UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended: September 30, 2007
or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______ to ______
Commission File Number: 0-29709
HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
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(Exact name of Registrant as specified in its charter)
Pennsylvania 23-3028464
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
271 Main Street, Harleysville, Pennsylvania 19438
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (215) 256-8828
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $.01 par value per share The Nasdaq Stock Market, LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
YES [_] NO [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
YES [_] NO [X]
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 and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
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 Act). YES [_] NO [X]
The aggregate market value of the 3,569,682 shares of the Registrant's Common
Stock held by non-affiliates (3,869,816 shares outstanding less 300,134 shares
held by affiliates), based upon the closing price of $16.75 for the Common Stock
on March 31, 2007, as reported by the Nasdaq Stock Market, was approximately
$59.8 million. Shares of Common Stock held by each executive officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded since such persons may be deemed affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
Number of shares of Common Stock outstanding as of December 12, 2007: 3,727,477
DOCUMENTS INCORPORATED BY REFERENCE
Set forth below are the documents incorporated by reference and the part of the
Form 10-K into which the document is incorporated:
Portions of the definitive Proxy Statement for the 2008 Annual Meeting of
Stockholders are incorporated by reference into Part III, Items 10-14 of this
Form 10-K.
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HARLEYSVILLE SAVINGS FINANICAL CORPORATION
2007 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
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PART I
Item 1. Business......................................................... 1
Item 1A. Risk Factors..................................................... 23
Item 1B. Unresolved Staff Comments........................................ 25
Item 2. Properties....................................................... 25
Item 3. Legal Proceedings................................................ 26
Item 4. Submission of Matters to a Vote of Security Holders.............. 26
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities............. 26
Item 6. Selected Financial Data.......................................... 28
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 29
Item 7A. Quantitative and Qualitative Disclosures about Market Risk....... 37
Item 8. Financial Statements and Supplementary Data...................... 40
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................... 69
Item 9A. Controls and Procedures.......................................... 69
Item 9B. Other Information................................................ 69
PART III
Item 10. Directors, Executive Officers and Corporate Governance........... 70
Item 11. Executive Compensation........................................... 70
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.............................. 70
Item 13. Certain Relationships and Related Transactions, and Director
Independence.................................................. 71
Item 14. Principal Accounting Fees and Services........................... 71
PART IV
Item 15. Exhibits and Financial Statement Schedules....................... 71
SIGNATURES................................................................. 73
i
Forward-Looking Statements
This Annual Report on Form 10-K contains certain forward looking
statements (as defined in the Securities Exchange Act of 1934 and the
regulations hereunder). Forward looking statements are not historical facts but
instead represent only the beliefs, expectations or opinions of Harleysville
Savings Financial Corporation and its management regarding future events, many
of which, by their nature, are inherently uncertain. Forward looking statements
may be identified by the use of such words as: "believe", "expect",
"anticipate", "intend", "plan", "estimate", or words of similar meaning, or
future or conditional terms such as "will", "would", "should", "could", "may",
"likely", "probably", or "possibly." Forward looking statements include, but are
not limited to, financial projections and estimates and their underlying
assumptions; statements regarding plans, objectives and expectations with
respect to future operations, products and services; and statements regarding
future performance. Such statements are subject to certain risks, uncertainties
and assumption, many of which are difficult to predict and generally are beyond
the control of Harleysville Savings Financial Corporation and its management,
that could cause actual results to differ materially from those expressed in, or
implied or projected by, forward looking statements. The following factors,
among others, could cause actual results to differ materially from the
anticipated results or other expectations expressed in the forward looking
statements: (1) economic and competitive conditions which could affect the
volume of loan originations, deposit flows and real estate values; (2) the
levels of non-interest income and expense and the amount of loan losses; (3)
competitive pressure among depository institutions increasing significantly; (4)
changes in the interest rate environment causing reduced interest margins; (5)
general economic conditions, either nationally or in the markets in which
Harleysville Savings Financial Corporation is or will be doing business, being
less favorable than expected;(6) political and social unrest, including acts of
war or terrorism; or (7) legislation or changes in regulatory requirements
adversely affecting the business in which Harleysville Savings Financial
Corporation will be engaged. Harleysville Savings Financial Corporation
undertakes no obligation to update these forward looking statements to reflect
events or circumstances that occur after the date on which such statements were
made.
As used in this report, unless the context otherwise requires, the
terms "we," "us," or the "Company" refer to Harleysville Savings Financial
Corporation, a Pennsylvania corporation, and the term the "Bank" refers to
Harleysville Savings Bank, a Pennsylvania chartered savings bank and wholly
owned subsidiary of the Company. In addition, unless the context otherwise
requires, references to the operations of the Company include the operations of
the Bank.
PART I
Item 1. Business.
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General
Harleysville Savings Financial Corporation is a Pennsylvania
corporation headquartered in Harleysville, Pennsylvania. The Company became the
bank holding company for Harleysville Savings Bank in connection with the
holding company reorganization of the Bank in February 2000 (the
"Reorganization"). In August 1987, the Bank's predecessor, Harleysville Savings
Association, converted to the stock form of organization. The Bank, whose
predecessor was originally incorporated in 1915, converted from a Pennsylvania
chartered, permanent reserve fund savings association to a Pennsylvania
chartered stock savings bank in June 1991. The Bank operates from six
full-service offices located in Montgomery County, Pennsylvania. The Bank's
primary market area includes Montgomery County, which has the third largest
population and the second highest per capita income in the Commonwealth of
Pennsylvania, and, to a lesser extent, Bucks County. As of September 30, 2007,
the Company had $773.5 million of total assets, $424.0
1
million of deposits and $47.0 million of stockholders' equity. The Company's
stockholders' equity constituted 6.08% of total assets as of September 30, 2007.
The Bank'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
Bank's primary market area. The Bank also originates a variety of consumer
loans, predominately home equity loans and lines of credit also secured by
residential properties in the Bank's primary lending area. The Bank serves its
customers through its full-service branch network as well as through remote ATM
locations, the internet and telephone banking.
Deposits with the Bank are insured to the maximum extent provided by
law through the Deposit Insurance Fund administered by the Federal Deposit
Insurance Corporation ("FDIC"). The Bank is subject to examination and
comprehensive regulation by the FDIC and the Pennsylvania Department of Banking
("Department"). It is also a member of the Federal Home Loan Bank of Pittsburgh
("FHLB of Pittsburgh" or "FHLB"), which is one of the 12 regional banks
comprising the Federal Home Loan Bank System ("FHLB System"). The Bank is also
subject to regulations of the Board of Governors of the Federal Reserve System
("Federal Reserve Board") governing reserves required to be maintained against
deposits and certain other matters.
The Company's principal executive offices are located at 271 Main
Street, Harleysville, Pennsylvania 19438 and its telephone number is (800)
243-8700.
Competition
The Company faces significant competition in attracting deposits. Its
most direct competition for deposits has historically come from commercial banks
and other savings institutions located in its market area. The Company faces
additional significant competition for investors' funds from other financial
intermediaries. The Company competes for deposits principally by offering
depositors a variety of deposit programs, convenient branch locations, hours and
other services. The Company does not rely upon any individual group or entity
for a material portion of its deposits.
The Company's competition for real estate loans comes principally from
mortgage banking companies, other savings institutions, commercial banks and
credit unions. The Bank competes for loan originations primarily through the
interest rates and loan fees it charges, the efficiency and quality of services
it provides borrowers, referrals from real estate brokers and builders, and the
variety of its products. Factors which affect competition include the general
and local economic conditions, current interest rate levels and volatility in
the mortgage markets.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") eliminated many of the distinctions between commercial banks and
savings institutions and holding companies and allowed bank holding companies to
acquire savings institutions. FIRREA has generally resulted in an increase in
the competition encountered by savings institutions and has resulted in a
decrease in both the number of savings institutions and the aggregate size of
the savings industry.
Lending Activities
Loan Portfolio Composition. The Company's loan portfolio is
predominantly comprised of loans secured by first mortgages on single-family
residential properties. As of September 30, 2007, first mortgage loans on
residential properties, including loans on single-family and multi-family
residential properties and construction loans on such properties, amounted to
$311.0 million or 50.3% of the Company's total loan and
2
mortgage-backed securities portfolio. Loans on the Company's residential
properties are primarily long-term and are conventional (i.e., not insured or
guaranteed by a federal agency). At September 30, 2007, mortgage-backed
securities totaled $193.7 million and comprised 31.3% of the portfolio.
As of September 30, 2007, loans secured by commercial real estate
comprised $15.3 million or 2.5% of the total loan and mortgage-backed securities
portfolio. Consumer loans, including installment home equity loans, home equity
lines of credit, automobile loans, loans on savings accounts and education
loans, constituted $97.5 million or 15.1% of the total loan and mortgage-backed
securities portfolio as of September 30, 2007.
As of September 30, 2007, the Company had $193.7 million, or 31.3%, of
the total portfolio invested in Federal Home Loan Mortgage Corporation
("FHLMC"), Government National Mortgage Association ("GNMA") or Federal National
Mortgage Association ("FNMA") backed securities. FHLMC securities are guaranteed
by the FHLMC, GNMA securities by the Federal Housing Administration and FNMA
securities by the FNMA, which are an instrumentality of the United States
government, and, pursuant to federal regulations, are deemed to be part of the
Company's loan portfolio.
The following table sets forth information concerning the Company's
loan and mortgage-backed securities portfolio by type of loan at the dates
indicated.
As of September 30,
-------------------------------------------------------------------------------------------------
2007 2006 2005 2004 2003
------------------ ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in Thousands)
Residential:
Single-family $302,271 49.6% $283,595 45.4% $268,546 41.8% $256,523 41.7% $235,248 43.6%
Multi-family 2,589 0.4 2,933 0.5 2,893 0.5 914 0.2 1,515 0.3
Construction 6,093 1.0 6,987 1.1 7,640 1.2 7,971 1.3 10,028 1.9
Lot loans 483 0.1 626 0.1 801 0.1 576 0.1 923 0.2
Mortgage-backed securities 193,660 31.3 220,314 35.9 265,009 41.5 265,087 43.2 230,247 42.6
Commercial 15,314 2.5 920 1.0 702 0.3 641 0.4 515 0.2
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans
and mortgage-backed
securities 520,410 84.9% 515,375 84.0% 545,591 85.4% 531,712 86.9% 478,476 88.8%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer loans:
Education loans -- -- -- -- -- -- -- -- 1 --
Installment equity loans 74,218 11.4% 70,515 11.5% 59,724 9.4% 46,257 7.6% 29,726 5.5%
Line of credit loans 21,385 3.6 25,500 4.3 31,580 5.0 32,329 5.3 29,420 5.5
Savings account loans 977 0.2 1,003 0.2 921 0.1 811 0.1 733 0.1
Automobile and other loans 903 0.1 812 0.1 772 0.1 732 0.1 578 0.1
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans 97,483 15.1% 97,830 16.0% 92,997 14.6% 80,129 13.1% 60,458 11.2%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable
and mortgage-backed
securities 617,893 100.0% 613,205 100.0% 638,588 100.0% 611,841 100.0% 538,934 100.0%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Less:
Loans in process (2,795) (4,941) (4,934) (5,238) (7,829)
Deferred loan fees (453) (544) (671) (955) (1,520)
Allowance for loan losses (1,932) (1,956) (1,968) (1,977) (1,991)
-------- -------- -------- -------- --------
Total loans receivable
and mortgage-backed
securities, net $612,713 $605,764 $631,015 $603,671 $527,594
======== ======== ======== ======== ========
Contractual Maturities. The following table sets forth scheduled
contractual maturities of the loan and mortgage-backed securities portfolio of
the Company as of September 30, 2007 by categories of loans and securities. The
principal balance of the loan is set forth in the period in which it is
scheduled to mature. This table does not reflect loans in process or unamortized
premiums, discounts and fees.
3
Principal Repayments Contractually Due in Year(s) Ended September 30,
Principal Balance ---------------------------------------------------------------------------
at September 30, 2010- 2013- 2017- 2022-and
2007 2008 2009 2012 2016 2021 Thereafter
---------- ---------- ---------- ---------- ---------- ---------- ----------
(In Thousands)
Real estate loans:
Residential
Single-family $ 302,271 $ 4,594 $ 4,900 $ 16,539 $ 37,671 $ 53,904 $ 188,663
Multi-family 2,589 39 41 140 318 456 1,595
Construction 6,093 91 97 329 749 1,072 3,753
Lot loans 483 26 28 98 219 112 --
Mortgage-backed Securities 193,660 2,905 3,292 10,845 24,401 34,278 117,939
Commercial 15,314 551 597 2,098 4,855 7,213 --
Consumer and other loans 97,483 11,498 12,340 42,792 21,034 5,819 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total(1) $ 617,893 $ 19,705 $ 21,297 $ 72,840 $ 89,247 $ 102,854 $ 311,950
========== ========== ========== ========== ========== ========== ==========
-------------
(1) With respect to the $598.2 million of loans with principal maturities
contractually due after September 30, 2008, $584.2 million have fixed
rates of interest and $14.0 million have adjustable or floating rates
of interest.
Contractual principal maturities of loans do not necessarily reflect
the actual term of the Company's loan portfolio. The average life of mortgage
loans is substantially less than their contractual terms because of loan
prepayments and because of enforcement of due-on-sale clauses, which give the
Company the right to declare a loan immediately due and payable in the event,
among other things, that the borrower sells the real property subject to the
mortgage and the loan is not repaid. The average life of mortgage loans tends to
increase when current mortgage loan rates substantially exceed rates on existing
mortgage loans and, conversely, decrease when rates on existing mortgage loans
substantially exceed current mortgage loan rates.
Interest rates charged by the Company on loans are affected principally
by the demand for such loans and the supply of funds available for lending
purposes. These factors are, in turn, affected by general economic conditions,
monetary policies of the federal government, including the Federal Reserve
Board, legislative tax policies and government budgetary matters. The interest
rates charged by the Company are competitive with those of other local financial
institutions.
Origination, Purchase and Sale of Loans. Although the Company has
general authority to originate, purchase and sell loans secured by real estate
located throughout the United States, the Company's lending activities are
focused in its assessment area of Montgomery County, Pennsylvania and
surrounding suburban counties.
The Company accepts loan applications through its branch network, and
also accepts mortgage applications from mortgage brokers who are approved by the
Board of Directors to do business with the Company. The Company generally does
not engage in the purchase of whole loans. The Company did engage in the sale
and the acquisition of participations of Commercial Loans on a limited basis
during fiscal year 2007.
The Company sold $921,000 of loans during fiscal 2005, resulting in a
gain of approximately $17,000. During the years ended September 30, 2007 and
2006, the Company did not sell any loans.
The Company's total loan originations increased by $14.6 million or
13.6% in fiscal 2007 and decreased by $6.1 million or 5.4% in fiscal 2006. Of
the $121.9 million and $107.3 million of total loans originated in fiscal 2007
and 2006, respectively, $5.7 million and $7.4 million, respectively, were loans
originated to fund multi-family and construction properties, $58.6 million and
$54.2 million, respectively, were loans to acquire residential property. During
this period, the Company's originations of consumer loans amounted to $57.7
million and $45.7 million or 47.3% and 42.6% of total loan originations during
fiscal 2007
4
and 2006, respectively. Management intends to continue to emphasize origination
of consumer loans which may have adjustable rates, and generally have shorter
terms than residential real estate loans.
The following table shows total loans originated, sold and repaid
during the periods indicated.
Year Ended September 30,
----------------------------------
2007 2006 2005
--------- --------- ---------
(In Thousands)
Real estate loan originations:
Residential:
Single-family $ 58,562 $ 54,249 $ 60,608
Multi-family -- 493 1,300
Construction 5,719 6,886 7,433
Lot loans -- -- --
--------- --------- ---------
Total real estate loan originations 64,281 61,628 69,341
Consumer loan originations(1) 57,654 45,688 44,057
--------- --------- ---------
Total loan originations 121,935 107,316 113,398
Purchases of mortgage-backed securities 20,939 2,001 62,027
--------- --------- ---------
Total loan originations, and purchases 142,874 109,317 175,425
Principal loan and mortgage-backed securities repayments 138,186 134,700 147,757
Sales of loans and mortgage-backed securities -- -- 921
--------- --------- ---------
Total principal repayments and sales 138,186 134,700 148,678
--------- --------- ---------
Net (decrease) increase in loans $ 4,688 $ (25,383) $ 26,747
========= ========= =========
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(1) Includes installment home equity loans, home equity lines of credit,
vehicle loans, secured and unsecured personal loans and lines of
credit.
Loan Underwriting Policies. Each loan application received by the
Company is underwritten to the standards of the Company's written underwriting
policies as adopted by the Company's Board of Directors. The Company's Board of
Directors has granted loan approval authority to several officers and employees
of the Company, provided that the loan meets the guidelines set out in its
written underwriting policies. Individual approval authority of $500,000 has
been granted to the Company's Chief Executive Officer, the Company's Chief
Financial Officer, and the Company's Chief Lending Officer. Joint approval
authority of $1.0 million has been granted to a combination of at least two of
the above named individuals. Individual lending authority of $250,000 has been
granted to the Bank's Assistant Vice President/Loan Administration Manager, the
Assistant Vice President/Loan Customer Service Manager and to the Bank's
Consumer Loan and Residential Mortgage Underwriter, employed by the Company.
Additional consumer loan lending authority of $50,000 has been granted to
several delegated underwriters, employed by the Bank. Loans with policy
exceptions require approval by the next highest approval authority. Loans over
$1.0 million must be approved by the Company's Senior Loan Committee or the
Board of Directors.
In the exercise of any loan approval authority, the officers of the
Company will take into account the risk associated with the extension of credit
to a single borrower, borrowing entity, or affiliation. The Company has an
aggregate loans to one borrower limit of 15% of the Company's unimpaired capital
and unimpaired surplus in accordance with federal regulations. At September 30,
2007, the largest aggregate amount of loans outstanding to any borrower,
including related entities, was $2 million, which did not exceed the Company's
loan to one borrower limitation.
Single Family Residential Real Estate Lending. The Company is permitted
to lend up to 100% of the appraised value of the real property securing a loan.
The Company will generally lend up to 95% of the lesser of the appraised value
or the sale price for the purchase of single-family, owner-occupied dwellings
5
which conform to the secondary market underwriting standards. Refinancings are
limited to 90% or less. Loans over $417,000 and other non-conforming loans,
secured by 1-4 residential, owner-occupied dwellings, are limited to 90% of the
lesser of the purchase price or appraised value. The purchase of non-owner
occupied, 1-4 unit dwellings may be financed to 80% of the lower of the
appraisal or sale price; a refinance is limited to 70% of the appraised value if
the borrower's FICO score is less than 720 and the transaction's purpose is
cash-out.
