Harleysville Savings
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FINANCIAL CORPORATION
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2006
Annual [GRAPHIC]
Report
Board of Directors
[PHOTO]
Seated (L to R): Charlotte A. Hunsberger, Ronald B. Geib, Edward J. Molnar,
Philip A. Clemens, David J. Friesen, Standing (L to R): Mark R. Cummins, James
L. Rittenhouse, Sanford L. Alderfer, George W. Meschter
Senior Officers
[PHOTO OF EDWARD J. MOLNAR]
Edward J. Molnar
Chairman
Chief Executive Officer
[PHOTO OF RONALD B. GEIB]
Ronald B. Geib
President
Chief Operating Officer
[PHOTO OF MARIAN BICKERSTAFF]
Marian Bickerstaff
Senior Vice President
Residential Lending Officer
[PHOTO OF BRENDAN J. MCGILL]
Brendan J. McGill
Senior Vice President
Chief Financial Officer
[PHOTO OF ADRIAN D. GORDON]
Adrian D. Gordon
Senior Vice President
Chief Information Officer
[PHOTO OF SHERI L. STROUSE]
Sheri L. Strouse
Senior Vice President
Branch Administrator
[PHOTO OF STEPHEN J. KOPENHAVER]
Stephen J. Kopenhaver
Senior Vice President
Commercial Lending Officer
Selected Consolidated Financial and Other Data
Selected Balance Sheet Data:
(in thousands, except per share data) As of September 30,
2006 2005 2004 2003 2002
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Total Assets $ 775,638 $ 766,990 $ 718,232 $ 653,288 $ 620,264
Mortgage-backed securities held to maturity 219,494 263,964 261,292 223,592 163,815
Mortgage-backed securities available-for-sale 820 1,045 3,795 6,656 29,515
Loans receivable - net 385,450 366,007 338,584 297,346 295,354
Investment securities held to maturity 111,099 87,364 68,162 83,327 55,665
Investment securities available-for-sale 8,108 2,835 7,715 4,923 12,000
Other investments (1) 25,549 23,971 19,903 18,618 45,369
Deposits 429,254 418,980 405,231 380,687 371,947
FHLB advances and other borrowings 294,611 297,268 265,953 228,817 207,502
Total stockholders' equity 48,471 47,576 44,313 40,816 37,868
Book value per share (3) 12.59 12.20 11.56 10.81 10.05
Selected Operations Data:
Year Ended September 30,
2006 2005 2004 2003 2002
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Interest income $ 39,091 $ 35,902 $ 32,636 $ 33,123 $ 35,218
Interest expense 26,366 22,747 20,391 21,673 24,226
--------- --------- --------- --------- ---------
Net interest income 12,725 13,155 12,245 11,450 10,992
Provision for loan losses - (40) - - -
--------- --------- --------- --------- ---------
Net interest income after provision
for loan losses 12,725 13,195 12,245 11,450 10,992
Gain on sales of loans and securities 27 115 326 247 7
Other income 1,273 1,351 1,282 1,270 1,068
Other expense 8,568 7,965 7,399 6,897 6,434
--------- --------- --------- --------- ---------
Income before taxes 5,457 6,696 6,454 6,070 5,633
Income tax expense 1,255 1,693 1,604 1,476 1,218
--------- --------- --------- --------- ---------
Net income $ 4,202 $ 5,003 $ 4,850 $ 4,594 $ 4,415
========= ========= ========= ========= =========
Earnings per share - basic (3) $ 1.09 $ 1.29 $ 1.28 $ 1.21 $ 1.18
Earnings per share - diluted (3) 1.08 1.27 1.25 1.19 1.16
Dividends per share (3) 0.64 0.58 0.48 0.40 0.32
Selected Other Data:
Year Ended September 30,
2006 2005 2004 2003 2002
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Return on average assets (2) 0.55% 0.67% 0.70% 0.72% 0.75%
Return on average equity (2) 8.76% 10.91% 11.44% 11.68% 12.31%
Dividend payout ratio 58.72% 44.96% 37.56% 32.67% 27.55%
Average equity to average assets (2) 6.25% 6.15% 6.17% 6.14% 6.10%
Interest rate spread (2) 1.51% 1.65% 1.64% 1.64% 1.71%
Net yield on interest-earning assets (2) 1.71% 1.82% 1.80% 1.84% 1.92%
Ratio of non-performing assets to
total assets at end of period 0.00% 0.03% 0.04% 0.04% 0.03%
Ratio of interest-earning assets to
interest-bearing liabilities at end of period 105.6% 105.4% 105.6% 105.6% 105.2%
Full service banking offices at
end of period 6 5 5 5 5
(1) Includes interest-bearing deposits at other depository institutions &
stock of the Federal Home Loan Bank of Pittsburgh.
(2) All ratios are based on average monthly balances during the indicated
periods.
(3) The number of shares and per share information for all periods presented
has been restated to reflect the five for three stock split as of February
24, 2005.
2006 ANNUAL REPORT 3
Chairman's Report to the Stockholders
To our Stockholders:
At our meeting of the stockholders on January 25, 2006, I announced that I would
be retiring after 40 years from the position of Chief Executive Officer of our
Company effective on the date of our 2007 stockholders' meeting.
During the time since that day, we have been transitioning to the new management
team led by our current President and Chief Operating Officer, Ronald Geib. Ron
has assembled a truly gifted and talented group of senior officers to take our
Company forward and I am confident they will maintain the culture and success
that we have experienced in the past. Each member of Ron's senior management
team brings a genuine commitment to the mission of our Company.
I personally hired Ron thirty years ago as a young man right out of college. He
has experienced every facet of the banking business and has weathered many
different phases of the business cycle during those thirty years. He has faced
the good and the bad during that time and believes in the culture that has been
developed over the years that has made our Company unique and successful. He
played a major role during the early 1980's as we managed the Bank through some
of the highest interest rates in history and during the late 1980's and early
1990's as many financial institutions failed because of credit losses.
In 1987, when we converted the Bank to a public company, Ron played a major role
in his responsibilities as our Chief Financial Officer. During our twenty years
as a public company, Ron has served as our Chief Financial Officer and our
President and Chief Operating Officer and now he is transitioning to his new
responsibilities as our President and Chief Executive Officer.
Ron will bring much of the "old" with him, but he will also bring his own
management style which will enable the changes to happen that are necessary for
our Company to move forward in a very competitive environment.
Last year, in my report to you, I mentioned that we had been laying the
foundation to expand relationships with small business customers in our market
area to complement the Company's retail business. I am pleased to report that
the newest member of Ron's senior management team, Senior Vice President and
Chief Lending Officer, Steve Kopenhaver has been developing a strong foundation
of policies and operating procedures to assure that the Company's key principles
remain intact as we expand our business opportunities. As I have observed
Steve's work over the past nine months, I have been impressed by his
understanding of our culture as it applies to maintaining high asset quality and
how critical that has been to our success.
In 1995, a young man joined our staff to develop the Company's growing
technology needs. Senior Vice President and Chief Information Officer, Adrian
Gordon, and a member of Ron's senior management team, is leading the way in
implementing the new technology that has become indispensable to a successful
21st century financial institution. As we expand into small business
relationships new technology advancements such as remote deposit capture will be
necessary and Adrian and his team are implementing strategies to assure that our
Company is able to offer the services that our customers will need to be
successful.
Last year, I reported to you that construction was started on our newest branch
location along the rapidly expanding "Route 422 Corridor". I am pleased to
report that our new Upper Providence Office opened in July and is now serving
our customers from that community. Sheri Strouse, Senior Vice President and
Branch Administrator and a member of Ron's senior management team, deserves a
great deal of credit for her tireless efforts in directing this project to its
successful conclusion. Sheri has been a member of our team since 1997 and is
already working on our seventh branch location which will serve our customers in
the Souderton/Telford communities.
Charged with the responsibility of financial management is our Senior Vice
President and Chief Financial Officer, Brendan McGill. Brendan joined our
Company in 1999 and has provided leadership during a difficult time of flat and
inverted yield curves during the past few years. The enduring principles that
have been key to our success: High asset quality, exceptional operating
efficiencies, effective capital management and genuine customer service take
priority in every decision that Brendan makes as a member of Ron's senior
management team.
I want to express a special thank you to Marian Bickerstaff. Marian will be
voluntarily stepping down from her role as a senior officer on January 1st but
will be continuing on a part time basis as the Company's Director of Marketing.
Marian joined Harleysville Savings Bank in 1975 and has served as a senior
officer since 1985. Her contribution to the decision making process was
invaluable not only because of her vast experience, but because of her personal
integrity, honesty and trustworthiness.
It has truly been an honor to serve and represent all of you as Chief Executive
Officer during the past forty years. Sharing in the success and growth of our
Company has been both exciting and rewarding for me personally and especially
working with our wonderful staff and board of directors for each of those years.
Even though I will be continuing as non-executive Chairman of the Board, I will
certainly miss the day to day activities of the Bank. I know that under Ron's
leadership we will continue to honor the business philosophy that is consistent
with the Proverb that God has given us: "A good name is to be more desired than
great riches."
Finally, I want to express my personal appreciation to you for the confidence
that you have expressed in the management of this Company and I hope to see you
at our annual stockholders' meeting in January.
Sincerely,
/s/ Edward J. Molnar
Edward J. Molnar
Chairman and Chief Executive Officer
4 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
President's Report to the Stockholders
To our Stockholders:
Over the course of time, fiscal year 2006 for Harleysville Savings Financial
Corporation will be known as a year of transition. We continue to be challenged
with implementing new ideas, processes, products and services to meet the needs
of our customers while preserving the core values to which our Company aspires.
The Company has embarked on developing a new line of business while experiencing
a transition in the senior management team in addition to operating in a
difficult economic environment and increased competition in the financial
industry.
Despite the challenging economic environment - a prolonged flat and inverted
yield curve in a low interest rate scenario, the Company achieved a return on
equity of 8.8% and increased assets to $776 million during fiscal year 2006.
I am pleased that the Board of Directors recognizes the value of sharing
financial success with our shareholders and that they increased the cash
dividend for the 19th consecutive year to 17 cents per share, a 6.25% increase.
The success of our Company is primarily the result of the ongoing
accomplishments of its team members.
I am pleased to report Shane Michalak and Anne Rostosky were appointed to the
position of Vice President during the year. Shane will have increased
responsibilities as he functions as the Company's Controller. Anne, who is the
Branch Manager of the Harleysville office, will assist in the expansion of our
non-deposit investments and our business banking deposit services.
The long-term service of our team members enables the Company to build strong
relationships with our customers. This year, 12 of our team members were honored
for their years of service: Edward J. Molnar - 40 years; Kathy Clairmont and
Dorothy Kulp - 20 years; Beverly Fretz, Dawn Hufnagle, and Teresa Fenstermacher
- 15 years; Marge Granahan - 10 years; Don Mihok, Joe Grayeske, Dhruva Shah,
Bethany Holsendorff, and Anne Rostosky - 5 years.
We are excited about our new line of business - Priority Business Banking. Led
by Steve Kopenhaver, Senior Vice President, the Company is now positioned to
offer the attentive personal service and a complete range of products and
services to provide solutions to the financial needs of our business community.
We are also pleased with the performance of our newest Upper Providence Office,
located at the intersection of Township Line Road and Ridge Pike in Upper
Providence Township. Under the leadership of Branch Manager, Sherry Williamson,
the office now has over $3 million in deposits.
Over this past year, we updated our strategic plan with a focus on strengthening
the retail components of our balance sheet: to grow and diversify the loan mix
and to grow and diversify the deposit mix. In order to complement the existing
offices, the strategic plan also calls for adding a key, full-service office in
the Souderton-Telford area. Once this office is in place, the plan is to restore
the profitability of the Company by concentrating on retail growth with
exceptional customer service before opening additional offices.
We also believe that the success of the Company is dependent upon the quality of
its management and the performance of every team member. It is the goal of
management to maintain our competitive advantages of exceptional operating
efficiency, high asset quality and exceptional customer service. We believe that
we can increase the overall efficiency of the Company by continually emphasizing
the necessity of "working smart" and utilizing state of the art technologies. We
believe the quality of our team members and the quality of our service delivery
will be enhanced by an emphasis on improving communication and service skills
and through the personal growth of each team member, beginning with me.
2007 will mark Ed Molnar's retirement as CEO of Harleysville Savings Financial
Corporation. While his daily presence will be missed by all, his legacy will be
reflected in the strong leadership team and enduring relationships with
customers, team members, stockholders and the community. Today, the culture of
the bank reflects the principles and standards of performance that he values:
integrity, trust, honesty, teamwork and exceptional customer service.
I am grateful to the Board of Directors for their support, for naming me as
President and the next Chief Executive Officer of Harleysville Savings Financial
Corporation, and for focusing on the need for thoughtful succession planning and
a smooth transition. Once again, they have set an example of good governance. As
we complete our carefully planned transition of leadership, the Board and
management remain clearly aligned with the mission of the Company - to build
value for our customers, team members, stockholders and the community by
consistently providing an exceptional community banking experience.
As we build on our 91-year history, I am excited and energized with the
opportunity to lead our competent and engaged management team as we expand our
product line into business banking services while continuing to create
additional value for our stakeholders. Thank you for your loyalty during a year
of significant transition.
