UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20429
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-29709
HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-3028464
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
271 Main Street, Harleysville, Pennsylvania 19438
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(Address of principal executive offices)
(Zip Code)
(215) 256-8828
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.01 Par Value, 3,921,177 shares outstanding as of May 7, 2007
Harleysville Savings Financial Corporation
and Subsidiary
Index
PAGE(S)
-------
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 2007 Unaudited and September 30, 2006 1
Unaudited Consolidated Statements of Income for the Three and Six
Months Ended March 31, 2007 and 2006 2
Unaudited Consolidated Statements of Comprehensive Income for the
Three and Six Months Ended March 31, 2007 and 2006 3
Unaudited Consolidated Statements of Stockholders' Equity for the Six
Months Ended March 31, 2007 and 2006 4
Unaudited Consolidated Statements of Cash Flows for the Six Months
Ended March 31, 2007 and 2006 5
Notes to Unaudited Consolidated Financial Statements 6 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 - 16
Item 4. Controls and Procedures 16
Part II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 1A. Risk Factors 17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other information 17
Signatures 17
Harleysville Savings Financial Corporation
Condensed Consolidated Statements of Financial Condition
March 31, September 30,
2007 2006
-------------- --------------
(Unaudited)
Assets
Cash and amounts due from depository institutions $ 1,604,307 $ 1,596,695
Interest bearing deposits in other banks 6,536,993 8,453,455
-------------- --------------
Total cash and cash equivalents 8,141,300 10,050,150
Investment securities held to maturity (fair value -
March 31, $106,931,057; September 30, $111,248,000) 106,821,321 111,098,682
Investment securities available-for-sale at fair value 7,260,149 8,107,759
Mortgage-backed securities held to maturity (fair value -
March 31, $194,049,300; September 30, $213,913,000) 198,350,674 219,493,818
Mortgage-backed securities available-for-sale at fair value 825,319 820,255
Loans receivable (net of allowance for loan losses -
March 31, $1,946,390; September 30, $1,955,805) 399,799,269 385,450,375
Accrued interest receivable 3,720,325 3,969,610
Federal Home Loan Bank stock - at cost 13,809,300 15,498,600
Office properties and equipment, net 9,917,011 8,013,969
Prepaid expenses and other assets 14,990,471 13,134,625
-------------- --------------
TOTAL ASSETS $ 763,635,139 $ 775,637,843
============== ==============
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 434,471,139 $ 429,254,047
Advances 274,153,786 294,611,162
Accrued interest payable 1,250,287 1,406,161
Advances from borrowers for taxes and insurance 3,804,507 1,184,089
Accounts payable and accrued expenses 714,105 711,014
Income taxes payable 33,689 --
-------------- --------------
Total liabilities 714,427,513 727,166,473
============== ==============
Stockholders' equity:
Preferred Stock: $.01 par value;
12,500,000 shares authorized; none issued
Common stock: $.01 par value; 25,000,000 shares authorized;
3,921,177 shares issued 39,212 39,212
Additional Paid-in capital 8,031,522 7,992,014
Treasury stock, at cost (Mar. 2007, 51,361 shares; Sept. 2006, 71,441) (913,419) (1,262,412)
Retained earnings - partially restricted 42,064,656 41,714,616
Accumulated other comprehensive loss (14,345) (12,060)
-------------- --------------
Total stockholders' equity 49,207,626 48,471,370
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 763,635,139 $ 775,637,843
============== ==============
See notes to unaudited condensed consolidated financial statements.
page -1-
Harleysville Savings Financial Corporation
Unaudited Condensed Consolidated Statements of Income
For the Three Months Ended For the Six Months Ended
March 31, March 31,
------------------------------ ------------------------------
2007 2006 2007 2006
------------- ------------- ------------- -------------
INTEREST INCOME:
Interest on mortgage loans $ 4,230,013 $ 3,943,558 $ 8,434,885 $ 7,884,807
Interest on mortgage-backed securities 2,335,004 2,754,221 4,779,244 5,602,480
Interest on consumer and other loans 1,606,748 1,385,364 3,158,026 2,729,369
Interest and dividends on tax-exempt investments 277,081 346,478 687,833 692,850
Interest and dividends on taxable investments 1,450,006 1,205,099 2,671,491 2,195,901
------------- ------------- ------------- -------------
Total interest income 9,898,852 9,634,720 19,731,479 19,105,407
------------- ------------- ------------- -------------
Interest Expense:
Interest on deposits 3,806,729 3,203,365 7,528,320 6,316,741
Interest on borrowings 3,150,755 3,167,082 6,456,526 6,475,737
------------- ------------- ------------- -------------
Total interest expense 6,957,484 6,370,447 13,984,846 12,792,478
------------- ------------- ------------- -------------
Net Interest Income 2,941,368 3,264,273 5,746,633 6,312,929
Provision for loan losses -- -- -- --
------------- ------------- ------------- -------------
Net Interest Income after Provision
for Loan Losses 2,941,368 3,264,273 5,746,633 6,312,929
------------- ------------- ------------- -------------
Other Income:
Gain on sales of securities 159,888 8,914 159,888 8,914
Other income 385,737 273,116 778,312 594,971
------------- ------------- ------------- -------------
Total other income 545,625 282,030 938,200 603,885
------------- ------------- ------------- -------------
Other Expenses:
Salaries and employee benefits 1,301,365 1,129,574 2,556,580 2,167,803
Occupancy and equipment 404,031 385,045 812,854 753,018
Deposit insurance premiums 12,957 13,679 26,377 27,476
Other 596,199 502,710 1,178,620 1,056,030
------------- ------------- ------------- -------------
Total other expenses 2,314,552 2,031,008 4,574,431 4,004,327
------------- ------------- ------------- -------------
Income before Income Taxes 1,172,441 1,515,295 2,110,402 2,912,487
Income tax expense 268,500 354,177 449,500 670,177
------------- ------------- ------------- -------------
Net Income $ 903,941 $ 1,161,118 $ 1,660,902 $ 2,242,310
============= ============= ============= =============
Basic Earnings Per Share $ 0.23 $ 0.30 $ 0.43 $ 0.58
============= ============= ============= =============
Diluted Earnings Per Share $ 0.23 $ 0.29 $ 0.43 $ 0.57
============= ============= ============= =============
Dividends Per Share $ 0.17 $ 0.16 $ 0.34 $ 0.32
============= ============= ============= =============
See notes to unaudited condensed consolidated financial statements.
