UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20429
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
--------------------------------------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 0-29709
HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-3028464
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
271 Main Street, Harleysville, Pennsylvania 19438
--------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(215) 256-8828
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No ___
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of "large accelerated filer" "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer __ Accelerated filer __
Non-accelerated filer __ Smaller reporting company |X|
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.01 Par Value, 3,543,190 shares outstanding as of May 12, 2008
Harleysville Savings Financial Corporation
and Subsidiary
Index
PAGE(S)
-------
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Statements of Financial Condition as of
March 31, 2008 Unaudited and September 30, 2007 1
Unaudited Consolidated Statements of Income for the Three and Six
Months Ended March 31, 2008 and 2007 2
Unaudited Consolidated Statements of Comprehensive Income for the
Three and Six Months Ended March 31, 2008 and 2007 3
Unaudited Consolidated Statements of Stockholders' Equity for the Six
Months Ended March 31, 2008 and March 31, 2007 4
Unaudited Consolidated Statements of Cash Flows for the Six Months
Ended March 31, 2008 and 2007 5
Notes to Unaudited Consolidated Financial Statements 6 - 17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18 - 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 -21
Item 4. Controls and Procedures 22
Part II OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 1A. Risk Factors 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3. Defaults upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other information 23
Item 6. Exhibits 23
Signatures 24
Harleysville Savings Financial Corporation
Unaudited Consolidated Statements of Financial Condition
March 31, September 30,
(In thousands, except share data) 2008 2007
------------ -------------
Assets
Cash and amounts due from depository institutions $ 1,561 $ 1,647
Interest bearing deposits in other banks 6,183 6,670
------------ ------------
Total cash and cash equivalents 7,744 8,317
Investment securities held to maturity (fair value -
March 31, $99,268; September 30, $109,305) 96,831 108,693
Investment securities available-for-sale at fair value 1,194 1,910
Mortgage-backed securities held to maturity (fair value -
March 31, $224,234; September 30, $188,612) 222,782 192,842
Mortgage-backed securities available-for-sale at fair value 797 817
Loans receivable (net of allowance for loan losses -
March 31, $1,925; September 30, $1,932) 440,337 419,053
Accrued interest receivable 3,881 4,047
Federal Home Loan Bank stock - at cost 14,096 14,140
Office properties and equipment, net 9,971 9,917
Prepaid expenses and other assets 14,221 13,808
------------ ------------
TOTAL ASSETS $ 811,854 $ 773,544
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 450,516 $ 424,035
Advances 309,285 298,609
Accrued interest payable 1,482 1,556
Advances from borrowers for taxes and insurance 4,414 1,247
Accounts payable and accrued expenses 760 1,056
------------ ------------
Total liabilities 766,457 726,503
------------ ------------
Stockholders' equity:
Preferred Stock: $.01 par value;
12,500,000 shares authorized; none issued
Common stock: $.01 par value; 25,000,000 shares authorized;
3,921,177 shares issued 39 39
Additional paid-in capital 7,982 8,044
Treasury stock, at cost (March 31, 2008 377,987 shares; September 30 2007, 203,658) (5,357) (3,316)
Retained earnings - partially restricted 42,933 42,363
Accumulated other comprehensive loss (200) (89)
------------ ------------
Total stockholders' equity 45,397 47,041
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 811,854 $ 773,544
============ ============
See notes to unaudited condensed consolidated financial statements.