Sincerely,
/s/ Ronald B. Geib
Ronald B. Geib
President
A tribute to Edward J. Molnar
Edward J. Molnar will retire on January 24, 2007 after having served as the
Chief Executive Officer of Harleysville Savings Financial Corporation and
Harleysville Savings Bank for 40 years.
The culture of the Company today reflects the principles and values he
exemplified in his distinguished career with the Company - integrity, trust,
honesty, teamwork and exceptional customer service.
One of his proudest achievements is seeing the Company grow and prosper. We are
enormously grateful for his leadership in the Company, the banking industry and
our community.
Ed will continue to serve as the Chairman of the Company.
2006 ANNUAL REPORT 5
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-Looking Statements
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," "except," "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.
Critical Accounting Policies and Judgments
The Company's consolidated financial statements are prepared based on the
application of certain accounting policies, the most significant of which are
described in Note 2, Summary of Significant 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 discounted cash flows (or 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.
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 is 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, 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, 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.
Overview
Harleysville Savings Financial Corporation, a bank holding company, of which
Harleysville Savings Bank (the "Bank"), is a wholly owned subsidiary, was formed
in February 2000. For purposes of this discussion, the Company, including its
wholly owned subsidiary, will be referred to as the "Company." The Company's
earnings are primarily dependent upon its net interest income, which is
determined by (i) the difference between yields earned on interest-earning
assets and rates paid on interest-bearing liabilities ("interest rate spread")
and (ii) the relative amounts of interest-earning assets and interest-bearing
liabilities outstanding. The Company's interest rate spread is affected by
regulatory, economic, and competitive factors that influence interest rates,
loan demand and deposit flows. The Company, like other thrift institutions, is
vulnerable to an increase in interest rates to the extent that interest-bearing
liabilities mature or reprice more rapidly than interest-earning assets. To
reduce the effect of adverse changes in interest rates on its operations, the
Company has adopted certain asset and liability management strategies, described
below. The Company's earnings are also affected by, among other factors, other
non-interest income, other expenses, and income taxes. The Company's total
assets at September 30, 2005, amounted to $767.0 million, compared to $718.2
million as of September 30, 2004. Deposits as of September 30, 2005, totaled
$419.0 million, compared to $405.2 million at September 30, 2004. Stockholders'
equity totaled $47.6 million as of September 30, 2005, compared to $44.3 million
at September 30, 2004.
The Company's total assets at September 30, 2006, amounted to $775.6 million,
compared to $767.0 million as of September 30, 2005. Deposits as of September
30, 2006, totaled $429.3 million, compared to $419.0 million at September 30,
2005. Stockholders' equity totaled $48.5 million as of September 30, 2006,
compared to $47.6 million at September 30, 2005.
During fiscal 2006, net interest income after provision for loan losses
decreased $471,000 or 3.6% from the prior fiscal year. This decrease was the
result of 3.1% growth in the average interest-earning assets, which was offset
by a 2.9% growth in average interest-bearing liabilities, and a decrease in the
interest rate spread from 1.65% in fiscal 2005 to 1.51% in fiscal 2006. Earnings
for fiscal 2006 were $4.2 million compared to $5.0 million and $4.9 million for
the years ended September 30, 2005 and 2004, respectively. The Company's return
on average assets (net income divided by average total assets) was 0.55% during
fiscal 2006 compared to 0.67% and 0.70% during fiscal 2005 and 2004,
respectively. Return on average equity (net income divided by average equity)
was 8.76% during fiscal 2006 compared to
6 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
10.91% during fiscal 2005 and 11.44% during fiscal 2004. This decline in return
on average assets and return on average equity during the three-year period was
a direct result of the compression of long and short term interest rates,
increased prepayments of higher yielding assets and the Company reinvesting
those funds into a shorter-term assets with a lower yield. The repositioning of
the portfolio into short-term assets will allow the Company to have more cash
flow to reinvest in a rising rate environment.
Recent Accounting Pronouncements - 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. For fiscal year 2006, the Company
recognized approximately $109,000 of pre-tax expense relating to these options
previously accounted for under the provisions of APB No. 25.
In March 2005, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 107 which expressed the views of the SEC regarding
the interaction between SFAS No. 123R and certain SEC rules and regulations. SAB
No. 107 provides guidance related to the valuation of share-based payment
arrangements for public companies, including assumptions such as expected
volatility and expected term.
In May 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 applied the guidance
in this FSP in 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 SFAS No. 140" ("SFAS No. 156"). SFAS No. 156:
(i) clarifies when a servicing asset or servicing liability should be
recognized; (ii) requires all separately recognized servicing assets and
servicing liabilities to be initially measured at fair value, if practicable;
(iii) subsequent to initial measurement, permits an entity to choose either the
amortization method or the fair value measurement method for each class of
separately recognized servicing assets or servicing liabilities; and (iv) at its
initial adoption, permits a one-time reclassification of available-for-sale
securities to trading securities by entities with recognized servicing rights.
SFAS No. 156 is effective for all separately recognized servicing assets and
liabilities acquired or issued after the beginning of an entity's fiscal year
that begins after September 15, 2006. Earlier adoption is permitted as of the
beginning of an entity's fiscal year, provided the entity has not yet issued
financial statements, including interim financial statements for any period of
that fiscal year. The Company has chosen to adopt SFAS No. 156 effective January
1, 2006 and has elected the fair value measurement method for subsequently
measuring its servicing assets. The election of the fair value measurement
method will subject the Company's earnings to increases and decreases in the
value of its servicing assets. The adoption of SFAS No. 156 is not expected to
have a material impact on the Company's Consolidated Financial Statements.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 ("FIN
48"). FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken in a
tax return. The Company must presume the tax position will be examined by the
relevant tax authority and determine whether it is more likely than not that the
tax position will be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical merits of the
position. A tax position that meets the more-likely-than-not recognition
threshold is measured to determine the amount of benefit to recognize in the
financial statements. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective January 1, 2007. The cumulative
effect of applying the provisions of FIN 48 represents a change in accounting
principle and shall be reported as an adjustment to the opening balance of
retained earnings. The Company is currently evaluating the impact of adopting
FIN 48 on its Consolidated Financial Statements.
2006 ANNUAL REPORT 7
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. The changes to current practice
resulting from the application of SFAS No. 157 relate to the definition of fair
value, the methods used to measure fair value and the expanded disclosures about
fair value measurements. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. Earlier application
is encouraged, provided that the reporting entity has not yet issued financial
statements for that fiscal year, including financial statements for an interim
period within that fiscal year. The provisions of SFAS No. 157 should be applied
prospectively as of the beginning of the fiscal year in which it is initially
applied, except for certain financial instruments which require retrospective
application as of the beginning of the fiscal year of initial application (a
limited form of retrospective application). The transition adjustment, measured
as the difference between the carrying amounts and the fair values of those
financial instruments at the date SFAS No. 157 is initially applied, should be
recognized as a cumulative-effect adjustment to the opening balance of retained
earnings. The Company is currently evaluating the impact of adopting SFAS No.
157 on its Consolidated Financial Statements and whether to adopt its provisions
prior to the required effective date.
In September 2006, the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin ("SAB") No. 108. This release expresses the staff's views
regarding the process of quantifying financial statement misstatements and
addresses diversity in practice in quantifying financial statement misstatements
and the potential under current practice for the build up of improper amounts on
the balance sheet. SAB No. 108 is effective for annual financial statements
covering the first fiscal year ending after November 15, 2006. The Company has
reviewed the SAB in connection with our condensed consolidated financial
statements for the current and prior periods, and has determined that its
adoption will not have an impact on any of these financial statements.
Results of Operations
The table on the next page sets forth for and as of the periods indicated,
information regarding: (i) the total dollar amounts of interest income from
interest-earning assets and the resulting average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resulting
average costs; (iii) net interest income; (iv) interest rate spread; (v) net
interest-earning assets; (vi) the net yield earned on interest-earning assets;
and (vii) the ratio of total interest-earning assets to total interest-bearing
liabilities. Average balances are calculated on a monthly basis.
Net Interest Income
Net interest income after provision for loan losses decreased by $471,000 or
3.57% in fiscal 2006, and increased by $951,000 or 7.77% in fiscal 2005 over the
respective prior periods. The decrease in the net interest income after
provision for loan losses in 2006 was due to a decrease in the interest rate
spread between interest earning assets and interest earning liabilities. The
increase in the net interest income after provision for loan losses in 2005 was
due to a higher amount of interest-earning assets and an increase in the
interest rate spread. The driving factors will be discussed below in Interest
Income and Interest Expense.
Interest Income
Interest income on mortgage loans increased by $761,000 or 5.0% in fiscal 2006
and increased by $413,000 or 2.8% in fiscal 2005 from the respective prior
years. During fiscal 2006, the average balance of mortgage loans increased $14.0
million or 5.3% and the yield decreased by 1 basis point. The decrease in the
yield of mortgage loans reflects the lower interest rate environment and the
increase in refinancing of existing loans at lower rates. During fiscal 2005,
the average balance of mortgage loans increased $16.0 million or 6.5% and the
yield decreased by 22 basis points. The majority of loans originated during the
2006 year were fixed rate mortgages. The decrease in interest income on
mortgage-backed securities reflected a decrease of $29.8 million or 11.0% in the
average balance. There was however an increase in yield earned by 17 basis
points during fiscal 2006. During fiscal 2005, the increase in interest income
on mortgage-backed securities reflected an increase of $13.2 million or 5.1% in
the average balance, which was also benefited by a 28 basis point increase in
yield. The increase in the balance of mortgage-backed securities reflects the
need the Company had for mortgage-related products that the Company was not able
to originate in the local market area. The Company needed a higher volume of
mortgage-backed securities during fiscal 2004 and 2005 to offset the flat
interest rate spread. In 2006, the increase in interest income on consumer and
other loans reflected an increase in the average balance due to growth in home
equity loans of $10.8 million or 18.1%, and an increase in the yield to 5.97%.
In 2005, the increase in interest income on consumer and other loans reflected
an increase in the average balance due to growth in home equity loans of $13.4
million or 28.9%, and an increase in the yield to 5.35%.
Interest and dividends on investments increased by $2.2 million or 51.8% in
fiscal 2006 over the respective prior years. During fiscal 2006, the increase
resulted from the average balance on investments increasing $29.5 million or
29.2% and a 74 basis point increase. The increase in the average balance in 2006
reflects funds that were redeployed from normal cash flows. Interest and
dividends on investments increased by $604,000 or 16.4% in fiscal 2005 over the
respective prior years. During fiscal 2005, the increase resulted from an
increase of 55 basis points and an increase in the average balance of $1.3
million or 1.3%.
Interest Expense
Interest expense on deposits increased $2.8 million or 27.4% in fiscal 2006 and
increased by $1.2 million or 13.6% in fiscal 2005 as compared to the respective
prior years. In fiscal 2006, the average balance increased $16.6 million or 4.1%
with a 58 basis point increase in the average rate paid. The increase in the
average balance reflects normal savings activity for the Company as well as
business checking and savings accounts being added in 2006. In fiscal 2005, the
average balance increased $14.7 million or 3.8% with a 22 basis point increase
in the average rate paid. The average rate paid on deposits was 3.2% for the
year ended September 30, 2006, compared to 2.6% for the year ended September 30,
2005 and 2.4% for 2004. The average rate paid on deposits, is a direct
reflection of the interest rate environment.
Interest expense on borrowings increased by $791,000 or 6.4% in fiscal 2006 and
increased by $1.1 million or 7.2% in fiscal 2005 as compared to the respective
prior years. The increase in interest expense during fiscal 2006 was the result
of a $3.0 million or 1.1% increase in the average balance of borrowings and an
increase of 23 basis points in the average rate paid. Borrowings were primarily
obtained during fiscal 2006 and 2005 to fund the purchase of mortgage-backed
securities and long-term fixed-rate mortgages. Long-term FHLB advances were used
to match the expected maturity terms of these mortgage products.
Provision for Loan Losses
Management establishes reserves for losses on loans when it determines that
losses are probable. The adequacy of loan loss reserves is based upon a regular
monthly review of loan delinquencies and "classified assets", as well as local
and national economic trends. Although management has currently established no
specific reserves for losses, no assurance can be given as to whether future
provision may be required. The allowance for loan losses totaled $2.0 million at
September 30, 2006 and 2005 or 0.5% and 0.5% of total loans at September 30,
2006 and 2005, respectively. Due to the Company's loan portfolio status and its
analysis of quantitative and qualitative factors, no provision was made in 2006,
2005 and 2004.
