================================================================================
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, 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 Number)
271 Main Street, Harleysville, Pennsylvania 19438
------------------------------------------- ----------------------------------
(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 on
Title of each class which registered
------------------------------------------- ----------------------------------
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, a non-accelerated filer, or a smaller reporting company. See
the definitions 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]
(Do not check if a smaller reporting company)
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 3,065,419 shares of the Registrant's Common
Stock held by non-affiliates (3,579,044 shares outstanding, less 513,625 shares
held by affiliates), based upon the closing price of $13.50 for the Common Stock
on March 31, 2008, as reported by the Nasdaq Stock Market, was approximately
$41.4 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 17, 2008: 3,579,044
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 2009 Annual Meeting of
Stockholders are incorporated by reference into Part III, Items 10-14 of this
Form 10-K.
================================================================================
HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
2008 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business .................................................................... 1
Item 1A. Risk Factors ................................................................ 25
Item 1B. Unresolved Staff Comments ................................................... 28
Item 2. Properties .................................................................. 29
Item 3. Legal Proceedings ........................................................... 29
Item 4. Submission of Matters to a Vote of Security Holders ......................... 29
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities .................................... 30
Item 6. Selected Financial Data ..................................................... 31
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ............................................................... 32
Item 7A. Quantitative and Qualitative Disclosures about Market Risk .................. 40
Item 8. Financial Statements and Supplementary Data ................................. 43
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ............................................................... 70
Item 9A(T). Controls and Procedures ..................................................... 70
Item 9B. Other Information ........................................................... 71
PART III
Item 10. Directors, Executive Officers and Corporate Governance ...................... 72
Item 11. Executive Compensation ...................................................... 72
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ...................................................... 72
Item 13. Certain Relationships and Related Transactions, and Director Independence ... 73
Item 14. Principal Accounting Fees and Services ...................................... 73
PART IV
Item 15. Exhibits and Financial Statement Schedules .................................. 74
SIGNATURES ................................................................................ 75
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.
-----------------
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, 2008, the Company had $825.7 million of total assets, $425.5
1
million of deposits and $47.2 million of stockholders' equity. The Company's
stockholders' equity constituted 5.72% of total assets as of September 30, 2008.
The Bank's primary business consists of attracting deposits from the
general public and business customers 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 is also engaged in the general commercial banking
business, and provides a full range of commercial loans and commercial real
estate loans to customers in the Bank's primary market 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, 2008, first mortgage
2
loans on residential properties, including loans on single-family and
multi-family residential properties and construction loans on such properties,
amounted to $344.5 million or 71.1% of the Company's total loan 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).
As of September 30, 2008, loans secured by commercial real estate
comprised $44.4 million or 9.2% of the total loan portfolio. Consumer loans,
including installment home equity loans, home equity lines of credit, automobile
loans, loans on savings accounts and education loans, constituted $94.3 million
or 19.6% of the total loan portfolio as of September 30, 2008.
The following table sets forth the composition of our loan portfolio by
type of loan at the dates indicated.
As of September 30,
---------------------------------------------------------------------------------------------
2008 2007 2006 2005 2004
----------------- ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in Thousands)
Residential:
Single-family 333,757 68.8% $302,271 71.3% $283,595 72.2% $268,546 71.9% $256,523 74.0%
Multi-family 2,392 0.5 2,589 0.6 2,933 0.7 2,893 0.8 914 0.3
Construction 8,346 1.7 6,093 1.4 6,987 1.8 7,640 2.0 7,971 2.3
Lot loans 1,167 0.2 483 0.1 626 0.2 801 0.2 576 0.2
Commercial 44,407 9.2 15,314 3.6 920 0.2 702 0.2 641 0.2
-------- ------- -------- ------- -------- ------- -------- -------- -------
Total real estate loans 390,069 80.4% 326,750 77.0% 295,061 75.1% 280,582 75.1% 266,625 76.9%
-------- ------- -------- ------- -------- ------- -------- -------- -------
Consumer loans:
Installment equity loans 66,280 13.7% 74,218 17.5% 70,515 17.9% 59,724 16.0% 46,257 13.3%
Line of credit loans 26,103 5.5 21,385 5.1 25,500 6.6 31,580 8.6 32,329 9.4
Savings account loans 955 0.2 977 0.2 1,003 0.3 921 0.2 811 0.2
Automobile and other loans 1,000 0.2 903 0.2 812 0.2 772 0.2 732 0.2
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total consumer loans 94,338 19.6% 97,483 23.0% 97,830 24.9% 92,997 24.9% 80,129 23.1%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total loans receivable 484,407 100.0% 424,233 100.0% 392,891 100.0% 373,579 100.0% 346,754 100.0%
-------- ------- -------- ------- -------- ------- -------- ======= -------- -------
Less:
Loans in process (5,109) (2,794) (4,941) (4,934) (5,238)
Deferred loan fees (452) (453) (544) (671) (955)
Allowance for loan losses (1,988) (1,933) (1,956) (1,968) (1,977)
-------- -------- -------- -------- --------
Total loans receivable net $476,858 $419,053 $385,450 $366,066 $338,584
======== ======== ======== ======== ========
3
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, 2008 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.
Principal Repayments Contractually Due in Year(s) Ended September 30,
Principal Balance ----------------------------------------------------------------------
at September 30, 2011- 2014- 2018- 2023-and
2008 2009 2010 2013 2017 2022 Thereafter
----------------- -------- -------- -------- -------- -------- ----------
(In Thousands)
Residential real estate
loans:
Single-family $ 333,757 $ 5,006 $ 5,340 $ 18,023 $ 41,052 $ 58,741 $ 205,595
Multi-family 2,392 36 38 129 294 421 1,474
Construction 8,346 125 134 451 1,027 1,469 5,140
Lot loans 1,167 63 69 236 529 271 --
Mortgage-backed Securities 214,691 3,220 3,650 12,023 27,051 38,000 130,747
Commercial 44,407 1,599 1,732 6,084 14,077 20,916 --
Consumer and other loans 94,338 11,604 12,453 43,183 21,226 5,873 --
--------- -------- -------- -------- -------- -------- ----------
Total(1) $ 699,098 $ 21,653 $ 23,416 $ 80,129 $105,256 $125,688 $ 342,956
========= ======== ======== ======== ======== ======== ==========
----------
(1) With respect to the $677.4 million of loans with principal maturities
contractually due after September 30, 2009, $661.5 million have fixed
rates of interest and $15.9 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 2008.
During the years ended September 30, 2008 and 2007, the Company did not
sell any loans.
The Company's total loan originations increased by $21.7 million or 17.7%
in fiscal 2008 and increased by $14.6 million or 13.6% in fiscal 2007. Of the
$143.6 million and $121.9 million of total loans
4
originated in fiscal 2008 and 2007, respectively, $9.4 million and $5.7 million,
respectively, were loans originated to fund multi-family and construction
properties, and $67.9 million and $58.6 million, respectively, were loans to
acquire residential property. During this period, the Company's originations of
consumer loans amounted to $66.3 million and $57.7 million or 46.2% and 47.3% of
total loan originations during fiscal 2008 and 2007, 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,
------------------------
2008 2007
--------- ---------
(In Thousands)
Real estate loan originations:
Residential:
Single-family $ 67,873 $ 58,562
Multi-family -- --
Construction 9,395 5,719
Lot loans -- --
Commercial 31,764 23,823
--------- ---------
Total real estate loan originations 109,032 88,104
Consumer loan originations(1) 34,584 33,831
--------- ---------
Total loan originations 143,616 121,935
Purchases of mortgage-backed securities 61,835 20,939
--------- ---------
Total loan originations, and purchases 205,451 142,874
Principal loan and mortgage-backed securities repayments 134,885 135,763
Sales of loans and mortgage-backed securities 1,268 --
--------- ---------
Total principal repayments and sales 136,153 135,763
--------- ---------
Net increase in loans and mortgage-backed securities $ 69,298 $ 7,111
========= =========
----------
(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,
2008, the largest aggregate amount of loans
5
outstanding to any borrower, including related entities, was $2.6 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 97%, provided that the borrower obtains private mortgage insurance on
loans that exceed 80% of the appraised value or sales price, whichever is less,
of the security property. 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 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 80% of the appraised value if the borrower's FICO score is 680 or
higher.
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 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 $2.0 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, 2008,
$341.1 million or 48.9% and $2.4 million or 0.3% 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, 2008, approximately $547.0 million or 90.4% 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, $57.8 million or 9.6%
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, 2008 and 2007, the Company originated
$13.0 million and $4.6 million of ARM mortgages, respectively. ARMs represented
20.3% and 8.6% of the Company's total mortgage loan portfolio originations in
fiscal 2008 and 2007, 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 units. At September
30, 2008, $2.4 million, or 0.3% 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
6
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, 2008, the
largest such loan had a balance of $529,000. At that date, we had no multifamily
residential real estate loans that were delinquent in excess of 30 days.
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, 2008, $8.3 million or 1.2% 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. Additionally, the Bank has not been active in residential
subdivision lending and has no acquisition/development of loans in the
portfolio.
Commercial Real Estate Loans. Harleysville Savings Bank originates
mortgage loans for the acquisition and refinancing of commercial real estate
properties. At September 30, 2008, $44.4 million, or 6.4% 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, 2008, the largest such loan had a balance of $2.6 million.
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 when making
decisions on commercial real estate loans.
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
7
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.
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 46.2% and
47.3% during fiscal 2008 and 2007, 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 $92.4 million or 13.4% of the loan and mortgage-backed securities
portfolio at September 30, 2008. 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, 2008, the Company had outstanding 3,022 home equity
loans of which 1,800 were installment equity loans and 1,222 were line of credit
loans. As of such date, the Company had an outstanding balance on line of credit
loans of approximately $26.1 million and there was approximately $41.3 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
8
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.
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.
As of September 30, 2008, the Company was servicing $2.9 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 $17,900 and $2.9 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 on
nonaccrual status 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 status. 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 one residential mortgage
loan totaling $244,000 which was classified as non-accrual at the end of fiscal
year 2008.
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 2008 or 2007.
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,
--------------------------------------
2008 2007 2006 2005 2004
------ ----- ----- ----- -----
(Dollars in Thousands)
Residential real estate loans:
Non-accrual loans $ 244 $ -- $ -- $ -- $ --
Accruing loans 90 days overdue 192 -- -- 260 291
Troubled debt restructurings -- -- -- -- --
------ ----- ----- ----- -----
Total 436 -- -- 260 291
------ ----- ----- ----- -----
Commercial loans:
Non-accrual loans -- -- -- -- --
Accruing loans 90 days overdue 815 -- -- -- --
Troubled debt restructurings -- -- -- -- --
------ ----- ----- ----- -----
Total 815 -- -- -- --
----- ----- ----- -----
Consumer loans:
Non-accrual loans -- -- -- -- --
Accruing loans 90 days overdue 7 28 18 -- --
Troubled debt restructurings -- -- -- -- --
------ ----- ----- ----- -----
Total 7 28 18 -- --
------ ----- ----- ----- -----
Total non-performing loans:
Non-accrual loans 244 -- -- -- --
Accruing loans 90 days overdue 1,014 28 18 260 291
Troubled debt restructurings -- -- -- -- --
------ ----- ----- ----- -----
Total $1,258 $ 28 $ 18 $ 260 $ 291
------ ===== ===== ===== =====
Total non-performing loans to total loans .26% n/m* n/m* .07% .09%
Total real estate owned, net of related
reserves -- -- -- -- --
Total non-performing loans and other real
estate owned to total assets n/m* n/m* n/m* .03% .04%
* Not material
Management establishes reserves for losses on delinquent loans when it
determines that losses are probable. The Company has recorded a provision for
general loan losses totaling $85,000 in fiscal 2008, due to the increase in
unemployment trends and decline in property values reflecting an instability in
the economy. The Company did not record a provision for general loan losses in
fiscal 2007 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.
10
The following table summarizes activity in the Company's allowance for
loan losses during the periods indicated.