page -2-
Harleysville Savings Financial Corporation
Unaudited Condensed Consolidated Statements of Comprehensive Income
Three Months Ended
March 31,
2007 2006
---------------------------------------------------------------------------------------------------------------------------------
Net Income $ 903,941 $ 1,161,118
Other Comprehensive Income
Unrealized gain on securities net of tax
2007, ($21,518); 2006, $(9,046) 41,775 (1) 24,855
------------ --- ---------------
Total Comprehensive Income $ 945,716 $ 1,185,973
============= ===============
(1) Disclosure of reclassification amount, net of tax for the three months ended: 2007 2006
------------- ---------------
Net unrealized gain arising during the three months ended $ 41,775 $ 30,738
Less: Reclassification adjustment for net gains included in net income
Net of tax expense -2007, 0; 2006, $3,031 0 5,883
------------- ---------------
Net unrealized gain on securities $ 41,775 $ 24,855
============= ===============
Six Months Ended
March 31,
2007 2006
---------------------------------------------------------------------------------------------------------------------------------
Net Income $ 1,660,902 $ 2,242,310
Other Comprehensive Income
Unrealized loss on securities net of tax benefit
2007, $1,177; 2006, $332 (2,285) (1) (913)
------------- ---------------
Total Comprehensive Income $ 1,658,617 $ 2,241,397
============= ===============
(1) Disclosure of reclassification amount, net of tax for the six months ended: 2007 2006
------------- ---------------
Net unrealized gain (loss) arising during the six months ended $ (2,285) $ 4,970
Less: Reclassification adjustment for net gains included in net income
Net of tax expense -2007, 0; 2006, $3,031 0 5,883
------------- ---------------
Net unrealized loss on securities $ (2,285) $ (913)
============= ===============
See notes to unaudited condensed consolidated financial statements.
page -3-
Harleysville Savings Financial Corporation
Unaudited Condensed Consolidated Statement of Stockholders' Equity
Retained Accumulated
Common Additional Earnings- Other Total
Stock Common Paid-in Treasury Partially Comprehensive Stockholders'
Shares Stock Capital Stock Restricted Loss Equity
-----------------------------------------------------------------------------------------------------------------------------------
Balance at October 1, 2006 3,921,177 $ 39,212 $7,992,014 $(1,262,412) $ 41,714,616 $ (12,060) $ 48,471,370
Net Income 1,660,902 1,660,902
Dividends - $.34 per share (1,310,862) (1,310,862)
Option Compensation 56,250 56,250
Treasury stock issued
for stock options
exercised (3,334 shares) (13,186) 57,947 44,761
Treasury Stock issued under
Dividend Reinvestment Plan
(16,746 shares) (3,556) 291,046 287,490
Unrealized holding loss on
available - for- sale
securities, net of tax (2,285) (2,285)
---------- -------- ----------- ------------ --------------- -------------- ---------------
Balance at March 31, 2007 3,921,177 $ 39,212 $8,031,522 $ (913,419) $ 42,064,656 $ (14,345) $ 49,207,626
========== ======== =========== ============ =============== ============== ===============
Retained Accumulated
Common Additional Earnings- Other Total
Stock Common Paid-in Treasury Partially Comprehensive Stockholders'
Shares Stock Capital Stock Restricted Loss Equity
-----------------------------------------------------------------------------------------------------------------------------------
Balance at October 1, 2005 3,904,136 $ 39,041 $ 7,610,511 $ (60,107) $ 39,995,584 $ (9,213) $ 47,575,816
Net Income 2,242,310 2,242,310
Issuance of Common Stock 17,041 171 171
Dividends - $.32 per share (1,249,734) (1,249,734)
Option Compensation 35,025 35,025
Treasury stock purchased (1,091,072) (1,091,072)
Treasury stock issued for
stock options exercised (12,339) 155,122 142,783
Stock delivered under
Dividend Reinvestment Plan 300,427 300,427
Unrealized holding loss on
available - for- sale
securities, net of tax (913) (913)
--------- ---------- ------------ ------------ ------------ ------------ ------------
Balance at March 31, 2006 3,921,177 $ 39,212 $ 7,933,624 $ (996,057) $ 40,988,160 $ (10,126) $ 47,954,813
========= ========== ============ ============ ============ ============ ============
See notes to unaudited condensed consolidated financial statements.