page -1-
Harleysville Savings Financial Corporation
Unaudited Consolidated Statements of Income
For the Three Months Ended For the Six Months Ended
(In thousands,except per share data) March 31, March 31,
-------------------------- --------------------------
2008 2007 2008 2007
---- ---- ---- ----
INTEREST INCOME:
Interest on mortgage loans $ 4,671 $ 4,230 $ 9,256 $ 8,435
Interest on commerical loans 409 112 717 153
Interest on mortgage-backed securities 2,437 2,335 4,718 4,779
Interest on consumer and other loans 1,466 1,495 2,982 3,005
Interest on taxable investments 1,378 1,328 2,829 2,586
Interest on tax-exempt investments 348 383 699 743
Dividends on investment securities 13 16 22 30
---------- ---------- ---------- ----------
Total interest income 10,722 9,899 21,223 19,731
---------- ---------- ---------- ----------
Interest Expense:
Interest on deposits 4,167 3,806 8,312 7,528
Interest on borrowings 3,352 3,151 6,839 6,457
---------- ---------- ---------- ----------
Total interest expense 7,519 6,957 15,151 13,985
---------- ---------- ---------- ----------
Net Interest Income 3,203 2,942 6,072 5,746
Provision for loan losses 5 -- 5 --
---------- ---------- ---------- ----------
Net Interest Income after Provision
for Loan Losses 3,198 2,942 6,067 5,746
---------- ---------- ---------- ----------
Other Income:
Customer service fees 140 127 304 257
Gain on sale of investments 4 160 4 160
Income on bank-owned life insurance 121 116 252 234
Other income 202 143 406 287
---------- ---------- ---------- ----------
Total other income 467 546 966 938
---------- ---------- ---------- ----------
Other Expenses:
Salaries and employee benefits 1,438 1,302 2,758 2,556
Occupancy and equipment 262 273 527 526
Deposit insurance premiums 12 13 25 26
Data Processing 130 131 248 287
Other 583 596 1,252 1,179
---------- ---------- ---------- ----------
Total other expenses 2,425 2,315 4,810 4,574
---------- ---------- ---------- ----------
Income before Income Taxes 1,240 1,173 2,223 2,110
Income tax expense 206 269 388 449
---------- ---------- ---------- ----------
Net Income $ 1,034 $ 904 $ 1,835 $ 1,661
========== ========== ========== ==========
Basic Earnings Per Share $ 0.28 $ 0.23 $ 0.49 $ 0.43
========== ========== ========== ==========
Diluted Earnings Per Share $ 0.28 $ 0.23 $ 0.49 $ 0.43
========== ========== ========== ==========
Dividends Per Share $ 0.17 $ 0.17 $ 0.34 $ 0.34
========== ========== ========== ==========
See notes to unaudited consolidated financial statements.
page -2-
Harleysville Savings Financial Corporation
Unaudited Consolidated Statements of Comprehensive Income
Three Months Ended
March 31,
(In thousands) 2008 2007
-----------------------------------------------------------------------------------------------------------------------
Net Income $ 1,034 $ 904
Other Comprehensive Income
Unrealized gain on securities net of tax
2008, ($7); 2007, $(22) 14(1) 42
----------- -----------
Total Comprehensive Income $ 1,048 $ 946
=========== ===========
(1) Disclosure of reclassification amount, net of tax for the three months ended: 2008 2007
---- ----
Net unrealized gain arising during the three months ended $ 14 $ 147
Less: Reclassification adjustment for net gains included in net income
net of tax expense 2008, $0; 2007, $54 -- 105
----------- -----------
Net unrealized gain on securities $ 14 $ 42
=========== ===========
Six Months Ended
March 31,
2008 2007
-----------------------------------------------------------------------------------------------------------------------
Net Income $ 1,835 $ 1,661
Other Comprehensive Income
Unrealized loss on securities net of tax benefit
2008, $57; 2007, $1 (111)(1) (2)
----------- -----------
Total Comprehensive Income $ 1,724 $ 1,659
=========== ===========
(1) Disclosure of reclassification amount, net of tax for the six months ended: 2008 2007
---- ----
Net unrealized gain arising during the six months ended $ 3 $ 103
Less: Reclassification adjustment for net gains included in net income
net of tax expense 2008, $59; 2007, $54 114 105
----------- -----------
Net unrealized (loss) on securities $ (111) $ (2)
=========== ===========
See notes to unaudited consolidated financial statements.
page -3-
Harleysville Savings Financial Corporation
Unaudited Consolidated Statements of Stockholders' Equity
Retained Accumulated
Common Additional Earnings- Other Total
Stock Common Paid-in Treasury Partially Comprehensive Stockholders'
(In thousands, except share and per share data) Shares Stock Capital Stock Restricted Loss Equity
------------------------------------------------------------------------------------------------------------------------------------
Balance at October 1, 2007 3,921,177 $ 39 $ 8,044 $(3,316) $ 42,363 $ (89) $ 47,041
Net Income 1,835 1,835
Dividends - $.34 per share (1,265) (1,265)
Option Compensation 54 54
Treasury stock purchased (205,358 shares) (2,557) (2,557)
Treasury stock issued for stock options
exercised (2,250 shares) (19) 38 19
Treasury Stock issued under
Dividend Reinvestment Plan (20,779 shares) (71) 345 274
Treasury stock delivered under
employee stock plan (8,000 shares) (26) 133 107
Change in unrealized holding loss on
available - for- sale securities (111) (111)
--------- --------- ------- ------- --------- --------- --------
Balance at March 31, 2008 3,921,177 $ 39 $ 7,982 $(5,357) $ 42,933 $ (200) $ 45,397
========= ========= ======= ======= ========= ========= ========
Retained Accumulated
Common Additional Earnings- Other Total
Stock Common Paid-in Treasury Partially Comprehensive Stockholders'
Shares Stock Capital Stock Restricted Loss Equity
------------------------------------------------------------------------------------------------------------------------------------
Balance at October 1, 2006 3,921,177 $ 39 $ 7,992 $(1,262) $ 41,715 $ (12) $ 48,472
Net Income 1,661 1,661
Dividends - $.34 per share (1,311) (1,311)
Option Compensation 56 56
Treasury stock issued for stock options
exercised (3,334 shares) (13) 58 45
Treasury Stock issued under
Dividend Reinvestment Plan (16,746 shares) (4) 291 287
Change in unrealized holding loss on
available - for- sale securities (2) (2)
--------- --------- ------- ------- --------- --------- --------
Balance at March 31, 2007 3,921,177 $ 39 $ 8,031 $ (913) $ 42,065 $ (14) $ 49,208
========= ========= ======= ======= ========= ========= ========
See notes to unaudited condensed consolidated financial statements.