All appraisals and other property valuations are performed by
independent fee appraisers approved by the Company's Senior Loan Committee. On
all amortizing real estate loans, the Company requires borrowers to obtain title
insurance, insuring the Company has a valid first lien on the mortgaged real
estate. Borrowers must also obtain and maintain a hazard insurance policy prior
to closing and, when the real estate is located in a flood hazard area
designated by the Federal Emergency Management Agency, a flood insurance policy
is required. Generally, borrowers advance funds on a monthly basis together with
payment of principal and interest into a mortgage escrow account from which the
Company makes disbursements for items such as real estate taxes and insurance
premiums when appropriate as they fall due.
The Company presently originates fixed-rate loans on single-family
residential properties pursuant to underwriting standards consistent with
secondary market guidelines, and which may or may not be sold into the secondary
mortgage market as conditions warrant. Adjustable rate mortgages ("ARMs"), as
well as non-conforming and jumbo fixed-rate loans in amounts up to $1.0 million,
are held in the portfolio. It is the Company's policy to originate both
fixed-rate loans and ARMs for terms up to 30 years. As of September 30, 2007,
$308.4 million or 49.9% and $2.6 million or 0.4% of the Company's total loan and
mortgage-backed securities portfolio consisted of single-family (including
construction loans) and multi-family residential loans, respectively. As of
September 30, 2007, approximately $471.4 million or 90.6% of the Company's total
mortgage loans and mortgage-backed securities portfolio consisted of fixed-rate,
single-family residential mortgage loans. As of such date, $49.0 million or 9.4%
of the total mortgage loan portfolio consisted of adjustable-rate single-family
residential mortgage loans and mortgage-backed securities. Most of the Company's
residential mortgage loans include "due on sale" clauses.
During the years ended September 30, 2007 and 2006, the Company
originated $4.6 million and $9.1 million of ARM mortgages, respectively. ARMs
represented 8.6% and 20.0% of the Company's total mortgage loan portfolio
originations in fiscal 2007 and 2006, respectively. The ARM mortgages offered by
the Company are originated with initial adjustment periods varying from one to
10 years, and provide for initial rates of interest below the rates which would
prevail were the index used for repricing applied initially. The Company expects
to emphasize the origination of ARMs as market conditions permit, in order to
reduce the impact of rising interest rates in the market place. Such loans,
however, may not adjust as rapidly as changes in the Company's cost of funds.
Multi-family Residential Real Estate Lending. Harleysville Savings Bank
originates mortgage loans secured by multifamily dwelling unit. At September 30,
2007, $2.6 million, or 0.4% of our total loan and mortgage-backed securities
portfolio consisted of loans secured by multifamily residential real estate. The
majority of our multifamily residential real estate loans are secured by
apartment buildings located in the Bank's local market area. The interest rates
for our multifamily residential real estate loans generally adjust at five- to
ten-year intervals, with the rate to be negotiated at the end of such term or to
automatically convert to a floating interest rate. These loans generally have a
five-year term with an amortization period of no more than twenty years. At
September 30, 2007, the largest such loan had a balance of $537,000. At that
date, we had no multifamily residential real estate loans that were delinquent
in excess of 30 days.
6
Construction Loans. The Company offers fixed-rate and adjustable-rate
construction loans on residential properties. Residential construction loans are
originated for individuals who are building their primary residence as well as
to selected local builders for construction of single-family dwellings. As of
September 30, 2007, $6.1 million or 1.0% of the total loan and mortgage-backed
securities portfolio consisted of construction loans.
Construction loans to homeowners are usually made in connection with
the permanent financing on the property. The permanent loans have amortizing
terms up to 30 years, following the initial construction phase during which time
the borrower pays interest on the funds advanced. These loans are reclassified
as permanent mortgage loans when the residences securing the loans are
completed. The Company will make construction/permanent loans up to a maximum of
90% of the fair market value of the completed project. The rate on the loan
during construction is the same rate as the Company will charge on the permanent
loan on the completed project. Advances are made on a percentage of completion
basis with the Company's receipt of a satisfactory inspection report of the
project.
Historically, the Company has been active in on-your-lot home
construction lending and intends to continue to emphasize such lending. Although
construction lending is generally considered to involve a higher degree of risk
of loss than long-term financing on improved, occupied real estate, the Company
historically has not experienced any significant problems.
The Company also offers mortgage loans on undeveloped single lots held
for residential construction. These loans are generally fixed-rate loans with
terms not exceeding 15 years; they are not a significant part of the Company's
lending activities.
Commercial Real Estate Loans. Harleysville Savings Bank originates
mortgage loans for the acquisition and refinancing of commercial real estate
properties. At September 30, 2007, $15.3 million, or 2.5% of the Bank's total
loan and mortgage-backed securities portfolio consisted of loans secured by
commercial real estate properties, owner occupied commercial real estate loans
and non-owner occupied commercial real estate loans. The majority of our
commercial real estate loans are secured by office buildings, manufacturing
facilities, distribution/warehouse facilities, and retail centers, which are
generally located in our local market area. The interest rates for our
commercial real estate loans generally adjust at one- to five-year intervals,
and are typically renegotiated at the end of such period or automatically
converted to a floating interest rate. The loans generally have a five-year term
with an amortization period of no greater than twenty five years. At September
30, 2007, the largest such loan had a balance of $1.8 million. At that date we
had no commercial real estate loans that were delinquent in excess of 30 days.
Harleysville Savings Bank generally requires appraisals of the
properties securing commercial real estate loans. Appraisals are performed by an
independent appraiser designated by Harleysville Savings Bank and all appraisals
are reviewed by management. Harleysville Savings Bank considers the quality and
location of the real estate, the credit of the borrower, the cash flow of the
project and the quality of management involved with the property.
Loan-to-value ratios on our commercial real estate loans are generally
limited to 80% of the appraised value of the secured property. As part of the
criteria for underwriting commercial real estate loans, we generally impose a
debt service coverage ratio (the ratio of net operating income before payment of
debt service compared to debt service) of not less than 1.2-to-1. It is also our
general practice to obtain personal guarantees from the principals of our
corporate borrowers on commercial real estate loans.
7
Loans secured by commercial real estate typically have higher balances
and are more difficult to evaluate and monitor and, therefore, involve a greater
degree of credit risk than other types of loans. If the estimate of value proves
to be inaccurate, the property may not provide us with full repayment in the
event of default and foreclosure. Because payments on these loans are often
dependent on the successful development, operation, and management of the
properties, repayment of these loans may be affected by adverse conditions in
the real estate market or the economy. Harleysville Savings Bank seeks to
minimize these risks by limiting the maximum loan-to-value ratio and strictly
scrutinizing the financial condition of the borrower, the quality of the
collateral and the management of the property securing the loan. Harleysville
Savings Bank also generally obtains loan guarantees from financially capable
parties based on a review of personal financial statements.
Commercial lending generally involves greater credit risk than
residential mortgage or consumer lending, and involves risks that are different
from those associated with commercial real estate lending. Although commercial
loans may be collateralized by equipment or other business assets, the
liquidation of collateral in the event of a borrower default may represent an
insufficient source of repayment because equipment and other business assets
may, among other things, be obsolete or of limited use. Accordingly, the
repayment of a commercial loan depends primarily on the creditworthiness and
projected cash flow of the borrower (and any guarantors), while liquidation of
collateral is considered a secondary source of repayment.
Consumer and Other Loans. The Company actively originates consumer
loans to provide a wider range of financial services to its customers and to
improve the interest rate sensitivity of its interest-earning assets.
Originations of consumer loans as a percent of total loan originations amounted
to 47.3% and 42.6% during fiscal 2007 and 2006, respectively. The shorter-term
and normally higher interest rates on such loans help the Company to maintain a
profitable spread between its average loan yield and its cost of funds. The
Company's consumer loan department offers a variety of loans, including home
equity installment loans and lines of credit, vehicle loans, personal loans and
lines of credit. Loans secured by deposit accounts at the Company are also made
to depositors in an amount up to 90% of their account balances with terms of up
to 15 years.
Home equity loans and lines of credit continue to be a popular product
and represented $95.6 million or 15.6% of the loan and mortgage-backed
securities portfolio at September 30, 2007. After taking into account first
mortgage balances, the Company will lend up to 80% of the value of
owner-occupied property on fixed rate terms up to 15 years. This amount may be
raised to 100% when considering other factors, such as excellent credit history
and income stability. At September 30, 2007, the Company had outstanding 3,109
home equity loans of which 1,922 were installment equity loans and 1,187 were
line of credit loans. As of such date, the Company had an outstanding balance on
line of credit loans of approximately $21.4 million and there was approximately
$41.1 million of unused credit available on such loans.
Consumer loans generally involve more risk of collectibility than
mortgage loans because of the type and nature of the collateral and, in certain
cases, the absence of collateral. As continued payments are dependent on the
borrower's continuing financial stability, these loans may be more likely to be
adversely affected by job loss, divorce, personal bankruptcy or by adverse
economic conditions.
Loan Fee and Servicing Income. The Company receives fees both for the
origination of loans and for making commitments to originate and purchase
residential and commercial mortgage loans. The Company also receives servicing
fees with respect to residential mortgage loans it has sold. It also receives
loan fees related to existing loans, including late charges, and credit life
insurance commissions. Loan origination and commitment fees and discounts are a
volatile source of income, varying with the volume and type of loans and
commitments made and purchased and with competitive and economic conditions.
8
Loans fees generated on origination of loans under accounting
principles generally accepted in the United States of America are deferred to
the extent that they exceed the costs of originating such loans. Deferred loan
fees and discounts on mortgage loans purchased are amortized to income as a
yield adjustment over the estimated remaining terms of such loans using the
interest method. The Company recorded servicing income of $8,000, $52,000 and
$138,000 in deferred loan fees in fiscal 2007, 2006 and 2005, respectively.
In its real estate lending, the Company charges loan fees which are
calculated as a percentage of the amount borrowed. The fees received in
connection with the origination of residential real estate loans and commercial
real estate loans generally do not exceed 3% of the principal amount. All
origination fees in excess of loan origination costs are deferred and amortized
into income over the estimated life of the related loans.
As of September 30, 2007, the Company was servicing $3.6 million of
loans for others, which related to loans sold by the Company to the FHLMC and
Federal Home Loan Bank of Pittsburgh in the amounts of $120,000 and $3.5
million, respectively. The Company receives a servicing fee of 0.25% on such
loans.
Non-performing Loans and Real Estate Owned. When a borrower fails to
make a required loan payment, the Company attempts to cure the default by
contacting the borrower; generally, after a payment is more than 15 days past
due, at which time a late charge is assessed. Defaults are cured promptly in
most cases. If the delinquency on a mortgage loan exceeds 60 days and is not
cured through the Company's normal collection procedures, or an acceptable
arrangement is not worked out with the borrower, the Company will institute
measures to remedy the default. This may include commencing a foreclosure action
or, in special circumstances, accepting from the borrower a voluntary deed of
the secured property in lieu of foreclosure with respect to mortgage loans and
equity loans, or title and possession of collateral in the case of other
consumer loans. Substantial delays may occur in instituting and completing
residential foreclosure proceedings due to the extensive procedures and time
periods required to be complied with under Pennsylvania law.
All interest accrued but not collected for loans that are placed
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. Interest income is recognized using the
interest method when the collection is reasonably assured. The Company had no
loans outstanding which were recorded as loans accounted for on a non-accrual
basis as of the end of fiscal 2007 and 2006.
If foreclosure is effected, the property is sold at a public auction in
which the Company may participate as a bidder. If the Company is the successful
bidder, the acquired real estate property is then included in the Company's real
estate owned ("REO") account until it is sold. When property is acquired, it is
recorded at the market value at the date of acquisition less estimated cost to
sell and any write-down resulting is charged to the allowance for loan losses.
Interest accrual, if any, ceases on the date of acquisition and all costs
incurred in maintaining the property from that date forward are expended. Costs
incurred for the improvement or development of such property are capitalized.
The Company is permitted under Department regulations to finance sales of real
estate owned by "loans to facilitate," which may involve more favorable interest
rates and terms than generally would be granted under the Company's underwriting
guidelines. The Company had no REO at the end of fiscal 2007 and 2006.
9
The following table sets forth information regarding non-accrual loans,
loans which are 90 days or more delinquent but on which the Company is accruing
interest, troubled debt restructuring, and other real estate owned held by the
Company at the dates indicated. The Company continues to accrue interest on
loans which are 90 days or more overdue where management believes that such
interest is collectible.
As of September 30,
------------------------
2007 2006 2005
------ ------ ------
(Dollars in Thousands)
Residential real estate loans:
Non-accrual loans $ -- $ -- $ --
Accruing loans 90 days overdue 28 18 260
Troubled debt restructurings -- -- --
------ ------ ------
Total 28 18 260
------ ------ ------
Consumer loans:
Non-accrual loans -- -- --
Accruing loans 90 days overdue -- -- --
Troubled debt restructurings -- -- --
------ ------ ------
Total -- -- --
------ ------ ------
Total non-performing loans:
Non-accrual loans -- -- --
Accruing loans 90 days overdue 28 18 260
Troubled debt restructurings -- -- --
------ ------ ------
Total $ 28 $ 18 $ 260
====== ====== ======
Total non-performing loans to total loans -- -- .07%
Total real estate owned, net of related reserves -- -- --
Total non-performing loans and other real n/m* n/m* .03%
estate owned to total assets
* Not material
Management establishes reserves for losses on delinquent loans when it
determines that losses are probable. The Company did not record a provision for
general loan losses in fiscal 2007, 2006 or 2005 due to the overall performance
of the loan portfolio and management's assessment of the overall adequacy of the
allowance for loan losses. Although management believes that it uses the best
information available to make determinations with respect to loan loss reserves,
future adjustments to reserves may be necessary if economic conditions differ
substantially from the assumptions used in making the initial determinations.
Residential mortgage lending generally entails a lower risk of default
than other types of lending. Consumer loans and commercial real estate loans
generally involve more risk of collectibility because of the type and nature of
the collateral and, in certain cases, the absence of collateral. It is the
Company's policy to establish specific reserves for losses on delinquent
consumer loans and commercial loans when it determines that losses are probable.
In addition, consumer loans are charged against reserves if they are more than
120 days delinquent unless a satisfactory repayment schedule is arranged.
Although management has currently established no specific reserves for losses,
no assurance can be given as to whether future provisions may be required. The
establishment of any such reserves could affect net income.
10
The following table summarizes activity in the Company's allowance for
loan losses during the periods indicated.
Year Ended September 30,
---------------------------------------------------------------------------
2007 2006 2005 2004 2003
----------- ----------- ----------- ----------- -----------
Allowances at beginning of year $ 1,955,805 $ 1,967,607 $ 1,976,849 $ 1,990,672 $ 2,034,832
Provision for loan losses charged to
operating expenses -- -- -- -- --
Recoveries 12,824 8,524 83,707 1,571 --
Loans charged off (36,084) (20,326) (92,949) (15,394) (44,160)
----------- ----------- ----------- ----------- -----------
Allowances at end of year $ 1,932,545 $ 1,955,805 $ 1,967,607 $ 1,976,849 $ 1,990,672
=========== =========== =========== =========== ===========
Ratio of net charge-offs to average loans
outstanding -- -- -- -- --
Ratio of allowances to period-end loans .46% .50% .54% .58% .66%
Investment Activities
The Company is required to maintain certain liquidity ratios and does
so by investing in securities that qualify as liquid assets under FDIC
regulations. Such securities include obligations issued or fully guaranteed by
the United States government, certain federal agency obligations, certain time
deposits and certificates of deposit as well as other specified investments. See
"Regulation - Federal Home Loan Bank System."
The Company's investment portfolio consists primarily of United States
Treasury securities and obligations of United States government agencies. The
other investments include interest-bearing deposits in other banks, tax-exempt
obligations, money market mutual funds, and stock of the FHLB of Pittsburgh. The
Company has primarily invested in instruments that reprice within five years;
the amount of such investments as of September 30, 2007 was $48.6 million.
The following table sets forth the Company's investment portfolio at
carrying value as of the dates indicated.
2007 2006 2005
---------- ---------- ----------
Interest-bearing deposits at
other depository institutions $ 6,670 $ 8,453 $ 6,742
Tax-exempt obligations 25,538 24,596 24,799
Money market mutual funds 576 7,110 1,976
Equities 1,334 997 859
U.S. Government and agency
obligations held to maturity 83,155 86,503 62,566
FHLB of Pittsburgh stock 14,140 15,499 16,036
---------- ---------- ----------
Total $ 131,413 $ 143,158 $ 112,978
========== ========== ==========
The Company's investment strategy is set and reviewed periodically by
the entire Board of Directors.
Sources of Funds
General. Deposits are the primary source of the Company's funds for use
in lending and for other general business purposes. In addition to deposits, the
Company obtains funds from loan payments and prepayments, FHLB advances and
other borrowings, and, to a lesser extent, sales of loans. Loan repayments are a
relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general market interest rates and economic
conditions.
11
Deposits. The Company has a number of different programs designed to
attract both short-term and long-term deposits from the general public by
providing an assortment of accounts and rates consistent with FDIC regulations.
These programs include passbook and club savings accounts, NOW and regular
checking accounts, money market deposit accounts, retirement accounts,
certificates of deposit ranging in terms from 90 days to 60 months and jumbo
certificates of deposit in denominations of $98,000 or more. The interest rates
on the Company's various accounts are determined weekly by the Interest Rate
Risk Management Officer based on reports prepared by members of senior
management. The Company attempts to control the flow of deposits by pricing its
accounts to remain competitive with other financial institutions in its market
area.
The Company's deposits are obtained primarily from residents of
Montgomery and Bucks Counties; the Company does not utilize brokered deposits.
The principal methods used by the Company to attract deposit accounts include
local advertising, offering a wide variety of services and accounts, competitive
interest rates and convenient office locations. The Company also is a member of
the "STAR" ATM network.
The following table shows the distribution of, and certain other
information relating to, the Company's deposits by type as of the dates
indicated.