8 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
As of
Sept 30, For The Year Ended September 30,
----------------------------------------------------------------------------------------------
2006 2006 2005 2004
-------- -------------------------- -------------------------- --------------------------
Average Yield/ Average Yield/ Average Yield/
Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- -------------------------- -------------------------- --------------------------
Interest-earning assets:
Mortgage loans (2) (3) 5.81% $277,359 $ 16,101 5.81% $263,400 $ 15,331 5.82% $247,358 $ 14,918 6.03%
Mortgage-backed securities 4.62% 241,751 10,801 4.47% 271,554 11,666 4.30% 258,347 10,398 4.02%
Consumer and other loans (3) 6.24% 94,987 5,675 5.97% 86,257 4,614 5.35% 73,098 3,633 4.97%
Investments 5.13% 130,425 6,514 4.99% 100,915 4,291 4.25% 99,652 3,687 3.70%
-------- -------- -------- ------ -------- -------- ------ -------- -------- ------
Total interest-earning assets 5.39% 744,522 39,091 5.25% 722,126 35,902 4.97% 678,455 32,636 4.81%
-------- -------- -------- ------ -------- -------- ------ -------- -------- ------
Interest-bearing liabilities:
Deposits 3.42% 418,506 13,165 3.15% 401,920 10,337 2.57% 387,203 9,100 2.35%
Borrowings 6.67% 286,500 13,201 4.61% 283,522 12,410 4.38% 255,159 11,291 4.43%
-------- -------- -------- ------ -------- -------- ------ -------- -------- ------
Total interest-bearing liabilities 3.94% 705,006 26,366 3.74% 685,442 22,747 3.32% 642,362 20,391 3.17%
-------- -------- -------- ------ -------- -------- ------ -------- -------- ------
Net interest income/interest rate
spread 1.45% $ 12,725 1.51% $ 13,155 1.65% $ 12,245 1.64%
======== ======== ====== ======== ====== ======== ======
Net interest-earning assets/net
yield on interest-earning assets
(1) $ 39,516 1.71% $ 36,684 1.82% $ 36,093 1.80%
======== ====== ======== ====== ======== ======
Ratio of interest-earning assets
to interest-bearing liabilities 105.6% 105.4% 105.6%
====== ====== ======
(1) Net interest income divided by average interest-earning assets.
(2) Loan fee income is immaterial to this analysis.
(3) There were no non-accruing loans at September 30, 2006, 2005 and 2004.
The following table shows, for the periods indicated, the changes in
interest income and interest expense attributable to changes in volume
(changes in volume multiplied by prior year rate) and changes in rate
(changes in rate multiplied by prior year volume). Changes in rate/volume
(determined by multiplying the change in rate by the change in volume)
have been allocated to the change in rate or the change in volume based
upon the respective percentages of their combined totals.
Fiscal 2006 Compared Fiscal 2005 Compared
to Fiscal 2005 to Fiscal 2004
Increase (Decrease) Increase (Decrease)
----------------------------------------------------
Volume Rate Total Volume Rate Total
------ ------- ------ ------ ------ ------
Interest income on interest-earning assets:
Mortgage loans (1) $ 810 $ (40) $ 770 $ 946 $ (533) $ 413
Mortgage-backed securities (1,317) 453 (864) 547 721 1,268
Consumer and other loans (1) 492 568 1,060 689 292 981
Investments 1,392 831 2,223 47 557 604
------ ------- ------ ------ ------ ------
Total 1,377 1,812 3,189 2,229 1,037 3,266
------ ------- ------ ------ ------ ------
Interest expense on interest-bearing
liabilities:
Deposits 441 2,387 2,828 355 882 1,237
Borrowings 131 660 791 1,243 (124) 1,119
------ ------- ------ ------ ------ ------
Total 572 3,047 3,619 1,598 758 2,356
------ ------- ------ ------ ------ ------
Net change in net interest income $ 805 $(1,235) $ (430) $ 631 $ 279 $ 910
====== ======= ====== ====== ====== ======
(1) There were no non-accruing loans at September 30, 2006 and 2005.
2006 ANNUAL REPORT 9
Other Income
The Company's total other operating income decreased to $1.3 million in fiscal
2006 and decreased to $1.5 million in fiscal 2005. The decrease from 2006 to
2005 is attributed to a gain on the sale of an investment available for sale of
$27,000 in fiscal 2006 as compared to a gain of $100,000 in fiscal 2005.
Other income, which consists primarily of income from fees on demand accounts,
loan servicing fees, the sale of non-deposit products, insurance commissions,
and Bank Owned Life Insurance ("BOLI") income, decreased by $63,000 or 7.0%
during fiscal year 2006. During fiscal 2005, other income decreased by $27,000
or 2.9%. The fees, which comprise other income, are set by the Company at a
level, which is intended to cover the cost of providing the related services and
expenses to customers and employees. Components of other income in 2006 remained
relatively consistent with the results of 2005. Based on the current services
offered by the Company, we anticipate other income to remain consistent in
fiscal year 2007.
Other Expenses
Salaries and employee benefits increased by $471,000 or 11.4% in fiscal 2006 and
by $251,000 or 6.5% in fiscal 2005 as compared to prior respective fiscal years.
The increased expenses of salaries and employee benefits during the periods are
attributable to the expenseing of stock options in the amount of $109,000 in
2006 campared to no expense in 2005 and the increased staffing needs due to
additional branch, normal growth; normal salary increases and increased employee
benefit expenses. The Company anticipates normal increase in salaries and
employee benefits in fiscal year 2007 due to additional staffing needs,
inflationary effects and stock option expense.
Occupancy and equipment expense increased by $31,000 or 3.3% in fiscal 2006 and
increased by $73,000 or 8.4% in fiscal 2005 as compared to the prior respective
fiscal years. The increase in 2006 and 2005 were attributable to the normal
activity of the Company.
The Company anticipates occupancy and equipment expense to increase in fiscal
year 2007 due to normal asset growth and a full year of operations of our new
branch.
Other expenses, which consist primarily of advertising expenses, directors'
fees, ATM network fees, professional fees, checking account costs, stockholders
expense, and insurance premiums, increased by $78,000 or 3.4% in fiscal 2006 and
increased by $264,000 or 13.2% in fiscal 2005 over the prior respective fiscal
years.
Income Taxes
The Company recorded income tax provisions of $1.3 million, $1.7 million and
$1.6 million for fiscal years 2006, 2005 and 2004, respectively. The primary
reason for the decrease in the income tax provision in fiscal 2006 was a
decrease in income. See Note 12 of the "Notes to Financial Statements" which
provides an analysis of the provision for income taxes.
Asset and Liability Management
The Company has instituted programs designed to decrease the sensitivity of its
earnings to material and prolonged increases or decreases 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 and decreases in interest rates, the Company remains
vulnerable to material and prolonged increases and decreases in interest rates
during periods in which its interest rate sensitive liabilities exceed its
interest rate sensitive assets and interest rate sensitive assets exceed
interest rate sensitive liabilities, respectively.
The authority and responsibility for interest rate management is vested in the
Company's Board of Directors. The Chief Financial Officer implements the Board
of Directors' policies during the day-to-day operations of the Company. Each
month, the Chief Financial Officer 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 Chief Financial Officer 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 table on the next page summarizes the amount of interest-earning assets and
interest-bearing liabilities outstanding as of September 30, 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. However, many of our assets can prepay at any time
without a penalty unlike many of our liabilities that have a contractual
maturity.
The passbook accounts, negotiable order of withdrawal ("NOW") accounts and a
portion of the 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 interest income. However, the above
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 in a different period.
10 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
1 Year 1 to 3 3 to 5 Over 5
or Less Years Years Years Total
--------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Mortgage loans $ 37,995 $ 59,240 $ 44,894 $ 140,056 $ 282,185
Commercial Mortgage loans 813 21 9 5,051 5,894
Mortgage-backed securities 75,077 74,071 36,295 34,871 220,314
Consumer and other loans 58,263 28,069 9,747 8,730 104,809
Investment securities and other investments 54,682 18,434 19,030 64,541 156,687
--------- --------- --------- --------- ---------
Total interest-earning assets 226,830 179,835 109,975 253,249 769,889
--------- --------- --------- --------- ---------
Interest-bearing liabilities:
Passbook and Club accounts - - - 3,325 3,325
NOW accounts - - - 36,130 36,130
Consumer Money Market Deposit accounts 17,411 - - 39,530 56,941
Business Money Market Deposit accounts 1,536 - - 512 2,048
Certificate accounts 210,395 103,594 6,482 - 320,471
Borrowed money 101,003 60,609 44,971 88,028 294,611
--------- --------- --------- --------- ---------
Total interest-bearing liabilities 330,345 164,203 51,453 167,525 713,526
--------- --------- --------- --------- ---------
Repricing GAP during the period $(103,515) $ 15,632 $ 58,522 $ 85,724 $ 56,363
========= ========= ========= ========= =========
Cumulative GAP $(103,515) $ (87,883) $ (29,361) $ 56,363
========= ========= ========= =========
Ratio of GAP during the period to total assets -13.35% 2.02% 7.55% 11.05%
========= ========= ========= =========
Ratio of cumulative GAP to total assets -13.35% -11.33% -3.79% 7.27%
========= ========= ========= =========
Liquidity and Capital Resources
The Company's assets increased to $776.0 million as of September 30, 2006, from
$767.0 million as of September 30, 2005. Stockholders' equity increased to $48.5
million as of September 30, 2006, from $47.6 million as of September 30, 2005.
As of September 30, 2006, stockholders' equity amounted to 6.3% of the Banks
total assets under accounting principles generally accepted in the United States
of America ("GAAP").
For a financial institution, liquidity is a measure of the ability to fund
customers' needs for loans, deposit withdrawals and repayment of borrowings.
Harleysville Savings regularly evaluates economic conditions in order to
maintain a strong liquidity position. One of the most significant factors
considered by management when evaluating liquidity requirements is the stability
of the Company's core deposit base. In addition to cash, the Company maintains a
portfolio of cash flows generating investments to meet its liquidity
requirements. The Company also relies upon cash flow from operations and other
financing activities, generally short-term and long-term debt. Liquidity is also
provided by investing activities including the repayment and maturity of loans
and investment securities as well as the management of asset sales when
considered necessary. The Company also has access to and sufficient assets to
secure lines of credit and other borrowings in amounts adequate to fund any
unexpected cash requirements.
2006 ANNUAL REPORT 11
As of September 30, 2006, the Company had a remaining borrowing capacity with
the Federal Home Loan Bank of Pittsburgh of approximately $262,548,000. To the
extent that the Company cannot meet its liquidity needs with normal cash flows
and deposit growth, the Company will be able to utilize the available borrowing
capacity provided by the Federal Home Loan Bank of Pittsburgh to fund asset
growth and loan commitments. At September 30, 2006 the Company had exposures to
limited recourse arrangements with respect to the Company's sale of whole loans.
At September 30, 2006, the exposure, which represents a portion of credit risk
associated with the sold interests, amounted to $62,000. The exposure is for the
life of the related loans and payable, on our proportional share, as losses are
incurred
The Company's contractual cash obligations at September 30, 2006 were as
follows:
Less Than 1 to 3 4 to 5 After
Total 1 Year Years Years 5 Years
-----------------------------------------------------------------------------------------------------
Lease agreements $ 512,191 $ 94,174 $ 202,739 $ 106,978 $ 108,300
FHLB debt 294,611,162 79,492,234 72,800,311 47,793,090 94,525,527
Funding Commitments 46,844,731 46,844,731
------------ ------------ ------------ ------------ ------------
$341,968,084 $126,431,139 $ 73,003,050 $ 47,900,068 $ 94,633,827
============ ============ ============ ============ ============
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein have
been prepared in accordance with GAAP 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, virtually 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. Interest rates do not necessarily move
in the same direction or in the same magnitude as the prices of goods and
services, since prices are affected by inflation to a larger extent than
interest rates.
12 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Harleysville Savings Financial
Corporation and Subsidiary - Harleysville, Pennsylvania:
We have audited the accompanying consolidated statements of financial condition
of Harleysville Savings Financial Corporation and Subsidiary (the "Company") as
of September 30, 2006 and 2005, and the related consolidated statements of
income, comprehensive income, stockholders' equity, and cash flows for each of
the three years in the period ended September 30, 2006. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Harleysville Savings Financial
Corporation and Subsidiary as of September 30, 2006 and 2005, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 2006, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, on October 1,
2005 the Company adopted the fair-value method of accounting for stock based
compensation.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
December 8, 2006
2006 ANNUAL REPORT 13
Consolidated Statements of Financial Condition
September 30,
2006 2005
----------------------------------------------------------------------------------------------------
Assets
Cash and amounts due from depository institutions $ 1,596,695 $ 1,193,285
Interest bearing deposits 8,453,455 6,741,695
------------- -------------
Total cash and cash equivalents 10,050,150 7,934,980
Investment securities held to maturity
(fair value - 2006, $111,248,000; 2005, $88,404,000) 111,098,682 87,364,445
Investment securities available-for-sale at fair value 8,107,759 2,835,244
Mortgage-backed securities held to maturity
(fair value - 2006, $213,913,000; 2005, $259,994,000) 219,493,818 263,963,765
Mortgage-backed securities available-for-sale at fair value 820,255 1,045,087
Loans receivable (net of allowance for loan losses -
2006, $1,956,000; 2005, $1,968,000) 385,450,375 366,006,917
Accrued interest receivable 3,969,610 3,432,054
Federal Home Loan Bank stock - at cost 15,498,600 16,035,900
Office properties and equipment, net 8,013,969 5,829,694
Prepaid expenses and other assets 13,134,625 12,542,379
------------- -------------
Total Assets $ 775,637,843 $ 766,990,465
============= =============
----------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 429,254,047 $ 418,979,655
Advances from Federal Home Loan Bank 294,611,162 297,268,488
Accrued interest payable 1,406,161 1,358,953
Advances from borrowers for taxes and insurance 1,184,089 1,135,429
Accounts payable and accrued expenses 711,014 672,124
------------- -------------
Total liabilities 727,166,473 719,414,649
------------- -------------
Commitments and contingencies (Note 16 & 17)
Stockholders' Equity:
Preferred Stock: $.01 par value;
12,500,000 shares authorized; none issued
Common stock: $.01 par value; 25,000,000
shares authorized; issued and outstanding,
2006, 3,921,177 shares and 2005, 3,904,136 shares 39,212 39,041
Additional Paid-in capital 7,992,014 7,610,511
Treasury stock, at cost (2006, 71,441 shares; 2005, 3,255 shares) (1,262,412) (60,107)
Retained earnings - partially restricted 41,714,616 39,995,584
Accumulated other comprehensive loss (12,060) (9,213)
------------- -------------
Total stockholders' equity 48,471,370 47,575,816
------------- -------------
Total Liabilities And Stockholders' Equity $ 775,637,843 $ 766,990,465
============= =============
See notes to consolidated financial statements.