page -4-
Harleysville Savings Financial Corporation
Unaudited Consolidated Statements of Cash Flows
Six Months Ended March 31,
--------------------------
(In thousands) 2008 2007
---- ----
Operating Activities:
Net Income $ 1,835 $ 1,661
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 257 260
Provision for loan losses 5 --
Gain on sale of securities (4) (160)
Amortization of deferred loan fees 12 (1)
Net amortization of premiums and discounts 17 85
Increase in cash surrender value (252) (234)
Compensation charge on stock options 54 56
Changes in assets and liabilities which provided (used) cash:
(Decrease) Increase in accounts payable and accrued expenses (296) 37
Increase in prepaid expenses and other assets (104) (14)
Decrease in accrued interest receivable 166 249
Decrease in accrued interest payable (74) (156)
----------- -----------
Net cash provided by operating activities 1,616 1,783
Investing Activities:
Purchase of investment securities held to maturity (18,086) (17,492)
Purchase of mortgage-backed securities held to maturity (48,147) (8,059)
Proceeds from maturities of investment securities available-for-sale 568 1,311
Proceeds from sale of investment securities available-for-sale -- (471)
Proceeds from sales of mortgage-backed securities -- 10,290
Proceeds from redemption of FHLB stock 44 1,690
Proceeds from maturities of investment securities held to maturity 29,948 21,769
Principal collected on long-term loans & mortgage-backed securities 62,287 59,555
Long-term loans originated or acquired (65,394) (56,523)
Purchases of premises and equipment (311) (2,163)
----------- -----------
Net cash (used in) provided by investing activities (39,091) 9,907
Financing Activities:
Net (decrease) increase in demand deposits, NOW accounts
and savings accounts (620) 7,365
Net increase (decrease) in certificates of deposit 27,101 (2,148)
Cash dividends (1,265) (1,311)
Proceeds from long-term debt 121,800 25,000
Repayment of long-term debt (111,124) (45,457)
Treasury stock delivered under Dividend Reinvestment and
employee stock plans 400 332
Acquisition of Treasury stock (2,557)
Net increase in advances from borrowers for taxes and insurance 3,167 2,620
----------- -----------
Net cash provided by (used in) financing activities 36,902 (13,599)
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (573) (1,909)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,317 10,050
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,744 $ 8,141
=========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest (credited and paid) $ 15,225 $ 14,141
Income taxes 433 2
See notes to consolidated financial statements.
page -5-
2. INVESTMENT SECURITIES HELD TO MATURITY
A comparison of amortized cost and approximate fair value of investment
securities held to maturity with gross unrealized gains and losses is as
follows:
March 31, 2008
Gross Gross
Amortized Unrealized Unrealized Approximate
(In thousands) Cost Gains Losses Fair Value
------------------------------------------------------------------------------------------------
U.S. Government Agencies $ 71,741 $ 1,173 $ -- $ 72,914
Tax-Exempt Obligations 25,090 1,377 (113) 26,354
----------- ----------- ----------- -----------
Total Investment Securities $ 96,831 $ 2,550 $ (113) $ 99,268
=========== =========== =========== ===========
September 30, 2007
Gross Gross
Amortized Unrealized Unrealized Approximate
(In thousands) Cost Gains Losses Fair Value
------------------------------------------------------------------------------------------------
U.S. Government Agencies $ 83,155 $ 211 $ (533) $ 82,833
Tax Exempt Obligations 25,538 1,101 (167) 26,472
----------- ----------- ----------- -----------
Total Investment Securities $ 108,693 $ 1,312 $ (700) $ 109,305
=========== =========== =========== ===========
page -12-
3. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
A comparison of amortized cost and approximate fair value of investment
securities available-for-sale with unrealized gains and losses is as follows:
March 31, 2008
Gross Gross
Amortized Unrealized Unrealized
(In thousands) Cost Gains Losses Fair Value
------------------------------------------------------------------------------------------------
Equity Securities $ 1,501 $ 24 $ (339) $ 1,186
Money Market Mutual Funds 8 -- -- 8
----------- ----------- ----------- -----------
Total Investment Securities $ 1,509 $ 24 $ (339) $ 1,194
=========== =========== =========== ===========
At March 31, 2008 the Company had 3 equity securities with unrealized losses of
$199,000 in this position for a time period greater than twelve months. The
Company also had 2 equity securities with unrealized losses of $140,000 in this
position for a time period less than twelve months. All these securities are
equity holdings of other financial institutions. The severity and duration of
the impairment is consistent with market developments in the financial industry.