page -4-
Harleysville Savings Financial Corporation
Unaudited Condensed Consolidated Statements of Cash Flows
Six Months Ended March 31,
-----------------------------------
2007 2006
---------------- --------------
Operating Activities:
Net Income $ 1,660,902 $ 2,242,310
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation 259,642 219,793
Compensation charge on stock options 56,250 35,025
Amortization of deferred loan fees (1,598) (31,295)
Gain on sale of securities (159,888) (8,914)
Increase in cash surrender value (234,000) (215,000)
Net amortization of premiums and discounts 84,924 258,300
Changes in assets and liabilities which provided (used) cash:
Increase (decrease) in accounts payable and accrued
expenses 36,780 (269,539)
(Increase) in prepaid expenses and other assets (1,620,670) (915,636)
(Increase) decrease in accrued interest receivable 249,285 (221,449)
Decrease in accrued interest payable (155,874) (36,662)
---------------- --------------
Net cash provided by operating activities 175,753 1,056,933
---------------- --------------
Investing Activities:
Purchase of investment securities held to maturity (17,491,691) (20,795,000)
Purchase of investment securities available for sale (471,067) (280,181)
Purchase of mortgage-backed securities held to maturity (8,058,720) (2,011,250)
Proceeds from the sales of mortgage-backed securities 10,290,037 --
Proceeds from maturities of investment securities held to maturity 21,769,052 163,074
Proceeds from maturities of investment securities available for sale 1,310,152 73,106
Principal collected on long-term loans & mortgage-backed securities 61,162,459 67,749,151
Proceeds of FHLB stock 1,689,300 1,453,200
Long-term loans originated (56,522,964) (46,838,255)
Purchases of premises and equipment (2,162,684) (1,522,045)
---------------- --------------
Net cash provided by (used in) investing activities 11,513,874 (2,008,200)
---------------- --------------
Financing Activities:
Net increase (decrease) in demand deposits, NOW accounts
and savings accounts 7,365,164 (1,482,196)
Net (decrease) increase in certificates of deposit (2,148,072) 14,368,443
Cash dividends (1,310,862) (1,249,734)
Proceeds from advances 25,000,000 --
Repayment of FHLB advances (45,457,376) (12,377,716)
Treasury stock delivered under employee stock plan and --
Dividend Reinvestment Plan 332,251 443,210
Purchase of treasury stock -- (1,091,072)
Net proceeds from issuance of stock -- 171
Net increase in advances from borrowers for taxes & insurance 2,620,418 2,352,614
---------------- --------------
Net cash (used in) provided by financing activities (13,598,477) 963,720
---------------- --------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,908,850) 12,453
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,050,150 7,934,980
---------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,141,300 $ 7,947,433
================ ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 2,000 $ 670,000
Interest expense 14,140,720 12,829,140
See notes to unaudited condensed consolidated financial statements.
page -5-
Harleysville Savings Financial Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The unaudited condensed consolidated financial
statements include the accounts of Harleysville Savings Financial Corporation
(the "Company") and its subsidiary. Harleysville Savings Bank (the "Bank") is
the wholly owned subsidiary of the Company. The accompanying consolidated
financial statements include the accounts of the Company, the Bank, and the
Bank's wholly owned subsidiaries, HSB Inc, a Delaware corporation which was
formed in order to hold 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.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and therefore do not
include information or footnotes necessary for a complete presentation of
financial condition, results of operations and cash flows in conformity with
accounting principles generally accepted in the United States of America.
However, all adjustments (consisting only of normal recurring adjustments)
which, in the opinion of management, are necessary for a fair presentation of
the consolidated financial statements have been included. The results of
operations for the six months ended March 31, 2007 are not necessarily
indicative of the results which may be expected for the entire fiscal year
ending September 30, 2007 or any other period. The financial information should
be read in conjunction with the Annual Report on Form 10-K for the period ended
September 30, 2006.
Use of Estimates in Preparation of Consolidated Financial Statements - The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statement and the reported amounts of income and
expenses during the reporting period. The most significant of these estimates is
the allowance for loan losses. Actual results could differ from those estimates.
Recent Accounting Pronouncements - In October 2006, the FASB issued FASB Staff
Position No. 123R-5, "Amendment of FASB Staff Position FAS 123(R)-1" ("FSP
123(R)-5"). FSP 123(R)-5 amends FSP 123(R)-1 for equity instruments that were
originally issued as employee compensation and then modified, with such
modification made solely to reflect an equity restructuring that occurs when the
holders are no longer employees. The Company does not expect the adoption of FSP
123(R)-5 to have a material impact on its financial condition, results of
operations or cash flows.
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 for fiscal years begining after
December 15, 2006. 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 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.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115." SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected will be
recognized in earnings at each subsequent reporting date. SFAS No. 159 is
effective for our Company January 1, 2008. The Company is evaluating the impact
that the adoption of SFAS No. 159 will have on our consolidated financial
statements.
In March 2007, the FASB ratified EITF Issue No. 06-11, "Accounting for Income
Tax Benefits of Dividends on Share-Based Payment Awards." EITF 06-11 requires
companies to recognize the income tax benefit realized from dividends or
dividend equivalents that are charged to retained earnings and paid to employees
for nonvested equity-classified employee share-based payment awards as an
increase to additional paid-in capital. EITF 06-11 is effective for fiscal years
beginning after September 15, 2007. The Company does not expect EITF 06-11 will
have a material impact on its financial position, results of operations or cash
flows.
On September 7, 2006, the Task Force reached a conclusion on EITF Issue No.
06-5, "Accounting for Purchases of Life Insurance-Determining the Amount That
Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4,
Accounting for Purchases of Life Insurance" ("EITF 06-5"). The scope of EITF
06-5 consists of six separate issues relating to accounting for life insurance
policies purchased by entities protecting against the loss of "key persons". The
six issues are clarifications of previously issued guidance on FASB Technical
Bulletin No. 85-4. EITF 06-5 is effective for fiscal years beginning after
December 15, 2006. The Company does not expect it to have a material impact on
the Company's consolidated financial statements.