14 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
Consolidated Statements of Income
Year Ended September 30,
2006 2005 2004
-------------------------------------------------------------------------------------
Interest Income:
Interest and fees on mortgage loans $ 16,092,641 $ 15,331,323 $ 14,918,198
Interest on mortgage-backed securities 10,801,029 11,665,529 10,397,548
Interest on consumer and other loans 5,683,386 4,614,316 3,633,483
Interest on taxable investments 5,066,939 2,886,342 2,292,515
Interest on tax-exempt investments 1,408,484 1,377,968 1,374,965
Dividends on investment securities 38,085 26,962 19,400
------------ ------------ ------------
Total interest and dividend income 39,090,564 35,902,440 32,636,109
------------ ------------ ------------
Interest Expense:
Interest on deposits 13,164,538 10,336,704 9,100,454
Interest on borrowings 13,201,226 12,410,032 11,290,735
------------ ------------ ------------
Total interest expense 26,365,764 22,746,736 20,391,189
------------ ------------ ------------
Net Interest Income 12,724,800 13,155,704 12,244,920
Provision for Loan Losses - (40,407) -
------------ ------------ ------------
Net Interest Income, after Provision for
Loan Losses 12,724,800 13,196,111 12,244,920
------------ ------------ ------------
Other Income:
Gain on sales of loans - 16,672 61,024
Gain on sales of investments and
mortgage-backed securities 26,920 97,905 265,602
Increase in cash surrender value on BOLI 436,000 450,500 354,000
Other income 837,464 900,304 927,558
------------ ------------ ------------
Total other income 1,300,384 1,465,381 1,608,184
------------ ------------ ------------
Other Expenses:
Salaries and employee benefits 4,617,167 4,146,584 3,895,117
Occupancy and equipment 967,990 937,228 864,469
Deposit insurance premiums 54,656 57,263 58,643
Data processing 589,558 562,932 583,591
Other 2,339,098 2,261,238 1,997,363
------------ ------------ ------------
Total other expenses 8,568,469 7,965,245 7,399,183
------------ ------------ ------------
Income before Income Taxes: 5,456,715 6,696,247 6,453,921
Income tax expenses 1,255,177 1,692,527 1,603,824
------------ ------------ ------------
Net Income $ 4,201,538 $ 5,003,720 $ 4,850,097
============ ============ ============
Earnings Per Share:
Basic $ 1.09 $ 1.29 $ 1.28
============ ============ ============
Diluted $ 1.08 $ 1.27 $ 1.25
============ ============ ============
Weighted Average Shares Outstanding:
Basic 3,872,655 3,871,255 3,802,937
============ ============ ============
Diluted 3,903,291 3,940,701 3,890,212
============ ============ ============
See notes to consolidated financial statements.
2006 ANNUAL REPORT 15
Consolidated Statements of Comprehensive Income
2006 2005 2004
----------------------------------------------------------------------------------------------------------------------------
Net Income $ 4,201,538 $ 5,003,720 $ 4,850,097
Other Comprehensive (Loss) Income
Unrealized (loss) gain on securities net of tax (benefit) or
expense -- 2006, $(1,744); 2005, $(25,930); 2004, $10,909 (2,847)(1) (42,337)(1) 17,150(1)
----------- ----------- -----------
Total Comprehensive Income $ 4,198,691 $ 4,961,383 $ 4,867,247
=========== =========== ===========
(1) Disclosure of reclassification amount, net of tax for the years ended: 2006 2005 2004
----------- ----------- -----------
Net unrealized gain arising during the year $ 14,920 $ 22,280 $ 192,447
Less: Reclassification adjustment for net gains included in net income
Net of tax expense -- 2006, $9,153; 2005, $33,288; 2004, $90,305 17,767 64,617 175,297
----------- ----------- -----------
Net unrealized (loss) gain on securities $ (2,847) $ (42,337) $ 17,150
=========== =========== ===========
See notes to consolidated financial statements.
Consolidated Statements of Stockholder's Equity
Retained Accumulated
Common Additional Earnings- Other Total
Stock Common Paid-in Partially Comprehensive Treasury Stockholders'
Shares Stock Capital Restricted Income (Loss) Stock Equity
---------------------------------------------------------------------------------------------------------------------------------
Balance at October 1, 2003 2,316,500 $ 23,165 $ 7,584,949 $ 34,220,406 $ 15,974 $ (1,028,772) $ 40,815,722
Net Income 4,850,097 4,850,097
Dividends - $.48 per share (1,826,303) (1,826,303)
Treasury stock purchased (251,580) (251,580)
Treasury stock delivered under
employee stock plans (296,533) 490,384 193,851
Treasury stock delivered under
Dividend Reinvestment Plan 138,437 375,538 513,975
Change in unrealized holding gain
on available-for-sale securities,
net of tax 17,150 17,150
--------- -------- ------------ ------------ ------------- ----------- -------------
Balance at September 30, 2004 2,316,500 23,165 7,426,853 37,244,200 33,124 (414,430) 44,312,912
Net Income 5,003,720 5,003,720
Issuance of Common Stock 15,876 436 459,995 460,431
Stock split 1,571,760 15,440 (15,440)
Dividends - $.58 per share (2,252,336) (2,252,336)
Treasury stock purchased (328,280) (328,280)
Treasury stock delivered under
employee stock plans (272,586) 578,247 305,661
Treasury stock delivered under
Dividend Reinvestment Plan 11,689 104,356 116,045
Change in unrealized holding gain
on available-for-sale securities,
net of tax (42,337) (42,337)
--------- -------- ------------ ------------ ------------- ----------- -------------
Balance at September 30, 2005 3,904,136 39,041 7,610,511 39,995,584 (9,213) (60,107) 47,575,816
Net Income 4,201,538 4,201,538
Issuance of Common Stock 17,041 171 300,428 300,599
Dividends - $.64 per share (2,482,506) (2,482,506)
Option Compensation 109,025 109,025
Treasury stock purchased (1,681,657) (1,681,657)
Treasury stock delivered under
employee stock plans (26,694) 191,332 164,638
Treasury stock delivered under
Dividend Reinvestment Plan (1,256) 288,020 286,764
Change in unrealized holding
gain on available-for-sale
securities, net of tax (2,847) (2,847)
--------- -------- ------------ ------------ ------------- ----------- -------------
Balance at September 30, 2006 3,921,177 $ 39,212 $ 7,992,014 $ 41,714,616 $ (12,060) $(1,262,412) $ 48,471,370
========= ======== ============ ============ ============= =========== =============
See notes to consolidated financial statements.
16 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
Year Ended September 30,
2006 2005 2004
--------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 4,201,538 $ 5,003,720 $ 4,850,097
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 466,020 436,400 483,864
Deferred income taxes 10,963 67,768 (24,745)
Realized gain on sales of loans - (16,672) (61,024)
Net realized gain on sale of investment securities (18,585) (97,905) (265,602)
Realized loss on disposal of fixed assets 3,124 49,233 4,293
Origination of loans held for sale - (908,522) (2,517,314)
Proceeds from the sale of loans held for sale - 921,129 2,578,338
Amortization of deferred loan fees (52,287) (138,102) (459,366)
Net amortization of premiums and discounts 309,052 675,869 922,291
Increase in bank owned life insurance - (2,500,000) -
Increase in cash surrender value (436,000) (450,500) (354,000)
Compensation charge on stock options 109,025 - -
Changes in assets and liabilities which provided (used) cash:
Increase (decrease) in accounts payable and accrued expenses 38,890 121,260 (252,795)
Increase (decrease) in prepaid expenses and other assets (145,283) 368,196 (86,150)
Increase in accrued interest receivable (537,556) (363,016) (267,698)
Increase in accrued interest payable 47,208 232,840 55,144
-------------- -------------- --------------
Net cash provided by operating activities 3,996,109 3,401,698 4,605,333
-------------- -------------- --------------
Investing Activities:
Purchase of mortgage-backed securities held to maturity (2,011,250) (62,026,532) (116,190,554)
Purchase of mortgage-backed securities available-for-sale - - (5,010,238)
Purchase of investment securities held to maturity (28,748,285) (35,852,191) (5,989,750)
Purchase of investment securities available-for-sale (5,578,924) (770,525) (2,792,039)
Proceeds (purchase) of FHLB stock 537,300 (851,800) (1,402,000)
Proceeds from the sale of investment securities available-for-sale 327,357 5,650,121 2,600,639
Proceeds from maturities of investment securities 4,595,380 16,239,738 18,554,405
Principal collected on long-term loans & mortgage-backed securities 134,713,613 147,947,065 182,398,317
Long-term loans originated or acquired (107,316,274) (113,398,481) (137,421,587)
Purchases of premises and equipment (2,653,419) (566,351) (1,309,061)
-------------- -------------- --------------
Net cash used in investing activities (6,134,502) (43,628,956) (66,561,868)
-------------- -------------- --------------
Financing Activities:
Net (decrease) increase in demand deposits, NOW accounts and savings
accounts (8,608,274) (18,710,587) 7,717,536
Net increase in certificates of deposit 18,882,665 32,459,603 16,826,549
Cash dividends (2,482,506) (2,252,336) (1,826,303)
Net (decrease) increase in FHLB advances (2,657,326) 31,315,495 37,135,555
Purchase of treasury stock (1,681,657) (328,280) (251,580)
Treasury stock delivered under Dividend Reinvestment and
employee stock plan 451,402 421,706 707,826
Net proceeds from issuance of stock 300,599 460,431 -
Net increase (decrease) in advances from borrowers for taxes and
insurance 48,660 77,422 (35,862)
-------------- -------------- --------------
Net cash provided by financing activities 4,253,563 43,443,454 60,273,721
-------------- -------------- --------------
Increase (Decrease) in cash and cash equivalents 2,115,170 3,216,196 (1,682,814)
Cash and cash equivalents at beginning of year 7,934,980 4,718,784 6,401,598
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 10,050,150 $ 7,934,980 $ 4,718,784
============== ============== ==============
Supplemental Disclosure of Cash Flow Information-
Cash paid during the period for:
Interest (credited and paid) $ 26,318,556 $ 22,513,896 $ 20,446,333
Income Tax 1,378,000 1,528,000 1,553,000
See notes to consolidated financial statements.
2006 ANNUAL REPORT 17
Notes to Consolidated Financial Statements
1. Nature of Operations and Organizational Structure
On February 25, 2000, Harleysville Savings Bank (the "Bank") completed its
Agreement and Plan of Reorganization ("Agreement") pursuant to which the Bank
was reorganized into a holding company form of ownership. The Agreement was
subject to approval by the Pennsylvania Department of Banking, the Board of
Governors of the Federal Reserve System and approved by the stockholders of the
Bank. Harleysville Savings Financial Corporation (the "Company") was
incorporated under the laws of the Commonwealth of Pennsylvania. It was formed
for the purpose of becoming the bank holding company of the Bank through the
issuance and exchange of its stock pursuant to the Agreement and the concurrent
acquisition of 100% of the common stock of the Bank. In connection with the
Reorganization, each share of the Bank's common stock, ("Bank Common Stock"),
was converted into one share of the Company's common stock, ("Company Common
Stock"). The result of the Reorganization of the Bank was that the Company
became the owner of all of the outstanding shares of Bank Common Stock and each
stockholder of the Bank became the owner of one share of the Company Common
Stock for each share of bank Common Stock held by him or her immediately prior
thereto.
The Company is a bank holding company that is regulated by the Federal Reserve
Bank of Philadelphia. The Bank is a wholly owned subsidiary and is regulated by
the FDIC and the Pennsylvania Department of Banking. The Bank is principally in
the business of attracting deposits through its branch offices and investing
those deposits, together with funds from borrowings and operations, primarily in
single family residential and consumer loans.
2. Summary of Significant Accounting Policies
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of the Company, the Bank, and the Bank's wholly owned
subsidiary, HSB Inc a Delaware subsidiary which was formed in order to
accommodate the transfer of certain assets, Freedom Financial LLC that allows
the Company to offer non deposit products and HARL LLC that allows the Bank to
invest in equity investments. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates in Preparation of the 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 consolidated financial statement and the reported
amounts of income and expenses during the reporting period. The most significant
of these estimates and assumptions in the Company's consolidated financial
statements is the allowance for loan losses. Actual results could differ from
those estimates.
Cash and Cash Equivalents - For purposes of the consolidated statements of cash
flows, cash and cash equivalents include cash and balances due from banks.