Management believes these equity securities in an unrealized loss position will
recover in the foreseeable future. The Company evaluated the near-term prospects
of the issuers in relation to the severity and duration of the impairment. Based
on that evaluation the Company's ability and intent to hold those securities for
a reasonable period of time sufficient for a forecasted recovery of fair value,
the Company does not consider these equity securities to be
other-than-temporarily impaired.
September 30, 2007
Gross Gross
Amortized Unrealized Unrealized
(In thousands) Cost Gains Losses Fair Value
------------------------------------------------------------------------------------------------
Equity Securities $ 1,501 $ 6 $ (173) $ 1,334
Money Market Mutual Funds 576 -- -- 576
----------- ----------- ----------- -----------
Total Investment Securities $ 2,077 $ 6 $ (173) $ 1,910
=========== =========== =========== ===========
page -13-
4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
A comparison of amortized cost and approximate fair value of mortgage-backed
securities held to maturity with gross unrealized gains and losses is as
follows:
March 31,2008
Gross Gross
Amortized Unrealized Unrealized Approximate
(In thousands) Cost Gains Losses Fair Value
--------------------------------------------------------------------------------------------------------
Collateralized mortgage obligations $ 15,703 $ 39 $ (220) $ 15,522
FHLMC pass-through certificates 94,831 866 (63) 95,634
FNMA pass-through certificates 112,027 868 (42) 112,853
GNMA pass-through certificates 221 4 -- 225
----------- ----------- ----------- -----------
Total Mortgage-Backed Securities $ 222,782 $ 1,777 $ (325) $ 224,234
=========== =========== =========== ===========
September 30,2007
Gross Gross
Amortized Unrealized Unrealized Approximate
(In thousands) Cost Gains Losses Fair Value
--------------------------------------------------------------------------------------------------------
Collateralized mortgage obligations $ 16,471 $ 97 $ (299) $ 16,269
FHLMC pass-through certificates 89,533 164 (2,198) 87,499
FNMA pass-through certificates 86,586 12 (2,008) 84,590
GNMA pass-through certificates 252 2 -- 254
----------- ----------- ----------- -----------
Total Mortgage-Backed Securities $ 192,842 $ 275 $ (4,505) $ 188,612
=========== =========== =========== ===========
page -14-
5. MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE
A comparison of amortized cost and approximate fair value of mortgage-backed
securities available-for-sales with gross unrealized gains and losses is as
follows:
March 31,2008
Gross Gross
Amortized Unrealized Unrealized
(In thousands) Cost Gains Losses Fair Value
----------------------------------------------------------------------------------------------------
FNMA pass-through certificates $ 785 $ 12 $ -- $ 797
----------- ----------- ----------- -----------
Total Mortgage-Backed Securities $ 785 $ 12 $ -- $ 797
=========== =========== =========== ===========
September 30,2007
Gross Gross
Amortized Unrealized Unrealized
(In thousands) Cost Gains Losses Fair Value
----------------------------------------------------------------------------------------------------
FNMA pass-through certificates $ 785 $ 32 $ -- $ 817
----------- ----------- ----------- -----------
Total Mortgage-Backed Securities $ 785 $ 32 $ -- $ 817
=========== =========== =========== ===========
6. LOANS RECEIVABLE
Loans receivable consist of the following: (In thousands)
March 31, 2008 September 30, 2007
-------------- ------------------
Residential Mortgages $ 322,237 $ 305,341
Commercial Mortgages 25,318 15,314
Construction 4,339 6,093
Savings Account 992 977
Home Equity 71,321 74,218
Automobile and other 933 904
Home Equity Line of Credit 22,161 21,386
--------- ---------
Total 447,301 424,233
Undisbursed portion of loans in process (4,622) (2,795)
Deferred loan fees (417) (453)
Allowance for loan losses (1,925) (1,932)
--------- ---------
Loans Receivable - net $ 440,337 $ 419,053
========= =========
The total amount of loans being serviced for the benefit of others was
approximately $3.3 million and $3.6 million at March 31, 2008 and September 30,
2007, respectively.