Year Ended September 30,
---------------------------------------------------------
2008 2007 2006 2005 2004
--------- --------- --------- --------- ---------
(In Thousands)
Total loans outstanding at end of period 484,407 424,233 392,892 373,580 346,754
Average loans outstanding 454,320 408,563 383,236 360,167 327,720
Allowances at beginning of year $ 1,933 $ 1,956 $ 1,968 $ 1,977 $ 1,991
Provision for loan loss 85 -- -- -- --
Charge-offs:
Single family -- -- -- -- --
Multi family -- -- -- -- --
Construction -- -- -- -- --
Commercial -- -- -- -- --
Home equity (13) (1) -- -- (15)
Consumer non-real estate (27) (35) (20) (14) --
--------- --------- --------- --------- ---------
Total charge-offs (40) (36) (20) (14) (15)
Recoveries of loans previously charged off 10 13 8 5 1
--------- --------- --------- --------- ---------
Allowance for loan losses, end of period $ 1,988 $ 1,933 $ 1,956 $ 1,968 $ 1,977
========= ========= ========= ========= =========
Allowance for loan losses as a percent non-
performing loans 158.03% 6,903.57% 10,866.67% 756.92% 679.38%
Ratio of net charge-offs during the period to
average loans outstanding during the
period 0.01% 0.01% 0.00% 0.00% 0.00%
The following table shows how our allowance for loan losses is allocated by
type of loan at each of the dates indicated.
As of September 30,
-------------------------------------------------------------------------------------------------------
2008 2007 2006 2005 2004
------------------- ------------------- ------------------- ------------------- -------------------
Loan Loan Loan Loan Loan
Category Category Category Category Category
Amount as a % Amount as a % Amount as a % Amount as a % Amount as a %
of of total of of total of of total of of total of of total
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(Dollars in Thousands)
Single-family $ 543 68.8% $ 304 71.3% $ 285 72.1% $ 300 71.8% $ 302 73.9%
Commercial real estate and
multi family residential 486 9.7 236 4.2 49 0.9 46 1.0 22 0.5
Construction 13 1.7 9 1.4 10 1.8 11 2.0 12 2.3
Lot loan 3 0.2 1 0.1 2 0.2 2 0.2 1 0.2
Installment equity loans 99 13.7 115 17.5 107 17.9 100 16.0 69 13.3
Line of credit loans 103 5.5 125 5.1 133 6.6 143 8.6 138 9.4
Savings account loans 1 0.2 1 0.2 1 0.3 1 0.2 1 0.2
Automobile and other loans 19 0.2 17 0.2 15 0.2 14 0.2 13 0.2
Unallocated 721 -- 1,125 -- 1,354 -- 1,351 -- 1,419 --
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
Total $ 1,988 100.0% $ 1,933 100.0% $ 1,956 100.0% $ 1,968 100.0% $ 1,977 100.0%
========= ======== ========= ======== ========= ======== ========= ======== ========= ========
The allowance consists of specific and general components. The specific
component relates to loans that are classified as either doubtful, substandard
or special mention. The general component covers non-classified loans and is
based on historical loss experience adjusted for qualitative factors.
11
Investment Activities
The Company's investment portfolio consists primarily of United States
government agency mortgage-backed securities and debt obligations of United
States government agencies. The other investments include tax-exempt municipal
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, 2008 was $49.5 million.
As of September 30, 2008, the Company had $214.7 million of mortgage-backed
securities, 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 certain information relating to our
investment and mortgage-backed securities portfolios and our investments in FHLB
stock at the dates indicated.
September 30,
------------------------------------------------------------------
2008 2007 2006
-------------------- -------------------- --------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- -------- --------- -------- --------- --------
(In thousands)
Mortgage-backed securities $ 214,691 $212,572 $ 193,660 $189,430 $ 222,314 $214,733
U.S. government and agency
Obligations 54,314 54,076 83,155 82,834 86,503 85,173
Municipal securities 24,940 24,897 25,538 26,472 24,596 26,075
Equity securities 842 842 1,334 1,334 997 997
Mutual Funds 12 12 576 576 7,110 7,110
FHLB stock 16,574 16,574 14,140 14,140 15,499 15,499
--------- -------- --------- -------- --------- --------
Total investment and mortgage-backed securities and
FHLB stock $ 311,373 $308,973 $ 318,403 $314,786 $ 355,019 $349,587
========= ======== ========= ======== ========= ========
The following table sets forth the amount of investment and mortgage-backed
securities which mature during each of the periods indicated and the weighted
average yields for each range of maturities at September 30, 2008. No tax-exempt
yields have been adjusted to a tax-equivalent basis.
Amounts at September 30, 2008 Which Mature in
--------------------------------------------------------------------------------------
Over One Over
Year Five
Weighted Through Weighted Through Weighted Over Weighted
One year Average Five Average Ten Average Ten Average
Or less Yield Years Yield Years Yield Years Yield
-------- -------- -------- -------- -------- -------- --------- --------
(Dollars in Thousands)
Bonds and other
Debt securities:
Mortgage-backed
securities $ 3,517 3.96% $ 27,149 4.32% $ 27,590 4.37% $ 156,435 5.07%
U.S. government
agency obligations -- -- 5,000 4.21% 2,000 4.46% 47,314 5.93%
Municipal securities -- -- -- -- 2,231 5.63% 22,708 5.07%
-------- -------- -------- -------- -------- -------- --------- --------
Total $ 3,517 3.96% $ 32,149 4.30% $ 31,821 4.47% $ 226,458 5.25%
======== ======== ======== ======== ======== ======== ========= ========
The Company's investment strategy is set and reviewed periodically by the
entire Board of Directors.
12
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.
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 $100,000 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.
13
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,
-----------------------------------------------
2008 2007
---------------------- ----------------------
Percent of Percent of
Amount Deposits Amount Deposits
--------- ---------- --------- ----------
(Dollars in Thousands)
Passbook and club accounts $ 2,641 0.7% $ 2,864 0.7%
NOW and interest-bearing checking
accounts 42,203 9.9 39,460 9.3
Non-interest-bearing checking
accounts 10,964 2.6 11,741 2.9
Money market demand accounts 50,928 12.0 50,966 12.0
Certificates of deposit:
3 month 584 0.1 703 0.2
6 month 1,840 0.4 2,697 0.6
7 month 69,257 16.4 41,186 9.7
9 month 15,488 3.6 55,684 13.1
12 month 19,327 4.5 6,269 1.5
15 month 6,113 1.4 10,989 2.6
17 month 40,895 9.6 56,257 13.3
18 month 14,039 3.3 4,336 1.0
20 month 18,811 4.4 971 0.2
24 month 3,037 0.7 2,576 0.6
27 month 582 0.1 728 0.2
36 month 30,048 7.1 5,099 1.2
48 month 33,636 7.9 60,381 14.2
60 month 8,591 2.0 15,464 3.6
Other 203 0.0 204 0.0
Retirement accounts:
Money market deposit accounts 1,076 0.3 860 0.2
Certificates of deposit 55,250 13.0 54,600 12.9
--------- ---------- --------- ----------
Total deposits $ 425,513 100.0% $ 424,035 100.0%
========= =========
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 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.
14
The following table presents certain information concerning the Company's
deposit accounts as of September 30, 2008 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 $ 2,641 0.6% 1.00%
NOW and interest-bearing checking accounts 42,203 9.9 0.83
Non-interest-bearing checking accounts 10,963 2.6 0.00
Money market deposits accounts(1) 52,005 12.2 1.47
--------- -------------- ----------------
Total $ 107,812 25.3% 1.06%
========= ============== ================
Certificate accounts maturing by quarter:
December 31, 2008 $ 91,899 21.6% 3.56%
March 31, 2009 69,615 16.5 3.31
June 30, 2009 26,572 6.2 3.08
September 30, 2009 20,804 4.9 3.13
December 31, 2009 16,356 3.8 3.10
March 31, 2010 26,974 6.3 3.70
June 30, 2010 3,183 0.7 3.28
September 30, 2010 1,975 0.5 3.81
December 31, 2010 1,425 0.3 4.28
March 31, 2011 1,794 0.4 4.17
June 30, 2011 10,857 2.6 3.92
September 30, 2011 25,272 6.0 3.95
Thereafter 20,975 4.9 3.81
--------- -------------- ----------------
Total certificate accounts(1) 317,701 74.7 3.49
--------- -------------- ----------------
Total deposits $ 425,513 100.0% 2.87%
========= ============== ================
----------
(1) Includes retirement accounts.
Management of the Company expects, based on historical experience and its
pricing policies, to retain a significant portion of the $208.9 million of
certificates of deposit which mature during the 12 months ending September 30,
2009.
The following table sets forth the net deposit flows of the Company during
the periods indicated.
Year Ended September 30,
------------------------
2008 2007
------------------------
(In Thousands)
Decrease before interest credited $ (13,740) $ (19,514)
Interest credited 15,218 14,295
---------- -----------
Net deposit increase (decrease) $ 1,478 $ (5,219)
========== ===========
15
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, 2008 which mature during the periods
indicated.
Amounts at September 30, 2008 Maturing
------------------------------------------------
As of
September 30, One Year
2008 or Less Two Years Three Years Thereafter
------------- --------- --------- ----------- ----------
(In Thousands)
Certificate accounts:
0.01% to 2.00% $ 996 $ 964 $ 32 $ -- $ --
2.01% to 4.00% 223,768 137,686 34,344 34,963 16,775
4.01% to 6.00% 92,937 70,239 14,113 4,385 4,200
------------- --------- --------- ----------- ----------
Total certificate accounts(1) $ 317,701 $ 208,889 $ 48,489 $ 39,348 $ 20,975
============= ========= ========= =========== ==========
----------
(1) Includes retirement accounts.
The following table sets forth the maturity of our certificates of deposit
of $100,000 or more at September 30, 2008, by time remaining to maturity.
At September 30, 2008
---------------------------------------------------------------------------
Weighted
Average
Quarter Ending: Amount Rate
------------------------------------------------- ----------------------
(Dollars in Thousands)
December 31, 2008 $ 16,015 3.44%
March 31, 2009 14,666 2.98%
June 30, 2009 4,278 3.03%
September 30, 2009 3,414 3.14%
After September 30, 2009 15,056 3.90%
--------- ----------
Total certificates of deposit with balances of
$100,000 or more $ 53,429 3.39%
========= ==========
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, 2008, the Bank had advances with maturities of
one year or less totaling $35.9 million at an interest rate of 3.18% and FHLB
advances with maturities of 13 months to 10 years totaling $262 million at
interest-rates ranging from 2.05% 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 $50 million at interest-rates ranging from 3.50% to 4.55%.
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.
16
The following table sets forth certain information regarding the
borrowings of the Company as of the dates indicated.
September 30,
-------------------------------------------
2008 2007
-------------------- --------------------
Weighted Weighted
Average Average
Balance Rate Balance Rate
--------- -------- --------- --------
(Dollars In Thousands)
Advances $ 347,846 4.12% $ 298,609 4.65%
The following table sets forth certain information concerning the
short-term borrowings of the Company for the periods indicated.
Year Ended September 30,
------------------------
2008 2007
---------- ----------
(In Thousands)
Advances :
Average balance outstanding $ 16,934 $ 48,172
Maximum amount outstanding at any
month-end during the period $ 39,000 $ 67,400
Weighted average interest rate during the period 2.96% 5.36%
Employees
The Company had 71 full-time employees and 46 part-time employees as of
September 30, 2008. 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 is 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 more than 50% of the voting shares of a bank to
acquire additional shares of such bank.
17
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 BHCA
permits a bank holding company to elect to be considered a financial holding
company ("FHC"). A bank holding company that makes an FHC election is permitted
to engage in activities that are financial in nature or incidental to such
financial activities. The BHCA 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 BHCA 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 contains 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 include 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
18
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 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. Section 18 of the Federal Deposit Insurance Act
("FDIA") 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 that 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. The Sarbanes-Oxley Act of 2002 generally
established 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 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)
19
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.
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 its 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.
20
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 not "opted out" of this interstate
merger provision. Therefore, the federal provision permitting interstate
acquisitions applies to banks chartered in Pennsylvania. Pennsylvania law,
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. The Interstate Act also allows a state to
permit out-of-state banks to establish and operate new branches in this state.
Pennsylvania law permits an out of state banking institution to establish a
branch office in Pennsylvania only if the laws of the state where that
institution is located would permit an institution chartered under the laws of
Pennsylvania to establish and maintain a branch in such other state on
substantially the same terms and conditions.
FDIC Insurance Premiums. The deposits of the Bank are insured by the
Deposit Insurance Fund, which is administered by the FDIC. Insured institutions
are assigned to one of three capital groups which are based solely on the level
of an institution's capital: "well capitalized," "adequately capitalized," and
"undercapitalized." There are also three supervisory groups generally based on
an institution's CAMEL-composite rating. Assessment rates for insured
institutions are determined semi-annually by the FDIC and currently range from
zero basis points for well-capitalized healthy institutions, such as the Bank,
to 43 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 2008 was .0028% 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, 2008, the Bank's regulatory
capital exceeded all of its capital requirements.
