================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(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, 2005
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(g) of the Act:
Common Stock, $.01 par value per share
--------------------------------------
(Title of Class)
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. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES |_| NO |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). YES |_| NO |X|
The aggregate market value of the 3,331,854 shares of the Registrant's Common
Stock held by non-affiliates (3,880,336 shares outstanding less 548,482 shares
held by affiliates), based upon the closing price of $18.75 for the Common Stock
on March 31, 2005, as reported by the Nasdaq Stock Market, was approximately
$62.5 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 21, 2005: 3,906,539
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:
(1) Portions of the Annual Report to Stockholders for the year ended September
30, 2005 are incorporated by reference into Part II, Items 5-8 and Part
IV, Item 15 of this Form 10-K.
(2) Portions of the definitive Proxy Statement for the 2006 Annual Meeting of
Stockholders are incorporated by reference into Part III, Items 10-14 of
this Form 10-K.
================================================================================
HARLEYSVILLE SAVINGS FINANICAL CORPORATION
2005 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business.................................................................... 2
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..................................................... 30
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................. 30
Item 8. Financial Statements and Supplementary Data................................. 31
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................ 31
Item 9A. Controls and Procedures..................................................... 31
Item 9B. Other Information........................................................... 31
PART III
Item 10. Directors and Executive Officers of the Registrant.......................... 31
Item 11. Executive Compensation...................................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters............................................. 32
Item 13. Certain Relationships and Related Transactions.............................. 32
Item 14. Principal Accounting Fees and Services...................................... 32
PART IV
Item 15. Exhibits, Financial Statement Schedules..................................... 32
SIGNATURES
i
Forward-Looking Statements
In the normal course of business, the Company, in an effort to help keep
its stockholders and the public informed about the Company's operations, may
from time to time issue or make certain statements, either in writing or orally,
that are or contain forward-looking statements, as that term is defined in the
federal securities laws. Generally, these statements relate to business plans or
strategies, projected or anticipated benefits from potential acquisitions,
projections involving anticipated revenues, earnings, profitability or other
aspects of operating results or other future developments in the affairs of the
Company or the industry in which it conducts business. These forward-looking
statements, which are based on various assumptions (some of which are beyond the
Company's control), may be identified by reference to a future period or periods
or by the use of forward-looking terminology such as "anticipate," "believe,"
"commitment," "consider," "continue," "could," "encourage," "estimate,"
"expect," "intend," "in the event of," "may," "plan," "present," "propose,"
"prospect," "update," "whether," "will," "would," future or conditional verb
tenses, similar terms, variations on such terms or negatives of such terms.
Although the Company believes that the anticipated results or other expectations
reflected in such forward-looking statements are based on reasonable
assumptions, it can give no assurance that those results or expectations will be
attained. Actual results could differ materially from those indicated in such
statements due to risks, uncertainties and changes with respect to a variety of
factors, including, but not limited to, the following: competitive pressure
among depository and other financial institutions may increase significantly;
changes in the interest rate environment may reduce interest margins and net
interest income, as well as adversely affect loan originations and sales
activities and the value of certain assets, such as investment securities;
general economic or business conditions, either nationally or in regions in
which the Company does business, may be less favorable than expected, resulting
in, among other things, a deterioration in credit quality or a reduced demand
for credit; legislation or changes in regulatory requirements, including without
limitation, capital requirements, or accounting standards may adversely affect
the Company and the business in which it is engaged; adverse changes may occur
in the securities markets; competitors of the company may have greater financial
resources and develop products and technology that enable those competitors to
compete more successfully than the company; and the growth and profitability of
the Company's noninterest income may be less than expected.
The Company undertakes no obligation to update forward-looking statements
to reflect events or circumstances occurring after the date of this report on
Form 10-K.
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.
1
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 five 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, 2005, the Company had $767.0 million of total assets, $419.0
million of deposits and $47.6 million of stockholders' equity. The Company's
stockholders' equity constituted 6.20% of total assets as of September 30, 2005.
The Bank's primary business consists of attracting deposits from the
general public through a variety of deposit programs and investing such deposits
principally in first mortgage loans secured by residential properties in the
Bank's primary market area. The Bank also originates a variety of consumer
loans, predominately home equity loans and lines of credit also secured by
residential properties in the Bank's primary lending area. The Bank serves its
customers through its full-service branch network as well as through remote ATM
locations, the internet and telephone banking.