As of September 30,
-----------------------------------------------------------------------------
2007 2006 2005
----------------------- ----------------------- -----------------------
Percent of Percent of Percent of
Amount Deposits Amount Deposits Amount Deposits
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Passbook and club accounts $ 2,864 0.7% $ 3,325 0.8% $ 3,807 0.9%
NOW accounts 13,711 3.2 15,720 3.7 18,283 4.4
Checking accounts 37,491 8.8 30,749 7.2 18,721 4.5
Money market demand accounts 50,966 12.0 58,174 13.6 75,874 18.1
Certificates of deposit:
6 month 2,697 0.6 5,019 1.2 8,126 1.9
9 month 55,684 13.1 25,508 5.9 10,630 2.5
12 month 6,269 1.5 22,747 5.3 10,110 2.4
15 month 10,989 2.6 45,565 10.6 17,063 4.1
17 month 56,257 13.3 1,215 0.3 1,485 0.3
18 month 4,336 1.0 6,443 1.5 11,125 2.7
20 month 971 0.2 7,810 1.8 9,685 2.3
24 month 2,574 0.6 4,796 1.1 7,740 1.8
27 month 728 0.2 4,112 1.0 4,966 1.2
36 month 5,099 1.2 24,892 5.8 29,302 7.0
48 month 60,381 14.2 71,565 16.7 82,402 19.7
60 month 15,464 3.6 32,321 7.5 38,431 9.2
Other 42,094 9.9 13,104 3.1 16,924 4.0
Retirement accounts:
Money market deposit accounts 860 0.2 815 0.2 707 0.2
Certificates of deposit 54,600 12.9 55,374 12.9 53,599 12.8
---------- ---------- ---------- ---------- ---------- ----------
Total deposits $ 424,035 100.0% $ 429,254 100.0% $ 418,980 100.0%
========== ========== ========== ========== ========== ==========
The large variety of deposit accounts offered by the Company has
increased the Company's ability to retain deposits and has allowed it to be
competitive in obtaining new funds, although the threat of disintermediation
(the flow of funds away from savings institutions into direct investment
vehicles such as government and corporate securities and non-deposit products)
still exists. The new types of accounts; however, have been more costly than
traditional accounts during periods of high interest rates. In addition, the
Company has become more vulnerable to short-term fluctuations in deposit flows
as customers have become more rate-conscious and willing to move funds into
higher yielding accounts. The ability of the
12
Company to attract and retain deposits and the Company's cost of funds have
been, and will continue to be, significantly affected by money market
conditions.
The following table presents certain information concerning the
Company's deposit accounts as of September 30, 2007 and the scheduled quarterly
maturities of its certificates of deposit.
Weighted
Percentage of Average
Amount Total Deposits Nominal Rate
------------ -------------- ------------
(Dollars in Thousands)
Passbook and club accounts $ 2,864 0.7% 0.98%
NOW accounts 13,711 3.2 0.25
Checking accounts 37,491 8.8 1.66
Money market deposits accounts(1) 51,826 12.2 1.80
------------ ------------ ------------
Total $ 105,892 25.0% 1.53%
============ ============ ============
Certificate accounts maturing by quarter:
December 31, 2007 $ 49,623 11.7% 4.59%
March 31, 2008 52,847 12.5 4.42
June 30, 2008 71,371 16.8 4.65
September 30, 2008 51,867 12.2 4.46
December 31, 2008 47,684 11.2 4.53
March 31, 2009 21,940 5.2 4.50
June 30, 2009 5,960 1.4 3.98
September 30, 2009 2,328 0.5 3.84
December 31, 2009 1,929 0.5 3.89
March 31, 2010 2,965 0.7 3.96
June 30, 2010 772 0.2 3.99
September 30, 2010 1,363 0.3 4.20
Thereafter 7,494 1.8 4.26
------------ ------------ ------------
Total certificate accounts(1) 318,143 75.0 4.50
------------ ------------ ------------
Total deposits $ 424,035 100.0% 3.76%
============ ============ ============
------------------
(1) Includes retirement accounts.
Management of the Company expects, based on historical experience and
its pricing policies, to retain a significant portion of the $225.7 million of
certificates of deposit which mature during the 12 months ending September 30,
2008.
The following table sets forth the net deposit flows of the Company
during the periods indicated.
Year Ended September 30,
--------------------------------------
2007 2006 2005
---------- ---------- ----------
(In Thousands)
Increase (decrease) before interest credited $ (19,514) $ (978) $ 5,112
Interest credited 14,295 11,252 8,637
---------- ---------- ----------
Net deposit (decrease) increase $ (5,219) $ 10,274 $ 13,749
========== ========== ==========
The following table presents by various interest rate categories the
amounts of certificate accounts as of the dates indicated and the amounts of
certificate accounts as of September 30, 2007 which mature during the periods
indicated.
13
Amounts at September 30, 2007 Maturing
As of ---------------------------------------------------------
September 30, One Year
2007 or Less Two Years Three Years Thereafter
------------ ------------ ------------ ------------ ------------
(In Thousands)
Certificate accounts:
0.01% to 2.00% $ 205 $ 85 $ 120 $ -- $ --
2.01% to 4.00% 68,140 44,025 19,688 4,231 196
4.01% to 6.00% 249,798 181,599 58,104 2,798 7,297
------------ ------------ ------------ ------------ ------------
Total certificate accounts(1) $ 318,143 $ 225,709 $ 77,912 $ 7,029 $ 7,493
============ ============ ============ ============ ============
--------------------
(1) Includes retirement accounts.
The following table sets forth the maturity of certificate deposits of
$100,000 or more as of September 30, 2007.
Amount
(In Thousands)
1 to 3 months $ 9,175
4 to 6 months 9,621
7 to 12 months 19,626
Thereafter 15,204
------------
Total $ 53,626
============
Borrowings. The Bank obtains advances from the FHLB of Pittsburgh upon
the security of its capital stock in the FHLB of Pittsburgh and a portion of its
first mortgages. See "Regulation - Regulation of the Bank - Federal Home Loan
Bank System." At September 30, 2007, the Bank had advances with maturities of
one year or less totaling $69.2 million at an interest rate of 5.07% and FHLB
advances with maturities of 13 months to 10 years totaling $189.4 million at
interest-rates ranging from 2.92% to 5.60%. Such advances are made pursuant to
several different credit programs, each of which has its own interest rate and
range of maturities. In addition, there are three long-term advances from other
financial institutions that are secured by investment and mortgage-backed
securities totaling $40.0 million at interest-rates ranging from 4.5% to 4.97%.
Depending on the program, limitations on the amount of advances are
based on either a fixed percentage of assets or the FHLB of Pittsburgh's
assessment of the Bank's creditworthiness. FHLB advances are generally available
to meet seasonal and other withdrawals of deposit accounts, to purchase
mortgage-backed securities, investment securities and to expand lending.
The following table sets forth certain information regarding the
borrowings of the Company as of the dates indicated.
September 30,
-----------------------------------------------------------------------------------------
2007 2006 2005
--------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Balance Rate Balance Rate Balance Rate
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
Advances $ 298,609 4.65% $ 294,611 4.67% $ 297,268 4.38%
14
The following table sets forth certain information concerning the
short-term borrowings of the Company for the periods indicated.
Year Ended September 30,
--------------------------------
2007 2006 2005
-------- -------- --------
(Dollars in Thousands)
Advances:
Average balance outstanding $ 48,172 $ 29,278 $ 29,355
Maximum amount outstanding at any
month-end during the period 67,400 59,400 36,100
Weighted average interest rate during the period 5.36% 4.89% 2.98%
Employees
The Company had 69 full-time employees and 48 part-time employees as of
September 30, 2007. None of these employees is represented by a collective
bargaining agent, and the Company believes that it enjoys good relations with
its personnel.
Regulation
The references to laws and regulations which are applicable to the
Company and the Bank set forth below and elsewhere herein are brief summaries
thereof which do not purport to be complete and are qualified in their entirety
by reference to such laws and regulations.
Regulation of the Company
General. The Company is a registered bank holding company pursuant to
the Bank Holding Company Act ("BHCA") and, as such, is subject to regulation and
supervision by the Federal Reserve Board and the Department. The Company is
required to file annually a report of its operations with, and will be subject
to examination by, the Federal Reserve Board and the Department.
BHCA Activities and Other Limitations. The BHCA prohibits a bank
holding company from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any bank, or increasing such ownership or
control of any bank, without prior approval of the Federal Reserve Board. The
BHCA also generally prohibits a bank holding company from acquiring any bank
located outside of the state in which the existing bank subsidiaries of the bank
holding company are located unless specifically authorized by applicable state
law. No approval under the BHCA is required; however, for a bank holding company
already lawfully owning or controlling 50% of the voting shares of a bank to
acquire additional shares of such bank.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. In making such determinations, the Federal Reserve Board is
required to weigh the expected benefit to the public, such as greater
convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices. The 1999 Act
permits a bank holding company to elect to be considered a financial holding
company ("FHC"). A bank holding company that
15
makes an FHC election is permitted to engage in activities that are financial in
nature or incidental to such financial activities. The 1999 Act lists certain
activities that are considered financial in nature and permits the Federal
Reserve Board to expand that list to include other activities that are
complementary to the activities on the preapproved list. The preapproved
activities include (1) securities underwriting, dealing and market making; (2)
insurance underwriting; (3) merchant banking; and (4) insurance company
portfolio investments. The Company has not made the FHC election.
The Federal Reserve Board has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA. These
activities include operating a mortgage company, finance company, credit card
company, factoring company, trust company or savings association; performing
certain data processing operations; providing limited securities brokerage
services; acting as an investment or financial advisor; acting as an insurance
agent for certain types of credit-related insurance; leasing personal property
on a full-payout, non-operating basis; providing tax planning and preparation
services; operating a collection agency; and providing certain courier services.
The Federal Reserve Board also has determined that certain other activities,
including real estate brokerage and syndication, land development, property
management and underwriting of life insurance not related to credit
transactions, are not closely related to banking and a proper incident thereto.
However, under the 1999 Act certain of these activities are permissible for a
bank holding company that becomes an FHC.
Limitations on Transactions with Affiliates. Transactions between
savings banks and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings bank is any company or entity
which controls, is controlled by or is under common control with the savings
bank. In a holding company context, the parent holding company of a savings bank
(such as the Company) and any companies which are controlled by such parent
holding company are affiliates of the savings bank. Generally, Section 23A (i)
limits the extent to which the savings bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
bank's capital stock and surplus, and contain an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such capital stock
and surplus. Section 23B applies to "covered transactions" as well as certain
other transactions and requires that all transactions be on terms substantially
the same, or at least favorable, to the bank or subsidiary as those provided to
a non-affiliate. The term "covered transaction" includes the making of loans to,
purchase of assets from, issuance of a guarantee to an affiliate and similar
transactions. Section 23B transactions also apply to the provision of services
and the sale of assets by a savings bank to an affiliate.
In addition, Sections 22(h) and (g) of the Federal Reserve Act places
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a savings bank, and certain affiliated
interests of either, may not exceed, together with all other outstanding loans
to such person and affiliated interests, the savings bank's loans to one
borrower limit (generally equal to 15% of the bank's unimpaired capital and
surplus). Section 22(h) also requires that loans to directors, executive
officers and principal stockholders be made on terms substantially the same as
offered in comparable transactions to other persons and also requires prior
board approval for certain loans. In addition, the aggregate amount of
extensions of credit by a savings bank to all insiders cannot exceed the bank's
unimpaired capital and surplus. Furthermore, Section 22(g) places additional
restrictions on loans to executive officers.
Capital Requirements. The Federal Reserve Board has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
to it under the BHCA. The Federal Reserve Board capital adequacy guidelines
generally require bank holding companies to maintain total capital equal to 8%
of total risk-adjusted assets, with at least one-half of that amount consisting
of Tier I or core capital and up to one-half of that amount consisting of Tier
II or supplementary capital. Tier I capital for bank holding companies generally
consists of
16
the sum of common stockholders' equity and perpetual preferred stock (subject in
the case of the latter to limitations on the kind and amount of such stocks
which may be included as Tier I capital), less goodwill and, with certain
exceptions, intangibles. Tier II capital generally consists of hybrid capital
instruments; perpetual preferred stock which is not eligible to be included as
Tier I capital; term subordinated debt and intermediate-term preferred stock;
and, subject to limitations, general allowances for loan losses. Assets are
adjusted under the risk-based guidelines to take into account different risk
characteristics, with the categories ranging from 0% (requiring no additional
capital) for assets such as cash to 100% for the bulk of assets which are
typically held by a bank holding company, including multi-family residential and
commercial real estate loans, commercial business loans and consumer loans.
Single-family residential first mortgage loans which are not past-due (90 days
or more) or non-performing and which have been made in accordance with prudent
underwriting standards are assigned a 50% level in the risk-weighing system, as
are certain privately-issued mortgage-backed securities representing indirect
ownership of such loans. Off-balance sheet items also are adjusted to take into
account certain risk characteristics.
In addition to the risk-based capital requirements, the Federal Reserve
Board requires bank holding companies to maintain a minimum leverage capital
ratio of Tier I capital to total assets of 3.0%. Total assets for this purpose
does not include goodwill and any other intangible assets and investments that
the Federal Reserve Board determines should be deducted from Tier I capital. The
Federal Reserve Board has announced that the 3.0% Tier I leverage capital ratio
requirement is the minimum for the top-rated bank holding companies without any
supervisory, financial or operational weaknesses or deficiencies or those which
are not experiencing or anticipating significant growth. Other bank holding
companies will be expected to maintain Tier I leverage capital ratios of at
least 4.0% to 5.0% or more, depending on their overall condition.
Financial Support of Affiliated Institutions. Under Federal Reserve
Board policy, the Company is expected to act as a source of financial strength
to the Bank and to commit resources to support the Bank in circumstances when it
might not do so absent such policy. The Congress attempted to clarify the
application of this "source-of-strength" doctrine by an amendment to Section 18
of the Federal Deposit Insurance Act ("FDIA") that was included in the
Gramm-Leach-Bliley Act of 1999. The amendment describes the circumstances under
which a Federal banking agency would be protected from a claim by an affiliate
or a controlling shareholder of an insured depository institution seeking the
return of assets of such an affiliate or controlling shareholder. Under the
amended provision, a claim would not be permitted if (1) the insured depository
institution was under a written Federal directive to raise capital, (2) the
institution was undercapitalized, and (3) the subject Federal banking agency
followed the procedures set forth in Section 5(g) of the BHCA.
Sarbanes-Oxley Act of 2002. On July 30, 2002, President George W. Bush
signed into law the Sarbanes-Oxley Act of 2002, which generally establishes a
comprehensive framework to modernize and reform the oversight of public company
auditing, improve the quality and transparency of financial reporting by those
companies and strengthen the independence of auditors. Among other things, the
new legislation (i) created a public company accounting oversight board which is
empowered to set auditing, quality control and ethics standards, to inspect
registered public accounting firms, to conduct investigations and to take
disciplinary actions, subject to SEC oversight and review; (ii) strengthened
auditor independence from corporate management by, among other things, limiting
the scope of consulting services that auditors can offer their public company
audit clients; (iii) heightened the responsibility of public company directors
and senior managers for the quality of the financial reporting and disclosure
made by their companies; (iv) adopted a number of provisions to deter wrongdoing
by corporate management; (v) imposed a number of new corporate disclosure
requirements; (vi) adopted provisions which generally seek to limit and expose
to public view possible conflicts of interest affecting securities analysts; and
(vii) imposed a range of new criminal penalties for fraud and other wrongful
acts, as well as extended the period during which certain types of lawsuits can
be brought against a company or its insiders.
17
Regulation of the Bank
General. The Bank is subject to extensive regulation and examination by
the Department and by the FDIC, which insures its deposits to the maximum extent
permitted by law. The federal and state laws and regulations which are
applicable to banks regulate, among other things, the scope of their business,
their investments, their reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral for
certain loans. There are periodic examinations by the Department and the FDIC to
test the Bank's compliance with various regulatory requirements. This regulation
and supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulation, whether by
the Department, the FDIC or the Congress could have a material adverse impact on
the Bank and their operations.
Pennsylvania Savings Bank Law. The Pennsylvania Banking Code of 1965,
as amended (the "Banking Code") contains detailed provisions governing the
organization, location of offices, rights and responsibilities of directors,
officers, employees and members, as well as corporate powers, savings and
investment operations and other aspects of the Bank and its affairs. The Banking
Code delegates extensive rulemaking power and administrative discretion to the
Department so that the supervision and regulation of state-chartered savings
banks may be flexible and readily responsive to changes in economic conditions
and in savings and lending practices.
One of the purposes of the Banking Code is to provide savings banks
with the opportunity to be competitive with each other and with other financial
institutions existing under other Pennsylvania laws and other state, federal and
foreign laws. A Pennsylvania savings bank may locate or change the location of
its principal place of business and establish an office anywhere in
Pennsylvania, with the prior approval of the Department.
The Department generally examines each savings bank not less frequently
than once every two years. Although the Department may accept the examinations
and reports of the FDIC in lieu of the Department's examination, the present
practice is for the Department to conduct individual examinations. The
Department may order any savings bank to discontinue any violation of law or
unsafe or unsound business practice and may direct any trustee, officer,
attorney or employee of a savings bank engaged in an objectionable activity,
after the Department has ordered the activity to be terminated, to show cause at
a hearing before the Department why such person should not be removed.
Interstate Acquisitions. The Interstate Banking Act allows federal
regulators to approve mergers between adequately capitalized banks from
different states regardless of whether the transaction is prohibited under any
state law, unless one of the banks' home states has enacted a law expressly
prohibiting out-of-state mergers before June 1997. This act also allows a state
to permit out-of-state banks to establish and operate new branches in this
state. The Commonwealth of Pennsylvania has "opted in" to this interstate merger
provision. Therefore, the prior requirement that interstate acquisitions would
only be permitted when another state had "reciprocal" legislation that allowed
acquisitions by Pennsylvania-based bank holding companies has been eliminated.
The new Pennsylvania legislation, however, retained the requirement that an
acquisition of a Pennsylvania institution by a Pennsylvania or a
non-Pennsylvania-based holding company must be approved by the Banking
Department.
FDIC Insurance Premiums. The deposits of the Bank are insured by the
Deposit Insurance Fund, which is administered by the FDIC. Under current FDIC
regulations, insured institutions are assigned to one
18
of three capital groups which are based solely on the level of an institution's
capital. Deposit Insurance Fund assessment rates are then tied to the level of
an institution's supervisory concern based on risk classifications derived from
the capital groups. Rates during the last six months of 2007 ranged from zero
for well capitalized, healthy institutions, such as the Bank, to 27 basis points
for undercapitalized institutions with substantial supervisory concerns.
In addition, all institutions with deposits insured by the FDIC are
required to pay assessments to fund interest payments on bonds issued by the
Financing Corporation, a mixed-ownership government corporation established to
recapitalize a predecessor to the Deposit Insurance Fund. The assessment rate
for the third quarter of 2007 was .00285% of insured deposits and is adjusted
quarterly. These assessments will continue until the Financing Corporation bonds
mature in 2019.
Under the FDIA, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged or is engaging in unsafe and
unsound practices, is in an unsafe or unsound condition to continue operations
or has violated any applicable law, regulation, rule, order or condition imposed
by the FDIC or written agreement entered into with the FDIC. The management of
the Bank does not know of any practice, condition or violation that might lead
to termination of deposit insurance. At September 30, 2007, the Bank's
regulatory capital exceeded all of its capital requirements.