Interest-Bearing Deposits in Banks - Interest-bearing deposits in banks are
carried at cost.
Investments and Mortgage-Backed Securities - The Company classifies and accounts
for debt and equity securities as follows:
Held to Maturity - Debt securities that management has the positive intent and
ability to hold until maturity are classified as held to maturity and are
carried at their remaining unpaid principal balance, net of unamortized premiums
or unaccreted discounts. Premiums are amortized and discounts are accreted using
the interest method over the estimated remaining term of the underlying
security.
Available for Sale - Debt and equity securities that will be held for indefinite
periods of time, including securities that may be sold in response to changes in
market interest or prepayment rates, needs for liquidity and changes in the
availability of and the yield of alternative investments are classified as
available for sale. These assets are carried at fair value. Fair value is
determined using published quotes as of the close of business. Unrealized gains
and losses are excluded from earnings and are reported net of tax in other
comprehensive income until realized. Realized gains and losses on the sale of
investment securities are recorded as of trade date, reported in the
consolidated statement of income and determined using the adjusted cost of the
specific security sold.
In March 2004, the Financial Accounting Standards Board ("FASB") Emerging Issues
Task Force ("EITF") reached consensus on several issues being addressed in EITF
Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments". The consensus provides guidance for
evaluating whether an investment is other-than-temporarily impaired and was
effective for other-than-temporary impairment evaluations made in reporting
periods beginning after June 15, 2004. The disclosure provisions of EITF 03-1
continue to be effective for the Company's consolidated financial statements for
the year ended September 30, 2006.
On November 3, 2005, the FASB issued FASB Staff Position ("FSP") Nos. FAS 115-1
and FAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments". This FSP addresses the determination as to
when an investment is considered impaired, whether that impairment is other than
temporary, and the measurement of an impairment loss. This FSP also includes
accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. This FSP nullifies certain requirements of EITF Issue 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments", and supersedes EITF Topic No. D-44, "Recognition of
Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost
Exceeds Fair Value". The guidance in this FSP amends FASB Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". The FSP is
effective for reporting periods beginning after December 15, 2005. There was no
material impact on the Company.
For all securities that are in an unrealized loss position for an extended
period of time and for all securities whose fair value is significantly below
amortized cost, the Company performs an evaluation of the specific events
attributable to the market decline of the security. The Company considers the
length of time and extent to which the security's market value has been below
cost as well as the general market conditions, industry characteristics, and the
fundamental operating results of the issuer to determine if the decline is
other-than-temporary. The Company also considers as part of the evaluation its
intent and ability to hold the security until its market value has recovered to
a level at least equal to the amortized cost. When the Company determines that a
security's unrealized loss is other-than-temporary, a realized loss is
recognized in the period in which the decline in value is determined to be
other-than-temporary. The write-downs are measured based on public market prices
of the security at the time the Company determines the decline in value was
other-than-temporary.
Loans - The Company grants mortgage and consumer loans to customers. A
substantial portion of the loan portfolio is represented by mortgage loans
throughout Pennsylvania. The ability of the Company's debtors to honor their
contracts is dependent upon the real estate and general economic conditions in
this area.
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off are reported at their outstanding unpaid
principal balances adjusted for charge-offs, the allowance for loan losses, and
any deferred fees or costs on originated loans. Interest income is accrued on
the unpaid principal balance.
Interest Income on Loans - Interest on loans is recognized as income when
earned. The accrual of interest on mortgage loans is discontinued at the time
the loan is 90 days delinquent unless the credit is well-secured and in process
of collection. Other personal loans are typically charged off no later than 180
days past due. In all cases, loans are placed on nonaccrual or charged-off at an
earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual
or charged off is reversed against interest income. The interest on these loans
is accounted for on the cash-basis or cost-recovery method, until qualifying for
return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
Deferred Loan Fees - Loan origination fees, net of certain direct origination
costs, are deferred and the balance is amortized to income as an adjustment over
the life of the loan using the interest method.
Allowance for Loan Losses - The allowance for loan losses is established as
losses are estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when
18 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance. An allowance for
loan losses is maintained at a level that management considers adequate to
provide for losses based upon evaluation of known and inherent risks in the loan
portfolio. The loan loss reserves are established as an allowance for estimated
losses based on the probable losses of the loan portfolio. In assessing risk,
management considers historical experience, volume and composition of lending
conducted by the Company, industry standards, status of nonperforming loans,
general economic conditions as they relate to the Company's market area, and
other factors related to the collectibility of the Company's loan portfolio.
The allowance for loan losses consists of three elements: (1) specific
allowances for impaired loans; (2) a general valuation allowance on all
classified loans which are not impaired; and (3) a general valuation allowance
on the remainder of the loan portfolio. This is consistent with the regulatory
method of classifying reserves. Although the amount of each element of the
allowance is determined separately, the entire allowance for loan losses is
available for the entire portfolio. An allowance for impaired loans is
established in the amounts by which the discounted cash flows (or collateral
value or observable market price) are lower than the carrying value of the loan.
A general allowance is established for classified loans that are not impaired.
These loans are segregated by loan category, and allowance percentages are
assigned 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. The general allowance
for loans that are not classified is established 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 non-classified loans by loan
category and assigning allowance percentages to each category. The allowance
percentages have been derived using percentages commonly applied under the
regulatory framework for the Company and similarly sized institutions. The
percentages are adjusted for significant factors that, in management's judgment,
could affect the collectibility of the portfolio as of the evaluation date.
These significant factors may include changes in lending policies and
procedures, 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, 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.
Real Estate Owned - Real estate owned is carried at the lower of carrying value
of the loan or fair value of the property based on an appraisal. Costs relating
to the development and improvement of the property are capitalized, and those
relating to holding the property are charged to expense.
Office Properties and Equipment - Land is carried at cost. Office properties and
equipment are recorded at cost, less accumulated depreciation. Depreciation is
computed using the straight-line method over the expected useful lives of the
assets that range from four to fifty years. The costs of maintenance and repairs
are expensed as they are incurred, and renewals and betterments are capitalized.
FHLB Stock - The Company reports its investment in FHLB stock at cost in the
consolidated statements of financial condition as the Company does not have the
ability to influence the FHLB.
Cash Surrender Value Of Bank Owned Life Insurance - The Bank funded the purchase
of insurance policies on the lives of officers and employees of the Bank. The
Company has recognized any increase in cash surrender value of life insurance,
net of insurance costs, in the consolidated statements of income as increase in
cash surrender value on BOLI. The cash surrender value of the insurance policies
is recorded as an asset in other assets in the consolidated statements of
financial condition.
Long-Lived Assets - Management evaluates the carrying amount of long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Measurement of an
impaired loss for long-lived assets would be based on the fair value of the
asset. For the years ended September 30, 2006, 2005 and 2004, the Company did
not recognize an impairment.
Income Taxes - Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on deferred taxes
of a change in tax rates is recognized in income in the period that includes the
enactment date.
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
-The Company accounts for transfers and servicing of financial assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" (a replacement of FASB Statement No. 125). This Statement
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but it carries
over most of SFAS No. 125 provisions without reconsideration.
The Statement requires an entity to recognize the financial and servicing assets
it controls and the liabilities it has incurred, derecognize financial assets
when control has been surrendered, and derecognize liabilities when
extinguished. It requires that servicing assets and other retained interests in
the transferred assets be measured by allocating the previous carrying amount
between the asset sold, if any, and retained interest, if any, based on their
relative fair values at the date of transfer. It also provides implementation
guidance for servicing of financial assets, securitizations, loan syndications
and participations and transfers of loan receivables with recourse.
Accounting for Derivative Instruments and Hedging Activities - The Company
adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" as amended by SFAS Nos. 137 and 138, and as interpreted
by the FASB and the Derivatives Implementation Group through "Statement 133
Implementation Issues", as of October 1, 2000. In April 2003, the FASB issued
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities". This Statement amended and clarified accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. This Statement was
effective for contracts entered into or modified after June 30, 2003, except for
the provision of this statement that relate to SFAS 133 Implementation Issues
that had been effective for fiscal quarters that began prior to June 15, 2003
and for hedging relationships designated after June 30, 2003. All provisions
were to be applied prospectively except for the provision of this Statement that
relate to SFAS 133 Implementation Issues that had been effective for fiscal
quarters that began prior to June 15, 2003. These provisions are to be applied
in accordance with their respective effective dates. Currently, no embedded
derivatives require bifurcation. The Company currently does not employ hedging
activities that require designation as either fair value or cash flow hedges, or
hedges of a net investment in a foreign operation.
Treasury Stock - The Company records treasury stock purchases at cost. Gains and
losses on subsequent reissuance of shares are credited or charged to capital in
excess of par value using the average-cost method.
In November of 2005, February, March, April and May of 2006, the Company
repurchased 3,000, 6,527, 52,767, 10,000 and 23,586 shares of common stock
respectively at $17.40, $17.68, $17.50, $17.50 and $17.62 per share,
respectively, for its treasury at a total cost of $1,681,657.
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.
2006 ANNUAL REPORT 19
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.
Year Ended September 30,
2006 2005 2004
---------------------------------------------------------------------------------------------------------
Net income: as reported $ 4,201,538 $ 5,003,720 $ 4,850,097
Add: Total stock-based employee compensation expense
included in reported net income (net of tax)
Deduct: Stock-based employee compensation expense 109,025
determined under the fair value based method for all awards,
net of related tax effects (109,025) (42,594) (37,773)
------------- ----------- ------------
Pro forma net income $ 4,201,538 $ 4,961,126 $ 4,812,324
============= =========== ============
Earnings per share:
Basic-as reported $ 1.09 $ 1.29 $ 1.28
Basic-pro forma 1.09 1.28 1.27
Diluted-as reported $ 1.08 $ 1.27 $ 1.25
Diluted-pro forma 1.08 1.26 1.24
Significant assumptions used to
calculate the above are as follows:
Risk free interest rate of return 4.36% 1% 1%
Expected option life 84 months 84 months 84 months
Expected volatility 17% 10% 10%
Expected dividends 3% 3% 3%
Stock Split - On January 26, 2005, the Board of Directors declared a declared a
cash dividend of $.25 ($.15 post split) per share and a five for three stock
split payable on February 23, 2005 to the stockholders of record at the close of
business on February 9, 2005. The number of shares and per share information has
been restated to reflect the five for three stock split. The shares of
Harleysville Savings Financial Corporation traded on February 24, 2005 on a post
split basis.
Earnings Per Share - Basic earnings per common share is computed based on the
weighted average number of shares outstanding. Diluted earnings per share is
computed based on the weighted average number of shares outstanding, increased
by the number of common shares that are assumed to have been purchased with the
proceeds from the exercise of stock options (treasury stock method). These
purchases were assumed to have been made at the average market price of the
common stock. The weighted average shares outstanding used to calculate earnings
per share were as follows:
Year Ended September 30,
2006 2005 2004
------------------------------------------------------------------------------
Average shares outstanding - basic 3,872,655 3,871,255 3,802,937
Increase in shares due to dilutive options 30,636 69,446 87,275
--------- --------- ---------
Average shares outstanding - diluted 3,903,291 3,940,701 3,890,212
========= ========= =========
Other Comprehensive Income - The Company presents, as a component of
comprehensive income, amounts from transactions and other events, which are
currently excluded from the statement of income and are recorded directly to
stockholders' equity. The Company's other comprehensive income consists of net
unrealized holding gains or losses on securities available-for-sale, net of
income taxes.
Interest Rate Risk - The Company is engaged principally in providing first
mortgage loans to individuals and commercial enterprises. At September 30, 2006,
the Company's assets that earned interest at fixed and variable interest rates
were funded primarily with long-term liabilities that have interest rates that
are fixed.
The Company is vulnerable to a decrease in interest rates to the extent that
interest-earning assets mature or reprice more rapidly than interest-bearing
liabilities. In the current market, the Company primarily originates long-term
fixed rate loans secured by single-family residences and purchases short-term
investments. The source of these funds has been long-term advances.
At September 30, 2006, the Company had interest-earning assets of approximately
$744,522,000 having a weighted average effective yield of 5.25% and
interest-bearing liabilities of approximately $705,006,000 having a weighted
average effective interest rate of 3.74%.
Recent Accounting Pronouncements - 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. For fiscal year 2006, the Company
recognized approximately $109,000 of pre- tax expense relating to these options
previously accounted for under the provisions of APB No. 25.
In March 2005, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 107 which expressed the views of the SEC regarding
the interaction between SFAS No. 123R and certain SEC rules and regulations. SAB
No. 107 provides guidance related to the valuation of share-based payment
arrangements for public companies, including assumptions such as expected
volatility and expected term.
In May 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.
20 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
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 applied the guidance
in this FSP in 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 SFAS No. 140" ("SFAS No. 156"). SFAS No. 156:
(i) clarifies when a servicing asset or servicing liability should be
recognized; (ii) requires all separately recognized servicing assets and
servicing liabilities to be initially measured at fair value, if practicable;
(iii) subsequent to initial measurement, permits an entity to choose either the
amortization method or the fair value measurement method for each class of
separately recognized servicing assets or servicing liabilities; and (iv) at its
initial adoption, permits a one-time reclassification of available-for-sale
securities to trading securities by entities with recognized servicing rights.