page -6-
2. INVESTMENT SECURITIES HELD TO MATURITY
A comparison of amortized cost and approximate fair value of investment
securities with gross unrealized gains and losses, by maturities, is as follows:
March 31, 2007
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
----------------------------------------------------------------------------------------------------------------
U.S. Government Agencies
Due after 1 years through 5 years $ 5,000,000 $ (82,820) $ 4,917,180
Due after 5 years through 10 years 20,899,629 $ 26,133 (270,486) 20,655,276
Due after 10 years through 15 years 48,416,180 24,865 (720,552) 47,720,493
Due after 15 years 6,387,323 -- (65,764) 6,321,559
Tax-Exempt Obligations
Due after 10 years through 15 years 17,913,446 1,046,056 18,959,502
Due after 15 years 8,204,743 265,543 (113,239) 8,357,047
-------------- --------------- --------------- ---------------
Total Investment Securities $ 106,821,321 $ 1,362,597 $ (1,252,861) $ 106,931,057
============== =============== =============== ===============
A summary of investment with unrealized losses, aggregated by category, at March
31, 2007 is as follows:
Less than 12 Months 12 Months or Longer
Fair Value Unrealized Losses Fair Value Unrealized Losses
-------------- ----------------- -------------- -----------------
US Government agencies $ 14,329,023 $ (143,477) $ 60,349,765 $ (996,145)
Tax-Exempt Obligations 2,903,433 (113,239) -- --
-------------- ---------------------------------------------------------
Total $ 17,232,456 $ (256,716) $ 60,349,765 $ (996,145)
============== =========================================================
Total Total
Fair Value Unrealized Losses
------------- ------------------
US Government agencies $ 74,678,788 $ (1,139,622)
Tax-Exempt Obligations 2,903,433 (113,239)
-----------------------------------
Total $ 77,582,221 $ (1,252,861)
===================================
At March 31, 2007, investment securities in a gross unrealized loss position for
twelve months or longer consisted of 23 US Government Agency Securities that at
such date had an aggregate depreciation of 1.6% 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 and the financial condition and near term
prospects of the issuer. The Company has the ability and intent to hold these
securities until the anticipated recovery of fair value occurs. Management does
not believe any individual unrealized loss as of March 31, 2007 represents an
other-than-temporary impairment.
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
Fair Value Unrealized Losses Fair Value Unrealized Losses
-------------- ------------------ -------------- ------------------
US Government agencies $ 26,578,627 $ (216,285) $ 50,655,619 $ (1,182,969)
-------------- ------------------ -------------- ------------------
Total $ 26,578,627 $ (216,285) $ 50,655,619 $ (1,182,969)
============== ================== ============== ==================
Total Total
Fair Value Unrealized Losses
------------- ------------------
US Government agencies $ 77,234,246 $ (1,399,254)
-----------------------------------
Total $ 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 and the financial condition and near term
prospects of the issuer. 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.
page -7-
3. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
A comparison of amortized cost and approximate fair value of investment
securities with gross unrealized gains and losses, is as follows:
March 31, 2007
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------------------------------------------------------------------------------------------------------------
Equity Securities $ 1,516,667 $ 30,902 $ (92,768) $ 1,454,801
Money Market Mutual Funds 5,805,348 5,805,348
-------------- --------------- -------------- ---------------
Total Investment Securities $ 7,322,015 $ 30,902 $ (92,768) $ 7,260,149
============== =============== ============== ===============
A summary of investment securities available for sale with unrealized losses,
aggregated by category, at March 31, 2007 is as follows:
Less than 12 Months 12 Months or Longer
Fair Value Unrealized Losses Fair Value Unrealized Losses
-------------- ------------------ -------------- -----------------
Equity Securities $ 1,023,251 $ (92,768) $ -- $ --
-------------- ------------------ -------------- -----------------
Total $ 1,023,251 $ (92,768) $ -- $ --
============== ================== ============== =================
Total Total
Fair Value Unrealized Losses
------------- ------------------
Equity Securities $ 1,023,251 $ (92,768)
------------- ------------------
Total $ 1,023,251 $ (92,768)
============= ==================
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 and the financial condition and near term prospects of
the issuer. The Company has the ability and intent to hold these securities
until the anticipated recovery of fair value occurs. Management does not believe
any individual unrealized loss as of March 31, 2007 represents an
other-than-temporary impairment.
September 30, 2006
Gross Gross
Amortized Unrealized Unrealized
Cost Gains 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 securities available for sale with unrealized losses,
aggregated by category, at September 30,2006 is as follows:
Less than 12 Months 12 Months or Longer
Fair Value Unrealized Losses Fair Value Unrealized Losses
-------------- ----------------- -------------- -----------------
Equity Securities $ 582,873 $ (67,143) $ -- $ --
-------------- ----------------- -------------- -----------------
Total $ 582,873 $ (67,143) $ -- $ --
============== ================= ============== =================
Total Total
Fair Value Unrealized Losses
------------- ------------------
Equity Securities $ 582,873 $ (67,143)
------------- ------------------
Total $ 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. 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.
page -8-
4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
A comparison of amortized cost and approximate fair value of mortgage-backed
securities with gross unrealized gains and losses, is as follows:
March 31,2007
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
----------------------------------------------------------------------------------------------------------------
Collateralized mortgage obligations $ 17,287,899 $ 119,699 $ (256,663) $ 17,150,935
FHLMC pass-through certificates 87,466,909 21,687 (2,127,171) 85,361,425
FNMA pass-through certificates 92,862,336 15,284 (2,077,724) 90,799,896
GNMA pass-through certificates 733,530 3,514 -- 737,044
-------------- --------------- -------------- ---------------
Total Mortgage-Backed Securities $ 198,350,674 $ 160,184 $ (4,461,558) $ 194,049,300
============== =============== ============== ===============
A summary of motgage-backed securities held to maturity with unrealized losses,
aggregated by category, at March 31, 2007 is as follows:
Less than 12 Months 12 Months or Longer
Fair Value Unrealized Losses Fair Value Unrealized Losses
-------------- ----------------- -------------- -----------------
Mortgage-backed securities
held to maturity $ 9,457,405 $ (30,339) $ 179,028,533 $ (4,431,219)
-------------- ----------------- -------------- -----------------
Total $ 9,457,405 $ (30,339) $ 179,028,533 $ (4,431,219)
============== ================= ============== =================
Total Total
Fair Value Unrealized Losses
------------- ------------------
Mortgage-backed securities
held to maturity $ 188,485,938 $ (4,461,558)
------------- ------------------
Total $ 188,485,938 $ (4,461,558)
============= ==================
At March 31, 2007, mortgage-related securities in a gross unrealized loss
position for twelve months or longer consisted of 88 securities that at such
date had an aggregate depreciation of 2.4% 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 and the financial condition and near term
prospects of the issuer. The Company has the ability and intent to hold these
securities until the anticipated recovery of fair value occurs. Management does
not believe any individual unrealized loss as of March 31, 2007 represents an
other-than-temporary impairment.