Deposit Insurance Reform. On February 8, 2006, President George W. Bush
signed into law legislation that merged the Bank Insurance Fund and the Savings
Association Insurance Fund to form the Deposit Insurance Fund, eliminated any
disparities in bank and thrift risk-based premium assessments, reduced the
administrative burden of maintaining and operating two separate funds and
established certain new insurance coverage limits and a mechanism for possible
periodic increases. The legislation also gave the Federal Deposit Insurance
Corporation greater discretion to identify the relative risks all institutions
present to the Deposit Insurance Fund and set risk-based premiums.
Major provisions in the legislation include:
o merging the Savings Association Insurance Fund and Bank
Insurance Fund, which became effective March 31, 2006;
o maintaining basic deposit and municipal account insurance
coverage at $100,000 but providing for a new basic insurance
coverage for retirement accounts of $250,000. Insurance
coverage for basic deposit and retirement accounts could be
increased for inflation every five years in $10,000 increments
beginning in 2011;
o providing the Federal Deposit Insurance Corporation with the
ability to set the designated reserve ratio within a range of
between 1.15% and 1.50%, rather than maintaining 1.25% at all
times regardless of prevailing economic conditions;
o providing a one-time assessment credit of $4.7 billion to
banks and savings associations in existence on December 31,
1996, which may be used to offset future premiums with certain
limitations; and
o requiring the payment of dividends of 100% of the amount that
the insurance fund exceeds 1.5% of the estimated insured
deposits and the payment of 50% of the amount that the
insurance fund exceeds 1.35% of the estimated insured deposits
(when the reserve is greater than 1.35% but no more than
1.5%).
Capital Requirements. The FDIC has promulgated regulations and adopted
a statement of policy regarding the capital adequacy of state-chartered banks
which, like the Bank, are not members of the Federal Reserve System. The FDIC's
capital regulations establish a minimum 3.0% Tier I leverage capital requirement
19
for the most highly-rated state-chartered, non-member banks, with an additional
cushion of at least 100 to 200 basis points for all other state-chartered,
non-member banks, which effectively will increase the minimum Tier I leverage
ratio for such other banks to 4.0% to 5.0% or more. Under the FDIC's regulation,
highest-rated banks are those that the FDIC determines are not anticipating or
experiencing significant growth and have well diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high liquidity, good
earnings and, in general, which are considered a strong banking organization,
rated composite 1 under the Uniform Financial Institutions Rating System.
Leverage or core capital is defined as the sum of common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
related surplus, and minority interests in consolidated subsidiaries, minus all
intangible assets other than certain qualifying supervisory goodwill, and
certain purchased mortgage servicing rights and purchased credit and
relationships.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital which is defined as Tier I capital and
supplementary (Tier 2 capital) to risk weighted assets of 8%. In determining the
amount of risk-weighted assets, all assets, plus certain off balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item.
The components of Tier I capital are equivalent to those discussed
above under the 3% leverage standard. The components of supplementary (Tier 2)
capital include certain perpetual preferred stock, certain mandatory convertible
securities, certain subordinated debt and intermediate preferred stock and
general allowances for loan losses. Allowance for loan losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets.
Overall, the amount of capital counted toward supplementary capital cannot
exceed 100% of core capital. At September 30, 2007, the Bank met each of its
capital requirements.
A bank which has less than the minimum leverage capital requirement
shall, within 60 days of the date as of which it fails to comply with such
requirement, submit to its FDIC regional director for review and approval a
reasonable plan describing the means and timing by which the bank shall achieve
its minimum leverage capital requirement. A bank which fails to file such plan
with the FDIC is deemed to be operating in an unsafe and unsound manner, and
could subject the bank to a cease-and-desist order from the FDIC. The FDIC's
regulation also provides that any insured depository institution with a ratio of
Tier I capital to total assets that is less than 2.0% is deemed to be operating
in an unsafe or unsound condition pursuant to Section 8(a) of the FDIA and is
subject to potential termination of deposit insurance. However, such an
institution will not be subject to an enforcement proceeding thereunder solely
on account of its capital ratios if it has entered into and is in compliance
with a written agreement with the FDIC to increase its Tier I leverage capital
ratio to such level as the FDIC deems appropriate and to take such other action
as may be necessary for the institution to be operated in a safe and sound
manner. The FDIC capital regulation also provides, among other things, for the
issuance by the FDIC or its designee(s) of a capital directive, which is a final
order issued to a bank that fails to maintain minimum capital to restore its
capital to the minimum leverage capital requirement within a specified time
period. Such directive is enforceable in the same manner as a final
cease-and-desist order.
The Bank is also subject to more stringent Department capital
guidelines. Although not adopted in regulation form, the Department utilizes
capital standards requiring a minimum of 6% leverage capital and 10% risk-based
capital. The components of leverage and risk-based capital are substantially the
same as those defined by the FDIC.
20
Loans-to-One Borrower Limitation. Under federal regulations, with
certain limited exceptions, a Pennsylvania chartered savings bank may lend to a
single or related group of borrowers on an "unsecured" basis an amount equal to
15% of its unimpaired capital and surplus. An additional amount may be lent,
equal to 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain securities
and bullion, but generally does not include real estate.
Activities and Investments of Insured State-Chartered Banks. Section 24
of the FDIA, as amended by the Federal Deposit Insurance Corporation Improvement
Act of 1991, generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks. Under regulations dealing with equity investments, an insured state bank
generally may not directly or indirectly acquire or retain any equity investment
of a type, or in an amount, that is not permissible for a national bank. An
insured state bank is not prohibited from, among other things, (i) acquiring or
retaining a majority interest in a subsidiary, (ii) investing as a limited
partner in a partnership the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation or new construction of a qualified
housing project, provided that such limited partnership investments may not
exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the voting
stock of a company that solely provides or reinsures directors', trustees' and
officers' liability insurance coverage or bankers' blanket bond group insurance
coverage for insured depository institutions, and (iv) acquiring or retaining
the voting shares of a depository institution if certain requirements are met.
The FDIC has adopted final regulations pertaining to the other activity
restrictions imposed upon insured savings banks and their subsidiaries by
Section 24. Pursuant to such regulations, insured savings banks engaging in
impermissible activities may seek approval from the FDIC to continue such
activities. Savings banks not engaging in such activities but that desire to
engage in otherwise impermissible activities may apply for approval from the
FDIC to do so; however, if such bank fails to meet the minimum capital
requirements or the activities present a significant risk to the FDIC insurance
funds, such application will not be approved by the FDIC. The FDIC has
authorized the bank's subsidiary HARL, LLC, to invest up to 15% of its capital
in the equity securities of bank holding companies, banks or thrifts. $1.334
million was invested by HARL, LLC as of September 30, 2007 in such equity
securities.
Regulatory Enforcement Authority. FIRREA included substantial
enhancement to the enforcement powers available to federal banking regulators.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities. FIRREA significantly increased the amount of and grounds
for civil money penalties and requires, except under certain circumstances,
public disclosure of final enforcement actions by the federal banking agencies.
Federal and State Taxation
General. The Bank is subject to federal income taxation in the same
general manner as other corporations with some exceptions, including
particularly the reserve for bad debts discussed below. The following discussion
of federal taxation is intended only to summarize certain pertinent federal
income tax matters and is not a comprehensive description of the tax rules
applicable to the Bank.
Method of Accounting. For federal income tax purposes, the Bank
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending September 30 for filing its federal income tax
returns.
21
Bad Debt Reserves. 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, 2007 and 2006 includes approximately $1.3 million representing bad
debt deductions for which no deferred income taxes have been provided.
Distributions. If the Bank distributes cash or property to its
stockholders, and the distribution is treated as being from its accumulated
pre-1988 tax bad debt reserves, the distribution will cause the Bank to have
additional taxable income. A distribution to stockholders is deemed to have been
made from accumulated bad debt reserves to the extent that (a) the reserves
exceed the amount that would have been accumulated on the basis of actual loss
experience, and (b) the distribution is a "non-dividend distribution." A
distribution in respect of stock is a non-dividend distribution to the extent
that, for federal income tax purposes, (i) it is in redemption of shares, (ii)
it is pursuant to a liquidation of the institution, or (iii) in the case of a
current distribution, together with all other such distributions during the
taxable year, it exceeds the Bank's current and post-1951 accumulated earnings
and profits. The amount of additional taxable income created by a non-dividend
distribution is an amount that when reduced by the tax attributable to it is
equal to the amount of the distribution.
Minimum Tax. The Code imposes an alternative minimum tax at a rate of
20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The alternative minimum tax is
payable to the extent such AMTI is in excess of an exemption amount. The Code
provides that an item of tax preference is the excess of the bad debt deduction
allowable for a taxable year pursuant to the percentage of taxable income method
over the amount allowable under the experience method. The other items of tax
preference that constitute AMTI include (a) tax exempt interest on newly-issued
(generally, issued on or after August 8, 1986) private activity bonds other than
certain qualified bonds and (b) for taxable years beginning after 1989, 75% of
the excess (if any) of (i) adjusted current earnings as defined in the Code,
over (ii) AMTI (determined without regard to this preference and prior to
reduction by net operating losses). Net operating losses can offset no more than
90% of AMTI. Certain payments of alternative minimum tax may be used as credits
against regular tax liabilities in future years.
Net Operating Loss Carryovers. A financial institution may carry back
net operating losses to the preceding three taxable years and forward to the
succeeding 15 taxable years. Effective for net operating losses arising in tax
years beginning after October 1, 1997, the carryback period is reduced from
three years to two years and the carryforward period is extended from 15 years
to 20 years. At September 30, 2007, the Bank had no net operating loss
carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated tax
return, and corporations which own less than 20% of the stock of a corporation
distributing a dividend may deduct only 70% of dividends received or accrued on
their behalf. However, a corporation may deduct 100% of dividends from a member
of the same affiliated group of corporations.
Other Matters. The Company's federal income tax returns for its tax
years 1993 and beyond are open under the statute of limitations and are subject
to review by the Internal Revenue Service ("IRS").
Pennsylvania Taxation. The Bank is subject to tax under the
Pennsylvania Mutual Thrift Institutions Tax Act, which imposes a tax at the rate
of 11.5% on the Bank's net earnings, determined in accordance with accounting
principles generally accepted in the United States of America, as shown on its
books. For fiscal years beginning in 1983, and thereafter, net operating losses
may be carried forward and
22
allowed as a deduction for three succeeding years. This Act exempts the Bank
from all other corporate taxes imposed by Pennsylvania for state tax purposes,
and from all local taxes imposed by political subdivisions thereof, except taxes
on real estate and real estate transfers.
Subsidiary
The Bank is the only direct wholly owned subsidiary of the Company. The
Bank formed HSB, Inc., a Delaware company, as a wholly owned subsidiary of the
Bank during fiscal 1997. HSB, Inc. was formed in order to accommodate the
transfer of certain assets that are legal investments for the Bank and to
provide for a greater degree of protection to claims of creditors. The laws of
the State of Delaware and the court system create a more favorable environment
for the proposed business affairs of the subsidiary. HSB, Inc. currently manages
the investment securities for the Bank, which as of September 30, 2007 amounted
to approximately $152.7 million. The Bank formed two limited liability companies
in 2002, Freedom Financial Solutions LLC ("FFS") and HARL, LLC. FFS was
established to engage in the sale of insurance products through a third party.
HARL, LLC was established for the purpose of investing in FDIC insured financial
institutions/holding company equity securities.
Item 1A. Risk Factors.
----------------------
In analyzing whether to make or to continue an investment in our
securities, investors should consider, among other factors, the following risk
factors.
Our results of operations are significantly dependent on economic conditions and
related uncertainties.
Commercial banking is affected, directly and indirectly, by domestic
and international economic and political conditions and by governmental monetary
and fiscal policies. Conditions such as inflation, recession, unemployment,
volatile interest rates, real estate values, government monetary policy,
international conflicts, the actions of terrorists and other factors beyond our
control may adversely affect our results of operations. Changes in interest
rates, in particular, could adversely affect our net interest income and have a
number of other adverse effects on our operations, as discussed in the
immediately succeeding risk factor. Adverse economic conditions also could
result in an increase in loan delinquencies, foreclosures and nonperforming
assets and a decrease in the value of the property or other collateral which
secures our loans, all of which could adversely affect our results of
operations. We are particularly sensitive to changes in economic conditions and
related uncertainties in Eastern Pennsylvania because we derive substantially
all of our loans, deposits and other business from this area. Accordingly, we
remain subject to the risks associated with prolonged declines in national or
local economies.
Changes in interest rates could have a material adverse effect on our
operations.
The operations of financial institutions such as ours are dependent to
a large extent on net interest income, which is the difference between the
interest income earned on interest-earning assets such as loans and investment
securities and the interest expense paid on interest-bearing liabilities such as
deposits and borrowings. Changes in the general level of interest rates can
affect our net interest income by affecting the difference between the weighted
average yield earned on our interest-earning assets and the weighted average
rate paid on our interest-bearing liabilities, or interest rate spread, and the
average life of our interest-earning assets and interest-bearing liabilities.
Changes in interest rates also can affect our ability to originate loans; the
value of our interest-earning assets and our ability to realize gains from the
sale of such assets; our ability to obtain and retain deposits in competition
with other available investment alternatives; the ability of our borrowers to
repay adjustable or variable rate loans. Interest rates are highly sensitive to
many factors, including governmental monetary policies, domestic and
international economic and political conditions and
23
other factors beyond our control. Although we believe that the estimated
maturities of our interest-earning assets currently are well balanced in
relation to the estimated maturities of our interest-bearing liabilities (which
involves various estimates as to how changes in the general level of interest
rates will impact these assets and liabilities), there can be no assurance that
our profitability would not be adversely affected during any period of changes
in interest rates.
There are increased risks involved with multi-family residential, commercial
real estate, commercial business and consumer lending activities.
Our lending activities include loans secured by existing multi-family
residential and commercial real estate. In addition, from time to time we
originate loans for the construction of multi-family residential real estate and
land acquisition and development loans. Multi-family residential, commercial
real estate and construction lending generally is considered to involve a higher
degree of risk than single-family residential lending due to a variety of
factors, including generally larger loan balances, the dependency on successful
completion or operation of the project for repayment, the difficulties in
estimating construction costs and loan terms which often do not require full
amortization of the loan over its term and, instead, provide for a balloon
payment at stated maturity. Our lending activities also include commercial
business loans and leases to small to medium businesses, which generally are
secured by various equipment, machinery and other corporate assets, and a wide
variety of consumer loans, including home improvement loans, home equity loans,
education loans and loans secured by automobiles, boats, mobile homes,
recreational vehicles and other personal property. Although commercial business
loans and leases and consumer loans generally have shorter terms and higher
interests rates than mortgage loans, they generally involve more risk than
mortgage loans because of the nature of, or in certain cases the absence of, the
collateral which secures such loans.
We are subject to extensive regulation which could adversely affect our business
and operations.
We and our subsidiaries are subject to extensive federal and state
governmental supervision and regulation, which are intended primarily for the
protection of depositors. In addition, we and our subsidiaries are subject to
changes in federal and state laws, as well as changes in regulations,
governmental policies and accounting principles. The effects of any such
potential changes cannot be predicted but could adversely affect the business
and operations of us and our subsidiaries in the future.
We face strong competition which may adversely affect our profitability.
We are subject to vigorous competition in all aspects and areas of our
business from banks and other financial institutions, including savings and loan
associations, savings banks, finance companies, credit unions and other
providers of financial services, such as money market mutual funds, brokerage
firms, consumer finance companies and insurance companies. We also compete with
non-financial institutions, including retail stores that maintain their own
credit programs and governmental agencies that make available low cost or
guaranteed loans to certain borrowers. Certain of our competitors are larger
financial institutions with substantially greater resources, lending limits,
larger branch systems and a wider array of commercial banking services.
Competition from both bank and non-bank organizations will continue.
Our ability to successfully compete may be reduced if we are unable to make
technological advances.
The banking industry is experiencing rapid changes in technology. In
addition to improving customer services, effective use of technology increases
efficiency and enables financial institutions to reduce costs. As a result, our
future success will depend in part on our ability to address our customers'
needs by using technology. We cannot assure you that we will be able to
effectively develop new technology-driven
24
products and services or be successful in marketing these products to our
customers. Many of our competitors have far greater resources than we have to
invest in technology.
We and our banking subsidiary are subject to capital and other requirements
which restrict our ability to pay dividends.
Our ability to pay dividends to our shareholders depends to a large
extent upon the dividends we receive from Harleysville Savings Bank. Dividends
paid by the Bank are subject to restrictions under Pennsylvania and federal laws
and regulations. In addition, Harleysville Savings Bank must maintain certain
capital levels, which may restrict the ability of the Bank to pay dividends to
us and our ability to pay dividends to our shareholders.
Holders of our common stock have no preemptive rights and are subject to
potential dilution.
Our articles of incorporation do not provide any shareholder with a
preemptive right to subscribe for additional shares of common stock upon any
increase thereof. Thus, upon the issuance of any additional shares of common
stock or other voting securities of the Company or securities convertible into
common stock or other voting securities, shareholders may be unable to maintain
their pro rata voting or ownership interest in us.
Item 1B. Unresolved Staff Comments.
-----------------------------------
Not applicable.
Item 2. Properties.
--------------------
As of September 30, 2007, the Company conducted its business from its
main office in Harleysville, Pennsylvania and five other full service branch
offices. The Company is also part of the STAR ATM System, which provides
customers with access to their deposits at locations worldwide.
Net Book Value of
Lease Property and Leasehold
Owned or Expiration Improvements at
County Address Leased Date September 30, 2007 Deposits
------------ -------------------------- -------- --------------- ------------------ --------
(In Thousands)
Montgomery 1889 Ridge Park
Royersford, Pennsylvania Owned -- $ 3,210 $ 7,251
Montgomery 271 Main Street
Harleysville, Pennsylvania Owned -- 1,038 148,111
Montgomery 640 East Main Street
Lansdale, Pennsylvania Leased May 2043(1) 880 42,595
Montgomery 1550 Hatfield Valley Road
Hatfield, Pennsylvania Leased January 2064(1) 815 82,081
Montgomery 2301 West Main Street
Norristown, Pennsylvania Owned -- 528 91,763
Montgomery 3090 Main Street
Sumneytown, Pennsylvania Owned -- 299 52,234
-------- --------
Total $ 6,770 $424,035
======== ========
---------------
(1) The land at this office is leased; however, the Bank owns the building.
25
Item 3. Legal Proceedings.
---------------------------
The Company is not involved in any legal proceedings except nonmaterial
litigation incidental to the ordinary course of business.
Item 4. Submission of Matters to a Vote of Security Holders.