SFAS No. 156 is effective for all separately recognized servicing assets and
liabilities acquired or issued after the beginning of an entity's fiscal year
that begins after September 15, 2006. Earlier adoption is permitted as of the
beginning of an entity's fiscal year, provided the entity has not yet issued
financial statements, including interim financial statements for any period of
that fiscal year. The Company has chosen to adopt SFAS No. 156 effective January
1, 2006 and has elected the fair value measurement method for subsequently
measuring its servicing assets. The election of the fair value measurement
method will subject the Company's earnings to increases and decreases in the
value of its servicing assets. The adoption of SFAS No. 156 is not expected to
have a material impact on the Company's Consolidated Financial Statements.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 ("FIN
48"). FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken in a
tax return. The Company must presume the tax position will be examined by the
relevant tax authority and determine whether it is more likely than not that the
tax position will be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical merits of the
position. A tax position that meets the more-likely-than-not recognition
threshold is measured to determine the amount of benefit to recognize in the
financial statements. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective January 1, 2007. The cumulative
effect of applying the provisions of FIN 48 represents a change in accounting
principle and shall be reported as an adjustment to the opening balance of
retained earnings. The Company is currently evaluating the impact of adopting
FIN 48 on its Consolidated Financial Statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. The changes to current practice
resulting from the application of SFAS No. 157 relate to the definition of fair
value, the methods used to measure fair value and the expanded disclosures about
fair value measurements. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. Earlier application
is encouraged, provided that the reporting entity has not yet issued financial
statements for that fiscal year, including financial statements for an interim
period within that fiscal year. The provisions of SFAS No. 157 should be applied
prospectively as of the beginning of the fiscal year in which it is initially
applied, except for certain financial instruments which require retrospective
application as of the beginning of the fiscal year of initial application (a
limited form of retrospective application). The transition adjustment, measured
as the difference between the carrying amounts and the fair values of those
financial instruments at the date SFAS No. 157 is initially applied, should be
recognized as a cumulative-effect adjustment to the opening balance of retained
earnings. The Company is currently evaluating the impact of adopting SFAS No.
157 on its Consolidated Financial Statements and whether to adopt its provisions
prior to the required effective date.
In September 2006, the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin ("SAB") No. 108. This release expresses the staffs views
regarding the process of quantifying financial statement misstatements and
addresses diversity in practice in quantifying financial statement misstatements
and the potential under current practice for the build up of improper amounts on
the balance sheet. SAB No. 108 is effective for annual financial statements
covering the first fiscal year ending after November 15, 2006. The Company has
reviewed the SAB in connection with our condensed consolidated financial
statements for the current and prior periods, and has determined that its
adoption will not have an impact on any of these financial statements.
Reclassification - Certain items in the 2005 and 2004 financial statements have
been reclassified to conform with the presentation in the 2006 consolidated
financial statements.
2006 ANNUAL REPORT 21
3. 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:
September 30, 2006
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
---------------------------------------------------------------------------------------------------
U.S. Government Agencies
Due after 1 year through 5 years $ 12,000,000 $ (146,000) $ 11,854,000
Due after 5 years through 10 years 21,878,790 $ 24,290 (386,080) 21,517,000
Due after 10 years through 15 years 46,237,147 45,273 (769,420) 45,513,000
Due after 15 years 6,386,754 (97,754) 6,289,000
Tax Exempt Obligations
Due after 10 years through 15 years 17,981,750 997,250 - 18,979,000
Due after 15 years 6,614,241 481,759 - 7,096,000
------------ ------------ ------------ -------------
Total Investment Securities $111,098,682 $ 1,548,572 $ (1,399,254) $ 111,248,000
============ ============ ============ =============
A summary of investment with unrealized losses, aggregated by category, at
September 30, 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 $ 26,578,627 $ (216,285) $ 50,655,619 $ (1,182,969) $ 77,234,246 $ (1,399,254)
------------ ----------------- ------------ ----------------- ------------ -----------------
Total $ 26,578,627 $ (216,285) $ 50,655,619 $ (1,182,969) $ 77,234,246 $ (1,399,254)
============ ================= ============ ================= ============ =================
At September 30, 2006, investment securities in a gross unrealized loss position
for twelve months or longer consisted of 19 US Government Agency Securities that
at such date had an aggregate depreciation of 2.3% 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 issuer, including any specific events which may influence the
operations of the issuer such as changes in technology that may impair the
earnings potential of the investment 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, 2006 represents an other-than-temporary impairment.
September 30, 2005
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
--------------------------------------------------------------------------------------------------
U.S. Government Agencies
Due after 1 year 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) $ 21,339,331 $ (618,249) $ 52,906,455 $ (902,518)
------------ ----------------- ------------ ----------------- ------------ -----------------
Total $ 31,567,124 $ (284,269) $ 21,339,331 $ (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 issuer, including any specific events which may influence the
operations of the issuer such as changes in technology that may impair the
earnings potential of the investment 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 represents an other-than-temporary impairment.
22 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
4. Investment Securities Available-For-Sale
A comparison of amortized cost and approximate fair value of investment
securities with gross unrealized gains and losses, by maturities, is as follows:
September 30, 2006
Gross Gross
Amortized Unrealized Unrealized
Cost Gain Losses Fair Value
-------------------------------------------------------------------------------
Equity Securities $1,050,664 $ 13,802 $ (67,143) $ 997,323
Money Market Mutual Funds 7,110,436 - - 7,110,436
---------- ---------- ---------- ----------
Total Investment Securities $8,161,100 $ 13,802 $ (67,143) $8,107,759
========== ========== ========== ==========
A summary of investment with unrealized losses, aggregated by category, at
September 30, 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
------------------------------ ------------------------------ ------------------------------
Unrealized Losses
Equity Securities $ 582,873 $ (67,143) $ - $ - $ 582,873 $ (67,143)
---------- ----------------- ---------- ----------------- ---------- -----------------
Total $ 582,873 $ (67,143) $ - $ - $ 582,873 $ (67,143)
========== ================= ========== ================= ========== =================
There were no securities in a loss position greater then twelve months.
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
issuer, including any specific events which may influence the operations of the
issuer such as changes in technology that may impair the earnings potential of
the investment 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,
2006 represents an other-than-temporary impairment.
September 30, 2005
Gross Gross
Amortized Unrealized Unrealized
Cost Gain 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
========== ========== ========== ==========
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
------------------------------ ------------------------------ ------------------------------
Unrealized Losses
Equity Securities $ 751,220 $ (56,723) $ - $ - $ 751,220 $ (56,723)
---------- ----------------- ---------- ----------------- ---------- -----------------
Total $ 751,220 $ (56,723) $ - $ - $ 751,220 $ (56,723)
========== ================= ========== ================= ========== =================
There were no securities in a loss position greater then twelve months.
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
issuer, including any specific events which may influence the operations of the
issuer such as changes in technology that may impair the earnings potential of
the investment 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 represents an other-than-temporary impairment.
Proceeds from the sale of investments available for sale during the year ended
September 30, 2006 were $327,000 resulting in a gross gain of $27,000 and a net
tax gain of $18,000. Proceeds from the sale of investments available for sale
during the year ended September 30, 2005 were $5,650,000 resulting in a gross
gain of $98,000 and a net tax gain of $65,000. Proceeds from the sale of
investments available for sale during the year ended September 30, 2004 were
$2,601,000 resulting in a gross gain of $266,000 and a net tax gain of $176,000.
2006 ANNUAL REPORT 23
5. 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, by maturities, is as follows:
September 30, 2006
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
-----------------------------------------------------------------------------------------------
Collateralized mortgage obligations $ 15,088,964 $ 88,867 $ (319,831) $ 14,858,000
FHLMC pass-through certificates 98,855,830 70,407 (2,793,237) 96,133,000
FNMA pass-through certificates 100,287,098 83,203 (2,825,301) 97,545,000
GNMA pass-through certificates 5,261,926 115,074 - 5,377,000
------------- ---------- ------------ -------------
Total Mortgage-Backed Securities $ 219,493,818 $ 357,551 $ (5,938,369) $ 213,913,000
============= ========== ============ =============
A summary of investment with unrealized losses, aggregated by category, at
September 30, 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 $ 6,898,645 $ (68,773) $ 191,950,265 $ (5,869,596) $ 198,848,910 $ (5,938,369)
------------ ----------------- ------------- ----------------- ------------- -----------------
Total $ 6,898,645 $ (68,773) $ 191,950,265 $ (5,869,596) $ 198,848,910 $ (5,938,369)
============ ================= ============= ================= ============= =================
At September 30, 2006, mortgage-related securities in a gross unrealized loss
position for twelve months or longer consisted of 76 securities that at such
date had an aggregate depreciation of 3.1% 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 issuer, including any specific events which may influence the
operations of the issuer such as changes in technology that may impair the
earnings potential of the investment 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, 2006 represents an other-than-temporary impairment.
September 30, 2005
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. 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 issuer, including any specific events which may influence the
operations of the issuer such as changes in technology that may impair the
earnings potential of the investment 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 represents an other-than-temporary impairment.
6. 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, by maturities, is as follows:
September 30, 2006
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
-----------------------------------------------------------------------------------
FNMA pass-through certificates $ 785,187 $ 35,068 $ - $ 820,255
--------- ---------- ---------- ----------
Total Mortgage-Backed Securities $ 785,187 $ 35,068 $ - $ 820,255
========= ========== ========== ==========
There were no securities in a loss position greater then twelve months.
24 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
September 30, 2005
Gross Gross
Amortized Unrealized Unrealized Approximate
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
=========== ========== ========== ===========
There were no securities in a loss position greater then twelve months.
7. Loans Receivable
Loans receivable consist of the following:
September 30,
2006 2005
-----------------------------------------------------------------------
Residential Mortgages $ 282,181,674 $ 268,047,173
Commercial Mortgages 5,893,737 4,896,608
Construction 6,986,632 7,639,300
Savings Account 1,002,672 921,400
Home Equity 70,515,174 59,724,004
Automobile and other 811,963 771,538
Line of Credit 25,499,895 31,579,680
------------- -------------
Total 392,891,747 373,579,703
Undisbursed portion of loans in process (4,941,266) (4,933,753)
Deferred loan fees (544,301) (671,426)
Allowance for loan losses (1,955,805) (1,967,607)
------------- -------------
Loans Receivable - net $ 385,450,375 $ 366,006,917
============= =============
The Company originates both adjustable and fixed interest rate loans and
purchases both adjustable and fixed interest rate mortgage-backed securities. At
September 30, 2006, the composition of these loans and mortgage-backed
securities, in thousands, is as follows:
Fixed-Rate Adjustable-Rate
Term to Maturity Book Value Term to Maturity Book Value
-------------------------------------------------------------
1 year or less $ 35,003 1 year or less $ 16,581
1-3 years 32,989 1-3 years 1,548
3-5 years 18,574 3-5 years 2,265
5-15 years 256,575 -
over 15 years 233,246 -
---------- ----------
$ 576,387 $ 20,394
========== ==========
The adjustable rate loans have interest rate adjustment limitations and are
generally indexed to the 1-year U.S. Treasury Securities rate. Future market
factors may affect the correlation of the interest rate adjustment with the
rates the Company pays on the short-term deposits that have been primarily
utilized to fund these loans. At September 30, 2006 and 2005, the Company was
servicing loans for others amounting to approximately $3,928,000 and $4,730,000
respectively. Servicing loans for others generally consists of collecting
mortgage payments, maintaining escrow accounts, disbursing payments to investors
and foreclosure processing. Loan servicing income is recognized over the life of
the loan. In connection with the loans serviced for others, the Company held
borrowers' escrow balances of approximately $21,000, $36,000, and $37,000 at
September 30, 2006, 2005, and 2004, respectively. Loans to officers and
directors at September 30, 2006 and 2005, were approximately $648,000 and
$459,000, respectively. Additional loans and repayments for the year ended
September 30, 2006, were $90,000 and $476,000, respectively, and for the year
ended September 30, 2005, were approximately $70,000 and $127,000, respectively.
The Company provides loans primarily in its local market area to borrowers that
share similar attributes. This concentration of credit exposes the Company to a
higher degree of risk in this regard.
The following schedule summarizes the changes in the allowance for loan losses:
Year Ended September 30,
2006 2005 2004
----------------------------------------------------------------------
Balance, beginning of year $ 1,967,607 $ 1,976,849 $ 1,990,672
Recoveries 8,524 83,707 1,571
Charged off (20,326) (92,949) (15,394)
----------- ----------- -----------
Balance, end of year $ 1,955,805 $ 1,967,607 $ 1,976,849
=========== =========== ===========
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.
2006 ANNUAL REPORT 25
The provision for loan losses charged to expense is based upon past loss
experiences and an evaluation of potential losses in the current loan portfolio,
including the evaluation of impaired loans under SFAS No. 114. A loan is
considered to be impaired when, based upon current information and events, it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan. An insignificant delay or insignificant
shortfall in amount of payments does not necessarily result in the loan being
identified as impaired. For this purpose, delays less than 90 days are
considered to be insignificant. As of September 30, 2006, 100% of the impaired
loan balance was measured for impairment based on the fair value of the loans'
collateral. Impairment losses are included in the provision for loan losses.