On October 16, 2008, the Federal Deposit Insurance Corporation published a
restoration plan designed to replenish the Deposit Insurance Fund over a period
of five years and to increase the deposit insurance reserve ratio, which
decreased to 1.01% of insured deposits on June 30, 2008, to the statutory
minimum of 1.15% of insured deposits by December 31, 2013. In order to implement
the restoration plan, the Federal Deposit Insurance Corporation proposes to
change both its risk-based assessment system and its base assessment rates.
Assessment rates would increase by seven basis points across the range of risk
weightings of depository institutions. Changes to the risk-based assessment
system would include increasing premiums for institutions that rely on excessive
amounts of brokered deposits, including CDARS, increasing premiums for excessive
use of secured liabilities, including Federal Home Loan Bank advances, lowering
premiums for smaller institutions with very high capital levels, and adding
financial ratios and debt issuer ratings to the premium calculations for banks
with over $10 billion in assets, while providing a reduction for their unsecured
debt.
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
21
Reserve System. The FDIC's capital regulations establish a minimum 3.0% Tier I
leverage capital requirement 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, 2008, the Bank met each of its
capital requirements.
Prompt Corrective Action. Under Section 38 of the FDIA, each federal
banking agency is required to implement a system of prompt corrective action for
institutions which it regulates. The federal banking agencies (including the
FDIC) have adopted substantially similar regulations to implement Section 38 of
the FDIA. Under the regulations, a savings bank shall be deemed to be (i) "well
capitalized" if it has total risk-based capital of 10.0% or more, has a Tier 1
risk-based ratio of 6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or
more and is not subject to any order or final capital directive to meet and
maintain a specific capital level for any capital measure, (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier
1 risk-based capital ratio of 4.0% or more and a Tier 1 leverage capital ratio
of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized", (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital
ratio that is less than 4.0% or a Tier 1 leverage capital ratio that is less
than 4.0% (3.0% under certain circumstances), (iv) "significantly
undercapitalized" if it has a total risk-based ratio that is less than 6.0%, a
Tier 1 risk-based capital ratio that is less than 3.0% or a Tier 1 leverage
capital ratio that is less than 3.0%, and (v) "critically undercapitalized" if
it has a ratio of tangible equity to total assets that is equal to or less than
2.0%. Section 38 of the FDIA and the regulations promulgated thereunder also
specify circumstances under which the FDIC may reclassify a well capitalized
savings bank as adequately capitalized and may require an adequately capitalized
savings bank or an undercapitalized savings bank to comply with supervisory
actions as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized savings bank as critically
undercapitalized). At September 30, 2008, the Bank was in the "well capitalized"
category.
22
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.
Loans-to-One Borrower Limitation. 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 capital account.
Activities and Investments of Insured State-Chartered Banks. Section 24 of
the FDIA 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.
Pursuant to FDIC regulations promulgated under Section 24 of the FDIA,
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. As
of September 30, 2008, $842,000 was invested by HARL, LLC in such equity
securities.
Regulatory Enforcement Authority. FIRREA included substantial enhancement
to the enforcement. Federal banking regulators have substantial enforcement
authority over the financial institutions that they regulate including, 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. Except under certain circumstances,
federal law requires 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.
23
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.
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, 2008 and 2007 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, 2008, 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").
24
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 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, 2008 amounted
to approximately $159.2 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
25
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 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.
26
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 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.
Our deposit insurance premium could be substantially higher in the future which
would have an adverse effect on our future earnings.
Under the Federal Deposit Insurance Act, the FDIC, absent extraordinary
circumstances, must establish and implement a plan to restore the deposit
insurance reserve ratio to 1.15% of insured deposits, over a five-year period,
at any time that the reserve ratio falls below 1.15%. The recent failures of a
large financial institution and several smaller ones have significantly
increased the Deposit Insurance Fund's loss provisions, resulting in a decline
in the reserve ratio to 1.01% as of June 30, 2008, 18 basis points below the
reserve ratio as of March 31, 2008. The FDIC expects a higher rate of insured
institution failures in the next few years, which may result in a continued
decline in the reserve ratio.
On October 7, 2008, the FDIC released a five-year recapitalization plan
and a proposal to raise premiums to recapitalize the fund. In order to implement
the restoration plan, the FDIC proposed to change both its risk-based assessment
system and its base assessment rates. Assessment rates would increase by seven
basis points across the range of risk weightings. Changes to the risk-based
assessment system would include increasing premiums for institutions that rely
on excessive amounts of brokered deposits, increasing premiums for excessive use
of secured liabilities, and lowering premiums for smaller institutions with very
high capital levels.
The actions of the U.S. Government for the purpose of stabilizing the financial
markets, or market response to those actions, may not achieve the intended
effect, and our results of operations could be adversely effected.
In response to the financial issues affecting the banking system and
financial markets and going concern threats to investment banks and other
financial institutions, the U.S. Congress recently enacted the
27
Emergency Economic Stabilization Act of 2008 ("EESA"). The EESA provides the
U.S. Secretary of the Treasury with the authority to establish a Troubled Asset
Relief Program to purchase from financial institutions up to $700 billion of
residential or commercial mortgages and any securities, obligations or other
instruments that are based on or related to such mortgages, that in each case
was originated or issued on or before March 14, 2008, as well as any other
financial instrument that the U.S. Secretary of the Treasury, after consultation
with the Chairman of the Federal Reserve, determines the purchase of which is
necessary to promote financial market stability. As of the date hereof, the
Treasury has determined not to purchase troubled assets under the program.
As part of the EESA, the Treasury Department has developed a Capital
Purchase Program to purchase up to $250 billion in senior preferred stock from
qualifying financial institutions. The Capital Purchase Program was designed to
strengthen the capital and liquidity positions of viable institutions and to
encourage banks and thrifts to increase lending to creditworthy borrowers. The
EESA also establishes a Temporary Liquidity Guarantee Program that gives the
Federal Deposit Insurance Corporation the ability to provide a guarantee for
newly-issued senior unsecured debt and non-interest bearing transaction deposit
accounts at eligible insured institutions. For non-interest bearing transaction
deposit accounts, a 10 basis point annual rate surcharge will be applied to
deposit amounts in excess of $250,000. We have elected not to participate in the
Capital Purchase Program but will participate in the Temporary Liquidity
Guarantee Program.
The U.S. Congress or federal banking regulatory agencies could adopt
additional regulatory requirements or restrictions in response to the threats to
the financial system and such changes may adversely affect the operations of
Company and the Bank. In addition, the EESA may not have the intended beneficial
impact on the financial markets or the banking industry. To the extent the
market does not respond favorably to the Troubled Asset Relief Program or the
program does not function as intended, our prospects and results of operations
could be adversely effected.
Item 1B. Unresolved Staff Comments.
----------------------------------
Not applicable.
28
Item 2. Properties.
------------------
As of September 30, 2008, 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, 2008 Deposits
---------- -------------------------- -------- --------------- ---------------------- ----------
(In Thousands)
Montgomery 1889 Ridge Pike
Royersford, Pennsylvania Owned -- $ 3,152 $ 17,976
Montgomery 271 Main Street
Harleysville, Pennsylvania Owned -- 1,089 148,400
Montgomery 640 East Main Street
Lansdale, Pennsylvania Leased May 2043(1) 854 42,312
Montgomery 1550 Hatfield Valley Road
Hatfield, Pennsylvania Leased January 2064(1) 855 79,334
Montgomery 2301 West Main Street
Norristown, Pennsylvania Owned -- 507 83,920
Montgomery 3090 Main Street
Sumneytown, Pennsylvania Owned -- 281 53,571
------- ----------
Total $ 6,738 $ 425,513
======= ==========
(1) The land at this office is leased; however, the Bank owns the building.
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.
29
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.
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 Stock Market during the indicated periods. The closing
price of the Common Stock on September 30, 2008 was $12.57 per share. There were
3,567,934 shares outstanding as of September 30, 2008, 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
--------------------- ------ ------ ------ --------------
September 30, 2008 $13.50 $10.70 $12.57 $0.18
June 30, 2008 14.31 11.85 11.85 0.17
March 31, 2008 13.99 10.55 13.50 0.17
December 31, 2007 14.69 12.00 12.50 0.17
September 30, 2007 16.72 13.30 13.71 0.17
June 30, 2007 17.59 16.00 16.20 0.17
March 31, 2007 19.25 16.02 16.75 0.17
December 31, 2006 19.93 15.60 18.48 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 2008.
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, 2008 ....... -- $ -- -- 66,351
August 1-31, 2008 ..... -- -- -- 66,351
September 1-30, 2008 .. -- -- -- 66,351
------------ ---------- ---- ------
Total .............. -- $ -- -- 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 does not have an expiration date and all
shares are purchased in the open market.
30
Item 6. Selected Financial Data.
-------------------------------
Selected Balance Sheet Data:
(Dollars in thousands, except per share data)
As of September 30,
-----------------------------------------------------
2008 2007 2006 2005 2004
-----------------------------------------------------------------------------------------------------
Total Assets $825,675 $773,544 $775,638 $766,990 $718,232
Mortgage-backed securities held to maturity 213,933 192,842 219,494 263,964 261,292
Mortgage-backed securities available-for-sale 758 818 820 1,045 3,795
Consumer loans receivable 434,439 405,672 386,486 368,034 340,561
Commercial loans 44,407 15,314 920 -- --
Allowance for loan losses 1,988 1,933 1,956 1,968 1,977
Investment securities held to maturity 79,254 108,693 111,099 87,364 68,162
Investment securities available-for-sale 854 1,910 8,108 2,835 7,715
Other investments (1) 25,948 22,457 25,549 23,971 19,903
Deposits 425,513 424,035 429,254 418,980 405,231
FHLB advances and other borrowings 347,846 298,609 294,611 297,268 265,953
Total stockholders' equity 47,209 47,041 48,471 47,576 44,313
Book value per share (3) 13.23 12.65 12.59 12.20 11.56
Selected Operations Data:
Year Ended September 30,
-----------------------------------------------------
2008 2007 2006 2005 2004
-----------------------------------------------------------------------------------------------------
Interest income $ 43,076 $ 40,289 $ 39,091 $ 35,902 $ 32,636
Interest expense 29,016 28,806 26,366 22,747 20,391
-------- -------- -------- -------- --------
Net interest income 14,060 11,483 12,725 13,155 12,245
Provision for loan losses 85 -- -- (40) --
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 13,975 11,483 12,725 13,195 12,245
Gain (loss) on impairment of securities
and sales of loans and securities (179) 160 27 115 326
Other income 1,909 1,730 1,273 1,351 1,282
Other expense 10,094 9,216 8,568 7,965 7,399
-------- -------- -------- -------- --------
Income before taxes 5,611 4,157 5,457 6,696 6,454
Income tax expense 1,232 911 1,255 1,693 1,604
-------- -------- -------- -------- --------
Net income $ 4,379 $ 3,246 $ 4,202 $ 5,003 $ 4,850
======== ======== ======== ======== ========
Earnings per share - basic (3) $ 1.20 $ 0.85 $ 1.09 $ 1.29 $ 1.28
Earnings per share - diluted (3) 1.20 0.83 1.08 1.27 1.25
Dividends per share (3) .69 0.68 0.64 0.58 0.48
Selected Other Data:
Year Ended September 30,
-----------------------------------------------------
2008 2007 2006 2005 2004
-----------------------------------------------------------------------------------------------------
Return on average assets (2) 0.54% 0.42% 0.55% 0.67% 0.70%
Return on average equity (2) 9.42% 6.71% 8.76% 10.91% 11.44%
Dividend payout ratio 57.26% 80.02% 58.72% 44.96% 37.56%
Average equity to average assets (2) 5.76% 6.13% 6.21% 6.19% 6.12%
Interest rate spread (2) 1.57% 1.39% 1.51% 1.65% 1.64%
Net yield on interest-earning assets (2) 1.79% 1.58% 1.71% 1.82% 1.80%
Ratio of non-performing assets to
total assets at end of period 0.15% 0.00% 0.00% 0.03% 0.04%
Ratio of interest-earning assets to
Interest-bearing liabilities at end of
period 105.9% 104.7% 105.6% 105.4% 105.6%
Full service banking offices at
end of period 6 6 6 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.