The following schedule summarizes the changes in the allowance for loan losses:
Six Months Ended Year Ended
March 31, 2008 September 30, 2007
-------------- ------------------
(In thousands)
--------------
Balance, beginning of period $ 1,932 $ 1,956
Provision for loan losses 5 --
Amounts charged-off (19) (37)
Loan recoveries 7 13
---------- ----------
Balance, end of period $ 1,925 $ 1,932
========== ==========
page -15-
7. DEPOSITS
Deposits are summarized as follows: (In thousands)
March 31,2008 September 30,2007
------------- -----------------
Non-interest bearing checking $ 11,775 $ 11,740
NOW accounts 14,958 13,711
Interest checking accounts 27,872 25,750
Money Market Demand accounts 48,208 51,827
Passbook and Club accounts 2,459 2,864
Certificate accounts 345,244 318,143
----------- -----------
Total deposits $ 450,516 $ 424,035
=========== ===========
The aggregate amount of certificate accounts in denominations of more than
$100,000 at March 31, 2008 and September 30, 2007 amounted to approximately
$58.4 million and $53.6 million, respectively. Amounts in excess of $100,000 may
not be federally insured.
8. COMMITMENTS
At March 31, 2008, the following commitments were outstanding:
(In thousands)
Commitments to originate mortgage loans $ 9,267
Unused line of credit loans 46,308
Loans in process 4,622
----------
Total $ 60,197
==========
page -16-
9. EARNINGS PER SHARE
The following shares were used for the computation of earnings per share:
For the Three Months Ended For the Six Months Ended
March 31, March 31,
----------------------------------------------------------------------------
2008 2007 2008 2007
---- ---- ---- ----
Basic 3,730,759 3,864,189 3,726,061 3,859,201
Diluted 3,746,480 3,891,445 3,743,211 3,892,782
The difference between the number of shares used for computation of basic
earnings per share and diluted earnings per share represents the dilutive effect
of stock options.
10. ADVANCES
Advances consists of the following:
March 31, September 30,
2008 2007
Weighted Weighted
(In thousands) Interest Interest
Maturing Period Amount Rate Amount Rate
-------------------------------------------------------------------------------------
1 to 12 months $ 37,623 4.36% $ 69,227 5.07%
13 to 24 months 22,995 4.43% 20,043 4.37%
25 to 36 months 15,000 4.71% 17,410 4.50%
37 to 48 months 29,313 4.46% 23,595 4.99%
49 to 60 months 52,379 4.23% 58,334 4.48%
61 to 72 months 41,975 4.22% 20,000 4.63%
73 to 84 months 5,000 3.58% 20,000 4.26%
85 to 120 months 105,000 4.03% 70,000 4.50%
--------------------------------------------------
Total $309,285 4.23% $298,609 4.65%
==================================================
The majority of the advances are collateralized by Federal Home Loan Bank
("FHLB") stock and substantially all first mortgage loans. The Company has a
line of credit with the FHLB of which $8 million out of $75.0 million was used
at March 31, 2008 and $31.5 million was used as of September 30, 2007, for
general purposes. Included in the table above at March 31, 2008 and September
30, 2007 are convertible advances whereby the FHLB has the option at a
predetermined strike rate to convert the fixed interest rate to an adjustable
rate tied to London Interbank Offered Rate ("LIBOR"). The Company then has the
option to repay these advances if the FHLB converts the interest rate. These
advances are included in the periods in which they mature. The Company has a
total FHLB borrowing capacity of $545.6 million of which $259.2 million was used
as of March 31, 2008. In addition, there are four long-term advances from other
financial institutions that are secured by investment and mortgage-backed
securities totalin
11. REGULATORY CAPITAL REQUIREMENTS
Harleysville Savings Bank (the "Bank") is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Bank's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Quantitative measures
established by regulation to ensure capital adequacy require the Bank to
maintain minimum amounts and ratios (set forth in the table below) of total Tier
1 capital (as defined in the regulations) to risk weighted assets (as defined),
and of Tier 1 capital (as defined) to assets (as defined). Management believes,
as of March 31, 2008, that the Bank meets all capital adequacy requirements to
which it is subject.
As of March 31, 2008, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
The Bank's actual capital amounts and ratios are also presented in the table.
To Be Considered Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------------------------------------------------------------------
As of March 31, 2008
Tier 1 Capital (to assets) $ 44,834 5.62% $ 31,905 4.00% $ 39,881 5.00%
Tier 1 Capital (to risk weighted assets) 44,834 11.10% 16,155 4.00% 24,232 6.00%
Total Capital (to risk weighted assets) 46,759 11.58% 32,309 8.00% 40,386 10.00%
As of September 30, 2007
Tier 1 Capital (to assets) $ 46,797 6.02% $ 31,021 4.00% $ 38,776 5.00%
Tier 1 Capital (to risk weighted assets) 46,797 12.12% 15,443 4.00% 23,164 6.00%
Total Capital (to risk weighted assets) 48,729 12.62% 30,886 8.00% 38,607 10.00%
page -17-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains certain forward-looking statements and information relating
to the Company that are based on the beliefs of management as well as
assumptions made by and information currently available to management. In
addition, in those and other portions of this document, the words "anticipate,"
"believe," "estimate," "intend," "should" and similar expressions, or the
negative thereof, as they relate to the Company or the Company's management, are
intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future-looking events and are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected or intended. The Company does not
intend to update these forward-looking statements.