Deposits with the Bank are insured to the maximum extent provided by law
through the Savings Association Insurance Fund ("SAIF") 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.
2
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, 2005, first mortgage loans on residential
properties, including loans on single-family and multi-family residential
properties and construction loans on such properties, amounted to $277.8 million
or 43.5% of the Company's total loan and mortgage-backed securities portfolio.
Loans on the Company's residential properties are primarily long-term and are
conventional (i.e., not insured or guaranteed by a federal agency). At September
30, 2005, mortgage-backed securities totaled $265.0 million and comprised 41.5%
of the portfolio.
As of September 30, 2005, loans secured by commercial real estate
comprised $2.0 million or 0.3% of the total loan and mortgage-backed securities
portfolio. Consumer loans, including installment home equity loans, home equity
lines of credit, automobile loans, loans on savings accounts and education
loans, constituted $93.0 million or 14.6% of the total loan and mortgage-backed
securities portfolio as of September 30, 2005.
As of September 30, 2005, the Company had $265.0 million, or 41.5%, of the
total portfolio invested in Federal Home Loan Mortgage Corporation ("FHLMC"),
Government National Mortgage Association ("GNMA") or Federal National Mortgage
Association ("FNMA") backed securities. FHLMC securities are guaranteed by the
FHLMC, GNMA securities by the Federal Housing Administration and FNMA securities
by the FNMA, which are an instrumentality of the United States government, and,
pursuant to federal regulations, are deemed to be part of the Company's loan
portfolio.
3
The following table sets forth information concerning the Company's loan
and mortgage-backed securities portfolio by type of loan at the dates indicated.
As of September 30,
--------------------------------------------------------------------
2005 2004 2003
-------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
-------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
Real estate loans:
Residential:
Single-family $267,246 41.8% $255,023 41.7% $234,748 43.6%
Multi-family 2,893 0.5 914 0.2 1,515 0.3
Construction 7,640 1.2 7,971 1.3 10,028 1.9
Lot loans 801 0.1 576 0.1 923 0.2
Mortgage-backed securities 265,009 41.5 265,087 43.2 230,247 42.6
Commercial 2,002 0.3 2,141 0.4 1,015 0.2
-------- ----- -------- ----- -------- -----
Total real estate loans and
mortgage-backed securities 545,591 85.4% 531,712 86.9% 478,476 88.8%
-------- ----- -------- ----- -------- -----
Consumer loans:
Education loans -- -- -- -- 1 --
Installment equity loans 59,724 9.4% 46,257 7.6% 29,726 5.5%
Line of credit loans 31,580 5.0 32,329 5.3 29,420 5.5
Savings account loans 921 0.1 811 0.1 733 0.1
Automobile and other loans 772 0.1 732 0.1 578 0.1
-------- ----- -------- ----- -------- -----
Total consumer loans 92,997 14.6% 80,129 13.1% 60,458 11.2%
Total loans receivable and
mortgage-backed securities 638,588 100.0% 611,841 100.0% 538,934 100.0%
-------- ----- -------- ----- -------- -----
Less:
Loans in process (4,934) (5,238) (7,829)
Deferred loan fees (671) (955) (1,520)
Allowance for loan losses (1,968) (1,977) (1,991)
-------- -------- --------
Total loans receivable and
mortgage-backed securities,
net $631,015 $603,671 $527,594
======== ======== ========
As of September 30,
--------------------------------------------
2002 2001
-------------------- --------------------
Amount Percent Amount Percent
-------- --------- -------- ---------
(Dollars in Thousands)
Real estate loans:
Residential:
Single-family $233,057 46.7% $224,100 48.2%
Multi-family 1,056 0.2 972 0.3
Construction 8,607 1.7 14,649 3.1
Lot loans 1,247 0.2 1,514 0.3
Mortgage-backed securities 193,330 38.8 167,727 36.0
Commercial 496 0.1 786 0.2
-------- ----- -------- -----
Total real estate loans and
mortgage-backed securities 437,793 87.7% 409,748 88.1%
-------- ----- -------- -----
Consumer loans:
Education loans 334 0.1% 1,041 0.3%
Installment equity loans 41,451 8.3 43,401 9.3
Line of credit loans 18,530 3.7 9,807 2.1
Savings account loans 479 0.1 617 0.1
Automobile and other loans 726 0.1 629 0.1
-------- ----- -------- -----
Total consumer loans 61,520 12.3% 55,495 11.9%