31
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, 2008 and 2007. 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, duration of
the current business cycle, and
32
bank regulatory examination results. The applied loss factors are reevaluated
monthly to ensure their relevance in the current economic environment.
Investment Securities Impairment Valuation. Management evaluates
securities for other-than-temporary impairment on at least a quarterly basis,
and more frequently when economic or market concerns warrant such evaluation.
Consideration is given to (1) length of time and the extent to which the fair
value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Company to retain
its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.
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, 2008, amounted to $825.7
million, compared to $773.5 million as of September 30, 2007. The increase in
assets was primarily due to the retail growth in mortgage and commercial loans,
resulting in an overall increase in loans receivable of approximately $57.8
million. In addition, there was an increase in Federal Home Loan Bank stock and
cash equivalents of $2.4 million and $1.1 million, respectively. These increases
were offset by a decrease in mortgage-backed and investment securities of
approximately $9.5 million. Total liabilities at September 30, 2008 were $778.5
million compared to $726.5 million at September 30, 2007. The increase in
liabilities was due to an increase in long-term borrowing and deposits of $58.9
million and $1.5 million, respectively. This increase was offset by a decrease
in short-term borrowing of $9.7 million. Stockholder's equity totaled $47.2
million as of September 30, 2008, compared to $47.0 million at September 30,
2007.
During fiscal 2008, net interest income after provision for loan losses
increased $2.5 million or 21.7% from prior fiscal year. This increase was the
result of an 8.29% increase in the average interest-earning assets which was
offset by a 7.08% increase in average interest-bearing liabilities, and an
increase in the interest rate spread from 1.39% in fiscal year 2007 to 1.57% in
fiscal year 2008. Earnings for fiscal 2008 were $4.4 million compared to $3.2
million for fiscal year ended 2007. The Company's return on average assets (net
income divided by average total assets) was .54% during fiscal 2008 compared to
..42% during fiscal year 2007. Return on average equity (net income divided by
average equity) was 9.42% during fiscal year 2008 compared to 6.71% in fiscal
year 2007. This increase in return on average assets and return on average
equity during the two-year period was a direct result of the growth in the
balance sheet.
33
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.
34
For The Year Ended September 30,
-------------------------------------------------------------------------------------------
2008 2007 2006
----------------------------- ----------------------------- -----------------------------
As of
Sept. 30,
2008
--------
Average Yield/ Yield/ Average Yield/
Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
Interest-earning assets:
Mortgage loans (2)(3) 5.87% $ 320,925 $ 19,043 5.93% $ 294,014 $ 17,270 5.87% $ 277,359 $ 16,101 5.81%
Mortgage-backed
securities 4.86% 211,563 10,088 4.77% 204,546 9,339 4.57% 241,751 10,801 4.47%
Commercial 6.45% 26,492 1,799 6.79% 8,839 674 7.63% -- -- --
Consumer and other
loans(3) 5.83% 108,747 5,719 5.26% 96,481 6,035 6.37% 94,987 5,675 5.97%
Investments 4.81% 119,133 6,427 5.39% 122,748 6,971 5.68% 130,424 6,514 4.99%
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total interest-earning
assets 5.48% 786,860 43,076 5.47% 726.627 40,289 5.54% 744,522 39,091 5.25%
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Interest-bearing
liabilities:
Savings and money
market 1.45% 54,669 1,189 2.17% 58,503 1,552 2.65% 62,315 712 1.14%
Checking 0.83% 42,832 367 0.86% 51,198 506 0.97% 36,130 352 0.97%
Certificate of deposit 3.49% 329,405 13,662 4.15% 307,567 13,414 4.36% 320,061 12,101 3.78%
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total deposits 2.95% 426,906 15,218 3.56% 418,268 15,472 3.70% 418,506 13,165 3.15%
Borrowings 4.12% 315,935 13,798 4.37% 275,429 13,334 4.84% 286,500 13,201 4.61%
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities 3.48% 742,841 29,016 3.90% 693,697 28,806 4.15% 705,006 26,366 3.74%
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Net interest income/
interest rate spread 2.00% $ 14,060 1.57% $ 11,483 1.39% $ 12,725 1.51%
========= ========= ========= ========= ========= ========= =========
Net interest-earning
assets/net yield
on interest-earning
assets(1) $ 44,019 1.79% $ 32,930 1.58% $ 39,516 1.71%
========= ========= ========= ========= ========= =========
Ratio of interest-earning
assets to interest-
bearing liabilities 105.9% 104.7% 105.6%
========= ========= =========
----------
(1) Net interest income divided by average interest-earning assets.
(2) Loan fee income is immaterial to this analysis.
(3) There was one non-accruing loan totaling $244,000 at September 2008, and
there were no non-accruing loans at September 2007.
35
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 2008 Compared Fiscal 2007 Compared
to Fiscal 2007 to Fiscal 2006
Increase (Decrease) Increase (Decrease)
--------------------------- ---------------------------
(In Thousands) Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- -------
Interest income on interest-earning assets:
Mortgage loans (1) $ 1,595 178 $ 1,773 $ 976 193 $ 1,169
Mortgage-backed securities 327 422 749 (1,694) 232 (1,462)
Commercial 1,206 (81) 1,125 673 -- 673
Consumer and other loans (1) 713 (1,029) (316) (30) 390 360
Interest and dividends on Investments (201) (343) (544) (398) 856 458
------- ------- ------- ------- ------- -------
Total 3,640 (853) 2,787 (473) 1,671 1,198
------- ------- ------- ------- ------- -------
Interest expense on interest-bearing
liabilities:
Deposits 312 (566) (254) (7) 2,314 2,307
Borrowings 1,846 (1,382) 464 (521) 654 133
------- ------- ------- ------- ------- -------
Total 2,158 (1,948) 210 (528) 2,968 2,440
------- ------- ------- ------- ------- -------
Net change in net interest income $ 1,482 $ 1,095 $ 2,577 $ 55 $(1,297) $(1,242)
======= ======= ======= ======= ======= =======
--------
(1) There was one non-accruing loan totaling $244,000 at September 2008, and
there were no non-accruing loans at September 2007.
36
Net Interest Income
Net interest income after provision for loan losses increased by $2.5
million or 21.7% in fiscal 2008, and decreased by $1.2 million or 9.76% in
fiscal 2007 over the prior period. The increase in the net interest income after
provision for loan losses in fiscal 2008 was due to a increase in the interest
rate spread between interest bearing assets and interest earning liabilities and
the growth in the balance sheet. The driving factors are further explained below
in Interest Income and Interest Expense.
Interest Income
Interest income on mortgage loans increased by $1.8 million or 10.3% in
fiscal 2008 and increased by $1.2 million or 7.3% in fiscal 2007 from the prior
year. During fiscal 2008, the average balance of mortgage loans increased $26.9
million or 9.2% 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 2007, the average balance of mortgage loans increased
$16.7 million or 6.0% and the yield increased by 6 basis points. The increase in
volume and yield during 2007 increased income for the period. The majority of
loans during both years were fixed rate mortgages. The increase in interest
income on mortgage-backed securities during fiscal 2008 reflected an increase of
$7.0 million or 3.43% in the average balance. In addition, there was an increase
in yield earned by 20 basis points during fiscal 2008. During fiscal 2007, the
decrease in interest income on mortgage-backed securities 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. In 2008, the
decrease in interest income on consumer and other loans reflected a decrease in
the yield of 100 basis points, in spite of the average balance increase of $12.3
million or 12.7%. In 2007, the increase in interest income on consumer and other
loans reflected an increase of $1.5 million or 1.6% in the average balance. This
increase is primarily due to an increase in the average yield to 6.4%. The
increase in interest income on commercial loans during fiscal 2008 reflected an
increase of $17.7 million in average balance in spite of the decrease in yield
to 6.79%. During fiscal 2007, the average growth of commercial loans was $8.8
million.
Interest and dividends on investments decreased by $544,000 or 7.8% in
fiscal 2008 over the prior year. Interest and dividends on investments increased
by $457,000 or 7.0% in fiscal 2007 over the prior year. During fiscal 2008, the
decrease resulted from a 29 basis point decrease in yield, and the redundant
average balance of investments decreased $3.6 million or 2.9%. 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 2008 reflects funds that were redeployed from normal
cash flows to commercial and residential lending. The decrease in the average
balance in 2007 reflects funds that were redeployed from normal cash flows to
pay down borrowings.
Interest Expense
Interest expense on deposits decreased $254,000 or 1.6% in fiscal 2008 and
increased by $2.3 million or 17.5% in fiscal 2007 as compared to the prior year.
In fiscal 2008, the average balance of deposits increased by $8.6 million or
2.1% with a 14 basis point decrease in the average rate paid. 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. The average rate paid
on deposits was 3.56% for the year ended September 30, 2008, compared to 3.70%
for the year ended September 30, 2007. The average rate paid on deposits is a
direct reflection of the falling interest rate environment.
Interest expense on borrowings increased by $464,000 or 3.5% in fiscal
2008 and increased by $133,000 or 1.0% in fiscal 2007 as compared to the prior
year. The increase in 2008 was the result of an increase in the average balance
in borrowings of $40.5 million or 14.7% offset by a decrease in the average rate
paid to 4.4%. 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.
37
Borrowings were primarily obtained during fiscal 2008 and 2007 to fund the
purchase of mortgage-backed securities and to originate 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. The allowance for loan losses totaled $2.0
million and $1.9 million at September 30, 2008 and 2007 or 0.4% and 0.5% of
total loans at September 30, 2008 and 2007, respectively. The Company has
recorded a provision for general loan losses totaling $85,000 in fiscal 2008,
due to the increase in unemployment trends and declines in property values
reflecting an instability in the economy. Due to the Company's loan portfolio
status and its analysis of quantitative and qualitative factors, no provision
was made in fiscal 2007.
Other Income
The Company's total other operating income decreased to $1.7 million in
fiscal 2008 and increased to $1.9 million in fiscal 2007 compared to the prior
year. The decrease in 2008 was primarily due to an other than temporary
impairment of equity securities of $252,000. The increase in 2007 was primarily
attributed to a gain on the sale of investments and mortgage backed securities
available for sale of $160,000 in fiscal 2007.
Customer service fees were $633,000 and $564,000 in 2008 and 2007,
respectively. The increases were due to more NFS fees during the periods.
Bank Owned Life Insurance ("BOLI") income was $499,000 and $475,000 in
2008 and 2007, respectively.
Other income, which consists primarily of loan servicing fees, the sale of
non-deposit products and insurance commissions, increased by $86,000 or 12.4%
during fiscal 2008. During fiscal 2007, other income increased by $223,000 or
47.5% during fiscal year 2007. 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.
Other Expenses
Salaries and employee benefits increased by $775,000 or 15.6% in fiscal
2008 and by $365,000 or 7.9% in fiscal 2007 as compared to prior fiscal year.
The increased expenses of salaries and employee benefits during the periods are
attributable to the increased staffing, normal growth, normal salary increases
and increased employee benefit expenses. The Company anticipates increases in
salaries and employee benefits in fiscal year 2009 due to additional staffing
needs of opening a branch, normal salary increases and stock option expense.
Occupancy and equipment expense decreased by $17,000 or 1.5% in fiscal
2008 and increased by $154,000 or 15.9% in fiscal 2007 as compared to the prior
fiscal year. Data processing costs increased by $23,000 in fiscal 2008 and
decreased by $11,000 in fiscal 2007. The increase in occupancy and equipment
expenses was attributable to the normal activity of the Company.
The Company anticipates additional increases in occupancy and equipment
expenses due to opening of a new branch, normal growth, normal technology needs
and inflationary effects in fiscal year 2009.
The Company anticipates an increase in the FDIC insurance premiums in
2009. See "Risk Factors - Our deposit insurance premium could be substantially
higher in the future which would have an adverse effect on our future earnings"
in Item 1A.
38
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 $93,000 or 3.7% in
fiscal 2008 and increased by $142,000 or 6.0% in fiscal 2007 over the prior
respective fiscal years. The increases in other expenses are primarily
attributable to a additional commercial lending and business deposits in 2008,
as well as additional legal and auditing expenses.
Income Taxes
The Company recorded income tax provisions of $1.2 million and $911,000
for fiscal years 2008 and 2007, respectively. The primary reason for the
increase in the income tax provision in fiscal 2008 and 2007 was an increase in
pretax income. See Note 11 of the "Notes to Consolidated 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, 2008 and 2007, 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, 2008 and 2007, commitments to originate loans and commitments under unused
lines of credit, including undisbursed portions of construction loans in
process, for which the Company is obligated amounted to approximately $66.5
million and $63.4 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, 2008 and September 30, 2007, the Company had letters of credit
outstanding of approximately $741,000 and $292,000, respectively, of which all
are standby letters of credit. At September 30, 2008 and 2007, the
uncollateralized portion of the letters of credit extended by the Company was
approximately $151,000 and $26,000, respectively, of which $135,000 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.