-------------------------------------------------------------
Not Applicable.
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
--------------------------------------------------------------------------------
and Issuer Purchases of Equity Securities.
------------------------------------------
(a) The information for all equity based and individual compensation
arrangements is incorporated by reference from Part III, Item 12 hereof.
Performance Graph. The following graph compares the yearly cumulative
total return on the Company's common stock over the past five years with (i) the
yearly cumulative total return on the stocks included in the Nasdaq Stock Market
Index and (ii) the yearly cumulative total return on the stocks included in the
Nasdaq Banks Index (all banks listed on the Nasdaq Stock Market). The cumulative
returns are computed assuming the reinvestment of dividends at the frequency
with which dividends were paid during the applicable years.
[GRAPH]
2002 2003 2004 2005 2006 2007
-------- -------- -------- -------- -------- --------
Harleysville Savings $ 100.00 $ 186.41 $ 205.22 $ 209.97 $ 213.83 $ 189.00
Nasdaq Market Index 100.00 176.31 187.30 213.78 225.45 266.83
Nasdaq Banks Index 100.00 326.79 381.40 398.54 435.60 409.65
Book Value Per Share 10.05 10.81 11.56 12.20 12.59 12.65
Market Value Per Share 12.07 15.83 17.25 17.15 16.90 13.71
26
Harleysville Savings Financial Corporation's Common Stock is listed on
the Nasdaq Global Market 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
Stock Market on September 3, 1987. Prices shown below reflect the prices
reported by the NASDAQ systems. The closing price on September 28, 2007 was
$13.71 per share. There were 3,717,519 shares outstanding as of September 30,
2007, held by approximately 1,000 stockholders of record, not including the
number of persons or entities whose stock is held in nominee or "street" name
through various brokerage firms and banks.
Cash Dividends
For The Quarter Ended High Low Close Declared
--------------------- ---------- --------- ---------- ----------
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
December 31, 2006 19.93 15.60 18.48 0.17
March 31, 2007 19.25 16.02 16.75 0.17
June 30, 2007 17.59 16.00 16.20 0.17
September 30, 2007 16.72 13.30 13.71 0.17
(b) Not applicable.
(c) The following table sets forth information with respect to
purchases made by or on behalf of the Company of shares of Common Stock of the
Company during the fourth quarter of fiscal 2007.
Total Number of
Shares Purchased as Maximum Number of
Total Number Average Part of Publicly Shares that May Yet Be
of Shares Price Paid Announced Plans or Purchased Under the Plans
Period Purchased per Share Programs or Programs(1)
----------------------- ------------ ------------ ------------ ------------
July 1-31, 2007 ....... 32,500 16.10 32,500 177,351
August 1-31, 2007 ..... 111,000 15.65 111,000 66,351
September 1-30, 2007 .. -- -- -- 66,351
------------ ------------ ------------
Total ............ 143,500 $ 15.75 143,500 66,351
============ ============
------------
(1) On June 18, 2003, the Company announced its program to repurchase up to
5.0% of the outstanding shares of Common Stock of the Company, or
191,667 shares. The program was completed on July 26, 2007.
(2) On June 20, 2007, the Company announced its current program to
repurchase up to 5.0% of the outstanding shares of Common Stock of the
Company, or 196,000 shares. The program commenced immediately following
the completion of the 2003 program. The program does not have an
expiration date and all shares are purchased in the open market.
27
Item 6. Selected Financial Data.
---------------------------------
Selected Balance Sheet Data:
(Dollars in thousands except per share data) As of September 30,
2007 2006 2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 773,544 $ 775,638 $ 766,990 $ 718,232 $ 653,288
Mortgage-backed securities held to maturity 192,843 219,494 263,964 261,292 223,592
Mortgage-backed securities available-for-sale 818 820 1,045 3,795 6,656
Consumer loans receivable - net 403,739 384,530 366,007 338,584 297,346
Commercial loans 15,314 920
Investment securities held to maturity 108,693 111,099 87,364 68,162 83,327
Investment securities available-for-sale 1,910 8,108 2,835 7,715 4,923
Other investments (1) 22,457 25,549 23,971 19,903 18,618
Deposits 424,035 429,254 418,980 405,231 380,687
FHLB advances and other borrowings 298,609 294,611 297,268 265,953 228,817
Total stockholders' equity 47,041 48,471 47,576 44,313 40,816
Book value per share (3) 12.65 12.59 12.20 11.56 10.81
Selected Operations Data: Year Ended September 30,
2007 2006 2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Interest income $ 40,289 $ 39,091 $ 35,902 $ 32,636 $ 33,123
Interest expense 28,806 26,366 22,747 20,391 21,673
------------ ------------ ------------ ------------ ------------
Net interest income 11,483 12,725 13,155 12,245 11,450
Provision for loan losses -- -- (40) -- --
------------ ------------ ------------ ------------ ------------
Net interest income after provision
for loan losses 11,483 12,725 13,195 12,245 11,450
Gain on sales of loans and securities 160 27 115 326 247
Other income 1,730 1,273 1,351 1,282 1,270
Other expense 9,216 8,568 7,965 7,399 6,897
------------ ------------ ------------ ------------ ------------
Income before taxes 4,157 5,457 6,696 6,454 6,070
Income tax expense 911 1,255 1,693 1,604 1,476
------------ ------------ ------------ ------------ ------------
Net income $ 3,246 $ 4,202 $ 5,003 $ 4,850 $ 4,594
============ ============ ============ ============ ============
Earnings per share - basic (3) $ 0.85 $ 1.09 $ 1.29 $ 1.28 $ 1.21
Earnings per share - diluted (3) 0.83 1.08 1.27 1.25 1.19
Dividends per share (3) 0.68 0.64 0.58 0.48 0.40
Selected Other Data:
Year Ended September 30,
2007 2006 2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Return on average assets (2) 0.42% 0.55% 0.67% 0.70% 0.72%
Return on average equity (2) 6.71% 8.76% 10.91% 11.44% 11.68%
Dividend payout ratio 80.02% 58.72% 44.96% 37.56% 32.67%
Average equity to average assets (2) 6.13% 6.21% 6.19% 6.12% 6.14%
Interest rate spread (2) 1.32% 1.51% 1.65% 1.64% 1.64%
Net yield on interest-earning assets (2) 1.57% 1.71% 1.82% 1.80% 1.84%
Ratio of non-performing assets to
total assets at end of period 0.00% 0.00% 0.03% 0.04% 0.04%
Ratio of interest-earning assets to
interest-bearing liabilities at end of period 104.7% 105.6% 105.4% 105.6% 105.6%
Full service banking offices at
end of period 6 6 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.
28
Item 7. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations.
--------------
The following discussion is intended to assist in understanding our
financial condition, and the results of operations for Harleysville Savings
Financial Corporation, and its subsidiary Harleysville Savings Bank, for the
fiscal years ended September 30, 2007, 2006 and 2005. The information in this
section should be read in conjunction with the Company's financial statements
and the accompanying notes included elsewhere herein.
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,
29
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, 2007, amounted to $773.5
million, compared to $775.6 million as of September 30, 2006. The decrease in
assets was due to a decrease in mortgage backed securities, investment
securities available for sale, investment securities held to maturity and
Federal Home Loan Bank stock of $26.7 million, $6.2 million, $2.4 million and
$1.4 million, respectively. These decreases were offset by an increase in loans
receivable of $33.6 million. Total liabilities at September 30, 2007 were $726.5
million compared to $727.2 million at September 30, 2006. The decrease in
liabilities was due to a decrease in short term borrowing and deposits of $26.7
million and $5.2 million, respectively. These decreases were offset by an
increase in long-term debt of $30.7 million. Stockholders' equity totaled $47.0
million as of September 30, 2007, compared to $48.5 million at September 30,
2006.
During fiscal 2007, net interest income after provision for loan losses
decreased $1.2 million or 9.8% from the prior fiscal year. This decrease was the
result of a 2.4% decrease in the average interest-earning assets, which was
offset by a 1.6% decrease in average interest-bearing liabilities, and a
decrease in the interest rate spread from 1.51% in fiscal 2006 to 1.39% in
fiscal 2007. Earnings for fiscal 2007 were $3.2 million compared to $4.2 million
and $5.0 million for the years ended September 30, 2006 and 2005, respectively.
The Company's return on average assets (net income divided by average total
assets) was 0.42% during fiscal 2007 compared to 0.55% and 0.67% during fiscal
2006 and 2005, respectively. Return on average equity (net income divided by
average equity) was 6.71% during fiscal 2007 compared to 8.76% during fiscal
2006 and 10.91% during fiscal 2005. This decline in return on average assets and
return on average equity during the three-year period was a direct result of the
continued compression of long and short term interest rates.
Results of Operations
The following table sets forth 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.
30
As of For The Year Ended September 30,
Sept 30, -----------------------------------------------------------------------------------------
2007 2007 2006 2005
------- ---------------------------- ---------------------------- ---------------------------
Average Yield/ Average Yield/ Average Yield/
Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Interest-earning assets:
Mortgage loans (2) (3) 5.94% $294,013 $ 17,270 5.87% $277,359 $ 16,101 5.81% $263,400 $ 15,331 5.82%
Mortgage-backed securities 4.72% 204,546 9,339 4.57% 241,751 10,801 4.47% 271,554 11,666 4.30%
Consumer and other loans (3) 6.33% 105,320 6,709 6.37% 94,987 5,675 5.97% 86,257 4,614 5.35%
Investments 5.32% 122,748 6,971 5.68% 130,425 6,514 4.99% 100,915 4,291 4.25%
------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total interest-earning
assets 5.56% 726,627 40,289 5.54% 744,522 39,091 5.25% 722,126 35,902 4.97%
------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Interest-bearing liabilities:
Deposits 3.87% 418,268 15,472 3.70% 418,506 13,165 3.15% 401,920 10,337 2.57%
Borrowings 4.65% 275,429 13,334 4.84% 286,500 13,201 4.61% 283,522 12,410 4.38%
------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total interest-bearing
liabilities 4.19% 693,697 28,806 4.15% 705,006 26,366 3.74% 685,442 22,747 3.32%
------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Net interest income/interest
rate spread 1.37% $ 11,483 1.39% $ 12,725 1.51% $ 13,155 1.65%
======== ======== ======== ======== ======== ======== =======
Net interest-earning assets/
net yield on interest-
earning assets (1) $ 32,930 1.58% $ 39,516 1.71% $ 36,684 1.82%
======== ======== ======== ======== ======== =======
Ratio of interest-earning
assets to interest-
bearing liabilities 104.7% 105.6% 105.4%
======== ======== =======
---------------------
(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, 2007, 2006 and 2005.
31
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 2007 Compared Fiscal 2006 Compared
to Fiscal 2006 to Fiscal 2005
Increase (Decrease) Increase (Decrease)
-------------------------------------- --------------------------------------
Volume Rate Total Volume Rate Total
---------- ---------- ---------- ---------- ---------- ----------
Interest income on
interest-earning assets:
Mortgage loans (1) $ 976 $ 193 $ 1,169 $ 810 $ (40) $ 770
Mortgage-backed securities (1,694) 232 (1,462) (1,317) 453 (864)
Consumer and other loans (1) 643 390 1,034 492 568 1,060
Investments (398) 856 457 1,392 831 2,223
---------- ---------- ---------- ---------- ---------- ----------
Total (473) 1,671 1,198 1,377 1,812 3,189
---------- ---------- ---------- ---------- ---------- ----------
Interest expense on
interest-bearing liabilities:
Deposits (7) 2,314 2,307 441 2,387 2,828
Borrowings (521) 654 133 131 660 791
---------- ---------- ---------- ---------- ---------- ----------
Total (528) 2,968 2,440 572 3,047 3,619
---------- ---------- ---------- ---------- ---------- ----------
Net change in net interest income $ 55 $ (1,297) $ (1,242) $ 805 $ (1,235) $ (430)
========== ========== ========== ========== ========== ==========
(1) There were no non-accruing loans at September 30, 2007 and 2006.
32
Net Interest Income
Net interest income after provision for loan losses decreased by $1.2
million or 9.76% in fiscal 2007, and decreased by $471,000 or 3.57% in fiscal
2006 over the respective prior periods. The decrease in the net interest income
after provision for loan losses for this two year period was due to a decrease
in the interest rate spread between interest bearing assets and interest earning
liabilities. The driving factors will be discussed below in Interest Income and
Interest Expense.
Interest Income
Interest income on mortgage loans increased by $1.2 or 7.3% in fiscal
2007 and increased by $761,000 or 5.0% in fiscal 2006 from the respective prior
years. During fiscal 2007, the average balance of mortgage loans increased $16.7
million or 6.0% and the yield increased by 6 basis points. The combined increase
in yield on mortgage loans and the higher loan volume increased income for the
period. 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 increase in
volume during 2006 had a greater impact on interest income than the decrease in
yield. The majority of loans originated during both years were fixed rate
mortgages. The decrease in interest income on mortgage-backed securities during
fiscal 2007 reflected a decrease of $37.2 million or 15.4% in the average
balance. There was, however, an increase in yield earned by 10 basis points
during fiscal 2007. During fiscal 2006, 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. In 2007, the increase in interest income on consumer
and other loans reflected an increase of $10.3 million or 10.9% in the average
balance. This increase is primarily due to growth in commercial mortgages of
$14.4 million and increase in the average yield to 6.37%. 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%.
Interest and dividends on investments increased by $457,000 or 7.0% in
fiscal 2007 over the respective prior year. During fiscal 2007, the increase
resulted from a 69 basis point increase in yield, even though the average
balance of investments decreased $7.7 million or 5.9%. The decrease in the
average balance in 2007 reflects funds that were redeployed from normal cash
flows to pay down borrowings. 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 of investments
increasing $29.5 million or 29.2% and a 74 basis point increase in yield. The
increase in the average balance in 2006 reflects funds that were redeployed from
normal cash flows.
33
Interest Expense
Interest expense on deposits increased $2.3 million or 17.5% in fiscal
2007 and increased by $2.8 million or 27.4% in fiscal 2006 as compared to the
respective prior years. In fiscal 2007, the average balance of deposits
decreased $238,000 or 0.1% with a 55 basis point increase in the average rate
paid. The decrease in the average balance reflects additional competition in a
challenging rate environment. In fiscal 2006, the average balance of deposits
increased $16.6 million or 4.1% with a 58 basis point increase in the average
rate paid. The average rate paid on deposits was 3.7% for the year ended
September 30, 2007, compared to 3.2% for the year ended September 30, 2006 and
2.6% for 2005. The average rate paid on deposits, is a direct reflection of the
rising interest rate environment.
Interest expense on borrowings increased by $133,000 or 1.0% in fiscal
2007 and increased by $791,000 or 6.4% in fiscal 2006 as compared to the
respective prior years. Even though there was a decrease in the average balance
of borrowings of $11.1 million or 3.9%, the increase in the average rate paid of
23 basis points increased the interest expense in 2007. 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
$1.9 million and $2.0 million at September 30, 2007 and 2006 or 0.5% and 0.5% of
total loans at September 30, 2007 and 2006, respectively. Due to the Company's
loan portfolio status and its analysis of quantitative and qualitative factors,
no provision was made in 2007, 2006 and 2005.
Other Income
The Company's total other operating income increased to $1.9 million in
fiscal 2007 and decreased to $1.3 million in fiscal 2006 compared to the
respective prior year periods. The increase from 2006 to 2007 is primarily
attributed to a gain on the sale of investments and mortgage backed securities
available for sale of $160,000 in fiscal 2007 as compared to a gain of $27,000
in fiscal 2006. The decrease from 2005 to 2006 is primarily 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.
Customer service fees were $564,000, $369,000 and $414,000 in 2007,
2006 and 2005, respectively. The increases were due to more NFS fees during the
periods.
Bank Owned Life Insurance ("BOLI") income was $475,000, $436,000 and
$451,000 in 2007, 2006 and 2005, respectively.
Other income, which consists primarily of loan servicing fees, the sale
of non-deposit products and insurance commissions, increased by $223,000 or
47.5% during fiscal year 2007. During fiscal 2006, other income decreased by
$18,000 or 3.6%. 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
2007 increased relatively consistent with the results of 2006 considering we had
a full year of activity in commercial lending and business deposit accounts in
2007
34
compared to 2006. Based on the current services offered by the Company, we
anticipate other income to grow consistently in fiscal year 2008.
Other Expenses
Salaries and employee benefits increased by $365,000 or 7.9% in fiscal
2007 and by $471,000 or 11.4% in fiscal 2006 as compared to prior respective
fiscal years. The increased expenses of salaries and employee benefits during
the periods are attributable to 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 2008 due to additional staffing needs, normal salary
increases and stock option expense.
Occupancy and equipment expense increased by $154,000 or 15.9% in
fiscal 2007 and increased by $31,000 or 3.3% in fiscal 2006 as compared to the
prior respective fiscal years. Data processing costs decreased by $11,000 in
fiscal 2007 and increased by $27,000 in fiscal 2006. The increase in occupancy
and equipment in 2007 and 2006 were attributable to the normal activity of the
Company and a full year operation of a new branch in 2007.
The Company anticipates normal increase in occupancy and equipment
expenses due to normal growth, normal technology needs and inflationary effects
in fiscal year 2008.
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 $142,000 or 6.0% in
fiscal 2007 and increased by $78,000 or 3.4% in fiscal 2006 over the prior
respective fiscal years. The increases in other expenses are primarily
attributable to a full year of commercial lending and business deposits in 2007.
Income Taxes
The Company recorded income tax provisions of $911,000, $1.3 million
and $1.7 million for fiscal years 2007, 2006 and 2005, respectively. The primary
reason for the decrease in the income tax provision in fiscal 2007 and 2006 was
a decrease in pretax income. See Note 11 of the "Notes to Financial Statements"
which provides an analysis of the provision for income taxes.
Commitments and Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of our customers.
These financial instruments include commitments to extend credit and the unused
portions of lines of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated statements of financial condition. Commitments to extend credit
and lines of credit are not recorded as an asset or liability by us until the
instrument is exercised. At September 30, 2007 and 2006, we had no commitments
to originate loans for sale.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the loan
agreement. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Company upon extension
of credit, is based on management's credit evaluation of the customer. The
amount and type of collateral required varies, but may include accounts
receivable, inventory, equipment, real estate and income-producing commercial
properties. At September 30, 2007 and 2006, commitments to originate loans and
commitments under unused lines of
35
credit, including undisbursed portions of construction loans in process, for
which the Company is obligated amounted to approximately $63.4 million and $53.4
million, respectively.