Total loans receivable and
mortgage-backed securities 499,313 100.0% 465,243 100.0%
-------- ----- -------- -----
Less:
Loans in process (6,503) (9,919)
Deferred loan fees (2,091) (2,052)
Allowance for loan losses (2,035) (2,036)
-------- --------
Total loans receivable and
mortgage-backed securities,
net $488,684 $451,236
======== ========
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, 2005 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, 2008- 2011- 2015- 2020 and
2005 2006 2007 2010 2014 2019 Thereafter
----------------- -------- -------- -------- -------- -------- ----------
(In Thousands)
Real estate loans:
Residential
Single-family $267,246 $ 4,009 $ 4,276 $ 14,431 $ 32,871 $ 47,035 $164,624
Multi-family 2,893 44 46 156 356 509 1,782
Construction 7,640 115 122 413 940 1,344 4,706
Lot loans 801 44 47 162 363 186 --
Mortgage-backed Securities 265,009 3,975 4,505 14,841 33,391 46,907 161,390
Commercial 2,002 72 78 274 635 943 --
Consumer and other loans 92,997 11,439 12,276 42,569 20,924 5,789 --
-------- -------- -------- -------- -------- -------- --------
Total(1) $638,588 $ 19,698 $ 21,350 $ 72,846 $ 89,480 $102,713 $332,502
======== ======== ======== ======== ======== ======== ========
----------
(1) With respect to the $618.9 million of loans with principal maturities
contractually due after September 30, 2005, $576.5 million have fixed
rates of interest and $42.4 million have adjustable or floating rates of
interest.
4
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 payments and
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 or loan participations.
During the years ended September 30, 2005 and 2004, the Company did not
sell any mortgage-backed securities. During the year ended September 30, 2003,
the Company sold $13.0 million in mortgage-backed securities, resulting in a
gain of $159,000. The Company sold $921,000, $2.6 million, and $1.4 million of
loans during fiscal 2005, 2004 and 2003, resulting in a gain of approximately
$17,000, $61,000 and $16,000, respectively.
The Company's total loan originations decreased by $24.2 million or 17.6%
in fiscal 2005 and decreased by $24.9 million or 15.3% in fiscal 2004. Of the
$113.4 million and $137.6 million of single-family loans originated in fiscal
2005 and 2004, respectively, $8.7 million and $9.8 million, respectively, were
loans originated to fund multi-family and construction properties, $60.6 million
and $67.3 million, respectively, were loans to acquire residential property.
During this period, the Company's originations of consumer loans amounted to
$44.1 million and $58.6 million or 38.9% and 42.6% of total loan originations
during fiscal 2005 and 2004, 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.
5
The following table shows total loans originated, sold and repaid during
the periods indicated.
Year Ended September 30,
--------------------------------
2005 2004 2003
-------- -------- --------
(In Thousands)
Real estate loan originations:
Residential:
Single-family $ 60,608 $ 69,124 $102,712
Multi-family 1,300 300 1,380
Construction 7,433 9,526 12,007
Lot loans -- -- 109
-------- -------- --------
Total real estate loan originations 69,341 78,950 116,208
Consumer loan originations(1) 44,057 58,655 46,288
-------- -------- --------
Total loan originations 113,398 137,605 162,496
Purchases of mortgage-backed securities 62,027 121,201 277,885
-------- -------- --------
Total loan originations, and purchases 175,425 258,806 440,381
Principal loan and mortgage-backed securities repayments 147,757 183,321 386,359
Sales of loans and mortgage-backed securities 921 2,578 14,401
-------- -------- --------
Total principal repayments and sales 148,678 185,899 400,760
-------- -------- --------
Net increase in loans $ 26,747 $ 72,907 $ 39,621
======== ======== ========
----------
(1) Includes installment home equity loans, home equity lines of credit,
vehicle loans, Pennsylvania Higher Education Assistance 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 President, 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 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,
2005, the largest aggregate amount of loans outstanding to any borrower,
including related entities, was $1.9 million, which did not exceed the Company's
loan to one borrower limitation.