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 motgage-backed securities held to maturity with unrealized losses,
aggregated by category, at September 30, 2006 is as follows:
Less than 12 Months 12 Months or Longer
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)
-------------- ----------------- -------------- -----------------
Total $ 6,898,645 $ (68,773) $ 191,950,265 $ (5,869,596)
============== ================= ============== =================
Total Total
Fair Value Unrealized Losses
------------- ------------------
Mortgage-backed securities
held to maturity $ 198,848,910 $ (5,938,369)
------------- ------------------
Total $ 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 and the financial condition and near term
prospects of the issuer. 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.
page -9-
5. MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE
A comparison of amortized cost and approximate fair value of mortgage-backed
securities with gross unrealized gains and losses, is as follows:
March 31,2007
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------------------------------------------------------------------------------------------
FNMA pass-through certificates $ 785,187 $ 40,132 $ -- $ 825,319
----------- ----------- ----------- ----------
Total Mortgage-Backed Securities $ 785,187 $ 40,132 $ -- $ 825,319
=========== =========== =========== ==========
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
=========== =========== =========== ==========
6. LOANS RECEIVABLE
Loans receivable consist of the following:
March 31, 2007 September 30, 2006
--------------- ------------------
Residential Mortgages $ 290,962,031 $ 282,181,674
Commercial Mortgages 9,500,497 5,893,737
Construction 8,027,620 6,986,632
Savings Account 855,073 1,002,672
Home Equity 73,316,689 70,515,174
Automobile and other 898,056 811,963
Home Equity Line of Credit 22,395,897 25,499,895
--------------- ------------------
Total 405,955,863 392,891,747
Undisbursed portion of loans in process (3,679,265) (4,941,266)
Deferred loan fees (530,939) (544,301)
Allowance for loan losses (1,946,390) (1,955,805)
--------------- ------------------
Loans Receivable - net $ 399,799,269 $ 385,450,375
=============== ==================
The total amount of loans being serviced for the benefit of others was
approximately $3.8 million and $3.9 million at March 31, 2007 and September 30,
2006, respectively.
The following schedule summarizes the changes in the allowance for loan losses:
Six Months Ended Year Ended
March 31, 2007 September 30, 2006
---------------- ------------------
Balance, beginning of period $ 1,955,805 $ 1,967,607
Amounts charged-off (12,826) (20,326)
Loan recoveries 3,411 8,524
---------------- ------------------
Balance, end of period $ 1,946,390 $ 1,955,805
================ ==================
Page -10-
7. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classification as
follows:
March 31, 2007 September 30, 2006
-------------- ------------------
Land $ 1,159,031 $ 1,159,031
Buildings 9,657,111 7,543,587
Furniture, fixtures and equipment 3,737,488 3,694,898
Automobiles 24,896 24,896
-------------- -----------------
Total 14,578,526 12,422,412
Less accumulated depreciation (4,661,515) (4,408,443)
-------------- -----------------
Net $ 9,917,011 $ 8,013,969
============== =================
8. DEPOSITS
Deposits are summarized as follows:
March 31, 2007 September 30, 2006
-------------- ------------------
Non-interest bearing checking $ 11,018,271 $ 10,338,951
NOW accounts 17,670,873 15,719,531
Checking accounts 26,779,067 20,410,198
Money Market Demand accounts 57,805,632 58,989,416
Passbook and Club accounts 2,874,568 3,325,151
Certificate accounts 318,322,728 320,470,800
-------------- ------------------
Total deposits $ 434,471,139 $ 429,254,047
============== ==================
The aggregate amount of certificate accounts in denominations of more than
$100,000 at March 31, 2007 and September 30, 2006 amounted to approximately
$43.9 million and $47.6 million, respectively. Amounts in excess of $100,000 may
not be federally insured.
9. COMMITMENTS
At March 31, 2007, the following commitments were outstanding:
Origination of mortgage loans $ 17,540,782
Unused line of credit loans 41,804,345
Loans in process 3,679,265
--------------
Total $ 63,024,392
==============
page -11-
10. EARNINGS PER SHARE
The following shares were used for the computation of earnings per share:
For the Three Months Ended For the Six Months Ended
March 31, March 31,
--------------------------------------------------------
2007 2006 2007 2006
--------- --------- --------- ---------
Basic 3,864,189 3,893,428 3,859,201 3,898,099
Diluted 3,891,445 3,953,751 3,892,782 3,949,506
The difference between the number of shares used for computation of basic
earnings per share and diluted earnings per share represents the dilutive effect
of stock options.