SFAS No. 114 does not apply to large groups of smaller balance homogeneous loans
that are collectively evaluated for impairment, except for those loans
restructured under a troubled debt restructuring. Loans collectively evaluated
for impairment include consumer loans and residential real estate loans. At
September 30, 2006 and 2005, the Company's impaired loans consisted of smaller
balance residential mortgage loans collectively evaluated for impairment.
Non-performing loans (which include loans in excess of 90 days delinquent) at
September 30, 2006 and 2005, amounted to approximately $18,000 and $260,000,
respectively. The non-performing loans are still accruing interest. The loans
were collectively evaluated for impairment.
8. Accrued Interest Receivable
Accrued interest receivable consists of the following:
September 30,
2006 2005
---------------------------------------------------------------------
Investments and interest-bearing deposits $ 1,499,045 $ 1,022,126
Mortgage-backed securities 872,319 1,036,830
Loans receivable 1,598,246 1,373,098
----------- -----------
Total $ 3,969,610 $ 3,432,054
=========== ===========
9. Office Properties and Equipment
Office properties and equipment are summarized by major classifications as
follows:
September 30,
2006 2005
---------------------------------------------------------------------
Land $ 1,159,031 $ 184,788
Buildings 7,543,587 6,383,356
Furniture, fixtures and equipment 3,694,898 3,433,247
Automobiles 24,896 24,896
----------- -----------
Total 12,422,412 10,026,287
Less accumulated depreciation (4,408,443) (4,196,593)
----------- -----------
Net $ 8,013,969 $ 5,829,694
=========== ===========
Depreciation expense for the years ended September 30, 2006, 2005, and 2004
amounted to approximately $466,000, $436,000, and $484,000, respectively.
10. Deposits
Deposits are summarized as follows:
September 30,
2006 2005
Weighted Weighted
Interest Interest
Amount Rate Amount Rate
------------------------------------------------------------------------------------
NOW accounts $ 15,719,531 0.25% $ 18,282,489 0.25%
Non-interest Checking accounts 10,338,951 0.00% 9,618,764 0.00%
Interest Checking accounts 20,410,198 2.46% 9,102,649 2.47%
Money Market Deposit accounts 58,989,416 1.58% 76,581,019 1.32%
Passbook and Club accounts 3,325,151 0.96% 3,806,599 0.78%
Certificate accounts 320,470,800 4.01% 301,588,135 3.52%
------------- -------- ------------- --------
Total Deposits $ 429,254,047 3.34% $ 418,979,655 2.85%
============= ======== ============= ========
At September 30, 2006, the amounts of scheduled maturities of certificate
accounts were as follows:
For the year ended September 30: 2007 $ 209,308,816
2008 71,344,627
2009 32,489,187
2010 5,373,535
2011 1,954,635
-------------
Total $ 320,470,800
=============
26 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
The aggregate amount of certificate accounts in denominations of $100,000 or
more at September 30, 2006 and 2005 amounted to approximately $47.6 million and
$39.7 million, respectively. Deposits in excess of $100,000 are not federally
insured.
The following table sets forth the maturity of certificate deposits in excess of
$100,000 as of September 30, 2006.
Amount
------
(In thousands)
1 to 3 months $ 6,875
4 to 6 months 9,033
7 to 12 months 8,689
Thereafter 18,576
-------
Total $43,173
=======
Interest expense on savings deposits is composed of the following:
September 30,
2006 2005 2004
----------------------------------------------------------------------------
NOW accounts and MMDA accounts $ 1,371,109 $ 1,245,110 $ 1,093,438
Passbook and Club accounts 27,867 26,325 22,734
Certificate accounts 11,765,562 9,065,269 7,984,282
------------ ------------- ------------
Total $ 13,164,538 $ 10,336,704 $ 9,100,454
============ ============= ============
11. Advances from Federal Home Loan Bank
Advances from the Federal Home Loan Bank consist of the following:
September 30,
2006 2005
Weighted Weighted
Interest Interest
Maturing Period Amount Rate Amount Rate
----------------------------------------------------------------------
1 to 12 months $ 79,492,234 4.92% $ 36,043,911 3.73%
13 to 24 months 46,949,489 4.79% 25,446,061 3.66%
25 to 36 months 25,850,822 4.07% 69,114,248 4.83%
37 to 48 months 8,375,148 3.96% 31,484,966 3.89%
49 to 60 months 39,417,941 5.38% 9,302,331 3.97%
61 to 72 months 59,525,528 4.47% 40,208,732 5.35%
73 to 84 months 5,000,000 3.80% 60,668,239 4.47%
85 to 120 months 30,000,000 4.10% 25,000,000 3.80%
------------- -------- ------------- --------
Total $ 294,611,162 4.67% $ 297,268,488 4.38%
============= ======== ============= ========
The advances are collateralized by Federal Home Loan Bank stock and
substantially all first mortgage loans.
The Company has a line of credit of which $58.2 million and $21.0 million of the
available $60.0 million was used at September 30, 2006 and 2005, respectively.
The average balance outstanding on the line of credit for September 30, 2006 and
2005 was $29.3 million and $29.4 million, respectively. The maximum amount
outstanding at any time for 2006 and 2005 was $59.4 million and $36.1 million,
respectively. The weighted average interest rate during 2006 and 2005 was 4.89%
and 2.98%, respectively.
2006 ANNUAL REPORT 27
12. Income Taxes
The Company computes its reserve for bad debts under the specific charge-off
method. The bad debt deduction allowable under this method is available to large
banks with assets greater than $500 million. Generally, this method allows the
Company to deduct an annual addition to the reserve for bad debts equal to its
net charge-offs. Retained earnings at September 30, 2006 and 2005 includes
approximately $1,325,000 representing bad debt deductions for which no deferred
income taxes have been provided.
The expense for income taxes differs from that computed at the statutory federal
corporate tax rate as follows:
Year Ended September 30,
2006 2005 2004
Percentage Percentage Percentage
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
-------------------------------------------------------------------------------------------------------------
At statutory rate $ 1,855,280 34.0% $ 2,276,724 34.0% $ 2,184,643 34.0%
Adjustments resulting from:
Tax-exempt income (592,375) (10.9) (595,428) (8.9) (572,457) (8.9)
State tax-net of federal
tax benefit - - 69,588 1.0 29,057 0.5
Other (7,728) (0.1) (58,357) (0.8) (37,419) (0.6)
----------- ---------- ----------- ---------- ----------- ----------
Expense per consolidated
statements of income $ 1,255,177 23.0% $ 1,692,527 25.3% $ 1,603,824 25.0%
=========== =========== =========== ========== =========== ==========
Income tax expense is summarized as follows:
Year Ended September 30,
2006 2005 2004
----------------------------------------------------------------------
Current $ 1,244,214 $ 1,624,759 $ 1,628,569
Deferred 10,963 67,768 (24,745)
----------- ----------- -----------
Total Income Tax Expense $ 1,255,177 $ 1,692,527 $ 1,603,824
=========== =========== ===========
Items that gave rise to significant portions of the deferred tax accounts are as
follows:
September 30,
2006 2005
--------------------------------------------------------------------
Deferred Tax Assets:
Deferred Loan Fees $ 73,722 $ 87,919
Allowance for Loan Losses 664,974 668,986
Unrealized loss on investment securities 6,212 4,746
Other 39,564 9,846
---------- ---------
Sub-Total 784,472 771,497
---------- ---------
Deferred Tax Liabilities:
Property (433,922) (431,910)
Other - -
---------- ---------
Sub-Total (433,922) (431,910)
---------- ---------
Total $ 350,550 $ 339,587
========== =========
Income taxes paid were approximately $1,378,000, $1,528,000, and $1,533,000 for
the years ended September 30, 2006, 2005, and 2004, respectively.
13. Regulatory Capital Requirements
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 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
28 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
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 September 30, 2006,
that the Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 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 September 30, 2006
Tier 1 Capital (to assets) $48,182,567 6.24% $30,868,800 4.00% $38,586,000 5.00%
Tier 1 Capital (to risk weighted assets) 48,182,567 13.02% 14,800,960 4.00% 22,201,440 6.00%
Total Capital (to risk weighted assets) 50,138,888 13.55% 29,601,920 8.00% 37,002,400 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%
14. Retirement Savings Plan
The Company has an employee stock ownership pension plan and a qualified 401 (k)
retirement savings plan covering all full-time employees meeting certain
eligibility requirements. Contributions for both plans are at the discretion of
the Company's Board of Directors. Contributions expense related to the plans was
$254,989, $260,528 and $241,185 for the years ended September 30, 2006, 2005,
and 2004, respectively.
15. Stock Options
In 1987, the Company established a stock compensation program for executive
officers and other selected full-time employees and directors of the Company.
The 1987 program consists of four plans that are available for grant: Plan I -
incentive stock options; Plan II - compensatory stock options; Plan III - stock
appreciation rights; and Plan IV - performance share awards.
In January 1996, the stockholders approved the 1995 Stock Option Plan. This plan
consists of two parts: Plan I - incentive stock options and Plan II -
compensatory stock options.
In January 2001, the stockholders approved the 2000 Stock Option Plan. This plan
consists of two parts: Plan I - incentive stock options and Plan II -
compensatory stock options. In January 2006, the stockholders approved the 2005
Stock Option Plan. This plan consists of two parts: Plan I - incentive stock
options and Plan II - compensatory stock options.
A summary of transactions under this plan follows:
Year Ended September 30,
2006 2005 2004
Weighted Weighted Weighted
Average Average Average
Options Price Options Price Options Price
--------------------------------------------------------------------------------------------------------
Outstanding, beginning of year 169,032 $ 13.23 201,982 $ 10.96 209,802 $ 8.99
Exercised (10,704) 8.93 (69,133) 9.16 (42,320) 6.73
Canceled (2,078) 12.16 (2,917) 13.50 (2,500) 11.17
Granted 86,850 17.68 39,100 17.78 37,000 17.16
-------- -------- ------- -------- ------- --------
Outstanding, end of year 243,100 $ 15.01 169,032 $ 13.23 201,982 $ 10.96
======== ======== ======= ======== ======= ========
Options exercisable, end of year 130,400 $ 13.32 98,267 $ 11.98 130,315 $ 9.41
======== ======== ======= ======== ======= ========
2006 ANNUAL REPORT 29
A summary of the exercise price range at September 30, 2006 is as follows:
Exercise Weighted Weighted Average
Number of Price Average Remaining Exercise Price
Option Shares Range Contractual Life per Share
------------- -------------- ----------------- ----------------
56,600 $ 7.11 - 11.48 3.96 years $ 9.26
186,500 $12.06 - 18.00 8.20 years 16.75
------------- -------------- ----------------- ----------------
243,100 $ 7.11 - 18.00 7.22 years $15.01
============= ============== ================= ================
The Company also has established an Employee Stock Purchase Plan (the "Purchase
Plan") whereby employees may elect to make contributions to the Purchase Plan in
an aggregate amount not less than 2% no more than 10% of such employee's total
compensation. These contributions would then be used to purchase stock during an
offering period determined by the Company's Salary and Benefits Committee. The
purchase price of the stock would be the lesser of 85% of the market price on
the first day or the last day of the offering period. During 2006 and 2005, 0
and 3,729 shares were issued to employees, respectively. At September 30, 2006
and 2005, there were 31,081 shares available for future purchase. The Company
suspended participation in the Purchase Plan in March 2005 and the plan is not
currently active.
16. Commitments
At September 30, 2006, the Company had approximately $4.5 million in outstanding
commitments to originate mortgage loans, of which $4.4 million were at fixed
rates ranging from 5.25% to 7.13% and adjustable rates of $1.0 million ranging
from 6.00% to 6.38%. The unfunded line of credit commitments at September 30,
2006 were $41.3 million. The Company had $900,000 and $1.6 million of committed
commercial and consumer loans, respectively at September 30, 2006. The amounts
of undisbursed portions of loans in process at September 30, 2006 were $4.9
million. At September 30, 2006 the Company had exposures to limited recourse
arrangements with respect to the Company's sale of whole loans. At September 30,
2006, the exposure, which represents a portion of credit risk associated with
the sold interests, amounted to $62,000. The exposure is for the life of the
related loans and payable, on our proportional share, as losses are incurred.
Also, at September 30, 2006, the Company had no outstanding futures or options
positions.
The Company leases land for two of its branch offices. Minimum rental
commitments at September 30, 2006, are summarized below:
Fiscal Rental
Year Amount
------ --------
2007 94,174
2008 98,407
2009 104,332
2010 106,978
2011 108,300
--------
Total $512,191
========
17. Legal Contingencies
Various legal claims also arise from time to time in the normal course of
business which, in the opinion of management, will have no material effect on
the Company's consolidated financial statements.
18. Conversion To A Stock Savings Bank
At the time of conversion, in 1987, the Bank established a liquidation account
in an amount equal to the Bank's net worth as reflected in the latest
consolidated statement of financial condition of the Bank contained in the
offering circular utilized in the conversion. The function of the liquidation
account is to establish a priority on liquidation and, except with respect to
the payment of cash dividends on, or the re-purchase of, any of the common stock
by the Bank, the existence of the liquidation account will not operate to
restrict the use or application of any of the net worth accounts of the Bank. In
the event of a complete liquidation of the Bank (and only in such event), each
eligible account holder will be entitled to receive a pro rata distribution from
the liquidation account, based on such holder's proportionate amount of the
total current adjusted balances from deposit accounts then held by all eligible
account holders, before any liquidation distribution may be made with respect to
stockholders. The liquidation account was approximately $2,300,000 at September
30, 2006. Furthermore, the Company may not repurchase any of its stock if the
effect thereof would cause the Company's net worth to be reduced below (i) the
amount required for the liquidation account or (ii) the regulatory capital
requirements.