6
Real Estate Lending. The Company is permitted to lend up to 100% of the
appraised value of the real property securing a loan. The Company will generally
lend up to 95% of the lesser of the appraised value or the sale price for the
purchase of single-family, owner-occupied dwellings which conform to the
secondary market underwriting standards. Refinancings are limited to 90% or
less. Loans over $359,650 and other non-conforming loans, secured by 1-4
residential, owner-occupied dwellings, are limited to 90% of the lesser of the
purchase price or appraised value. The purchase of non-owner occupied, 1-4 unit
dwellings may be financed to 80% of the lower of the appraisal or sale price; a
refinance is limited to 70% of the appraised value if the borrower's FICO score
is less than 720 and the transaction's purpose is cash-out.
All appraisals and other property valuations are performed by independent
fee appraisers approved by the Company's Board of Directors. On all amortizing
real estate loans, the Company requires borrowers to obtain title insurance,
insuring the Company has a valid first lien on the mortgaged real estate.
Borrowers must also obtain and maintain a hazard insurance policy prior to
closing and, when the real estate is located in a flood hazard area designated
by the Federal Emergency Management Agency, a flood insurance policy is
required. Generally, borrowers advance funds on a monthly basis together with
payment of principal and interest into a mortgage escrow account from which the
Company makes disbursements for items such as real estate taxes and insurance
premiums when appropriate as they fall due.
The Company presently originates fixed-rate loans on single-family
residential properties pursuant to underwriting standards consistent with
secondary market guidelines, and which may or may not be sold into the secondary
mortgage market as conditions warrant. Adjustable rate mortgages ("ARMs"), as
well as non-conforming and jumbo fixed-rate loans in amounts up to $1.0 million,
are held in the portfolio. It is the Company's policy to originate both
fixed-rate loans and ARMs for terms up to 30 years. As of September 30, 2005,
$277.8 million or 43.5% and $2.9 million or 0.5% 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, 2005, approximately $503.7 million or 94.0% 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, $31.9 million or 6.0%
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, 2005 and 2004, the Company originated
$5.9 million and $5.5 million of ARM mortgages, respectively. ARMs represented
9.7% and 8.0% of the Company's total mortgage loan portfolio originations in
fiscal 2005 and 2004, 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.
The Company also originates, to a lesser extent, loans secured by
multi-family rental units or properties with some commercial usage. The primary
method used by the Company to evaluate a
7
multi-family residential or commercial mortgage loan is based on both the fair
market value of the property and an income approach pursuant to which the
Company determines if the income from the project will be sufficient to support
the related debt and other associated costs. The Company also considers a review
of the costs to develop the project and the overall financial strength of the
borrower. Multi-family residential loans are made on an adjustable rate basis
for a maximum term of 25 years or a fixed rate of 15 years or less.
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, 2005, $7.6 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.
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 38.9% and
42.6% during fiscal 2005 and 2004, 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 continue to be a popular product and represented $91.3
million or 14.4% of the loan and mortgage-backed securities portfolio at
September 30, 2005. After taking into account first mortgage balances, the
Company will lend up to 80% of the value of owner-occupied
8
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, 2005, the Company had outstanding 2,898 home equity
loans of which 1,505 were installment equity loans and 1,393 were line of credit
loans. As of such date, the Company had an outstanding balance on line of credit
loans of approximately $31.6 million and there was approximately $39.9 million
of unused credit available on such loans.
Consumer loans generally involve more risk of collectibility than mortgage
loans because of the type and nature of the collateral and, in certain cases,
the absence of collateral. As continued payments are dependent on the borrower's
continuing financial stability, these loans may be more likely to be adversely
affected by job loss, divorce, personal bankruptcy or by adverse economic
conditions.