11. ADVANCES
Advances consists of the following:
March 31, September 30,
2007 2006
Weighted Weighted
Interest Interest
Maturing Period Amount Rate Amount Rate
-------------------------------------------------------------------------------
1 to 12 months $ 56,458,175 5.12% $ 79,492,234 4.92%
13 to 24 months 45,055,964 4.58% 46,949,489 4.79%
25 to 36 months 14,693,156 4.48% 25,850,822 4.07%
37 to 48 months 15,000,000 5.26% 8,375,148 3.96%
49 to 60 months 30,428,267 4.44% 39,417,941 5.38%
61 to 72 months 42,518,224 3.84% 59,525,528 4.47%
73 to 84 months 20,000,000 4.26% 5,000,000 3.80%
85 to 120 months 50,000,000 4.61% 30,000,000 4.10%
------------------------------------------------
Total $ 274,153,786 4.67% $ 294,611,162 4.67%
================================================
The majority of the advances are collateralized by Federal Home Loan Bank
("FHLB") stock and substantially all first mortgage loans. The Company has a
line of credit with the FHLB of which $42.3 million out of $75.0 million was
used at March 31, 2007 and $58.2 million was used as of September 30, 2006, for
general purposes. Included in the table above at March 31, 2007 and September
30, 2006 are convertible advances whereby the FHLB has the option at a
predetermined strike rate to convert the fixed interest rate to an adjustable
rate tied to London Interbank Offered Rate ("LIBOR"). The Company then has the
option to repay these advances if the FHLB converts the interest rate. These
advances are included in the periods in which they mature. The Company has a
total FHLB borrowing capacity of $535.6 million of which $249.2 million was used
as of March 31, 2007. The Company has two advances that are secured by
investment and mortgage-backed securities totaling $25.0 million.
12. REGULATORY CAPITAL REQUIREMENTS
Harleysville Savings Bank (the "Bank") is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Bank's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Quantitative measures
established by regulation to ensure capital adequacy require the Bank to
maintain minimum amounts and ratios (set forth in the table below) of total Tier
1 capital (as defined in the regulations) to risk weighted assets (as defined),
and of Tier 1 capital (as defined) to assets (as defined). Management believes,
as of March 31, 2007, that the Bank meets all capital adequacy requirements to
which it is subject.
As of March 31, 2007, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
The Bank's actual capital amounts and ratios are also presented in the table.
To Be Considered Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------------------------------------------------------------
As of March 31, 2007
Tier 1 Capital (to assets) $49,019,555 6.55% $29,957,960 4.00% $37,447,450 5.00%
Tier 1 Capital (to risk weighted assets) 49,019,555 12.92% 29,957,960 4.00% 44,936,940 6.00%
Total Capital (to risk weighted assets) 50,965,899 13.43% 30,354,640 8.00% 37,943,300 10.00%
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%
page -12-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains certain forward-looking statements and information relating
to the Company that are based on the beliefs of management as well as
assumptions made by and information currently available to management. In
addition, in those and other portions of this document, the words "anticipate,"
"believe," "estimate," "intend," "should" and similar expressions, or the
negative thereof, as they relate to the Company or the Company's management, are
intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future-looking events and are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected or intended. The Company does not
intend to update these forward-looking statements.
The Company's primary business consists of attracting deposits from the general
public through a variety of deposit programs and investing such deposits
principally in first mortgage loans secured by residential properties in the
Company's primary market area. The Company also originates a variety of consumer
loans, predominately home equity loans and lines of credit also secured by
residential properties in the Company's primary lending area. The Company serves
its customers through its full-service branch network as well as through remote
ATM locations, the internet and telephone banking.
Critical Accounting Policies and Judgments
------------------------------------------
The Company's consolidated financial statements are prepared based on the
application of certain accounting policies. Certain of these policies require
numerous estimates and strategic or economic assumptions that may prove
inaccurate or subject to variations and may significantly affect the Company's
reported results and financial position for the period or in future periods.
Changes in underlying factors, assumptions, or estimates in any of these areas
could have a material impact on the Company's future financial condition and
results of operations.
Analysis and Determination of the Allowance for Loan Losses - The allowance for
loan losses is a valuation allowance for probable losses inherent in the loan
portfolio. The Company evaluates the need to establish allowances against losses
on loans on a monthly basis. When additional allowances are necessary, a
provision for loan losses is charged to earnings.
Our methodology for assessing the appropriateness of the allowance for loan
losses consists of three key elements: (1) specific allowances for certain
impaired or collateral-dependent loans; (2) a general valuation allowance on
certain identified problem loans; and (3) a general valuation allowance on the
remainder of the loan portfolio. Although we determine the amount of each
element of the allowance separately, the entire allowance for loan losses is
available for the entire portfolio.
Specific Allowance Required for Certain Impaired or Collateral-Dependent Loans:
We establish an allowance for certain impaired loans for the amounts by which
the collateral value or observable market price are lower than the carrying
value of the loan. Under current accounting guidelines, a loan is defined as
impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due under the contractual terms
of the loan agreement. At March 31, 2007, no loans were considered impaired.
General Valuation Allowance on Certain Identified Problem Loans - We also
establish a general allowance for classified loans that do not have an
individual allowance. We segregate these loans by loan category and assign
allowance percentages to each category based on inherent losses associated with
each type of lending and consideration that these loans, in the aggregate,
represent an above-average credit risk and that more of these loans will prove
to be uncollectible compared to loans in the general portfolio.
General Valuation Allowance on the Remainder of the Loan Portfolio - We
establish another general allowance for loans that are not classified to
recognize the inherent losses associated with lending activities, but which,
unlike specific allowances, has not been allocated to particular problem assets.
This general valuation allowance is determined by segregating the loans by loan
category and assigning allowance percentages based on our historical loss
experience, delinquency trends and management's evaluation of the collectibility
of the loan portfolio. The allowance may be adjusted for significant factors
that, in management's judgment, affect the collectibility of the portfolio as of
the evaluation date. These significant factors may include changes in lending
policies and procedures,
page -13-
changes in existing general economic and business conditions affecting our
primary lending areas, credit quality trends, collateral value, loan volumes and
concentrations, seasoning of the loan portfolio, recent loss experience in
particular segments of the portfolio, duration of the current business cycle and
bank regulatory examination results. The applied loss factors are reevaluated
monthly to ensure their relevance in the current economic environment.