The Company's 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, commercial loans and
commercial lines of credit in the Company's primary market area. The Company
also originates a variety of consumer loans, predominately home equity loans and
lines of credit also secured by residential properties in the Company's primary
lending area. The Company serves its customers through its full-service branch
network as well as through remote ATM locations, the internet and telephone
banking.
Critical Accounting Policies and Judgments
------------------------------------------
The Company's consolidated financial statements are prepared based on the
application of certain accounting policies. Certain of these policies require
numerous estimates and strategic or economic assumptions that may prove
inaccurate or subject to variations and may significantly affect the Company's
reported results and financial position for the period or in future periods.
Changes in underlying factors, assumptions, or estimates in any of these areas
could have a material impact on the Company's future financial condition and
results of operations.
Analysis and Determination of the Allowance for Loan Losses - The allowance for
loan losses is a valuation allowance for probable losses inherent in the loan
portfolio. The Company evaluates the need to establish allowances against losses
on loans on a monthly basis. When additional allowances are necessary, a
provision for loan losses is charged to earnings.
Our methodology for assessing the appropriateness of the allowance for loan
losses consists of three key elements: (1) specific allowances for certain
impaired loans that are collateral dependent; (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 Loans that are Collateral
Dependent: We establish an allowance for certain impaired loans for the amounts
by which the collateral value or observable market price are lower than the
carrying value of the loan. Under current accounting guidelines, a loan is
defined as impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due under the
contractual terms of the loan agreement. At March 31,2008 and December 31, 2007,
no loans were considered impaired.
General Valuation Allowance on Certain Identified Problem Loans - We also
establish a general allowance for classified loans that do not have an
individual allowance. We segregate these loans by loan category and assign
allowance percentages to each category based on inherent losses associated with
each type of lending and consideration that these loans, in the aggregate,
represent an above-average credit risk and that more of these loans will prove
to be uncollectible compared to loans in the general portfolio.
General Valuation Allowance on the Remainder of the Loan Portfolio - We
establish another general allowance for loans that are not classified to
recognize the inherent losses associated with lending activities, but which,
unlike specific allowances, has not been allocated to particular problem assets.
This general valuation allowance is determined by segregating the loans by loan
category and assigning allowance percentages based on our historical loss
experience, delinquency trends and management's evaluation of the collectibility
of the loan portfolio. The allowance may be adjusted for significant factors
that, in management's judgment, affect the collectibility of the portfolio as of
the evaluation date. These significant factors may include changes in lending
policies and procedures,
page -18-
changes in existing general economic and business conditions affecting our
primary lending areas, credit quality trends, collateral value, loan volumes and
concentrations, seasoning of the loan portfolio, recent loss experience in
particular segments of the portfolio, duration of the current business cycle and
bank regulatory examination results. The applied loss factors are reevaluated
monthly to ensure their relevance in the current economic environment.
Changes in Financial Position for the Six-Month Period Ended March 31, 2008
---------------------------------------------------------------------------
Total assets at March 31, 2008 were $811.9 million, an increase of $38.3 million
for the six-month period then ended. The increase was primarily due to the
retail growth in mortgage and commercial loans, resulting in an overall increase
in loans receivable of approximately $21.3 million. There was also an increase
in investments due to purchases less maturities of approximately $18.1 million.
Asset growth was primarily funded by deposit growth during the six -month period
ended March 31, 2008, total deposits increased by $26.5 million to $450.5
million. Advances from borrowers for taxes and insurance also increased by $3.2
million due to the timing of property tax payments. There was also an increase
in advances of $10.7 million.
Comparisons of Results of Operations for the Three and Six Month Period Ended
-----------------------------------------------------------------------------
March 31, 2008 with the Three Month and Six Month Period Ended March 31, 2007
-----------------------------------------------------------------------------
Net Interest Income
-------------------
Net interest income was $3.2 million for the three-month period ended March 31,
2008 compared to $2.94 million for the comparable period in 2007. The increase
in the net interest income for the three -month period ended March 31, 2008 when
compared to the same period in 2007 can be attributed to the increase in the
difference between the average interest earning assets in relation to the
average interest earning liabilities in comparable periods. This increase was
partially offset by the decrease in interest rate spread from 1.4% in 2007 to
1.39% in 2008. The increase in the net interest income for the six-month period
ended March 31, 2008 when compared to the same period in 2007 can be attributed
to the increase in interest rate spread from 1.42% in 2007 to 1.63% in 2008. Net
interest income was $6.1 million for the six-month period ended March 31, 2008
compared to $5.7 million for the comparable period in 2007.