Loan Fee and Servicing Income. The Company receives fees both for the
origination of loans and for making commitments to originate and purchase
residential and commercial mortgage loans. The Company also receives servicing
fees with respect to residential mortgage loans it has sold. It also receives
loan fees related to existing loans, including late charges, and credit life
insurance commissions. Loan origination and commitment fees and discounts are a
volatile source of income, varying with the volume and type of loans and
commitments made and purchased and with competitive and economic conditions.
Loans fees generated on origination of real estate mortgage loans under
accounting principles generally accepted in the United States of America are
deferred to the extent that they exceed the costs of originating such loans.
Deferred loan fees and discounts on mortgage loans purchased are amortized to
income as a yield adjustment over the estimated remaining terms of such loans
using the interest method. The Company recorded servicing income of $138,000,
$459,000 and $1.9 million in deferred loan fees in fiscal 2005, 2004 and 2003,
respectively.
In its real estate lending, the Company charges loan fees which are
calculated as a percentage of the amount borrowed. The fees received in
connection with the origination of residential real estate loans and commercial
real estate loans generally do not exceed 3% of the principal amount. All
origination fees in excess of loan origination costs are deferred and amortized
into income over the estimated life of the related loans.
As of September 30, 2005, the Company was servicing $4.7 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 $600,000 and $4.1 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
9
commencing a foreclosure action or, in special circumstances, accepting from the
borrower a voluntary deed of the secured property in lieu of foreclosure with
respect to mortgage loans and equity loans, or title and possession of
collateral in the case of other consumer loans. Substantial delays may occur in
instituting and completing residential foreclosure proceedings due to the
extensive procedures and time periods required to be complied with under
Pennsylvania law.
All interest accrued but not collected for loans that are placed
nonaccrual or charged off is reversed against interest income. The interest on
these loans is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to accrual status when all
the principal and interest amounts contractually due are brought current and
future payments are reasonably assured. Interest income is recognized using the
interest method when the collection is reasonably assured. The Company had no
loans outstanding which were recorded as loans accounted for on a non-accrual
basis as of the end of fiscal 2005 and 2004.
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 lower of cost or 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
2005 and 2004.
10
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,
--------------------------------
2005 2004 2003
-------- -------- --------
(Dollars in Thousands)
Residential real estate loans:
Non-accrual loans -- -- --
Accruing loans 90 days overdue $260 $291 $273
Troubled debt restructurings -- -- --
---- ---- ----
Total 260 291 273
---- ---- ----
Consumer loans:
Non-accrual loans -- -- --
Accruing loans 90 days overdue -- -- --
Troubled debt restructurings -- -- --
---- ---- ----
Total -- -- --
---- ---- ----
Total non-performing loans:
Non-accrual loans -- -- --
Accruing loans 90 days overdue 260 291 273
Troubled debt restructurings -- -- --
---- ---- ----
Total $260 $291 $273
==== ==== ====
Total non-performing loans to total loans .07% .09% .09%
Total real estate owned, net of related reserves -- -- --
Total non-performing loans and other real
estate owned to total assets .03% .04% .04%
Management establishes reserves for losses on delinquent loans when it
determines that losses are probable. The Company did not record a provision for
general loan losses in fiscal 2005, 2004 or 2003 due to the overall performance
of the loan portfolio and management's assessment of the overall adequacy of the
allowance for loan losses. Although management believes that it uses the best
information available to make determinations with respect to loan loss reserves,
future adjustments to reserves may be necessary if economic conditions differ
substantially from the assumptions used in making the initial determinations.
Residential mortgage lending generally entails a lower risk of default
than other types of lending. Consumer loans and commercial real estate loans
generally involve more risk of collectibility because of the type and nature of
the collateral and, in certain cases, the absence of collateral. It is the
Company's policy to establish specific reserves for losses on delinquent
consumer loans and commercial loans when it determines that losses are probable.
In addition, consumer loans are charged against reserves if they are more than
120 days delinquent unless a satisfactory repayment schedule is arranged.
Although management has currently established no specific reserves for losses,
no assurance can be given as to whether future provisions may be required. The
establishment of any such reserves could affect net income.
11
The following table summarizes activity in the Company's allowance for
loan losses during the periods indicated.