30 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
19. Fair Market Value of Financial Instruments
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret the market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
September 30,
2006 2005
Carrying Estimated Fair Carrying Estimated Fair
Amount Value Amount Value
------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 10,050,150 $ 10,050,150 $ 7,934,980 $ 7,934,980
Investment securities held to maturity 111,098,682 111,247,877 87,364,445 88,404,000
Investment securities available-for-sale at fair value 8,107,758 8,107,758 2,835,244 2,835,244
Mortgage-backed securities held to maturity 219,493,818 213,912,604 263,963,765 259,994,000
Mortgage-backed securities available-for-sale at
fair value 820,255 820,255 1,045,087 1,045,087
Loans receivable - net 385,450,374 379,488,305 366,006,917 363,642,590
Federal Home Loan Bank Stock 15,498,600 15,498,600 16,035,900 16,035,900
Liabilities:
Passbook, Club and NOW accounts 49,793,832 49,793,832 40,810,501 40,810,501
Money Market Demand accounts 58,989,416 58,989,416 76,581,019 76,581,019
Certificate accounts 320,470,800 316,274,938 301,588,135 299,156,071
Advances from Federal Home Loan Bank 294,611,162 293,194,247 297,268,488 298,554,899
The carrying amounts of cash and short-term instruments approximate fair values.
The carrying amounts of interest-bearing deposits maturing within ninety days
approximate their fair values. The fair value of investment securities and
mortgage-backed securities is based on quoted market prices, dealer quotes, and
prices obtained from independent pricing services. For variable-rate loans that
reprice frequently and with no significant change in credit risk, fair values
are based on carrying values. Fair values for certain mortgage loans (e.g.,
one-to-four family residential) and other consumer loans are based on quoted
market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. Fair values for
non-performing loans are estimated using discounted cash flow analyses or
underlying collateral values, where applicable. Although Federal Home Loan Bank
Stock (FHLB) is an equity interest in FHLB, it is carried at cost because it
does not have a readily determinable fair value as its ownership is restricted
and it lacks a market. The estimated fair value approximates the carrying
amount.
The fair value of NOW and money market deposits and savings accounts is the
amount reported in the consolidated financial statements. The fair value of
savings certificates and advances from Federal Home Loan Bank are based on a
present value estimate using rates currently offered for instruments of similar
remaining maturity. Fair values for off-balance sheet lending commitments are
based on fees currently charged to enter similar agreements.
The fair value estimates presented herein are based on pertinent information
available to management as of September 30, 2006 and 2005. Although management
is not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since that date and, therefore, current estimates
of fair value may differ significantly from the amounts presented herein.
20. Parent Company Condensed Financial Information
Condensed financial statements of Harleysville Savings Financial Corporation are
as follows:
Condensed Statements of Financial Condition
September 30,
2006 2005
----------------------------------------------------------------------
Assets
Cash $ 183,080 $ 19,441
Investment in subsidiary 48,662,388 47,603,551
------------ ------------
Total Assets $ 48,845,468 $ 47,622,992
============ ============
Liabilities & Stockholders' Equity
Liabilities
Other Liabilities $ 374,098 $ 47,176
Stockholders' equity 48,471,370 47,575,816
------------ ------------
Total liabilities & stockholders' equity $ 48,845,468 $ 47,622,992
============ ============
2006 ANNUAL REPORT 31
Condensed Statement of Income Year Ended September 30,
Income: 2006 2005 2004
----------- ----------- -----------
Equity in undistributed income of subsidiary $ 4,594,634 $ 5,375,655 $ 5,150,997
Other expense 393,096 371,935 300,900
----------- ----------- -----------
Net income $ 4,201,538 $ 5,003,720 $ 4,850,097
=========== =========== ===========
Condensed Statement of Cash Flows Year Ended September 30,
2006 2005 2004
----------- ----------- -----------
Net income $ 4,201,538 $ 5,003,720 $ 4,850,097
Increase in other Liabilities 326,922 3,408 7,506
Undistributed income of Harleysville Savings Bank (4,594,634) (5,375,655) (5,150,997)
----------- ----------- -----------
Net cash used by operating activities (66,174) (368,527) (293,394)
----------- ----------- -----------
Investing activities:
Dividends received from subsidiaries 3,641,975 1,960,000 1,696,000
----------- ----------- -----------
Net cash provided by investing activities 3,641,975 1,960,000 1,696,000
----------- ----------- -----------
Financing activities:
Acquisition of treasury stock (1,681,657) (328,280) (251,580)
Use of treasury stock 451,573 421,706 707,826
Proceeds from issuance of common stock 300,428 460,431 -
Dividends paid (2,482,506) (2,252,336) (1,826,303)
----------- ----------- -----------
Net cash used in financing activities (3,412,162) (1,698,479) (1,370,057)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 163,639 (107,006) 32,549
Cash and cash equivalents at the beginning of the period 19,441 126,447 93,898
----------- ----------- -----------
Cash and cash equivalents at the end of the period $ 183,080 $ 19,441 $ 126,447
=========== =========== ===========
21. Quarterly Financial Data (Unaudited)
Unaudited quarterly financial data for the years ended September 30, 2006 and
2005 is as follows:
2005 2004
---------------------------------- ---------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
QTR QTR QTR QTR QTR QTR QTR QTR
---------------------------------- ---------------------------------
Interest Income $9,463 $9,635 $9,923 $10,062 $8,586 $8,848 $9,167 $9,281
Interest Expense 6,422 6,371 6,621 6,953 5,351 5,503 5,856 6,037
------ ------ ------ ------- ------ ------ ------ ------
Net Interest Income 3,041 3,264 3,302 3,109 3,235 3,345 3,311 3,244
Provision for loan loss (40)
------ ------ ------ ------- ------ ------ ------ ------
Net interest income after provision for
loan losses 3,041 3,264 3,302 3,109 3,235 3,345 3,311 3,284
Non-interest income 329 282 340 356 407 341 379 359
Non-interest expense 1,973 2,031 2,156 2,407 1,959 2,012 2,017 1,976
------ ------ ------ ------- ------ ------ ------ ------
Income before income taxes 1,397 1,515 1,486 1,058 1,683 1,674 1,673 1,667
Income tax expense 316 354 386 199 428 432 429 405
------ ------ ------ ------- ------ ------ ------ ------
Net income $1,081 $1,161 $1,100 $ 859 $1,255 $1,242 $1,244 $1,262
====== ====== ====== ======= ====== ====== ====== ======
Per Common Share:
Earnings per share - basic $ 0.28 $ 0.30 $ 0.29 $ 0.22 $ 0.33 $ 0.32 $ 0.32 $ 0.32
Earnings per share - diluted $ 0.27 $ 0.29 $ 0.28 $ 0.22 $ 0.32 $ 0.32 $ 0.32 $ 0.32
Earnings per share is computed independently for each period presented.
Consequently, the sum of the quarters may not equal the total earnings per share
for the year.
The number of shares and per share information for all periods presented has
been restated to reflect the five for three stock split.
32 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
Market and Corporate Information
Market Information
Harleysville Savings Financial Corporation's Common Stock is traded in the
Over-the-Counter Market and quoted on the NASDAQ National Market System under
the symbol "HARL". The Common Stock was issued at an adjusted price of $1.45 per
share in connection with the Company's conversion from mutual to stock form and
the Common Stock commenced trading on the NASDAQ National Market System on
September 3, 1987. Prices shown below reflect the prices reported by the NASDAQ
systems. The closing price on September 30, 2006, was $16.90 per share. There
were 3,849,736 shares outstanding as of September 30, 2006, held by
approximately 1,000 stockholders.
Cash Dividends
For The Quarter Ended High Low Close Declared
--------------------------------------------------------------------
September 30, 2004 $ 18.00 $ 15.45 $ 17.25 $0.12
December 31, 2004 18.12 16.35 18.06 0.13
March 31, 2005 26.00 16.50 18.75 0.15
June 30, 2005 20.00 16.00 17.70 0.15
September 30, 2005 18.25 17.00 17.15 0.15
December 31, 2005 18.44 17.01 17.98 0.16
March 31, 2006 18.00 17.20 17.45 0.16
June 30, 2006 17.95 17.08 17.22 0.16
September 30, 2006 17.35 14.81 16.90 0.16
--------------------------------------------------------------------
Corporate Information
Auditors
Deloitte & Touche LLP
1700 Market Street
Philadelphia, PA 19103-3984
(215) 246-2300
Annual Meeting
Indian Valley Country Club
Telford, PA
Wednesday, January 24, 2007
9:30 A.M.
Market Makers
Boenning & Scattergood, Inc.
Midwest Res. First Tennessee
Ryan Beck & Co., Inc.
Special Counsel
Elias, Matz, Tiernan & Herrick LLP.
734 15th Street, N.W.
Washington, DC 20005
(202) 347-0300
Dividend Reinvestment Plan
The Company has a Dividend Reinvestment and Stock
Purchase Plan. Interested stockholders can
obtain more information regarding the Plan by
contacting:
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
(800) 525-7686, extension 2542
General Counsel
James J. Garrity
Wisler, Pearlstine, Talone, Craig, Garrity & Potash
Office Court at Walton Point
484 Norristown Road
Blue Bell, PA 19422
(610) 825-8400
Investor Information
Investors, Analysts and others seeking
financial information may contact:
Chief Financial Officer
Harleysville Savings Financial Corporation
271 Main Street
Harleysville, PA 19438
(215) 256-8828
Transfer Agent
Direct questions regarding dividend
checks, address and name changes or
lost certificates to:
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
web site: www.rtco.com
email: invrel@rtco.com
Upon request, the Company's Annual Report or form 10-K for the year ended
September 30, 2006, and the exhibits thereto required to be filed with the
Securities and Exchange Commission under the Securities Act of 1934 will be
furnished without charge to any stockholder.
2006 ANNUAL REPORT 33
BOARD OF DIRECTORS
Sanford L. Alderfer
President
Sanford Alderfer
Auction Co., Inc.
Hatfield, PA
Ronald B. Geib
President/COO
Harleysville Savings
Financial Corporation
Harleysville, PA
James J. Rittenhouse, CPA
Shareholder in the firm
Detweiler, Hershey &
Associates, P.C.
Souderton, PA
Philip A. Clemens
Chairman/CEO
Clemens Family Corporation
Hatfield, PA
Charlotte A. Hunsberger, Esq.
Partner
Bricker, Landis & Hunsberger
Souderton, PA
Mark R. Cummins, CPA, CFA
Executive Vice President,
CIO, and Treasurer
Harleysville Insurance Companies
Harleysville, PA
George W. Meschter
President
Meschter Insurance Group
Collegeville, PA
David J. Friesen, CPA
Director of Development
Penn View Christian School
Souderton, PA
Edward J. Molnar
Chairman/CEO
Harleysville Savings
Financial Corporation
Harleysville, PA
OFFICERS
Edward J. Molnar
Chairman and
Chief Executive Officer
Adrian D. Gordon
Senior Vice President and
Chief Information Officer
Ronald B. Geib
President and
Chief Operating Officer
Sheri Strouse
Senior Vice President
and Branch Administrator
Marian Bickerstaff
Senior Vice President
Residential Lending Officer
and Corporate Secretary
Stephen J. Kopenhaver
Senior Vice President and
Commercial Lending Officer
Brendan J. McGill
Senior Vice President,
Chief Financial Officer
and Treasurer
34 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
Managers
[PHOTO]
Michelle A. Beck Rodney A. Kipp
Assistant Vice President Assistant Vice President
Security Officer Technology Operations Manager
M. Shane Michalak
Vice President, Controller
Accounting Department Manager
[PHOTO]
Kathleen L. Clairmont Sherry L. Williamson
Assistant Vice President Assistant Vice President
West Norriton Office Manager Upper Providence Office Manager
Anne J. Rostosky
Vice President
Harleysville Office Manager
[PHOTO]
Denise L. Monaghan Kim A. Licata
Assistant Vice President Assistant Vice President
Loan Department Manager Loan Customer Service Manager
[PHOTO]
Dawn L. Hufnagle Helena C. Baron
Assistant Vice President Assistant Vice President
Sumneytown Office Manager Lansdale Office Manager
Paul F. Pendrak Diane M. Carlson
Assistant Vice President Assistant Vice President
Hatfield Office Manager Human Resource Manager
--------------------------------------------------------------------------------
Harleysville Savings Bank
Mission Statement
To create value for customers, team members,
stockholders and the community by consistently
providing anexceptional community
banking experience
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Harleysville Hatfield Lansdale Sumneytown Upper Providence West Norriton
271 Main Street 1700 Cowpath Rd 640 East Main St 3090 Main St 1889 East Ridge Pike 2301 West Main St
Harleysville, PA 19438 Hatfield, PA 19440 Lansdale, PA 19446 Sumneytown, PA 18084 Royersford, PA 19468 Norristown, PA 19403
215-256-8828 215-362-0750 215-855-1011 215-234-8053 610-454-0391 610-631-0887
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