Non-Interest Income
-------------------
Non-interest income decreased to $467,000 for the three-month period ended March
31, 2008 from $546,000 for the comparable period in 2007. The decrease is
primarily due to the fact that the prior period includes a gain on sale of
investments of $160,000. Non-interest income increased to $966,000 for the
six-month period ended March 31, 2008 from $938,000 for the comparable period in
2007. The increase is primarily due to the fact that the Company had additional
income related to commercial loan fees and customers transaction accounts.
Non-Interest Expenses
---------------------
For the three-month period ended March 31, 2008, non-interest expenses increased
by $111,000 or 4.8% to $2.4 million compared to $2.3 million for the same period
in 2007. For the six month period ended March 31, 2008, non-interest expenses
increased by $236,000 or 5.2% to $4.8 million compared to $4.6 million for the
same period in 2007. Management believes that these are reasonable increases in
the cost of operations after considering the impact of additional expenses
related to the Company's new commercial loan department and business banking.
The annualized ratio of non-interest expenses to average assets for the three
and six month periods ended March 31, 2008 and 2007 were 1.21%,1.22% and 1.23%,
1.21%, respectively.
Income Taxes
------------
The Company made provisions for income taxes of $205,503 and $387,503 for the
three-month and six-month period ended March 31, 2008, respectively, compared to
$268,500 and $449,500 for the comparable period in 2007. These provisions are
based on the levels of pre-tax income, adjusted primarily for tax-exempt
interest income on investments.
page -19-
Liquidity and Capital Recourses
-------------------------------
For a financial institution, liquidity is a measure of the ability to fund
customers' needs for loans and deposit withdrawals. Harleysville Savings Bank
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 Bank's core deposit
base. In addition to cash, the Bank maintains a portfolio of short-term
investments to meet its liquidity requirements. Harleysville Savings 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 Bank 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 March 31, 2008, the Company had $60.2 million in commitments to fund loan
originations, disburse loans in process and meet other obligations. Management
anticipates that the majority of these commitments will be funded within the
next six months by means of normal cash flows and new deposits.
The Company invests excess funds in overnight deposits and other short-term
interest-earning assets, which provide liquidity to meet lending requirements.
The Company also has available borrowings with the Federal Home Loan Bank of
Pittsburgh up to the Company's maximum borrowing capacity, which was $545.6
million at March 31, 2008 of which $259.2 million was outstanding at March 31,
2008.
The Bank's net income for the six months ended March 31, 2008 is $1.8 million
compared to $1.7 million for the comparable period in 2007. In spite of a
profitable six month period, the decrease in our stockholder's equity is due to
a repurchase of common stock in an unsolicited private transaction. The Company
repurchased the shares at a price of $12.45 per share or $2,556,707.10 in the
aggregate. The Bank's stockholders' equity of $45.4 million or 5.6% of total
assets is in excess of the Bank's minimum regulatory capital requirement.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
The Company has instituted programs designed to decrease the sensitivity of its
earnings to material and prolonged increases in interest rates. The principal
determinant of the exposure of the Company's earnings to interest rate risk is
the timing difference between the repricing or maturity of the Company's
interest-earning assets and the repricing or maturity of its interest-bearing
liabilities. If the maturities of such assets and liabilities were perfectly
matched, and if the interest rates borne by its assets and liabilities were
equally flexible and moved concurrently, neither of which is the case, the
impact on net interest income of rapid increases or decreases in interest rates
would be minimized. The Company's asset and liability management policies seek
to increase the interest rate sensitivity by shortening the repricing intervals
and the maturities of the Company's interest-earning assets. Although management
of the Company believes that the steps taken have reduced the Company's overall
vulnerability to increases in interest rates, the Company remains vulnerable to
material and prolonged increases in interest rates during periods in which its
interest rate sensitive liabilities exceed its interest rate sensitive assets.
The authority and responsibility for interest rate management is vested in the
Company's Board of Directors. The Chief Executive Officer implements the Board
of Directors' policies during the day-to-day operations of the Company. Each
month, the Chief Financial Officer ("CFO") presents the Board of Directors with
a report, which outlines the Company's asset and liability "gap" position in
various time periods. The "gap" is the difference between interest- earning
assets and interest-bearing liabilities which mature or reprice over a given
time period.
page -20-
The CFO also meets weekly with the Company's other senior officers to review and
establish policies and strategies designed to regulate the Company's flow of
funds and coordinate the sources, uses and pricing of such funds. The first
priority in structuring and pricing the Company's assets and liabilities is to
maintain an acceptable interest rate spread while reducing the effects of
changes in interest rates and maintaining the quality of the Company's assets.