Letters of credit are conditional commitments issued by the Company
guaranteeing payments of drafts in accordance with the terms of the letter of
credit agreements. Commercial letters of credit are used primarily to facilitate
trade or commerce and are also issued to support public and private borrowing
arrangements, bond financings and similar transactions. Standby letters of
credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. Collateral may be required to
support letters of credit based upon management's evaluation of the
creditworthiness of each customer. The credit risk involved in issuing letters
of credit is substantially the same as that involved in extending loan
facilities to customers. Most letters of credit expire within one year. At
September 30, 2007 and September 30, 2006, the Company had letters of credit
outstanding of approximately $292,000 and $228,000, respectively, of which all
are standby letters of credit. At September 30, 2007 and 2006, the
uncollateralized portion of the letters of credit extended by the Company was
approximately $26,000 and $0, respectively, of which $26,000 was for standby
letters of credit in current year.
The Company is also subject to various pending claims and contingent
liabilities arising in the normal course of business, which are not reflected in
the unaudited consolidated financial statements. Management considers that the
aggregate liability, if any, resulting from such matters will not be material.
We anticipate that we will continue to have sufficient funds and
alternative funding sources to meet our current commitments.
The following tables summarize our outstanding commitments to originate
loans and to advance additional amounts pursuant to outstanding Letters of
credit, lines of credit and under our construction loans at September 30, 2007.
Total Amounts
Committed in thousands
----------------------
Letters of credit $ 292
Commitments to originate loans 17,361
Unused portion of home equity lines of credit 41,055
Unused portion of commercial lines of credit 2,077
Undisbursed portion of construction loans in process 2,873
-------
Total commitments $63,658
-------
Contractual Obligations
The Company's contractual cash obligations at September 30, 2007 were
as follows:
Less Than 1 to 3 3 to 5 After 5
Total 1 Year Years Years Years
--------------------------------------------------------------------------------------------------
Lease agreements $ 531,185 $ 98,407 $ 211,310 $ 221,468 $ --
Borrowings 298,608,627 69,227,457 37,452,369 81,928,801 110,000,000
Certificates of deposit 318,142,918 225,708,981 84,941,067 7,492,870 --
------------ ------------ ------------ ------------ ------------
$617,282,730 $295,034,845 $122,604,746 $ 89,643,139 $110,000,000
============ ============ ============ ============ ============
36
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
--------------------------------------------------------------------
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 following table summarizes the amount of interest-earning assets
and interest-bearing liabilities outstanding as of September 30, 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
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.
37
1 Year 1 to 3 3 to 5 Over 5
or less Years Years Years Total
------------ ------------ ------------ ------------ ------------
Interest-earning assets:
Mortgage loans $ 57,084 $ 51,463 $ 40,643 $ 156,151 $ 305,341
Commercial Mortgage loans 6,594 1,655 706 6,359 15,314
Mortgage-backed securities 65,716 65,251 31,974 30,719 193,660
Consumer and other loans 44,693 27,332 12,984 18,569 103,578
Investment securities and other investments 62,693 17,756 38,729 26,289 145,467
------------ ------------ ------------ ------------ ------------
Total interest-earning assets 236,780 163,457 125,036 238,087 763,360
------------ ------------ ------------ ------------ ------------
Interest-bearing liabilities:
Passbook and Club accounts -- -- -- 2,864 2,864
NOW accounts -- -- -- 39,460 39,460
Consumer Money Market Deposit accounts 17,540 -- -- 28,136 45,676
Business Money Market Deposit accounts 4,613 -- -- 1,538 6,151
Certificate accounts 225,873 84,776 7,494 -- 318,143
Borrowed money 78,319 34,927 75,363 110,000 298,609
------------ ------------ ------------ ------------ ------------
Total interest-bearing liabilities 326,345 119,703 82,857 181,998 710,903
------------ ------------ ------------ ------------ ------------
Repricing GAP during the period $ (89,565) $ 43,754 $ 42,179 $ 56,089 $ 52,457
============ ============ ============ ============ ============
Cumulative GAP $ (89,565) $ (45,811) $ (3,632) $ 52,457
============ ============ ============ ============
Ratio of GAP during the period to total assets -11.58% 5.66% 5.45% 7.25%
============ ============ ============ ============
Ratio of cumulative GAP to total assets -11.58% -5.92% -0.47% 6.78%
============ ============ ============ ============
Liquidity and Capital Resources
The Company's assets decreased to $773.5 million as of September 30,
2007, from $775.6 million as of September 30, 2006. Stockholders' equity
decreased to $47.0 million as of September 30, 2007, from $48.5 million as of
September 30, 2006. As of September 30, 2007, stockholders' equity amounted to
6.1% of the Bank's 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.
As of September 30, 2007, the Company had a remaining borrowing
capacity with the Federal Home Loan Bank of Pittsburgh of approximately $266.9
million. 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, 2007 the
Company had exposures to limited recourse arrangements with respect to the
Company's sale of whole loans. At September 30, 2007, the exposure, which
represents a
38
portion of credit risk associated with the sold interests, amounted to $73,000.
The exposure is for the life of the related loans and payable, on our
proportional share, as losses are incurred.
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.
39
Item 8. Financial Statements and Supplementary Data.
-----------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Harleysville Savings Financial Corporation
Harleysville, Pennsylvania
We have audited the accompanying consolidated statement of financial
condition of Harleysville Savings Financial Corporation and subsidiary ("the
Company") as of September 30, 2007, and the related consolidated statements of
income, comprehensive income, stockholders' equity and cash flows for the year
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The financial statements
for the years ended September 30, 2006 and 2005 were audited by other auditors
whose report, dated December 8, 2006, expressed an unqualified opinion on those
statements.
We conducted our audit 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 audit 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 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 audit provides a reasonable basis
for our opinion.
In our opinion, the 2007 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Harleysville Savings Financial Corporation and subsidiary as of September 30,
2007, and the results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ Beard Miller Company LLP
Beard Miller Company LLP
Allentown, Pennsylvania
December 7, 2007
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Harleysville Savings Financial Corporation and Subsidiary
Harleysville, Pennsylvania:
We have audited the accompanying consolidated statement of financial
condition of Harleysville Savings Financial Corporation and Subsidiary (the
"Company") as of September 30, 2006, and the related consolidated statements of
income, comprehensive income, stockholders' equity, and cash flows for each of
the two 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 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 the results
of their operations and their cash flows for each of the two 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
41
Consolidated Statements of Financial Condition
September 30,
2007 2006
---------------------------------------------------------------------------------------------------------
Assets
Cash and amounts due from depository institutions $ 1,647,273 $ 1,596,695
Interest bearing deposits 6,669,666 8,453,455
------------- -------------
Total cash and cash equivalents 8,316,939 10,050,150
Investment securities held to maturity
(fair value - 2007, $109,306,000; 2006, $111,248,000) 108,693,247 111,098,682
Investment securities available-for-sale at fair value 1,909,949 8,107,759
Mortgage-backed securities held to maturity
(fair value - 2007, $188,612,000; 2006, $213,913,000) 192,842,505 219,493,818
Mortgage-backed securities available-for-sale at fair value 817,524 820,255
Loans receivable (net of allowance for loan losses -
2007, $1,933,000; 2006, $1,956,000) 419,052,750 385,450,375
Accrued interest receivable 4,046,947 3,969,610
Federal Home Loan Bank stock - at cost 14,140,100 15,498,600
Office properties and equipment, net 9,916,548 8,013,969
Prepaid expenses and other assets 13,807,507 13,134,625
------------- -------------
TOTAL ASSETS $ 773,544,016 $ 775,637,843
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 424,035,072 $ 429,254,047
Short-term borrowings 31,500,000 58,200,000
Long-term debt 267,108,628 236,411,162
Accrued interest payable 1,556,225 1,406,161
Advances from borrowers for taxes and insurance 1,247,399 1,184,089
Accounts payable and accrued expenses 1,055,789 711,014
------------- -------------
Total liabilities 726,503,113 727,166,473
------------- -------------
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 3,921,177 shares 39,212 39,212
Additional Paid-in capital 8,043,698 7,992,014
Treasury stock, at cost (2007, 203,658 shares; 2006, 71,441 shares) (3,316,127) (1,262,412)
Retained earnings - partially restricted 42,363,307 41,714,616
Accumulated other comprehensive loss (89,187) (12,060)
------------- -------------
Total stockholders' equity 47,040,903 48,471,370
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 773,544,016 $ 775,637,843
============= =============
See notes to consolidated financial statements.
42
Consolidated Statements of Income
Year Ended September 30,
2007 2006 2005
----------------------------------------------------------------------------------------------------------
Interest Income:
Interest and fees on mortgage loans $ 17,269,866 $ 16,092,641 $ 15,331,323
Interest on mortgage-backed securities 9,338,744 10,801,029 11,665,529
Interest on consumer and other loans 6,708,965 5,683,386 4,614,316
Interest on taxable investments 5,411,431 5,066,939 2,886,342
Interest on tax-exempt investments 1,497,002 1,408,484 1,377,968
Dividends on investment securities 62,689 38,085 26,962
------------ ------------ ------------
Total interest and dividend income 40,288,697 39,090,564 35,902,440
------------ ------------ ------------
Interest Expense:
Interest on deposits 15,471,662 13,164,538 10,336,704
Interest on borrowings 13,333,917 13,201,226 12,410,032
------------ ------------ ------------
Total interest expense 28,805,579 26,365,764 22,746,736
------------ ------------ ------------
Net Interest Income 11,483,118 12,724,800 13,155,704
Provision (Credit) for Loan Losses -- -- (40,407)
------------ ------------ ------------
Net Interest Income, after Provision (Credit) for Loan Losses 11,483,118 12,724,800 13,196,111
------------ ------------ ------------
Other Income:
Customer service fees 563,671 368,559 413,777
Gain on sales of loans -- -- 16,672
Realized gains on investments and
mortgage-backed securities 159,888 26,920 97,905
Income on bank-owned life insurance 475,000 436,000 450,500
Other income 691,405 468,905 486,527
------------ ------------ ------------
Total other income 1,889,964 1,300,384 1,465,381
------------ ------------ ------------
Other Expenses:
Salaries and employee benefits 4,981,910 4,617,167 4,146,584
Occupancy and equipment 1,121,902 967,990 937,228
Deposit insurance premiums 51,908 54,656 57,263
Data processing 578,934 589,558 562,932
Other 2,481,485 2,339,098 2,261,238
------------ ------------ ------------
Total other expenses 9,216,139 8,568,469 7,965,245
------------ ------------ ------------
Income before Income Taxes 4,156,943 5,456,715 6,696,247
Provision for income taxes 911,000 1,255,177 1,692,527
------------ ------------ ------------
Net Income $ 3,245,943 $ 4,201,538 $ 5,003,720
============ ============ ============
Earnings Per Share:
Basic $ 0.85 $ 1.09 $ 1.29
============ ============ ============
Diluted $ 0.83 $ 1.08 $ 1.27
============ ============ ============
Weighted Average Shares Outstanding:
Basic 3,834,518 3,872,655 3,871,255
============ ============ ============
Diluted 3,896,317 3,903,291 3,940,701
============ ============ ============
See notes to consolidated financial statements.
43
Consolidated Statements of Comprehensive Income
Year Ended September 30,
2007 2006 2005
-----------------------------------------------------------------------------------------------------------------------------
Net Income $ 3,245,943 $ 4,201,538 $ 5,003,720
Other Comprehensive (Loss) Income
Unrealized loss on securities net of tax (benefit) or
expense -- 2007, $(39,733); 2006, $(1,744); 2005, $(25,930) (77,127)(1) (2,847)(1) (42,337)(1)
----------- ----------- -----------
Total Comprehensive Income $ 3,168,816 $ 4,198,691 $ 4,961,383
=========== =========== ===========
(1) Disclosure of reclassification amount, net of tax for the years ended: 2007 2006 2005
----------- ----------- -----------
Net unrealized gain (loss) arising during the year $ (77,127) $ 14,920 $ 22,280
Less: Reclassification adjustment for net gains included in net income
Net of tax expense -- 2007,$0; 2006,$9,153; 2005,$33,288 -- 17,767 64,617
----------- ----------- -----------
Net unrealized loss on securities $ (77,127) $ (2,847) $ (42,337)
=========== =========== ===========
See notes to consolidated financial statements.
44
Consolidated Statements of Stockholders' 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 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 (17,000 shares) (328,280) (328,280)
Treasury stock delivered under
employee stock plans (21,162 shares) (272,586) 578,247 305,661
Treasury stock delivered under
Dividend Reinvestment Plan (4,366 shares) 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 (95,880 shares) (1,681,657) (1,681,657)
Treasury stock delivered under
employee stock plans (11,121 shares) (26,694) 191,332 164,638
Treasury stock delivered under
Dividend Reinvestment Plan (16,572 shares) (1,256) 288,020 286,764
Change in unrealized holding loss
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
Net Income 3,245,943 3,245,943
Dividends - $.68 per share (2,597,252) (2,597,252)
Option Compensation 96,650 96,650
Treasury stock purchased (169,496 shares) (2,693,853) (2,693,853)
Treasury stock delivered under
employee stock plans (3,751 shares) (16,001) 65,180 49,179
Treasury stock delivered under
Dividend Reinvestment Plan (33,528 shares) (28,965) 574,958 545,993
Change in unrealized holding loss
on available-for-sale securities, net
of tax (77,127) (77,127)
--------- -------- ----------- ----------- --------- ----------- -----------
Balance at September 30, 2007 3,921,177 $ 39,212 $ 8,043,698 $42,363,307 $ (89,187) $(3,316,127) $47,040,903
========= ======== =========== =========== ========= =========== ===========
See notes to consolidated financial statements.
45
Consolidated Statements of Cash Flows
Year Ended September 30,
2007 2006 2005
---------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 3,245,943 $ 4,201,538 $ 5,003,720
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 510,980 466,020 436,400
Deferred income taxes 55,777 10,963 67,768
Realized gain on sales of loans -- -- (16,672)
Net realized gain on investment and mortgage-backed securities (159,888) (18,585) (97,905)
Realized loss on disposal of fixed assets -- 3,124 49,233
Origination of loans held for sale -- -- (908,522)
Proceeds from the sale of loans held for sale -- -- 921,129
Amortization of deferred loan fees (19,235) (52,287) (138,102)
Net amortization of premiums and discounts 205,960 309,052 675,869
Purchase of bank owned life insurance -- -- (2,500,000)
Increase in cash surrender value (475,000) (436,000) (450,500)
Compensation charge on stock options 96,650 109,025
Changes in assets and liabilities which provided (used) cash:
Increase in accounts payable and accrued expenses 344,775 38,890 121,260
(Increase) decrease in prepaid expenses and other assets (227,435) (145,283) 368,196
Increase in accrued interest receivable (77,337) (537,556) (363,016)
Increase in accrued interest payable 150,064 47,208 232,840
------------- ------------- -------------
Net cash provided by operating activities 3,651,254 3,996,109 3,401,698
------------- ------------- -------------
Investing Activities:
Purchase of mortgage-backed securities held to maturity (20,939,437) (2,011,250) (62,026,532)
Purchase of investment securities held to maturity (19,917,941) (28,748,285) (35,852,191)
Purchase of investment securities available-for-sale (466,003) (5,578,924) (770,525)
Proceeds from (purchase) of FHLB stock 1,358,500 537,300 (851,800)
Proceeds from the sale of investment securities available-for-sale -- 327,357 5,650,121
Proceeds from maturities of investment securities 28,987,189 4,595,380 16,239,738
Principal collected on long-term loans & mortgage-backed securities 135,795,508 134,713,613 147,947,065
Long-term loans originated or acquired (121,934,589) (107,316,274) (113,398,481)
Purchases of premises and equipment (2,413,560) (2,653,419) (566,351)
------------- ------------- -------------
Net cash provided by (used in) investing activities 469,667 (6,134,502) (43,628,956)
------------- ------------- -------------
Financing Activities:
Net (decrease) increase in demand deposits, NOW accounts
and savings accounts (2,923,840) (8,608,274) (18,710,587)
Net (decrease) increase in certificates of deposit (2,295,135) 18,882,665 32,459,603
Cash dividends (2,597,252) (2,482,506) (2,252,336)
Net increase (decrease) in short-term borrowings (26,700,000) 37,200,000 1,900,000
Proceeds from long-term debt 63,000,000 10,000,000 69,899,000
Repayment of long-term debt (32,302,534) (49,857,326) (40,483,505)
Purchase of treasury stock (2,693,853) (1,681,657) (328,280)
Treasury stock delivered under Dividend Reinvestment and
employee stock plans 595,172 451,402 421,706
Net proceeds from issuance of stock -- 300,599 460,431
Net increase in advances from borrowers for taxes and insurance 63,310 48,660 77,422
------------- ------------- -------------
Net cash (used in) provided by financing activities (5,854,132) 4,253,563 43,443,454
------------- ------------- -------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,733,211) 2,115,170 3,216,196
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,050,150 7,934,980 4,718,784
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,316,939 $ 10,050,150 $ 7,934,980
============= ============= =============
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest (credited and paid) $ 28,655,515 $ 26,318,556 $ 22,513,896
Income Tax 665,290 1,378,000 1,528,000
See notes to consolidated financial statements.
46
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. The Bank's customers are primarily
in southeastern Pennsylvania.
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 Solutions 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 statements 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.
Significant Group Concentrations of Credit Risk - Most of the Company's
activities are with customers located within the southeastern region of
Pennsylvania. Notes 3, 4, 5 and 6 discuss types of securities that the Company
invests in. Note 7 discusses the types of lending that the Company engages in.
The Company does not have any significant concentrations to any one industry or
customer.
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:
47
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. Realized gains and losses on the sale of investment
securities are recorded as of the trade date, reported in the consolidated
statement of income and determined using the amortized cost of the specific
security sold.
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 fair 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 fair 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 commercial, mortgage and consumer loans to customers.
A substantial portion of the loan portfolio is represented by mortgage loans
throughout southeastern 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. 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
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
48
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.
A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loans
effective interest rate, the loan's obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.
Large groups of smaller balances homogenous loans are collectively evaluated for
impairment. Accordingly, the Corporation does not separately identify individual
consumer and residential loans for impairment disclosures, unless such loans are
the subject of a restructuring agreement.
49
Foreclosed Real Estate - Real estate acquired through, or in lieu of, loan
foreclosures are carried at the fair value of the property, based on an
appraisal less cost to sell. 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 Federal Home Loan Bank (FHLB)
stock at cost in the consolidated statements of financial condition. Federal law
requires a member of the FHLB to hold stock according to a predetermined
formula.
Cash Surrender Value Of Bank Owned Life Insurance (BOLI) - 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
income 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.
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.
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.
Accounting for Stock Options - The Company currently has several stock option
plans in place for employees and directors of the Company. 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
50
compensation expense for the fair value of stock options that were granted or
vest after that date. Stock-based compensation expense related to stock options
for the years ended September 30, 2007 and 2006 was $96,650 and $109,025,
respectively. The tax benefit recognized related to the compensation expense for
the years ended September 30, 2007 and 2006 was $4,541 and $3,406, respectively.