39
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, 2008.
Total Amounts
Committed
--------------
(In Thousands)
Letters of credit $ 741
Commitments to originate loans 15,583
Unused portion of home equity lines of credit 41,379
Unused portion of commercial lines of credit 4,106
Undisbursed portion of construction loans in process 4,691
--------------
Total commitments $ 66,500
==============
Contractual Obligations
The Company's contractual cash obligations at September 30, 2008 were as
follows:
Less Than 1 to 3 3 to 5 After 5
Total 1 Year Years Years Years
---------------------------------------------------------
(In Thousands)
Lease agreements $ 639 $ 121 $ 250 $ 268 $ --
Borrowings 347,846 35,855 49,144 96,372 166,475
Certificates of deposit 317,701 208,889 87,837 20,975 --
--------- --------- --------- --------- ---------
$ 666,186 $ 244,865 $ 137,231 $ 117,615 $ 166,475
========= ========= ========= ========= =========
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
40
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, 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. 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
table below 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.
1 Year 1 to 3 3 to 5 Over 5
or less Years Years Years Total
--------- --------- --------- --------- ---------
(In Thousands)
Interest-earning assets:
Mortgage loans $ 68,188 $ 54,866 $ 23,027 $ 191,235 $ 337,316
Commercial Mortgage loans 17,448 5,123 7,438 14,398 44,407
Mortgage-backed securities 70,875 73,346 21,141 49,329 214,691
Consumer and other loans 47,055 24,549 6,820 24,260 102,684
Investment securities and other investments 30,143 16,455 10,572 46,670 103,840
--------- --------- --------- --------- ---------
Total interest-earning assets 233,709 174,339 68,998 325,892 802,938
--------- --------- --------- --------- ---------
Interest-bearing liabilities:
Passbook and Club accounts -- -- -- 2,641 2,641
NOW and interest-bearing checking accounts -- -- -- 42,203 42,203
Consumer Money Market Deposit accounts 12,530 -- -- 30,368 42,898
Business Money Market Deposit accounts 6,830 -- -- 2,277 9,107
Certificate accounts 209,041 87,715 20,945 -- 317,701
Borrowed money 43,299 58,853 90,610 155,084 347,846
--------- --------- --------- --------- ---------
Total interest-bearing liabilities 271,700 146,568 111,555 232,573 762,396
--------- --------- --------- --------- ---------
Repricing GAP during the period $ (37,991) $ 27,771 $ (42,557) $ 93,319 $ 40,542
========= ========= ========= ========= =========
Cumulative GAP $ (37,991) $ (10,220) $ (52,777) $ 40,542
========= ========= ========= =========
Ratio of GAP during the period to total assets -4.60% 3.36% -5.15% 11.30%
========= ========= ========= =========
Ratio of cumulative GAP to total assets -4.60% -1.24% -6.39% 5.23%
========= ========= ========= =========
41
Liquidity and Capital Resources
The Company's assets increased to $825.7 million as of September 30, 2008,
from $773.5 million as of September 30, 2007. Stockholders' equity increased to
$47.2 million as of September 30, 2008, from $47.0 million as of September 30,
2007. As of September 30, 2008, stockholders' equity amounted to 5.7% 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, 2008, the Company had a remaining borrowing capacity
with the Federal Home Loan Bank of Pittsburgh of approximately $230.1 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, 2008 the Company had
exposures to limited recourse arrangements with respect to the Company's sale of
whole loans. At September 30, 2008, the exposure, which represents a portion of
credit risk associated with the sold interests, amounted to $84,000. 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.
42
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 statements of financial
condition of Harleysville Savings Financial Corporation and subsidiary ("the
Company") as of September 30, 2008 and 2007, and the related consolidated
statements of income, comprehensive income, stockholders' equity and cash flows
for the years 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 audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 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, 2008 and 2007,
and the results of their operations and their cash flows for the years 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 15, 2008
43
Consolidated Statements of Financial Condition
September 30,
---------------------------
(In thousands, except share data) 2008 2007
---------------------------------------------------------------------------------------------------------------------
Assets
Cash and amounts due from depository institutions $ 2,217 $ 1,647
Interest bearing deposits 7,157 6,670
------------ ------------
Total cash and cash equivalents 9,374 8,317
Investment securities held to maturity
(fair value - 2008, $78,973; 2007, $109,306) 79,254 108,693
Investment securities available-for-sale at fair value 854 1,910
Mortgage-backed securities held to maturity
(fair value - 2008, $211,814; 2007, $188,612) 213,933 192,842
Mortgage-backed securities available-for-sale at fair value 758 818
Loans receivable (net of allowance for loan losses -
2008, $1,988; 2007, $1,933 476,858 419,053
Accrued interest receivable 3,799 4,047
Federal Home Loan Bank stock - at cost 16,574 14,140
Office properties and equipment, net 10,154 9,916
Prepaid expenses and other assets 14,117 13,808
------------ ------------
TOTAL ASSETS $ 825,675 $ 773,544
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 425,513 $ 424,035
Short-term borrowings 21,800 31,500
Long-term debt 326,046 267,109
Accrued interest payable 1,686 1,556
Advances from borrowers for taxes and insurance 1,483 1,247
Accounts payable and accrued expenses 1,938 1,056
------------ ------------
Total liabilities 778,466 726,503
------------ ------------
Commitments and contingencies (Notes 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: outstanding 2008 3,567,934
shares 2007 3,717,519 shares 39 39
Additional paid-in capital 7,993 8,044
Treasury stock, at cost (2008, 353,243 shares; 2007, 203,658 shares) (5,017) (3,316)
Retained earnings - partially restricted 44,235 42,363
Accumulated other comprehensive loss (41) (89)
------------ ------------
Total stockholders' equity 47,209 47,041
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 825,675 $ 773,544
============ ============
See notes to consolidated financial statements.
44
Consolidated Statements of Income
Year Ended September 30,
---------------------------
(In thousands, except share data) 2008 2007
---------------------------------------------------------------------------------------------------------------------
Interest Income:
Interest and fees on mortgage loans $ 19,043 $ 17,270
Interest on mortgage-backed securities 10,088 9,339
Interest on commercial loans 1,799 674
Interest on consumer and other loans 5,719 6,035
Interest on taxable investments 5,008 5,411
Interest on tax-exempt investments 1,360 1,497
Dividends on investment securities 59 63
------------ ------------
Total interest and dividend income 43,076 40,289
------------ ------------
Interest Expense:
Interest on deposits 15,218 15,472
Interest on borrowings 13,798 13,334
------------ ------------
Total interest expense 29,016 28,806
------------ ------------
Net Interest Income 14,060 11,483
Provision for loan losses 85 --
------------ ------------
Net Interest Income, after Provision for Loan Losses 13,975 11,483
------------ ------------
Other Income:
Customer service fees 633 564
Impairment of equity securities (252) --
Realized gains on investments and mortgage-backed securities 73 160
Income on bank-owned life insurance 499 475
Other income 777 691
------------ ------------
Total other income 1,730 1,890
------------ ------------
Other Expenses:
Salaries and employee benefits 5,757 4,982
Occupancy and equipment 1,105 1,122
Deposit insurance premiums 56 52
Data processing 602 579
Other 2,574 2,481
------------ ------------
Total other expenses 10,094 9,216
------------ ------------
Income before Income Taxes 5,611 4,157
Provision for income taxes 1,232 911
------------ ------------
Net Income $ 4,379 $ 3,246
============ ============
Earnings Per Share:
Basic $ 1.20 $ 0.85
============ ============
Diluted $ 1.20 $ 0.83
============ ============
Weighted Average Shares Outstanding:
Basic 3,643,363 3,834,518
============ ============
Diluted 3,663,469 3,896,317
============ ============
See notes to consolidated financial statements.
45
Consolidated Statements of Income
Year Ended September 30,
------------------------------
(In Thousands) 2008 2007
-----------------------------------------------------------------------------------------------------------------
Net Income $ 4,379 $ 3,246
Other Comprehensive (Loss) Income
Unrealized gain (loss) on securities available for sale, net of tax (benefit) or
expense -- 2008, $25; 2007, $(40) 48 (1) (77) (1)
------------ ------------
Total Comprehensive Income $ 4,427 $ 3,169
============ ============
(1) Disclosure of reclassification amount, net of tax for the years ended:
2008 2007
------------ ------------
Net unrealized gain (loss) arising during the year $ (106) $ 43
Reclassification adjustment for net losses (gains) included in net income 179 (160)
------------ ------------
$ 73 $ (117)
Tax (expense) benefit (25) 40
------------ ------------
Net unrealized gain (loss) on securities $ 48 $ (77)
============ ============
See notes to consolidated financial statements.
46
Consolidated Statements of Stockholders' Equity
Common Retained Accumulated
Stock Additional Earnings- Other Total
Shares Common Paid-in Partially Comprehensive Treasury Stockholders'
(In thousands, except share data) Outstanding Stock Capital Restricted Income (Loss) Stock Equity
-----------------------------------------------------------------------------------------
Balance at September 30, 2006 3,849,736 $ 39 $ 7,992 $ 41,714 $ (12) $ (1,262) $ 48,471
Net income 3,246 3,246
Dividends - $.68 per share (2,597) (2,597)
Stock option compensation 97 97
Treasury stock purchased (169,496) (2,694) (2,694)
Treasury stock delivered under
employee stock plans 3,751 (16) 65 49
Treasury stock delivered under
dividend reinvestment plan 33,528 (29) 575 546
Change in unrealized holding loss
on available-for-sale securities,
net of tax (77) (77)
----------- ------ ---------- ---------- ------------- -------- -------------
Balance at September 30, 2007 3,717,519 $ 39 $ 8,044 $ 42,363 $ (89) $ (3,316) $ 47,041
Net income 4,379 4,379
Dividends - $.69 per share (2,507) (2,507)
Stock option compensation 99 99
Treasury stock purchased (205,358) (2,556) (2,556)
Treasury stock delivered under
employee stock plans 8,000 (32) 133 101
Treasury stock delivered under
dividend reinvestment plan 42,773 (118) 646 528
Employee options exercised 5,000 76 76
Change in unrealized holding loss
on available-for-sale securities,
net of tax 48 48
----------- ------ ---------- ---------- ------------- -------- -------------
Balance at September 30, 2008 $ 3,567,934 $ 39 $ 7,993 $ 44,235 $ (41) $ (5,017) $ 47,209
=========== ====== ========== ========== ============= ======== =============
See notes to consolidated financial statements.
47
Consolidated Statements of Cash Flows
Year Ended September 30,
------------------------
(In Thousands) 2008 2007
------------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 4,379 $ 3,246
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 523 511
Deferred income taxes (41) 56
Provision for loan losses 85 --
Gain on sales of securities (73) (160)
Loss on impairment of securities 252 --
Amortization of deferred loan fees 9 (19)
Net amortization of premiums and discounts 147 206
Increase in cash surrender value (499) (475)
Compensation charge on stock options 99 97
Changes in assets and liabilities which provided (used) cash:
Increase in accounts payable and accrued expenses 882 344
Decrease (increase) in prepaid expenses and other assets 230 (228)
Decrease (increase) in accrued interest receivable 248 (77)
Increase in accrued interest payable 130 150
---------- -----------
Net cash provided by operating activities 6,371 3,651
---------- -----------
Investing Activities:
Purchase of mortgage-backed securities held to maturity (61,835) (20,939)
Purchase of investment securities held to maturity (20,997) (19,918)
Purchase of investment securities available-for-sale -- (466)
Net (purchase) redemption of FHLB stock (2,434) 1,359
Proceeds from the sale of investment securities
available-for-sale 442 --
Proceeds from maturities of investment securities 42,408 28,987
Principal collected on mortgage-backed securities 49,168 38,897
Principal collected on long-term loans 85,717 96,866
Long-term loans originated or acquired (143,616) (121,935)
Purchases of premises and equipment (760) (2,414)
---------- -----------
Net cash (used in) provided by investing activities (51,907) 437
---------- -----------
Financing Activities:
Net increase (decrease) in demand deposits, NOW accounts
And savings accounts 1,920 (2,891)
Net decrease in certificates of deposit (442) (2,295)
Cash dividends (1,979) (2,051)
Net decrease in short-term borrowings (9,700) (26,700)
Proceeds from long-term debt 113,000 63,000
Repayment of long-term debt (54,063) (32,302)
Acquisition of treasury stock (2,556) (2,694)
Treasury stock delivered under employee stock plan 177 49
Net increase in advances from borrowers for taxes and insurance 236 63
---------- -----------
Net provided (used in) by cash financing activities 46,593 (5,821)
---------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,057 (1,733)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,317 10,050
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9,374 $ 8,317
========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest (credited and paid) $ 28,886 $ 28,656
Income Tax 1,183 665
See notes to consolidated financial statements.