Changes in Financial Position for the Six-Month Period Ended March 31, 2007
---------------------------------------------------------------------------
Total assets at March 31, 2007 were $763.6 million, a decrease of $12.0 million
for the six-month period then ended. The decrease was primarily the result of a
decrease in mortgage-backed securities held to maturity of $21.1 million and
investment securities held to maturity of $4.3 million. These decreases were
partially offset by an increase in loans receivable of $14.3 million. As of
March 31, 2007, total deposits increased by $5.2 million to $434.5 million.
Advances from borrowers for taxes and insurance also increased by $2.6 million.
There was also a decrease in advances of $20.5 million due to the growth of
deposits and normal cash flows.
Comparisons of Results of Operations for the Three and Six Month Period Ended
-----------------------------------------------------------------------------
March 31, 2007 with the Three and Six Month Period Ended March 31, 2006.
------------------------------------------------------------------------
Net Interest Income
-------------------
Net interest income was $2.94 million for the three-month period ended March 31,
2007 compared to $3.3 million for the comparable period in 2006. The decrease in
the net interest income for the three-month period ended March 31, 2007 when
compared to the same period in 2006 is attributed to the decrease in interest
rate spread to 1.40% in 2007 from 1.57% in 2006. The decrease in the net
interest income for the six-month period ended March 31, 2007 when compared to
the same period in 2006 can be attributed to the decrease in interest rate
spread to 1.36% in 2007 from 1.51% in 2006. Net interest income was $5.7 million
for the six-month periods ended March 31, 2007 compared to $6.3 million for the
same period in 2006.
Total interest income was $9.9 million for the three-month period ended March
31, 2007 compared to $9.6 million for the comparable period in 2006. For the six
month period ended March 31, 2007, total interest income was $19.7 million
compared to $19.1 million for the comparable period in 2006. The increase is the
result of the increased average yield for the interest-earning assets to 5.53%
and 5.44% for the three and six-month periods ended March 31, 2007,
respectively, from 5.18% and 5.14% for the comparable periods in 2006.
Total interest expense increased to $7.0 million for the three-month period
ended March 31, 2007 from $6.4 million for the comparable period in 2006. For
the six-month period ended March 31, 2007, total interest expense increased to
$14.0 million from $12.8 million for the comparable period in 2006. These
increases occurred as a result of a increase in the average rate paid on
interest-bearing liabilities to 4.13% and 4.10% for the three and six month
periods ended March 31, 2007, respectively, from 3.62% and 3.63% for the
comparable period ended March 31, 2006.
Other Income
------------
Non-interest income increased to $546,000 for the three-month period ended March
31, 2007 from $282,000 for the comparable period in 2006. The increase is due to
the fact that the Company sold investments classified as held to maturity for a
gain of approximately $160,000 and had approximately $48,000, $22,000 and
$10,000 of additional income from fees associated with transaction accounts,
fees associated with loans and additional Bank Owned Life Insurance ("BOLI")
income. The Company sold securities held to maturity in accordance with
provisions of SFAS No. 115 allowing such securities to be sold if principal
reductions on such securities were at least 85%. Non-interest income increased
to $938,000 for the six-month period ended March 31, 2007 from $604,000 for the
comparable period in 2006. The increase is due to the fact that the Company sold
investments for a gain of approximately $160,000 and had approximately $101,000,
$35,000 and $15,000 of additional income from fees associated with transaction
accounts, fees associated with loans and additional BOLI income.
Other Expenses
--------------
For the three-month period ended March 31, 2007, non-interest expenses increased
by $284,000 or 14.0% to $2.3 million compared to $2.0 million for the same
period in 2006. For the six month period ended March 31, 2007, non-interest
expenses increased by $570,000 or 14.24% to $4.6 million compared to $4.0
million for the same period in 2006. Management believes that these are
reasonable increases in the cost of operations after considering the impact of
opening a new branch location in June of 2006 and additional expenses related to
the Company's new commercial loan department. The annualized ratio of
non-interest expenses to average assets for the three and six
page -14-
month periods ended March 31, 2007 and 2006 were 1.23%, 1.21% and 1.06%, 1.04%,
respectively.
Income Taxes
------------
The Company made provisions for income taxes of $268,500 and $449,500 for the
three and six-month periods ended March 31, 2007, respectively, compared to
$354,000 and $670,000 for the comparable periods in 2006. These provisions are
based on the levels of taxable income, adjusted for tax-exempt income on
investments. The Company's effective tax rate was 22.9% and 21.3% for the three
and six-month periods ended March 21, 2007 compared to 23.4% and 23.0% for the
three and six-month periods ended March 31, 2006.
Liquidity and Capital Resources
-------------------------------
As of March 31, 2007, the Company had $63.0 million in commitments to fund loan
originations, disburse loans in process and meet other obligations. Management
anticipates that the majority of these commitments will be funded within the
next six months by means of normal cash flows, FHLB borrowings and new deposits.
The amount of certificate accounts, which are scheduled to mature during the 12
months ending March 31, 2008, is $276.4 million. Management expects that a
substantial portion of these maturing deposits will remain as accounts in the
Company. The Company invests excess funds in overnight deposits and other
short-term interest-earning assets, which provide liquidity to meet lending
requirements. The Company also has available borrowings with the Federal Home
Loan Bank of Pittsburgh up to the Company's maximum borrowing capacity, which
was $535.6 million at March 31, 2007 of which $249.2 million was outstanding at
March 31, 2007.