Year Ended September 30,
----------------------------------------------------------------------
2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
Allowances at beginning of year $1,976,849 $1,990,672 $2,034,832 $2,036,188 $2,038,131
Provision for loan losses charged to
operating expenses -- -- -- -- --
Recoveries 83,707 1,571 -- 5,113 --
Loans charged off (92,949) (15,394) (44,160) (6,469) (1,943)
---------- ---------- ---------- ---------- ----------
Allowances at end of year $1,967,607 $1,976,849 $1,990,672 $2,034,832 $2,036,188
========== ========== ========== ========== ==========
Ratio of net charge-offs to average loans
outstanding -- -- -- -- --
Ratio of allowances to period-end loans .54% .58% .66% .68% .69%
Investment Activities
The Company is required to maintain certain liquidity ratios and does so
by investing in securities that qualify as liquid assets under FDIC regulations.
Such securities include obligations issued or fully guaranteed by the United
States government, certain federal agency obligations, certain time deposits and
certificates of deposit as well as other specified investments. See "Regulation
- Federal Home Loan Bank System."
The Company's investment portfolio consists primarily of United States
Treasury securities and obligations of United States government agencies. The
other investments include interest-bearing deposits in other banks, tax-exempt
obligations, money market mutual funds, and stock of the FHLB of Pittsburgh. The
Company has primarily invested in instruments that reprice within five years;
the amount of such investments as of September 30, 2005 was $55.3 million.
The following table sets forth the Company's investment portfolio at
carrying value as of the dates indicated.
As of September 30,
--------------------------------
2005 2004 2003
-------- -------- --------
(In Thousands)
Interest-bearing deposits at
other depository institutions $ 6,742 $ 3,040 $ 4,836
Tax-exempt obligations 24,799 24,966 25,290
Money market mutual funds 1,976 6,685 3,812
Equities 859 1,029 1,061
U.S. Government and agency
obligations held to maturity 62,566 43,196 58,036
FHLB of Pittsburgh stock 16,036 15,184 13,782
-------- -------- --------
Total $112,978 $ 94,100 $106,817
======== ======== ========
12
The Company's investment strategy is set and reviewed periodically by the
entire Board of Directors.
Sources of Funds
General. Deposits are the primary source of the Company's funds for use in
lending and for other general business purposes. In addition to deposits, the
Company obtains funds from loan payments and prepayments, FHLB advances and
other borrowings, and, to a lesser extent, sales of loans. Loan repayments are a
relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general market interest rates and economic
conditions.
Deposits. The Company has a number of different programs designed to
attract both short-term and long-term deposits from the general public by
providing an assortment of accounts and rates consistent with FDIC regulations.
These programs include passbook and club savings accounts, NOW and regular
checking accounts, money market deposit accounts, retirement accounts,
certificates of deposit ranging in terms from 90 days to 60 months and jumbo
certificates of deposit in denominations of $98,000 or more. The interest rates
on the Company's various accounts are determined weekly by the Interest Rate
Risk Management Officer based on reports prepared by members of senior
management. The Company attempts to control the flow of deposits by pricing its
accounts to remain competitive with other financial institutions in its market
area.
The Company's deposits are obtained primarily from residents of Montgomery
and Bucks Counties; the Company does not utilize brokered deposits. The
principal methods used by the Company to attract deposit accounts include local
advertising, offering a wide variety of services and accounts, competitive
interest rates and convenient office locations. The Company also is a member of
the "STAR" ATM network.