48
Notes to Consolidated Financial Statements
1. Nature of Operations and Organizational Structure
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.
Investment and Mortgage-Backed Securities - The Company classifies and accounts
for debt and equity securities as follows:
Held to Maturity - Debt securities that management has the positive intent and
ability to hold until maturity are classified as held to maturity and are
carried at their remaining unpaid principal balance, net of unamortized premiums
or unaccreted discounts. Premiums are amortized and discounts are accreted using
the interest method over the estimated remaining term of the underlying
security.
Available for Sale - Debt and equity securities that will be held for indefinite
periods of time, including securities that may be sold in response to changes in
market interest or prepayment rates, needs for liquidity and changes in the
availability of and the yield of alternative investments are classified as
available for sale. These assets are carried at fair value. 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
49
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, an impairment loss is recognized in the period in which
the decline in value is determined to be 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 on Loans - Interest income is accrued on the unpaid principal
balance. 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 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
50
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.
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. The Company had no foreclosed real estate at September 30,
2008 and 2007.
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.
Federal Home Loan Bank 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 and amounted to $12,906,000 and $12,407,000 at September 30 2008 and
2007, respectively.
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 of Financial Assets - Transfers of financial assets are accounted for
as sales, when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets
51
have been isolated from the Company (2) the transferee obtains the right (free
of conditions that constrain it from taking advantage of that right) to pledge
or exchange the transferred assets, and (3) the Company does not maintain
effective control over the transferred assets through an agreement to repurchase
them before their maturity.
Treasury Stock - The Company records treasury stock purchases at cost. Gains and
losses on subsequent reissuance of shares are credited or charged to additional
paid-in capital 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. Stock-based
compensation expense related to stock options for the years ended September 30,
2008 and 2007 was $99,000 and $97,000, respectively. The tax benefit recognized
related to the compensation expense for the years ended September 30, 2008 and
2007 was $5,000 and $5,000, respectively.
The weighted average fair value of options granted in the years ended September
30, 2008 and 2007 was $1.39 and $2.81, respectively, and was estimated at the
date of grant using a Binomial Option Pricing Model with the following
weighted-average assumptions:
Year Ended September 30,
2008 2007
------------------------------------------------------------
Risk free interest rate of return 3.59% 4.77%
Expected option life 84 months 84 months
Expected volatility 17% 17%
Expected dividends 5.4% 3.9%
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.
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 additional common shares that would have been outstanding if dilutive
potential common shares had been issued. Potential common shares that may be
issued by the Company relate solely to outstanding stock options, and are
determined using the treasury stock method. The weighted average shares
outstanding used to calculate earnings per share were as follows:
Year Ended September 30,
2008 2007
---------------------------------------------------------------------------
Weighted average shares outstanding - basic 3,643,363 3,834,518
Increase in shares due to dilutive stock options 20,106 61,799
--------- ---------
Weighted average shares outstanding - diluted 3,663,469 3,896,317
========= =========
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.
52
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 beginning 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. There was no impact on the Company's financial statements upon
adoption of FIN 48 as of October 1, 2007 and for the year ended September 30,
2008.
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. We do not expect the adoption of SFAS
No. 159 to have a significant impact on our 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. 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.
In February 2000, the FASB issued FASB Staff Position (FSP) 157-2, "Effective
Date of FASB Statement No. 157," that would permit a one-year deferral in
applying the measured provisions of Statement No. 157 to non-financial assets
and non-financial liabilities (non-financial items) that are not recognized or
disclosed at fair value in an entity's financial statements on a recurring basis
(at least annually). Therefore, if the change in fair value of a non-financial
item is not required to be recognized or disclosed in the financial statements
on an annual basis or more frequently, the effective date of application of
Statement 157 to that item is deferred until fiscal years beginning after
November 15, 2008 and interim periods within those fiscal years. This deferral
does not apply, however, to an entity that applies Statement 157 in interim or
annual financial statements before FSB 157-2 is effective. The Company is
currently evaluating the impact, if any, that the adoption of FSP 157-2 will
have on the Company's operating income or net earnings.
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
53
highlights that the employer (who is also the policyholder) has a liability for
the benefit it is providing to its 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 adoption of this new accounting standard will not have an impact
to our 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 adoption of EITF 06-10 will not have an impact on the Company's
consolidated financial position and results of operations.
In December of 2007, FASB issued statement No. 141 (R) "Business Combinations".
This Statement establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. The Statement also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. The guidance will become
effective as of the beginning of a company's fiscal year beginning after
December 15, 2008. The new pronouncement will impact the Company's accounting
for business combinations completed beginning October 1, 2009.
In December 2007, FASB issued statement No. 160 "Noncontrolling Interests in
Consolidated Financial Statements--an amendment of ARB No. 51". This Statement
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. The guidance will
become effective as of the beginning of a company's fiscal year beginning after
December 15, 2008. The Company believes that this new pronouncement will have an
immaterial impact on the Company's financial statements in future periods.
In March 2008, the FASB issued Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities--an amendment of FASB Statement No. 133"
(Statement 161). Statement 161 requires entities that utilize derivative
instruments to provide qualitative disclosures about their objectives and
strategies for using such instruments, as well as any details of
credit-risk-related contingent features contained within derivatives. Statement
161 also requires entities to disclose additional information about the amounts
and location of derivatives located within the financial statements, how the
provisions of SFAS 133 have been applied, and the impact that hedges have on an
entity's financial position, financial performance, and cash flows. Statement
161 is effective for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. The Company is currently evaluating
the potential impact the new pronouncement will have on its consolidated
financial statements.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles." This Statement identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements. This Statement is effective 60 days
following the SEC's approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles." The implementation of this standard
will not have any impact on the Company's consolidated financial statements.
54
In October 2008, the FASB issued FSP SFAS No. 157-3, "Determining the Fair Value
of a Financial Asset When The Market for That Asset Is Not Active" (FSP 157-3),
to clarify the application of the provisions of SFAS 157 in an inactive market
and how an entity would determine fair value in an inactive market. FSP 157-3 is
effective immediately and applies to our September 30, 2008 financial
statements. The application of the provisions of FSP 157-3 did not materially
affect our results of operations or financial condition as of and for the
periods ended September 30, 2008.
In September 2008, the FASB issued FSP 133-1 and FIN 45-4, "Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161" (FSP 133-1 and FIN 45-4). FSP 133-1 and FIN 45-4 amends
and enhances disclosure requirements for sellers of credit derivatives and
financial guarantees. It also clarifies that the disclosure requirements of SFAS
No. 161 are effective for quarterly periods beginning after November 15, 2008,
and fiscal years that include those periods. FSP 133-1 and FIN 45-4 is effective
for reporting periods (annual or interim) ending after November 15, 2008. The
implementation of this standard will not have a material impact on our
consolidated financial position and results of operations.
3. 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, by
maturities, is as follows:
September 30, 2008
Gross Gross
Amortized Unrealized Unrealized
(In Thousands) Cost Gains Losses Fair Value
--------------------------------------------------------------------------------------------
U.S. Government Agencies
Due after 1 year through 5 years $ 5,000 $ 67 $ -- $ 5,067
Due after 5 years through 10 years 2,500 5 -- 2,005
Due after 10 years through 15 years 38,497 11 (341) 38,167
Due after 15 years 8,818 64 (44) 8,838
Tax Exempt Obligations
Due after 10 years through 15 years 21,544 592 (109) 22,027
Due after 15 years 3,395 -- (526) 2,869
--------- ---------- ---------- ----------
Total Investment Securities $ 79,254 $ 739 $ (1,020) $ 78,973
========= ========== ========== ==========
September 30, 2007
Gross Gross
Amortized Unrealized Unrealized
(In Thousands) Cost Gains Losses Fair Value
--------------------------------------------------------------------------------------------
U.S. Government Agencies
Due after 1 year through 5 years $ 5,000 $ -- $ (27) $ 4,973
Due after 5 years through 10 years 20,919 38 (114) 20,843
Due after 10 years through 15 years 48,422 87 (342) 48,167
Due after 15 years 8,814 87 (50) 8,851
Tax Exempt Obligations
Due after 10 years through 15 years 15,853 717 -- 16,570
Due after 15 years 9,685 384 (167) 9,902
--------- ---------- ---------- ----------
Total Investment Securities $ 108,693 $ 1,313 $ (700) $ 109,306
========= ========== ========== ==========
55
A summary of investments with unrealized losses, aggregated by category, at
September 30, 2008 is as follows:
Less than 12 Months 12 Months or Longer Total Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
---------- ----------------- ---------- ----------------- ---------- -----------------
(In Thousands)
US Government agencies $ 34,501 $ (385) $ -- $ -- $ 34,501 $ (385)
Tax exempt obligations 4,502 (298) 1,675 (337) 6,177 (635)
---------- ----------------- ---------- ----------------- ---------- -----------------
Total $ 39,003 $ (683) $ 1,675 $ (337) $ 40,678 $ (1,020)
========== ================= ========== ================= ========== =================
At September 30, 2008, investment securities in a gross unrealized loss position
consisted of 21 securities that at such date had an aggregate depreciation of
..36% 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 fair 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 maturity. Management
does not believe any individual unrealized loss as of September 30, 2008
represents an other-than-temporary impairment.
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 Total
(In Thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
---------- ----------------- ---------- ----------------- ---------- -----------------
US Government agencies $ 4,446 $ (26) $ 56,849 $ (506) $ 61,295 $ (532)
Tax exempt obligations 2,849 (168) -- -- 2,849 (168)
---------- ----------------- ---------- ----------------- ---------- -----------------
Total $ 7,295 $ (194) $ 56,849 $ (506) $ 64,144 $ (700)
========== ================= ========== ================= ========== =================
4. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
A comparison of amortized cost and approximate fair value of investment
securities available-for sale with gross unrealized gains and losses, is as
follows:
September 30, 2008
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
(In Thousands) Cost Gain Losses Fair Value
--------------------------------------- ---------- ---------- ----------
Equity Securities $ 877 $ 46 $ (81) $ 842
Money Market Mutual Funds 12 -- -- 12
--------- ---------- ---------- ----------
Total Investment Securities $ 889 $ 46 $ (81) $ 854
========= ========== ========== ==========
September 30, 2007
Gross Gross
Amortized Unrealized Unrealized
(In Thousands) Cost Gain 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
========= ========== ========== ==========
A summary of investments with unrealized losses, aggregated by category, at
September 30, 2008 is as follows:
Less than 12 Months 12 Months or Longer
------------------------------ ------------------------------
Total Total
(In Thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
---------- ----------------- ---------- ----------------- ---------- -----------------
Equity Securities $ 258 $ (14) $ 339 $ (67) $ 597 $ (81)
---------- ----------------- ---------- ----------------- ---------- -----------------
56
As of September 30, 2008 there were 3 equity securities in an unrealized loss
position. Management evaluated the length of time and the extent to which the
market value has been less than cost; the financial condition and near term
prospects of the 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, 2008 represents an other-than-temporary impairment.
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 Total
(In Thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
---------- ----------------- ---------- ----------------- ---------- -----------------
Equity Securities $ 793 $ (89) $ 255 $ (84) $ 1,048 $ (173)
---------- ----------------- ---------- ----------------- ---------- -----------------
Proceeds from the sale of investment securities available for sale during the
year ended September 30, 2008 were $442,000 resulting in a gross gain of $69,000
and an after tax gain of $46,000. There were no sales of investment securities
available for sale for the year ended September 30, 2007.
During the year ended September 30, 2008, the Company recognized an impairment
charge of $252,000 on two equity securities.