The Bank's net income for the six months ended March 31, 2007 of $1.7 million
increased the Bank's stockholders' equity to $49.2 million or 6.6% of total
assets. This amount is well in excess of the Bank's minimum regulatory capital
requirement.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has instituted programs designed to decrease the sensitivity of its
earnings to material and prolonged increases in interest rates. The principal
determinant of the exposure of the Company's earnings to interest rate risk is
the timing difference between the repricing or maturity of the Company's
interest-earning assets and the repricing or maturity of its interest-bearing
liabilities. If the maturities of such assets and liabilities were perfectly
matched, and if the interest rates borne by its assets and liabilities were
equally flexible and moved concurrently, neither of which is the case, the
impact on net interest income of rapid increases or decreases in interest rates
would be minimized. The Company's asset and liability management policies seek
to increase the interest rate sensitivity by shortening the repricing intervals
and the maturities of the Company's interest-earning assets. Although management
of the Company believes that the steps taken have reduced the Company's overall
vulnerability to increases in interest rates, the Company remains vulnerable to
material and prolonged increases in interest rates during periods in which its
interest rate sensitive liabilities exceed its interest rate sensitive assets.
The authority and responsibility for interest rate management is vested in the
Company's Board of Directors. The Chief Executive Officer implements the Board
of Directors' policies during the day-to-day operations of the Company. Each
month, the Chief Financial Officer ("CFO") presents the Board of Directors with
a report, which outlines the Company's asset and liability "gap" position in
various time periods. The "gap" is the difference between interest- earning
assets and interest-bearing liabilities which mature or reprice over a given
time period.
The CFO also meets weekly with the Company's other senior officers to review and
establish policies and strategies designed to regulate the Company's flow of
funds and coordinate the sources, uses and pricing of such funds. The first
priority in structuring and pricing the Company's assets and liabilities is to
maintain an acceptable interest rate spread while reducing the effects of
changes in interest rates and maintaining the quality of the Company's assets.
The following table summarizes the amount of interest-earning assets and
interest-bearing liabilities outstanding as of March 31, 2007, 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
page -15-
anticipated to be repaid. The passbook accounts, negotiable order of withdrawal
("NOW") accounts, interest bearing accounts, and money market deposit accounts,
are included in the "Over 5 Years" categories based on management's beliefs that
these funds are core deposits having significantly longer effective maturities
based on the Company's retention of such deposits in changing interest rate
environments.
Generally, during a period of rising interest rates, a positive gap would result
in an increase in net interest income while a negative gap would adversely
affect net interest income. Conversely, during a period of falling interest
rates, a positive gap would result in a decrease in net interest income while a
negative gap would positively affect net interest income. However, the following
table does not necessarily indicate the impact of general interest rate
movements on the Company's' net interest income because the repricing of certain
categories of assets and liabilities is discretionary and is subject to
competitive and other pressures. As a result, certain assets and liabilities
indicated as repricing within a stated period may in fact reprice at different
rate levels.
1 Year 1 to 3 3 to 5 Over 5
or less Years Years Years Total
--------- --------- --------- --------- ---------
Interest-earning assets:
Mortgage loans $ 34,159 $ 54,663 $ 42,658 $ 161,482 $ 292,962
Commercial loans 5,873 766 328 2,533 9,500
Mortgage-backed securities 68,086 66,855 32,760 31,475 199,176
Consumer and other loans 48,445 27,056 12,825 9,140 97,466
Investment securities and other investments 42,549 22,265 15,470 67,914 148,198
---------------------- --------- --------- ---------
Total interest-earning assets 199,112 171,605 104,041 272,544 747,302
-------------------------------------------------- ---------
Interest-bearing liabilities:
Passbook and Club accounts -- -- -- 2,875 2,875
NOW accounts -- -- -- 44,450 44,450
Money Market Deposit accounts 16,663 -- -- 35,144 51,807
Choice Savings 1,499 -- -- 4,499 5,998
Certificate accounts 199,758 112,099 6,466 -- 318,323
Borrowed money 75,146 47,494 44,131 107,383 274,154
--------- --------- --------- --------- ---------
Total interest-bearing liabilities 293,066 159,593 50,597 194,351 697,607
--------- --------- --------- --------- ---------
Repricing GAP during the period $ (93,954) $ 12,012 $ 53,444 $ 78,193 $ 49,695
========== ========= ========= ========= =========
Cumulative GAP $ (93,954) $ (81,942) $ (28,498) $ 49,695
========== ========== ========== =========
Ratio of GAP during the period to total assets -12.30% 1.57% 7.00% 10.24%
========== ========== ========== ==========
Ratio of cumulative GAP to total assets -12.30% -10.73% -3.73% 6.51%
========== ========== ========== ==========
Item 4. Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer
and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this report. Based
on such evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
regulations and are operating in an effective manner.
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred
during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
page -16-
Part II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 1A. Risk Factors
There are no material changes to the risk factors set forth in
Part 1, Item 1A, "Risk Factors" of the Company's Form 10-K for
the year ended September 30, 2006. Please refer to that
section for disclosures regarding the risk and uncertainties
related to the Company's business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents the repurchasing activity of the stock repurchase
program during the quarter ended March 31, 2007:
Total Number
of Shares
Purchased as
Part of Maximum Number of
Total Publicly Shares that May
Number of Average Announced Yet Be Purchased
Shares Price Paid Plans or Under the Plans
Period Purchased per Share Programs or Programs (a)
January 1 - 31, 2007 39,787
Febuary1 - 28, 2007 39,787
March 1 - 31, 2007 39,787
--------- ---------- ------------ -----------------
Total 39,787
=================
Notes to this table:
(a) On June 18, 2003, the Company announced its current program to repurchase
up to 5.0% of the outstanding shares of Common Stock of the Company, or
191,667 shares. The program does not have an expiration date and all
shares have been purchased in the open market.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other information.
Not applicable.
Item 6. Exhibits
--------
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.0 Section 1350 Certification of Chief Executive
Officer and Chief Financial Officer
page -17-
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
Date: May 14, 2007 By: /s/ Ronald B. Geib
-------------------------------------
Ronald B. Geib
Chief Executive Officer
Date: May 14, 2007 By: /s/ Brendan J. McGill
-------------------------------------
Brendan J. McGill
Senior Vice President
Treasurer and Chief Financial Officer