitive and other pressures. As a result,
certain assets and liabilities indicated as repricing within a stated period may
in fact reprice at different rate levels.
1 Year 1 to 3 3 to 5 Over 5
or less Years Years Years Total
--------- --------- --------- --------- ---------
Interest-earning assets
Mortgage loans $ 36,744 $ 56,918 $ 43,132 $ 136,564 $ 273,358
Mortgage-backed securities 81,751 81,539 39,955 38,388 241,633
Consumer and other loans 64,637 25,835 8,971 5,045 104,488
Investment securities and other investments 31,381 2,725 24,625 85,390 144,121
--------- --------- --------- --------- ---------
Total interest-earning assets 214,513 167,017 116,683 265,387 763,600
--------- --------- --------- --------- ---------
Interest-bearing liabilities
Passbook and Club accounts -- -- -- 3,528 3,528
NOW and checking accounts -- -- -- 33,509 33,509
Money Market Deposit accounts 17,390 -- -- 39,730 57,120
Choice Savings 2,627 7,880 10,507
Certificate accounts 184,845 119,868 11,244 -- 315,957
Borrowed money 78,038 78,691 40,924 87,238 284,891
--------- --------- --------- --------- ---------
Total interest-bearing liabilities 282,900 198,559 52,168 171,885 705,512
--------- --------- --------- --------- ---------
Repricing GAP during the period $ (68,387) $ (31,542) $ 64,515 $ 93,502 $ 58,088
========= ========= ========= ========= =========
Cumulative GAP $ (68,387) $ (99,929) $ (35,414) $ 58,088
========= ========= ========= =========
Ratio of GAP during the period to total assets -8.96% -4.13% 8.45% 12.24%
========= ========= ========= =========
Ratio of cumulative GAP to total assets -8.96% -13.09% -4.64% 7.61%
========= ========= ========= =========
Item 4. Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer
and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this report. Based
on such evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
regulations and are operating in an effective manner.
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred
during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
page -17-
Part II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 1A. Risk Factors
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents the repurchasing activity of the stock
repurchase program during the first six months of fiscal 2006:
Total Number
of Shares Maximum
Purchased as Number of Shares
Total Part of Publicly that May Yet Be
Number of Average Announced Purchased Under
Shares Price Paid Plans or the Plans or
Period Purchased per Share Programs Programs
October 1-31, 2005 135,667
November 1-30, 2005 3,000 $ 17.40 3,000 132,667
December 1-31, 2005
January 1-31, 2006
February 1-28, 2006 6,527 17.68 6,527 126,140
March 1-31, 2006 52,767 17.50 52,767 73,373
------------ ------------ ------------ ------------
Total 62,294 17.51 62,294 73,373
============ ============ ============ ============
Notes to this table:
(a) On June 18, 2003, the Company announced its current program to
repurchase up to 5.0% of the outstanding shares of Common Stock of the
Company, or 191,667 shares.
(b) The program does not have an expiration date and all shares are
purchased in the open market.
Item 3. Defaults upon Senior Securities
Not applicable.
page -18-
Item 4. Submission of Matters to a Vote of Security Holders
Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The annual meeting of Stockholders was held on January 25, 2006.
(c) There were 3,906,278 shares of Common Stock of the Company eligible to
be voted at the Annual Meeting and 3,348,115 shares were represented at
the meeting by the holders thereof, which constituted a quorum. The
items voted upon at the Annual Meeting and the vote for each proposal
were as follows:
1. Election of directors for a three-year term:
FOR WITHHELD
--- --------
David J. Friesen 3,334,148 13,967
George W. Meschter 3,329,385 18,730
James L. Rittenhouse 3,335,793 12,322
Name of each director whose term of office continued:
Sanford L. Alderfer
Mark R. Cummins
Phillip A. Clemens
Ronald B. Geib
Charlotte A. Hunsberger, Esq.
Edward J. Molnar
2. To consider and approve the Harleysville Savings Financial
Corporation 2005 Stock Option Plan.
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
2,707,913 139,689 21,577 478,936
3. Proposal to ratify the appointment by the board of Deloitte &
Touche, LLP as the Company's independent auditors for the year
ending September 30, 2006.
FOR AGAINST ABSTAIN
--- ------- -------
3,336,358 6,083 5,674
Each of the proposals were adopted by the stockholders of the Company.
Item 5. Other information.
Not applicable.
page -19-
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
No.
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.0 Section 1350 Certification of Chief Executive
Officer and Chief Financial Officer
page -20-
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
Date: May 15, 2006 By: /s/ Edward J. Molnar
------------------------------------------
Edward J. Molnar
Chief Executive Officer
Date: May 15, 2006 By: /s/ Brendan J. McGill
------------------------------------------
Brendan J. McGill
Senior Vice President
Treasurer and Chief Financial Officer
page -21-