5. 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:
September 30, 2008
Gross Gross
Amortized Unrealized Unrealized
(In Thousands) Cost Gains Losses Fair Value
--------------------------------------------------------------------------------------
Collateralized mortgage obligations $ 14,708 $ 8 $ (624) $ 14,092
FHLMC pass-through certificates 88,594 283 (826) 88,051
FNMA pass-through certificates 110,431 99 (1,061) 109,469
GNMA pass-through certificates 200 2 -- 202
--------- ---------- ---------- ----------
Total mortgage-backed securities $ 213,933 $ 392 $ (2,511) $ 211,814
========= ========== ========== ==========
September 30, 2007
Gross Gross
Amortized Unrealized Unrealized
(In Thousands) Cost Gains Losses Fair Value
--------------------------------------------------------------------------------------
Collateralized mortgage obligations $ 16,470 $ 97 $ (299) 16,268
FHLMC pass-through certificates 89,533 164 (2,198) 87,499
FNMA pass-through certificates 86,587 12 (2,008) 84,591
GNMA pass-through certificates 252 2 -- 254
--------- ---------- ---------- ----------
Total Mortgage-Backed Securities $ 192,842 $ 275 $ (4,505) $ 188,612
========= ========== ========== ==========
57
A summary of securities with unrealized losses, aggregated by category, at
September 30, 2008 is as follows:
Less than 12 Months 12 Months or Longer
------------------------------ ------------------------------ Total
Total -----------------
(In Thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
---------- ----------------- ---------- ----------------- ---------- -----------------
Mortgage-backed securities
held to maturity $ 159,415 $ (2,412) $ 4,615 $ (99) $ 164,030 $ (2,511)
---------- ----------------- ---------- ----------------- ---------- -----------------
At September 30, 2008, mortgage-backed securities in a gross unrealized loss
position for twelve months or longer consisted of 6 securities that at such date
had an aggregate depreciation of 10.9% 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 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
maturity. Management does not believe any individual unrealized loss as of
September 30, 2008 represents an other-than-temporary impairment.
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 Total
---------- -----------------
(In Thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
---------- ----------------- ---------- ----------------- ---------- -----------------
Mortgage-backed securities
held to maturity $ 11,829 $ (95) $ 162,008 $ (4,410) $ 173,837 $ (4,505)
---------- ----------------- ---------- ----------------- ---------- -----------------
Proceeds from the sales of mortgage-backed securities during the year ended
September 30, 2008 were $1,271,000 resulting in a gross gain of $4,000 and an
after tax gain of $3,000. 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%.
6. MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE
A comparison of amortized cost and approximate fair value of mortgage-backed
securities available-for sale with gross unrealized gains and losses, is as
follows:
September 30, 2008
Gross Gross
Amortized Unrealized Unrealized
(In Thousands) Cost Gains Losses Fair Value
------------------------------------------------------------------------------------
FNMA pass-through certificates $ 785 $ -- $ (27) $ 758
--------- ---------- ---------- ----------
Total mortgage-backed securities $ 785 $ -- $ (27) $ 758
========= ========== ========== ==========
The Company has one security in an unrealized loss position at September 30,
2008 for less than twelve months. Management does not believe this loss
represents an other-than-temporary impairment.
58
September 30, 2007
Gross Gross
Amortized Unrealized Unrealized
(In Thousands) Cost Gains Losses Fair Value
------------------------------------------------------------------------------------
FNMA pass-through certificates $ 785 $ 33 $ -- $ 818
--------- ---------- ---------- ----------
Total mortgage-backed securities $ 785 $ 33 $ -- $ 818
========= ========== ========== ==========
7. LOANS RECEIVABLE
Loans receivable consists of the following:
September 30,
(In Thousands) 2008 2007
-------------------------------------------------------------------
Residential Mortgages $ 337,316 $ 305,341
Commercial Mortgages 44,407 15,314
Construction 8,346 6,093
Savings Account 955 977
Home Equity 66,280 74,218
Home Equity Line of Credit 26,103 21,386
Automobile and other 1,000 904
--------- ---------
Total 484,407 424,233
Undisbursed portion of loans in process (5,109) (2,794)
Deferred loan fees (452) (453)
Allowance for loan losses (1,988) (1,933)
--------- ---------
Loans Receivable - net $ 476,858 $ 419,053
========= =========
At September 30, 2008 and 2007, the Company was servicing loans for others
amounting to approximately $2,918,000 and $3,642,000 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 $13,000 and $18,000, at September 30, 2008 and 2007,
respectively.
Loans to officers and directors at September 30, 2008 and 2007, were
approximately $554,000 and $582,000, respectively. Additional loans and
repayments for the year ended September 30, 2008, were $0 and $28,000,
respectively.
59
The following schedule summarizes the changes in the allowance for loan losses:
Year Ended September 30,
(In Thousands) 2008 2007
---------------------------------------------------------------
Balance, beginning of year $ 1,933 $ 1,956
Provision of loan losses 85 --
Recoveries 10 13
Charge offs (40) (36)
-------- --------
Balance, end of year $ 1,988 $ 1,933
======== ========
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, 2008, 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, 2008 and 2007, the Company had impaired loans of $815,000 and $0,
respectively, with a related allowance for loan losses of $122,000 and $0,
respectively. At September 30, 2008, the Company had non-accrual loans of
$244,000. At September 30, 2007, the Company had no non-accrual loans. At
September 30, 2008 and 2007, the Company had loans in excess of 90 days
delinquent and still accruing interest in the amount of $1,014,000 and $28,000,
respectively.
8. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classifications as
follows:
September 30,
(In Thousands) 2008 2007
---------------------------------------------------------------
Land $ 1,159 $ 1,159
Buildings 7,725 7,548
Branch office in construction 2,430 2,193
Furniture, fixtures and equipment 4,251 3,904
Automobiles 25 25
-------- --------
Total 15,590 14,829
Less accumulated depreciation (5,436) (4,913)
-------- --------
Net $ 10,154 $ 9,916
======== ========
Depreciation expense for the years ended September 30, 2008 and 2007 amounted to
approximately $523,000 and $511,000 respectively.
60
9. DEPOSITS
Deposits are summarized as follows:
September 30,
2008 2007
-------------------- ---------------------
Weighted Weighted
Interest Interest
(Dollars in Thousands) Amount Rate Amount Rate
-------------------------------------------------------------------------------------
Non-interest bearing checking accounts $ 10,963 0.00% $ 11,740 0.00%
NOW accounts 14,315 0.25 13,711 0.25
Interest bearing checking accounts 27,888 1.13 25,750 2.41
Money market deposit accounts 52,005 1.47 51,827 1.80
Passbook and club accounts 2,641 1.00 2,864 0.98
Certificate of deposit accounts 317,701 3.49 318,143 4.50
--------- -------- --------- --------
Total Deposits $ 425,513 2.87% $ 424,035 3.76%
========= ======== ========= ========
At September 30, 2008, the amounts of scheduled maturities of certificate of
deposit accounts were as follows:
For the year ended September 30: 2009 $ 208,889
2010 48,489
2011 39,348
2012 12,760
2013 8,215
---------
Total $ 317,701
=========
The aggregate amount of certificate accounts in denominations of $100,000 or
more at September 30, 2008 and 2007 amounted to approximately $53.4 million and
$53.6 million, respectively. On October 3, 2008, FDIC deposit insurance
temporarily increased from $100,000 to $250,000 per depositor through December
31, 2009
Interest expense on savings deposits is composed of the following:
Year Ended September 30,
(In Thousands) 2008 2007
-----------------------------------------------------------------------------
NOW, interest-bearing checking and MMDA accounts $ 2,212 $ 2,558
Passbook and club accounts 31 32
Certificate accounts 12,975 12,882
-------- --------
Total $ 15,218 $ 15,472
======== ========
61
10. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
The Company has a line of credit with the Federal Home Loan Bank of which $21.8
million and $31.5 million of the available $75.0 million was used at September
30, 2008 and 2007, respectively. The average balance outstanding on the line of
credit for the years ended September 30, 2008 and 2007 was $16.9 million and
$48.2 million, respectively. The maximum amount outstanding at any time for 2008
and 2007 was $39.0 million and $67.4 million, respectively. The weighted average
interest rate during 2008 and 2007 was 2.96% and 5.36%. The interest rate at
September 30, 2008 and 2007 was 2.05% and 5.15%, respectively.
Long-term debt consist of the following:
Weighted
Amount Average Rate
--------------------- ------------
2008 2007 2008 2007
--------- --------- ---- ----
(dollars in thousands)
FHLB long-term debt:
Fixed rate advances maturing:
2009 $ 14,055 4.93%
2010 31,405 4.36%
2011 17,740 4.33%
2012 57,090 4.48%
2013 24,282 3.61%
2014 11,444 3.47%
2015 19,683 3.81%
Maturing after 9/30/2015: 100,347 4.32%
--------- ----
Total FHLB long-term debt 276,046 227,109 4.25% 4.56%
Other long-term debt:
Fixed rate advances maturing:
2013 15,000 4.55%
2014 15,000 4.50%
Maturing after 9/30/2015: 10,000 3.50%
--------- ----
Total other long term debt fixed 40,000 30,000 4.27% 4.70%
Adjustable long-term debt maturing:
Maturing after 9/30/2015: 10,000 10,000 4.37% 4.97%
--------- --------- ---- ----
Total other long term debt $ 50,000 40,000 4.29% 4.77%
--------- --------- ---- ----
Total Long Term Debt $ 326,046 $ 267,109 4.26% 4.59%
========= ========= ==== ====
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 $50 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. 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, 2008 and 2007 includes
approximately $1,325,000 representing bad debt deductions for which no deferred
income taxes have been provided.
62
The expense for income taxes differs from that computed at the statutory federal
corporate tax rate as follows:
Year Ended September 30,
2008 2007
-------------------- ---------------------
Percentage Percentage
of Pretax of Pretax
(Dollars in Thousands) Amount Income Amount Income
----------------------------------------------------------------------------
At statutory rate $ 1,908 34.0% $ 1,413 34.0%
Adjustments resulting from:
Tax-exempt income (597) (10.6) (557) (13.4)
State tax-net of federal
tax benefit -- -- -- --
Other (79) (1.4) 55 1.3
------- ---------- ------- ----------
Expense per consolidated
statements of income $ 1,232 22.0% $ 911 21.9%
======= ========== ======= ==========
Income tax expense is summarized as follows:
Year Ended September 30,
(In thousands) 2008 2007
------------------------
Current $ 1,273 $ 855
Deferred (41) 56
------- ------
Total Income Tax Expense $ 1,232 $ 911
======= ======
Items that gave rise to significant portions of the deferred tax accounts are as
follows:
September 30,
(In thousands) 2008 2007
------- ------
Deferred Tax Assets:
Deferred Loan Fees $ 37 $ 55
Allowance for Loan Losses 676 657
Unrealized loss on investment securities 21 46
Securities impairment 86 --
Other 32 27
------- ------
Sub-Total 852 785
------- ------
Deferred Tax Liabilities:
Properties and equipment (501) (450)
------- ------
Sub-Total (501) (450)
------- ------
Total $ 351 $ 335
======= ======
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 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
63
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, 2008, that the Bank meets all capital adequacy requirements to
which it is subject.
As of September 30, 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
---------------- ----------------- ----------------------
(Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------------------------------------
Tier 1 Capital (to assets) $ 47,191 5.69% $ 33,167 4.00% $ 41,459 5.00%
Tier 1 Capital (to risk weighted assets) 47,191 10.97% 17,203 4.00% 25,804 6.00%
Total Capital (to risk weighted assets) 49,179 11.44% 34,406 8.00% 43,007 10.00%
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%
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
$309,000 and $278,000 for the years ended September 30, 2008 and 2007,
respectively.
14. STOCK OPTIONS
In January 1996, the stockholders approved the 1995 Stock Option Plan. This plan
consists of two parts: Plan I - incentive stock options and Plan II -
compensatory stock options.
In January 2001, the stockholders approved the 2000 Stock Option Plan. This plan
consists of two parts: Plan I - incentive stock options and Plan II -
compensatory stock options.
In January 2006, the stockholders approved the 2005 Stock Option Plan. This plan
consists of two parts: Plan I - incentive stock options and Plan II -
compensatory stock options. There are 151,499 options remaining for grant in
this plan.