The following table summarizes the amount of interest-earning assets and
interest-bearing liabilities outstanding as of March 31, 2008, which are
expected to mature, prepay or reprice in each of the future time periods shown.
Except as stated below, the amounts of assets or liabilities shown which mature
or reprice during a particular period were determined in accordance with the
contractual terms of the asset or liability. Adjustable and floating-rate assets
are included in the period in which interest rates are next scheduled to adjust
rather than in the period in which they are due, and fixed-rate loans and
mortgage-backed securities are included in the periods in which they are
anticipated to be repaid.
The passbook accounts, negotiable order of withdrawal ("NOW") accounts, interest
bearing accounts, and money market deposit accounts, are included in the "Over 5
Years" categories based on management's beliefs that these funds are core
deposits having significantly longer effective maturities based on the Company's
retention of such deposits in changing interest rate environments.
Generally, during a period of rising interest rates, a positive gap would result
in an increase in net interest income while a negative gap would adversely
affect net interest income. Conversely, during a period of falling interest
rates, a positive gap would result in a decrease in net interest income while a
negative gap would positively affect net interest income. However, the following
table does not necessarily indicate the impact of general interest rate
movements on the Company's' net interest income because the repricing of certain
categories of assets and liabilities is discretionary and is subject to
competitive and other pressures. As a result, certain assets and liabilities
indicated as repricing within a stated period may in fact reprice at different
rate levels.
1 Year 1 to 3 3 to 5 Over 5
or less Years Years Years Total
--------- --------- --------- --------- ---------
Interest-earning assets:
Mortgage loans $ 65,056 $ 52,194 $ 21,858 $ 183,129 $ 322,237
Commercial loans 9,867 2,935 1,252 11,264 25,318
Mortgage-backed securities 74,483 76,037 21,918 51,141 223,579
Consumer and other loans 44,625 26,318 7,339 21,464 99,746
Investment securities and other investments 69,713 42,573 8,509 10,168 130,963
------------------------- --------- --------- ---------
Total interest-earning assets 263,744 200,057 60,876 277,166 801,843
--------------------------------------------------------- ---------
Interest-bearing liabilities:
Passbook and Club accounts -- -- -- 2,459 2,459
NOW and checking accounts -- -- -- 42,830 42,830
Consumer Money Market Deposit accounts 12,311 -- -- 29,812 42,123
Business Money Market Deposit accounts 4,565 -- -- 1,520 6,085
Certificate accounts 303,990 29,730 11,524 -- 345,244
Borrowed money 45,299 48,729 72,460 142,797 309,285
--------- --------- --------- --------- ---------
Total interest-bearing liabilities 366,165 78,459 83,984 219,418 748,026
--------- --------- --------- --------- ---------
Repricing GAP during the period $(102,421) $ 121,598 $ (23,108) $ 57,748 $ 53,817
========= ========= ========= ========= =========
Cumulative GAP $(102,421) $ 19,177 $ (3,931) $ 53,817
========= ========= ========= =========
Ratio of GAP during the period to total assets -12.62% 14.98% -2.85% 7.11%
========= ========= ========= =========
Ratio of cumulative GAP to total assets -12.62% 2.36% -0.48% 6.63%
========= ========= ========= =========
page -21-
Item 4. Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer
and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this report. Based
on such evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
regulations and are operating in an effective manner.
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred
during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
page -22-
Part II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 1A. Risk Factors
There are no material changes to the risk factors set forth in Part
1, Item 1A, Risk Factors"' of the Company's Form 10-K for the year
ended September 30, 2007. Please refer to that section for
disclosures regarding the risk and uncertainties related to the
Company's business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Total
Number of
Shares
Purchased
as Part of
Average Publicly Maximum Number of
Price Announced Shares that May Yet Be
Total Number of Paid per Plans or Purchased Under the Plans
Period Shares Purchased Share Programs or Programs (1)
January 1 - 31, 2008 66,351
February 1 - 29, 2008 66,351
March 1 - 31, 2008 205,358(2) 12.45 -- 66,351
------- ---------- --------- ----------
Total 205,358 $ 12.45 -- 66,351
==========
(1) 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.
(2) Shares were purchased in a private transaction outside of the Company's
current repurchase program.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
No.
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.0 Section 1350 Certification of Chief Executive
Officer and Chief Financial Officer
page -23-
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
Date: May 12, 2008 By: /s/ Ronald B. Geib
--------------------------------------
Ronald B. Geib
Chief Executive Officer
Date: May 12, 2008 By: /s/ Brendan J. McGill
--------------------------------------
Brendan J. McGill
Senior Vice President
Treasurer and Chief Financial Officer
page -24-