Prior to October 1, 2005, the Company accounted for it's stock option plans,
under the recognition and measurement provision of APB Opinion No 25,
"Accounting for Stock Issued to Employees," and the related Interpretations, as
permitted by FASB Statement No. 123, "Accounting for Stock-Based Compensation".
No stock-based employee compensation cost was recognized in the Company's
consolidated statements of income through September 30, 2005, as all options
granted under the Company's plans had an exercise price equal to the market
value of the underlying common stock on the date of grant.
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, to stock-based employee compensation for the year ended September 30, 2005:
Year Ended
September 30, 2005
------------------
Net income: as reported $ 5,003,720
Add: Total stock-based employee compensation
expense included in reported net income (net of tax) --
Deduct: Stock-based employee compensation expense
determined under the fair value based method for
all awards, net of related tax effects (42,594)
-------------
Pro forma net income $ 4,961,126
=============
Earnings per share:
Basic-as reported $ 1.29
Basic-pro forma $ 1.28
Diluted-as reported $ 1.27
Diluted-pro forma $ 1.26
The fair value of options granted in the years ended September 30, 2007, 2006
and 2005 were estimated at the date of grant using a Binomial Option Pricing
Model with the following weighted-average assumptions:
Year Ended September 30,
2007 2006 2005
-------------------------------------------------------------------------------
Risk free interest rate of return 4.77% 4.36% 1%
Expected option life 84 months 84 months 84 months
Expected volatility 17% 17% 10%
Expected dividends 3.9% 3.0% 3.0%
51
The expected volatility is based on historic volatility. The risk-free interest
rates for periods within the contractual life of the awards are based on the
U.S. Treasury yield curve in effect at the time of the grant. The expected life
is based on historical exercise experience. The dividend yield assumption is
based on the Company's history and expectation of dividend payouts.
Stock Split - On January 26, 2005, the Board of Directors 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,
2007 2006 2005
--------------------------------------------------------------------------------
Weighted average shares outstanding - basic 3,834,518 3,872,655 3,871,255
Increase in shares due to dilutive options 61,799 30,636 69,446
--------- --------- ---------
Weighted average shares outstanding - diluted 3,896,317 3,903,291 3,940,701
========= ========= =========
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, 2007,
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-
52
family residences and purchases short-term investments. The source of these
funds has been long-term advances.
Recent Accounting Pronouncements - In July 2006, the FASB issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of SFAS 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. In May 2007, the FASB issued FASB Staff Position ("FSP") FIN
48-1 "Definition of Settlement in FASB Interpretation No. 48" (FSP FIN 48-1).
FSP FIN 48-1 provides guidance on how to determine whether a tax position is
effectively settled for the purpose of recognizing previously unrecognized tax
benefits. The Company is currently evaluating the impact of adopting FIN 48 and
FIN-48-1 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 consolidated financial statements for
the current and prior periods, and has determined that its adoption did not have
an impact on any of these financial statements.
In September 2006, the Emerging Issues Task Force (EITF) of FASB issued EITF
Issue No. 06-4, "Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split Dollar Life Insurance Arrangements" (EITF 06-04).
EITF 06-4 requires the recognition of a liability related to the postretirement
benefits covered by an endorsement split-dollar life insurance arrangement. The
consensus highlights that the employer (who is also the policyholder) has a
liability for the benefit it is providing to its
53
employee. As such, if the policyholder has agreed to maintain the insurance
policy in force for the employee's benefit during his or her retirement, then
the liability recognized during the employee's active service period should be
based on the future cost of insurance to be incurred during the employee's
retirement. Alternatively, if the policyholder has agreed to provide the
employee with a death benefit, then the liability for the future death benefit
should be recognized by following the guidance in SFAS No. 106 or Accounting
Principles Board (APB) Opinion No. 12, as appropriate. For transition, an entity
can choose to apply the guidance using either of the following approaches: (a) a
change in accounting principle through retrospective application to all periods
presented or (b) a change in accounting principle through a cumulative-effect
adjustment to the balance in retained earnings at the beginning of the year of
adoption. The disclosures are required in fiscal years beginning after December
15, 2007, with early adoption permitted. The Company is continuing to evaluate
the impact of this statement on its consolidated 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 October 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.
In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10
"Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements:
(EITF 06-10). EITF 06-10 provides guidance for determining a liability for the
postretirement benefit obligation as well as recognition and measurement of the
associated asset on the basis of the terms of the collateral assignment
agreement. EITF 06-10 is effective for fiscal years beginning after December 15,
2007. The Company is currently assessing the impact of EITF 06-10 on its
consolidated financial position and results of operations.
Reclassification - Certain items in the 2006 and 2005 financial statements have
been reclassified to conform with the presentation in the 2007 consolidated
financial statements.
54
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, 2007
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
-------------------------------------------------------------------------------------------------------
U.S. Government Agencies
Due after 1 year through 5 years $ 5,000,000 $ (26,880) $ 4,973,120
Due after 5 years through 10 years 20,918,747 $ 37,242 (114,168) 20,841,821
Due after 10 years through 15 years 48,421,750 87,118 (341,677) 48,167,191
Due after 15 years 8,814,462 87,194 (49,905) 8,851,751
Tax Exempt Obligations
Due after 10 years through 15 years 15,853,732 717,040 -- 16,570,772
Due after 15 years 9,684,556 383,866 (167,588) 9,900,834
------------ ------------ ------------ ------------
Total Investment Securities $108,693,247 $ 1,312,460 $ (700,218) $109,305,489
============ ============ ============ ============
A summary of investments with unrealized losses, aggregated by category, at
September 30, 2007 is as follows:
Less than 12 Months 12 Months or Longer Total
Unrealized Unrealized Total Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
------------ ------------ ------------ ------------ ------------ ------------
US Government agencies $ 4,446,141 $ (26,541) $ 56,849,408 $ (506,089) $ 61,295,549 $ (532,630)
Tax Exempt Obligations 2,848,983 (167,588) -- -- -- (167,588)
------------ ------------ ------------ ------------ ------------ ------------
Total $ 7,295,124 $ (194,129) $ 56,849,408 $ (506,089) $ 61,295,549 $ (700,218)
============ ============ ============ ============ ============ ============
At September 30, 2007, investment securities in a gross unrealized loss position
for twelve months or longer consisted of 23 US Government Agency securities and
state and municipal securities that at such date had an aggregate depreciation
of 0.9% 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. 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, 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
============ ============ ============ ============
55
A summary of investments with unrealized losses, aggregated by category, at
September 30, 2006 is as follows:
Less than 12 Months 12 Months or Longer Total
Unrealized Unrealized Total Unrealized
Fair Value Losses Fair Value Losses Fair Value 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)
============ ============ ============ ============ ============ ============
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, 2007
Gross Gross
Amortized Unrealized Unrealized
Cost Gain Losses Fair Value
--------------------------------------------------------------------------------
Equity Securities $1,501,552 $ 5,810 $ (173,280) $1,334,082
Money Market Mutual Funds 575,867 -- -- 575,867
---------- ---------- ---------- ----------
Total Investment Securities $2,077,419 $ 5,810 $ (173,280) $1,909,949
========== ========== ========== ==========
A summary of investments with unrealized losses, aggregated by category, at
September 30, 2007 is as follows:
Less than 12 Months 12 Months or Longer Total
Unrealized Unrealized Total Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
----------- ------------ ------------ ------------ ------------ ------------
Equity Securities $ 792,970 $ (89,038) $ 254,637 $ (84,242) $ 1,047,607 $ (173,280)
------------ ------------ ------------ ------------ ------------ ------------
Total $ 792,970 $ (89,038) $ 254,637 $ (84,242) $ 1,047,607 $ (173,280)
============ ============ ============ ============ ============ ============
As of September 30,2007 there has been one investment security in a loss
position greater than 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, 2007 represents an
other-than-temporary impairment.
56
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
Unrealized Unrealized Total Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
----------- ------------ ------------ ------------ ------------ ------------
Equity Securities $ 582,873 $ (67,143) $ -- $ -- $ 582,873 $ (67,143)
------------ ------------ ------------ ------------ ------------ ------------
Total $ 582,873 $ (67,143) $ -- $ -- $ 582,873 $ (67,143)
============ ============ ============ ============ ============ ============
There were no sales of investment securities available for sale for the year
ended September 30, 2007. Proceeds from the sale of investment securities
available for sale during the year ended September 30, 2006 were $327,000
resulting in a gross gain of $27,000 and an after 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 an after tax
gain of $65,000.
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, is as follows:
September 30,2007
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
------------------------------------------------------------------------------------------------
Collateralized mortgage obligations $ 16,470,836 $ 96,904 $ (298,787) $ 16,268,953
FHLMC pass-through certificates 89,532,845 164,145 (2,198,243) $ 87,498,747
FNMA pass-through certificates 86,586,624 11,268 (2,007,620) $ 84,590,272
GNMA pass-through certificates 252,200 2,298 -- $ 254,498
------------ ------------ ------------ ------------
Total Mortgage-Backed Securities $192,842,505 $ 274,615 $ (4,504,650) $188,612,470
============ ============ ============ ============
A summary of securities with unrealized losses, aggregated by category, at
September 30, 2007 is as follows:
Less than 12 Months 12 Months or Longer Total
Unrealized Unrealized Total Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
------------ ------------ ------------ ------------ ------------ ------------
Mortgage-backed securities held to
maturity $ 11,829,093 $ (94,682) $162,007,873 $ (4,409,968) $173,836,966 $ (4,504,650)
------------ ------------ ------------ ------------ ------------ ------------
Total $ 11,829,093 $ (94,682) $162,007,873 $ (4,409,968) $173,836,966 $ (4,504,650)
============ ============ ============ ============ ============ ============
At September 30, 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 2.7% 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
57
and the extent to which the fair 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, 2007 represents another-than-temporary impairment.
Proceeds from the sales of mortgage-backed securities during the year ended
September 30, 2007 were $10,281,000 resulting in a gross gain of $160,000 and an
after tax gain of $106,000. 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%.
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 securities with unrealized losses, aggregated by category, at
September 30, 2006 is as follows:
Less than 12 Months 12 Months or Longer Total
Unrealized Unrealized Total Unrealized
Fair Value Losses Fair Value Losses Fair Value 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)
============ ============ ============ ============ ============ ============
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, is as follows:
September 30,2007
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------------------------------------------------------------------------------------------
FNMA pass-through certificates $ 785,187 $ 32,337 $ -- $ 817,524
------------ ------------ ------------ ------------
Total Mortgage-Backed Securities $ 785,187 $ 32,337 $ -- $ 817,524
============ ============ ============ ============
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
============ ============ ============ ============
58
7. LOANS RECEIVABLE
Loans receivable consists of the following:
September 30,
2007 2006
------------------------------------------------------------------------
Residential Mortgages $ 305,340,840 $ 287,155,808
Commercial Mortgages 15,314,312 919,603
Construction 6,092,667 6,986,632
Savings Account 977,255 1,002,672
Home Equity 74,218,316 70,515,174
Home Equity Line of Credit 21,385,435 25,499,895
Automobile and other 903,921 811,963
------------- -------------
Total 424,232,746 392,891,747
Undisbursed portion of loans in process (2,794,545) (4,941,266)
Deferred loan fees (452,906) (544,301)
Allowance for loan losses (1,932,545) (1,955,805)
------------- -------------
Loans Receivable - net $ 419,052,750 $ 385,450,375
============= =============
The Company originates both adjustable and fixed interest rate loans and
purchases both adjustable and fixed interest rate mortgage-backed securities. At
September 30, 2007, the maturity of these loans and mortgage-backed securities,
in thousands, is as follows (in thousands):
Fixed-Rate Adjustable-Rate
Term to Maturity Book Value Term to Maturity Book Value
------------------------------------- --------------------------------
1 year or less $ 25,728 1 year or less $ 8,451
1-3 years 29,760 1-3 years 2,534
3-5 years 20,650 3-5 years 3,494
5-15 years 235,152
over 15 years 292,124
------------ ------------
$ 603,414 $ 14,479
============ ============
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, 2007 and 2006, the Company was servicing loans for others
amounting to approximately $3,642,000 and $3,928,000 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 $18,300, and $21,000, at September 30, 2007 and 2006,
respectively.
Loans to officers and directors at September 30, 2007 and 2006, were
approximately $582,000 and $648,000, respectively. Additional loans and
repayments for the year ended September 30, 2007, were $74,000 and $140,000,
respectively.
59
The following schedule summarizes the changes in the allowance for loan losses:
Year Ended September 30,
2007 2006 2005
-------------------------------------------------------------------------
Balance, beginning of year $ 1,955,805 $ 1,967,607 $ 1,976,849
Recoveries 12,824 8,524 83,707
Charged off (36,084) (20,326) (92,949)
------------ ------------ ------------
Balance, end of year $ 1,932,545 $ 1,955,805 $ 1,967,607
============ ============ ============
The activity in the recoveries and charge off accounts was primarily the result
of the Company's Bounce protection program. This program extends credit
automatically to our depositors. If the account is not brought current by the
depositor the loan is charged off. If the customer subsequently brings the
account current, a recovery is recognized.
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, 2007, 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, 2007 and 2006, 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, 2007 and 2006, amounted to approximately $28,000 and $18,000,
respectively. The non-performing loans are still accruing interest. The loans
were collectively evaluated for impairment.
8. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classifications as
follows:
September 30,
2007 2006
----------------------------------------------------------------
Land $ 1,159,031 $ 1,159,031
Buildings 7,548,837 7,543,587
Branch office in construction 2,192,847 --
Furniture, fixtures and equipment 3,903,790 3,694,898
Automobiles 24,896 24,896
------------ ------------
Total 14,829,401 12,422,412
Less accumulated depreciation (4,912,853) (4,408,443)
------------ ------------
Net $ 9,916,548 $ 8,013,969
============ ============
Depreciation expense for the years ended September 30, 2007, 2006, and 2005
amounted to approximately $511,000, $466,000, and $436,000, respectively.
60
9. DEPOSITS
Deposits are summarized as follows:
September 30,
2007 2006
--------------------------- ---------------------------
Weighted Weighted
Interest Interest
Amount Rate Amount Rate
-------------------------------------------------------------------------------------------
NOW accounts $ 13,710,669 0.25% $ 15,719,531 0.25%
Non-interest Checking accounts 11,740,589 0.00% 10,338,951 0.00%
Interest Checking accounts 25,750,545 2.41% 20,410,198 2.46%
Money Market Deposit accounts 51,826,626 1.80% 58,989,416 1.58%
Passbook and Club accounts 2,863,725 0.98% 3,325,151 0.96%
Certificate accounts 318,142,918 4.50% 320,470,800 4.01%
------------ ------------ ------------ ------------
Total Deposits $424,035,072 3.76% $429,254,047 3.34%
============ ============ ============ ============
At September 30, 2007, the amounts of scheduled maturities of certificate
accounts were as follows:
For the year ended September 30: 2008 225,708,981
2009 77,911,934
2010 7,029,133
2011 4,543,301
2012 2,949,569
------------
Total $318,142,918
============
The aggregate amount of certificate accounts in denominations of $100,000 or
more at September 30, 2007 and 2006 amounted to approximately $53.6 million and
$47.6 million, respectively. Deposits in excess of $100,000 are not generally
federally insured.
Interest expense on savings deposits is composed of the following:
Year Ended September 30,
2007 2006 2005
---------------------------------------------------------------------------
NOW accounts and MMDA accounts $ 2,557,964 $ 1,371,109 $ 1,245,110
Passbook and Club accounts 31,414 27,867 26,325
Certificate accounts 12,882,284 11,765,562 9,065,269
------------ ------------ ------------
Total $ 15,471,662 $ 13,164,538 $ 10,336,704
============ ============ ============
61
10. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
The Company has a line of credit with the Federal Home Loan Bank of which $31.5
million and $58.2 million of the available $75.0 million was used at September
30, 2007 and 2006, respectively. The average balance outstanding on the line of
credit for the years ended September 30, 2007 and 2006 was $48.2 million and
$29.3 million, respectively. The maximum amount outstanding at any time for 2007
and 2006 was $67.4 million and $59.4 million, respectively. The weighted average
interest rate during 2007 and 2006 was 5.36% and and 4.89%.
Long-term debt consist of the following:
Weighted
Amount Average Rate
------ ------------
2007 2006 2007 2006
-------- -------- -------- --------
FHLB long-term debt: (dollars in thousands)
Fixed rate advances maturing:
2008 $ 37,727 $ 21,292 5.00% 3.79%
2009 20,043 46,949 4.37% 4.79%
2010 17,410 25,851 4.50% 4.07%
2011 23,595 8,375 4.99% 3.96%
2012 58,334 39,418 4.48% 5.38%
2013 5,000 59,526 3.80% 4.47%
2014 5,000 5,000 3.54% 3.80%
Maturing after 9/30/2014: 60,000 30,000 4.42% 4.10%
-------- -------- -------- --------
Total FHLB long-term debt $227,109 $236,411 4.56% 4.16%
Other long-term debt:
Fixed rate advances maturing:
2013 $ 15,000 $ -- 4.90% --
2014 15,000 -- 4.50% --
-------- -------- --------
Total other long term debt fixed $ 30,000 $ -- 4.70%
Adjustable long-term debt maturing:
2017 $ 10,000 $ -- 4.97% --
-------- -------- --------
Total other long term debt adjustable $ 10,000 $ -- 4.97%
-------- -------- --------
Total other long term debt $ 40,000 $ -- 4.77% --
-------- -------- -------- --------
Total Long Term Debt $267,109 $236,411 4.59% 4.16%
======== ======== ======== ========
Federal Home Loan Bank (FHLB) advances are collateralized by Federal Home Loan
Bank stock and substantially all first mortgage loans. In addition, there are
three long-term advances from other financial institutions that are secured by
investment and mortgage-backed securities totaling $40 million.
11. 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.