64
A summary of transactions under this plan follows:
Year Ended September 30,
2008 2007
------------------ ------------------
Weighted Weighted
Average Average
Options Price Options Price
--------------------------------------------------------------------------
Outstanding, beginning of year 279,799 $ 15.54 243,100 $ 15.01
Exercised (5,000) 8.87 (3,751) 10.10
Canceled (10,918) 15.61 (8,750) 14.35
Granted 79,478 12.50 49,200 17.68
------- -------- ------- --------
Outstanding, end of year 343,359 $ 15.02 279,799 $ 15.54
======= ======== ======= ========
Options exercisable, end of year 145,666 $ 14.45 145,599 $ 13.86
======= ======== ======= ========
A summary of the exercise price ranges at September 30, 2008 is as follows:
Weighted
Exercise Weighted Average
Number of Price Average Remaining Exercise Price
Option Shares Range Contractual Life per Share
------------- ------------ ----------------- --------------
127,527 $ 8.10-12.50 6.72 $ 11.50
101,567 13.13-17.50 6.09 16.41
114,265 17.68-18.00 5.88 17.81
------------- ------------ ---- --------------
343,359 $ 8.10-18.00 7.34 $ 15.02
============= ============ ==== ==============
For the years ended September 30, 2008 and 2007, the aggregate intrinsic value
of options outstanding was $137,000 and $251,000, respectively. For the years
ended September 30, 2008 and 2007, the aggregate intrinsic value of options
exercisable was $131,000 and $242,000, 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, 2008. This amount changes based on changes in the market value of the
Company's stock.
Stock based compensation expense related to stock options for the years ended
September 30, 2008 and 2007 was $99,000, or $94,000 net of tax and $97,000, or
$92,000, net of tax, respectively. As of September 30, 2008, there was
approximately $231,000 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 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 2008 and 2007, no
shares were issued to employees, respectively. At September 30, 2008 and 2007,
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.
65
15. COMMITMENTS
At September 30, 2008, the Company had approximately $10.6 million in
outstanding commitments to originate mortgage loans, of which $10.4 million were
at fixed rates ranging from 5.00% to 7.625% and adjustable rates of $167,000 at
6.00%. The unfunded line of credit commitments at September 30, 2008 were $41.3
million. The Company had $4.7 million and $370,000 of committed commercial and
consumer loans, respectively at September 30, 2008. In addition, the Company had
$4.1 million of unused commercial lines of credit. The amounts of undisbursed
portions of loans in process at September 30, 2008 were $4.7 million. The
Company had a total of $741,000 in standby letters of credit. Also, at September
30, 2008 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, 2008, are summarized below:
Fiscal Year Rental Amount
----------- -------------
2009 $ 121,627
2010 124,272
2011 125,595
2012 130,463
2013 137,277
-------------
Total $ 639,234
=============
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, 2008. 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.
66
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 use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
September 30,
2008 2007
---------------------------------------------------------
Carrying Estimated Fair Carrying Estimated Fair
(In Thousands) Amount Value Amount Value
---------- -------------- ---------- --------------
Assets:
Cash and cash equivalents $ 9,374 $ 9,374 $ 8,317 $ 8,317
Investment securities held to maturity 79,254 78,973 108,693 109,306
Investment securities available-for-sale 854 854 1,910 1,910
Mortgage-backed securities held to maturity 213,933 211,814 192,842 188,612
Mortgage-backed securities available-for-sale 758 758 818 818
Loans receivable - net 476,858 476,399 419,053 411,521
Federal Home Loan Bank Stock 16,574 16,574 14,140 14,140
Accrued interest receivable 3,799 3,799 4,047 4,047
Liabilities:
Checking, Passbook, Club and NOW accounts 55,807 55,807 54,065 54,065
Money Market Demand accounts 52,005 52,005 51,827 51,827
Certificate accounts 317,701 318,929 318,143 315,848
Borrowings 347,846 357,376 298,609 300,032
Accrued interest payable 1,686 1,686 1,556 1,556
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 checking, 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, 2008 and 2007. 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
67
these financial statements since that date and, therefore, current estimates of
fair value may differ significantly from the amounts presented herein.
19. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Condensed financial statements of Harleysville Savings Financial Corporation are
as follows:
Condensed Statements of Financial Condition
September 30,
---------------------------------
2008 2007
--------------- ---------------
(In Thousands)
Assets
Cash $ 47 $ 195
Investment in subsidiary 47,618 47,312
--------------- ---------------
Total Assets $ 47,665 $ 47,507
=============== ===============
Liabilities & Stockholders' Equity
Other liabilities $ 456 $ 466
Stockholders' equity 47,209 47,041
--------------- ---------------
Total Liabilities & Stockholders' Equity $ 47,665 $ 47,507
=============== ===============
Condensed Statement of Income:
For the Year Ended September 30,
2008 2007
--------------- ---------------
Equity in income of subsidiary $ 4,788 $ 3,680
Other expense 409 434
--------------- ---------------
Net income $ 4,379 $ 3,246
=============== ===============
Condensed Statements of Cash Flows
For the Year Ended September 30,
2008 2007
--------------- ---------------
Net income $ 4,379 $ 3,246
(Decrease) increase in other liabilities (10) 92
Income of Harleysville Savings Bank (4,788) (3,680)
--------------- ---------------
Net cash used by operating activities (419) (342)
--------------- ---------------
Investing activities:
Dividends received from subsidiary 4,629 5,050
--------------- ---------------
Net cash provided by investing activities 4,629 5,050
--------------- ---------------
Financing activities:
Acquisition of treasury stock (2,556) (2,694)
Issuance of treasury stock 177 49
Dividends paid (1,979) (2,051)
--------------- ---------------
Net cash used in financing activities (4,358) (4,696)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents (148) 12
Cash and cash equivalents at the beginning of the period 195 183
--------------- ---------------
Cash and cash equivalents at the end of the period $ 47 $ 195
=============== ===============
68
20. Quarterly Financial Data (Unaudited)
Unaudited quarterly financial data for the years ended September 30, 2008 and
2007 is as follows: (in thousands, except per share data)
2008 2007
----------------------------------------- ---------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
QTR QTR QTR QTR QTR QTR QTR QTR
-------- -------- -------- -------- ------- ------- -------- --------
(In Thousands)
Interest Income $ 10,501 $ 10,722 $ 10,812 $ 11,041 $ 9,840 $ 9,899 $ 10,115 $ 10,442
Interest Expense 7,631 7,519 7,056 6,810 7,015 6,957 7,249 7,572
-------- -------- -------- -------- ------- ------- -------- --------
Net Interest Income 2,870 3,203 3,756 4,231 2,825 2,942 2,866 2,870
Provision for loan losses -- 5 35 45 -- -- -- --
-------- -------- -------- -------- ------- ------- -------- --------
Net interest income after
provision for loan losses 2,870 3,198 3,721 4,186 2,825 2,942 2,866 2,870
Impairment of equity securities -- -- 252 -- -- -- -- --
Gain on sales of investments -- 4 -- 69 -- 160 -- --
Other Income 499 463 453 494 373 386 475 477
Non-interest expense 2,386 2,425 2,554 2,729 2,260 2,315 2,316 2,326
-------- -------- -------- -------- ------- ------- -------- --------
Income before income taxes 983 1,240 1,368 2,020 938 1,173 1,025 1,021
Income tax expense 182 206 332 512 181 269 212 250
-------- -------- -------- -------- ------- ------- -------- --------
Net income $ 801 $ 1,034 $ 1,036 $ 1,508 $ 757 $ 904 $ 813 $ 771
======== ======== ======== ======== ======= ======= ======== ========
Per Common Share:
Earnings per share - basic $ 0.22 $ 0.28 $ 0.29 $ 0.42 $ 0.20 $ 0.23 $ 0.21 $ 0.21
Earnings per share - diluted $ 0.21 $ 0.28 $ 0.29 $ 0.42 $ 0.19 $ 0.23 $ 0.21 $ 0.21
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.
69
Item 9. Changes in and Disagreements With Accountants on Accounting and
-----------------------------------------------------------------------
Financial Disclosure.
--------------------
The information required herein is incorporated by reference from the
information contained in the section captioned "Ratification of Selection of
Independent Registered Public Accounting Firm - Change in Auditors" in the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders to
be held in January 2009 (the "Proxy Statement").
Item 9A(T). 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, 2008. 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 2008 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
Report of Management's Assessment of Internal Control over Financial Reporting
Management is responsible for designing, implementing, documenting, and
maintaining an adequate system of internal control over financial reporting. An
adequate system of internal control over financial reporting encompasses the
processes and procedures that have been established by management to:
o maintain records that accurately reflect the company's transactions;
o prepare financial statement and footnote disclosures in accordance with
GAAP that can be relied upon by external users;
o prevent and detect unauthorized acquisition, use or disposition of the
company's assets that could have a material effect on the financial
statements.
Management conducted an evaluation of the effectiveness of the Company's
internal control over financial reporting based on the criteria in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Based on this evaluation under the criteria
in Internal Control-Integrated Framework, management concluded that internal
control over financial reporting was effective as of September 30, 2008.
Furthermore, during the conduct of its assessment, management identified no
material weakness in its financial reporting control system.
The Board of Directors of Harleysville Savings Financial Corporation, through
its Audit Committee, provides oversight to managements' conduct of the financial
reporting process. The Audit Committee, which is composed entirely of
independent directors, is also responsible to recommend the appointment of
independent public accountants. The Audit Committee also meets with management,
the internal audit staff, and the independent public accountants throughout the
year to provide assurance as to the adequacy of the financial reporting process
and to monitor the overall scope of the work performed by the internal audit
staff and the independent public accountants.
Because of its inherent limitations, our disclosure controls and procedures may
not prevent or detect misstatements. A control system, no matter how well
conceived and operated, can only provide reasonable, not absolute, assurance
that the objectives of the control system are met. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances
70
of fraud, if any, have been detected. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to a temporary rule of the Securities
and Exchange Commission that permits the Company to provide only management's
report in this annual report.
/s/ Ronald B. Geib /s/ Brendan J. McGill
------------------ ---------------------
President and Chief Executive Officer Chief Financial Officer
Item 9B. Other Information.
--------------------------
Not applicable.
71
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 2009 Annual Meeting of Stockholders
to be held in January 2009 (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
may 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" 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,
2008.
Number of Shares to be
issued upon the Exercise Weighted-Average Number of Shares Remaining Available for
of Outstanding Options, Exercise Price of Future Issuance (Excluding Shares Reflected
Plan Category Warrants and Rights(1) Outstanding Options in the First Column)(2)
------------------------------- ------------------------ ------------------- -------------------------------------------
Equity compensation plans
approved by security holders 343,359 $15.02 205,082
Equity compensation plans not
approved by security holders -- -- --
------- ------ -------
Total 343,359 $15.02 205,082
======= ====== =======
----------
(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, 2008, an aggregate of 53,583 shares of
common stock were available for issuance under this plan. The Company
suspended participation in the Employee Stock Purchase Plan in March 2005
and the plan is not currently active.
72
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.
73
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, 2008 and 2007
Consolidated Statements of Income for the Years Ended September 30, 2008 and 2007
Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 2008 and 2007
Consolidated Statements of Comprehensive Income for the Years Ended September 30, 2008 and 2007
Consolidated Statements of Cash Flows for the Years Ended September 30, 2008 and 2007
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 Amended and Restated 2000 Stock Option Plan* (4)
10.3 Amended and Restated 2005 Stock Option Plan* (4)
10.4 Profit Sharing Incentive Plan* (3)
10.5 Amended and Restated Employment Agreement between the Company,
the Bank and Ronald B. Geib* (4)
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
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 Officer Filed herewith
----------
* 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) 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 21, 2008.
(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.
74
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 19, 2008 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 19, 2008
--------------------------------
Edward J. Molnar
/s/ Ronald B. Geib President and Chief Executive December 19, 2008
-------------------------------- Officer
Ronald B. Geib (principal executive officer)
/s/ Brendan J. McGill Senior Vice President, Treasurer December 19, 2008
-------------------------------- and Chief Financial Officer
Brendan J. McGill (principal financial and principal
accounting officer)
/s/ Sanford L. Alderfer Director December 19, 2008
--------------------------------
Sanford L. Alderfer
/s/ Mark R. Cummins Director December 19, 2008
--------------------------------
Mark R. Cummins
/s/ David J. Friesen Director December 19, 2008
--------------------------------
David J. Friesen
75
Name Title Date
-------------------------------- ---------------------------------- -----------------
/s/ Charlotte A. Hunsberger Director December 19, 2008
--------------------------------
Charlotte A. Hunsberger
/s/ George W. Meschter Director December 19, 2008
--------------------------------
George W. Meschter
/s/ James L. Rittenhouse Director December 19, 2008
--------------------------------
James L. Rittenhouse
76