62
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, 2007 and 2006 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,
2007 2006 2005
-------------------------- -------------------------- --------------------------
Percentage Percentage Percentage
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
----------------------------------------------------------------------------------------------------------------------
At statutory rate $ 1,413,361 34.0% $ 1,855,280 34.0% $ 2,276,724 34.0%
Adjustments resulting from:
Tax-exempt income (557,602) (13.4) (592,375) (10.9) (595,428) (8.9)
State tax-net of federal
tax benefit -- -- -- -- 69,588 1.0
Other 55,241 1.3 (7,728) (0.1) (58,357) (0.8)
----------- ----------- ----------- ----------- ----------- -----------
Expense per consolidated
statements of income $ 911,000 21.9% $ 1,255,177 23.0% $ 1,692,527 25.3%
=========== =========== =========== =========== =========== ===========
Income tax expense is summarized as follows:
Year Ended September 30,
2007 2006 2005
------------------------------------
Current $ 855,223 $1,244,214 $1,624,759
Deferred 55,777 10,963 67,768
---------- ---------- ----------
Total Income Tax Expense $ 911,000 $1,255,177 $1,692,527
========== ========== ==========
Items that gave rise to significant portions of the deferred tax accounts are as
follows:
September 30,
2007 2006
--------- ---------
Deferred Tax Assets:
Deferred Loan Fees $ 55,064 $ 73,722
Allowance for Loan Losses 657,065 664,974
Unrealized loss on investment securities 45,945 6,212
Other 26,714 39,564
--------- ---------
Sub-Total 784,788 784,472
--------- ---------
Deferred Tax Liabilities:
Property (450,282) (433,922)
--------- ---------
Sub-Total (450,282) (433,922)
--------- ---------
Total $ 334,506 $ 350,550
========= =========
Income taxes paid were approximately $665,000, $1,378,000, and $1,528,000 for
the years ended September 30, 2007, 2006, and 2005, respectively.
12. REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are 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 Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for
63
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 September 30, 2007, that the Bank meets all
capital adequacy requirements to which it is subject.
As of September 30, 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 September 30, 2007
Tier 1 Capital (to assets) $46,796,989 6.02% $31,020,640 4.00% $38,775,800 5.00%
Tier 1 Capital (to risk weighted assets) 46,796,989 12.12% 15,442,800 4.00% 23,164,200 6.00%
Total Capital (to risk weighted assets) 48,729,123 12.62% 30,885,600 8.00% 38,607,000 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%
The Company's capital ratios are not significantly different than the Bank's
disclosed above.
13. RETIREMENT SAVINGS PLANS
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
$277,946, $254,989 and $260,528 for the years ended September 30, 2007, 2006,
and 2005, respectively.
14. 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.
64
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. There are 219,642 options remaining for grant in
this plan.
A summary of transactions under this plan follows:
Year Ended September 30,
2007 2006 2005
---------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Options Price Options Price Options Price
-----------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of year 243,100 $ 15.01 169,032 $ 13.23 201,982 $ 10.96
Exercised (3,751) 10.10 (10,704) 8.93 (69,133) 9.16
Canceled (8,750) 14.35 (2,078) 12.16 (2,917) 13.50
Granted 49,200 17.68 86,850 17.68 39,100 17.78
------------ ------------ ------------ ------------ ------------ ------------
Outstanding, end of year 279,799 $ 15.54 243,100 $ 15.01 169,032 $ 13.23
============ ============ ============ ============ ============ ============
Options exercisable, end of year 145,599 $ 13.86 130,400 $ 13.32 98,267 $ 11.98
============ ============ ============ ============ ============ ============
A summary of the exercise price range at September 30, 2007 is as follows:
Exercise Weighted Weighted Average
Number of Price Average Remaining Exercise Price
Option Shares Range Contractual Life per Share
-------------- -------------- ---------------- --------------
60,350 $8.10 - 12.80 2.89 years $ 9.77
102,400 $13.13 - 17.50 7.21 years 16.42
117,049 $17.68 - 18.00 8.43 years 17.81
-------------- -------------- -------------- --------------
279,799 $8.10 - 18.00 6.79 years $ 15.54
============== ============== ============== ==============
For the years ended September 30, 2007 and 2006, the aggregate intrinsic value
of options outstanding was $251,000 and $984,000, respectively. For the years
ended September 30, 2007 and 2006, the aggregate intrinsic value of options
exercisable was $242,000 and $425,000, respectively.
The aggregate intrinsic value of a stock option represents the total pre-tax
intrinsic value (the amount by which the current market value of the underlying
stock exceeds the exercise price of the option) that would have been received by
the option holder had all option holders exercised their options on September
30, 2007. This amount changes based on changes in the market value of the
Company's stock.
Stock Based Compensation Expense. As stated in Note 1 - Significant Accounting
Policies, the Company adopted the provisions of SFAS 123R on October 1, 2005.
SFAS 123R requires that stock-based compensation to employees be recognized as
compensation cost in the consolidated statements of income based on their fair
values on the measurement date, which, for the Company, is the date of grant.
Included in the results for the years ended September 30, 2007 and 2006 were
compensation costs relating to the adoption of Statement No. 123R of
approximately $97,000, or $64,000 net of tax and $109,000, or $72,000, net of
tax, respectively. As of September 30, 2007, there was approximately $224,000 of
total unrecognized compensation cost related to non-vested stock options under
the plans.
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% nor
65
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 2007, 2006 and 2005, 0, 0 and 3,729 shares were issued
to employees, respectively. At September 30, 2007 and 2006, 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.
15. COMMITMENTS
At September 30, 2007, the Company had approximately $8.9 million in outstanding
commitments to originate mortgage loans, of which $7.7 million were at fixed
rates ranging from 5.88% to 7.75% and adjustable rates of $1.2 million at 6.25%.
The unfunded line of credit commitments at September 30, 2007 were $41.0
million. The Company had $1.3 million and $7.2 million of committed commercial
and consumer loans, respectively at September 30, 2007. In addition, the Company
had $2.1 million of unused commercial lines of credit. The amounts of
undisbursed portions of loans in process at September 30, 2007 were $2.9
million. The Company had a total of $292,000 in standby letters of credit. Also,
at September 30, 2007 the Company had no outstanding futures or options
positions.
The Company leases land for two of its branch offices. Minimum rental
commitments for the next five years at September 30, 2007, are summarized below:
Fiscal Rental
Year Amount
---- --------
2008 98,407
2009 104,332
2010 106,978
2011 108,300
2012 113,168
--------
Total $531,185
========
16. 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.
17. 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, 2007. 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.
18. 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
66
use of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
September 30,
2007 2006
-----------------------------------------------------------------
Carrying Estimated Fair Carrying Estimated Fair
Amount Value Amount Value
-------------- -------------- -------------- --------------
Assets:
Cash and cash equivalents $ 8,316,939 $ 8,316,939 $ 10,050,150 $ 10,050,150
Investment securities held to maturity 108,693,247 109,305,489 111,098,682 111,247,877
Investment securities available-for-sale at fair value 1,909,949 1,909,949 8,107,759 8,107,759
Mortgage-backed securities held to maturity 192,842,505 188,612,469 219,493,818 213,912,604
Mortgage-backed securities available-for-sale at fair value 817,524 817,524 820,255 820,255
Loans receivable - net 419,052,750 411,520,696 385,450,375 379,488,305
Federal Home Loan Bank Stock 14,140,100 14,140,100 15,498,600 15,498,600
Accrued interest receivable 4,046,947 4,046,947 3,969,610 3,969,610
Liabilities:
Passbook, Club and NOW accounts 54,065,528 54,065,528 49,793,831 49,793,831
Money Market Demand accounts 51,826,626 51,826,626 58,989,416 58,989,416
Certificate accounts 318,142,918 315,847,783 320,470,800 316,274,938
Borrowings 298,608,628 300,032,013 294,611,162 293,194,247
Accrued interest payable 1,556,225 1,556,225 1,406,161 1,406,161
Off balance sheet financial instruments -- -- -- --
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 accrued interest receivable and payable is 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 borrowings 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, 2007 and 2006. 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.
67
19. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Condensed financial statements of Harleysville Savings Financial Corporation are
as follows:
September 30,
-------------
Condensed Statements of Financial Condition
2007 2006
---- ----
Assets
Cash $ 194,960 $ 183,080
Investment in subsidiary 47,311,645 48,662,388
------------ ------------
Total Assets $ 47,506,605 $ 48,845,468
============ ============
Liabilities & Stockholders' Equity
Other Liabilities $ 465,702 $ 374,098
Stockholders' equity 47,040,903 48,471,370
------------ ------------
Total Liabilities & Stockholders' Equity $ 47,506,605 $ 48,845,468
============ ============
Condensed Statements of Income
For the Year Ended September 30,
Income: 2007 2006 2005
---- ---- ----
Equity in income of subsidiary $ 3,679,733 $ 4,594,634 $ 5,375,655
Other expense 433,790 393,096 371,935
------------ ------------ ------------
Net income $ 3,245,943 $ 4,201,538 $ 5,003,720
============ ============ ============
Condensed Statements of Cash Flows For the Year Ended September 30,
Income: 2007 2006 2005
---- ---- ----
Net income $ 3,245,943 $ 4,201,538 $ 5,003,720
Increase in other liabilities 91,604 326,922 3,408
Income of Harleysville Savings Bank (3,679,733) (4,594,634) (5,375,655)
------------ ------------ ------------
Net cash used by operating activities (342,186) (66,174) (368,527)
------------ ------------ ------------
Investing activities:
Dividends received from subsidiary 5,050,000 3,641,975 1,960,000
------------ ------------ ------------
Net cash provided by investing activities 5,050,000 3,641,975 1,960,000
------------ ------------ ------------
Financing activities:
Acquisition of treasury stock (2,693,853) (1,681,657) (328,280)
Use of treasury stock 595,171 451,402 421,706
Proceeds from issuance of common stock -- 300,599 460,431
Dividends paid (2,597,252) (2,482,506) (2,252,336)
------------ ------------ ------------
Net cash used in financing activities (4,695,934) (3,412,162) (1,698,479)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 11,880 163,639 (107,006)
Cash and cash equivalents at the beginning of the period 183,080 19,441 126,447
------------ ------------ ------------
Cash and cash equivalents at the end of the period $ 194,960 $ 183,080 $ 19,441
============ ============ ============
68
20. Quarterly Financial Data (Unaudited)
Unaudited quarterly financial data for the years ended September 30, 2007 and
2006 is as follows: (in thousands, except per share data)
2007 2006
------------------------------------- -------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
QTR QTR QTR QTR QTR QTR QTR QTR
------- ------- ------- ------- ------- ------- ------- -------
Interest Income $ 9,840 $ 9,899 $10,115 $10,442 $ 9,463 $ 9,635 $ 9,923 $10,062
Interest Expense 7,015 6,957 7,249 7,572 6,422 6,371 6,621 6,953
------- ------- ------- ------- ------- ------- ------- -------
Net Interest Income 2,825 2,942 2,866 2,870 3,041 3,264 3,302 3,109
Provision for loan losses -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses 2,825 2,942 2,866 2,870 3,041 3,264 3,302 3,109
Non-interest income 373 546 475 477 329 282 340 356
Non-interest expense 2,260 2,315 2,316 2,326 1,973 2,031 2,156 2,407
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 938 1,173 1,025 1,021 1,397 1,515 1,486 1,058
Income tax expense 181 269 212 250 316 354 386 199
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 757 $ 904 $ 813 $ 771 $ 1,081 $ 1,161 $ 1,100 $ 859
======= ======= ======= ======= ======= ======= ======= =======
Per Common Share:
Earnings per share - basic $ 0.20 $ 0.23 $ 0.21 $ 0.21 $ 0.28 $ 0.30 $ 0.29 $ 0.22
Earnings per share - diluted $ 0.19 $ 0.23 $ 0.21 $ 0.21 $ 0.27 $ 0.29 $ 0.28 $ 0.22
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.
Item 9. Changes in and Disagreements With Accountants on Accounting and
------------------------------------------------------------------------
Financial Disclosure.
---------------------
Not Applicable.
Item 9A. 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 September 30, 2007. 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 fourth fiscal quarter of fiscal 2007 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Item 9B. Other Information.
---------------------------
Not applicable.
69
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
----------------------------------------------------------------
The information required herein is incorporated by reference from the
information contained in the sections captioned "Information with Respect to
Nominees for Director, Directors Whose Terms Continue and Executive Officers"
and "Beneficial Ownership of Common Stock by Certain Beneficial Owners and
Management - Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's definitive Proxy Statement for the 2008 Annual Meeting of Stockholders
to be held in January 2008 (the "Proxy Statement").
The Company has adopted a Code of Conduct and Ethics that applies to
its principal executive officer and principal financial officer, as well as
other officers and employees of the Company and the Bank. A copy of the Code of
Ethics, was included as an exhibit to the Company's Form 10-K for the year ended
September 30, 2003 and filed with the Securities and Exchange Commission, may
also be found on the Company's website at www.harleysvillesavingsbank.com.
Item 11. Executive Compensation.
--------------------------------
The information required herein is incorporated by reference from the
information contained in the sections captioned "Management Compensation" and
"Compensation Committee Report" and "Compensation Committee Interlocks and
Insider Participation" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
---------------------------------------------------------------------------
Related Stockholder Matters.
----------------------------
The information required herein is incorporated by reference from the
information contained in the section captioned "Beneficial Ownership of Common
Stock by Certain Beneficial Owners and Management" in the Proxy Statement.
Equity Compensation Plan Information
The following table sets forth certain information for all equity
compensation plans and individual compensation arrangements (whether with
employees or non-employees, such as directors), in effect as of September 30,
2007.
Number of Shares to be Number of Shares Remaining
issued upon the Exercise Weighted-Average Available for Future Issuance
of Outstanding Options, Exercise Price of (Excluding Shares Reflected
Plan Category Warrants and Rights(1) Outstanding Options in the First Column)(2)
----------------------------- ---------------------- -------------------- -----------------------
Equity compensation plans
approved by security holders 279,799 $ 15.54 273,225
Equity compensation plans not
approved by security holders -- -- --
-------------- -------------- --------------
Total 279,799 $ 15.54 273,225
============== ============== ==============
-----------
(1) Does not take into account purchase rights accruing under the Company's
1995 Employee Stock Purchase Plan, which was approved by stockholders and
provides for up to 87,281 shares to be issued. Under the Employee Stock
Purchase Plan, each eligible employee may purchase shares of common stock
at semi-annual intervals each year at a purchase price determined by the
committee of the board of directors which administers the plan, which shall
not be less than the lesser of (i) 85% of the fair market value of a share
of common stock on the first business day of the applicable semi-annual
offering period or (ii) 85% of the fair market value of a share of common
stock on the last business day of such offering period. In no event may the
amount of common stock purchased by a participant in the Employee Stock
Purchase Plan in a calendar year exceed $25,000, measured as of the time an
option under the plan is granted.
(2) Includes shares available for future issuance under the Employee Stock
Purchase Plan. As of September 30, 2007, an aggregate of 53,583 shares of
common stock were available for issuance under this plan.
70
Item 13. Certain Relationships and Related Transactions and Directors
---------------------------------------------------------------------
Independence.
-------------
The information required herein is incorporated by reference from the
information contained in the sections captioned "Management Compensation -
Related Party Transactions" and "Information with Respect to Nominees for
Director, Continuing Directors and Executive Officers" in the Proxy Statement.
Item 14. Principal Accounting Fees and Services.
------------------------------------------------
The information required herein is incorporated by reference from the
information contained in the section captioned "Relationship with Independent
Registered Public Accounting Firm - Audit Fees" in the Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
---------------------------------------------------
(a) (1) The following financial statements are incorporated by reference
from Item 8 hereof:
Consolidated Statements of Financial Condition as of September 30, 2007
and 2006
Consolidated Statements of Income for the Years Ended September 30,
2007, 2006 and 2005
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 2007, 2006 and
2005
Consolidated Statements of Comprehensive Income for the Years Ended
September 30, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the Years Ended September 30,
2007, 2006 and 2005 Notes to Consolidated Financial Statements
(2) All schedules are omitted because they are not required or
applicable, or the required information is shown in the consolidated financial
statements or the notes thereto.
(3) Exhibits
The following exhibits are filed as part of this Form 10-K and this
list includes the Exhibit Index.
No. Description Location
---- ------------------------------------------------------------------------------ ---------------
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Amended and Restated Bylaws (1)
4.0 Common Stock Certificate (2)
10.1 1995 Stock Option Plan* (3)
10.2 2000 Stock Option Plan* (4)
10.3 2005 Stock Option Plan* (5)
10.4 Profit Sharing Incentive Plan* (3)
10.5 Amended and Restated Employment Agreement between the Company,
the Bank and Ronald B. Geib* (6)
22.0 Subsidiaries of the Registrant - Reference is made to "Item 1. Business
- Subsidiaries" of this Form 10-K for the required information --
23.1 Consent of Beard Miller Company LLP Filed herewith
23.2 Consent of Deloitte & Touche LLP Filed herewith
31.1 Certification of Chief Executive Officer Filed herewith
31.2 Certification of Chief Financial Officer Filed herewith
32.0 Section 1350 Certification of the Chief Executive Officer and Chief Financial Filed herewith
Officer
99.0 Code of Conduct and Ethics (4)
------------
(Footnotes on following page)
71
------------
* Denotes management compensation plan or arrangement.
(1) Incorporated herein by reference to the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission ("SEC") on
August 17, 2007.
(2) Incorporated by reference to the Company's Current Report on Form 8-K
filed with the SEC on February 25, 2000.
(3) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended September 30, 2003, filed with the SEC on
December 23, 2003.
(4) Incorporated by reference to the Company's definitive proxy statement
dated December 19, 2000 filed with the SEC.
(5) Incorporated by reference from the Company's definitive proxy statement
for the 2005 Annual Meeting of Stockholders filed with the SEC on
December 16, 2005.
(6) Incorporated by reference to the Company's Current Report on Form 8-K
filed with the SEC on November 1, 2006.
(b) Exhibits
The exhibits listed under (a)(3) of this Item 15 are filed herewith.
(c) Reference is made to (a)(2) of this Item 15.
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
December 21, 2007 By: /s/ Ronald B. Geib
-------------------------------------
Ronald B. Geib
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Name Title Date
----------------------------- ---------------------------------- -------------------
/s/ Edward J. Molnar Chairman of the Board December 21, 2007
-----------------------------
Edward J. Molnar
/s/ Ronald B. Geib President and Chief Executive December 21, 2007
----------------------------- Officer
Ronald B. Geib (principal executive officer)
/s/ Brendan J. McGill Senior Vice President, Treasurer December 21, 2007
----------------------------- and Chief Financial Officer
Brendan J. McGill (principal financial and principal
accounting officer)
/s/ Sanford L. Alderfer December 21, 2007
-----------------------------
Sanford L. Alderfer Director
/s/ Mark R. Cummins Director December 21, 2007
-----------------------------
Mark R. Cummins
/s/ David J. Friesen Director December 21, 2007
-----------------------------
David J. Friesen
73
Name Title Date
----------------------------- ---------------------------------- -------------------
/s/ Charlotte A. Hunsberger Director December 21, 2007
-----------------------------
Charlotte A. Hunsberger
/s/ George W. Meschter Director December 21, 2007
-----------------------------
George W. Meschter
/s/ James L. Rittenhouse Director December 21, 2007
-----------------------------
James L. Rittenhouse
/s/ Philip A. Clemens Director December 21, 2007
-----------------------------
Philip A. Clemens
74