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,
---------------------------------------------------------------------
2005 2004 2003
--------------------- --------------------- ---------------------
Percent of Percent of Percent of
Amount Deposits Amount Deposits Amount Deposits
-------- ---------- -------- ---------- -------- ----------
(Dollars in Thousands)
Passbook and club
accounts $ 3,807 0.9% $ 4,047 1.0% $ 4,027 1.1%
NOW accounts 18,283 4.4 19,839 4.9 17,340 4.6
Checking accounts 18,721 4.5 11,767 2.9 10,047 2.6
Money market demand
accounts 75,874 18.1 99,225 24.5 95,729 25.1
Certificates of deposit:
6 month 8,126 1.9 8,650 2.1 10,649 2.8
9 month 10,630 2.5 3,031 0.8 3,431 0.9
12 month 10,110 2.4 16,471 4.1 18,798 4.9
15 month 17,063 4.1 4,554 1.1 6,774 1.8
17 month 1,485 0.3 2,474 0.6 3,573 0.9
18 month 11,125 2.7 18,967 4.7 26,565 7.0
20 month 9,685 2.3 -- -- -- --
24 month 7,740 1.8 12,297 3.0 17,041 4.5
27 month 4,966 1.2 12,326 3.0 23,359 6.1
36 month 29,302 7.0 35,024 8.7 23,655 6.2
48 month 82,402 19.7 60,392 14.9 25,020 6.6
60 month 38,431 9.2 38,901 9.6 39,495 10.4
Other 16,924 4.0 7,057 1.7 8,988 2.4
Retirement accounts:
Money market deposit
accounts 707 0.2 1,224 0.3 1,242 0.3
Certificates of deposit 53,599 12.8 48,985 12.1 44,954 11.8
-------- ----- -------- ----- -------- -----
Total deposits $418,980 100.0% $405,231 100.0% $380,687 100.0%
======== ===== ======== ===== ======== =====
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, 2005 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 $ 3,807 0.9% 0.67%
NOW accounts 18,283 4.3 0.15
Checking accounts 18,721 4.5 0.22
Money market deposits accounts(1) 76,581 18.3 1.03
-------- ----- -----
Total $117,392 28.0% 0.75%
======== ===== =====
Certificate accounts maturing by quarter:
December 31, 2005 $ 23,217 5.5% 2.15%
March 31, 2006 30,494 7.3 1.92
June 30, 2006 19,371 4.6 2.07
September 30, 2006 28,370 6.8 2.17
December 31, 2006 49,102 11.7 3.15
March 31, 2007 25,847 6.2 3.09
June 30, 2007 15,713 3.7 3.85
September 30, 2007 15,598 3.7 4.04
December 31, 2007 5,010 1.2 3.20
March 31, 2008 14,056 3.4 3.40
June 30, 2008 13,673 3.3 4.07
September 30, 2008 28,114 6.7 4.35
Thereafter 33,023 7.9 3.71
-------- ----- -----
Total certificate accounts(1) 301,588 72.0 3.09
-------- ----- -----
Total deposits $418,980 100.0% 2.44%
======== ===== =====
----------
(1) Includes retirement accounts.
Management of the Company expects, based on historical experience and its
pricing policies, to retain a significant portion of the $101.5 million of
certificates of deposit which mature during the 12 months ending September 30,
2006.
15
The following table sets forth the net deposit flows of the Company during
the periods indicated.
Year Ended September 30,
-------------------------------
2005 2004 2003
------- ------- -------
(In Thousands)
Increase (decrease) before interest credited $ 5,112 $ 1,770 $ (9)
Interest credited 8,637 7,474 8,749
------- ------- -------
Net deposit increase $13,749 $24,544 $ 8,740
======= ======= =======
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, 2005 which mature during the periods
indicated.
Amounts at September 30, 2005 Maturing
As of ---------------------------------------------------
September 30, One Year Three
2005 or Less Two Years Years Thereafter
-------- -------- --------- -------- ----------
(In Thousands)
Certificate accounts:
0.01% to 2.00% $ 19,143 $ 18,297 $ 814 $ 32 $ --
2.01% to 4.00% 219,463 61,549 66,504 58,600 32,810
4.01% to 6.00% 60,385 19,022 38,938 2,222 203
6.01% to 8.00% 2,597 2,584 4 -- 9
-------- -------- -------- -------- --------
Total certificate accounts(1) $301,588 $101,452 $106,260 $ 60,854 $ 33,022
======== ======== ======== ======== ========
----------
(1) Includes retirement accounts.
The following table sets forth the maturity of certificate deposits in
excess of $100,000 as of September 30, 2005.
Amount
--------------
(In Thousands)
1 to 3 months $ 2,237
4 to 6 months 4,907
7 to 12 months 6,306
Thereafter 26,257
-------
Total $39,707
=======
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, 2005, the Bank had FHLB advances with maturities
of one year or less totaling $36.0 million at an interest rate of 3.73% and FHLB
advances with maturities of 13 months to 10 years totaling $261.2 million at
interest-rates ranging from 3.66% to 5.35%. Such advances are made pursuant to
several different credit programs, each of which has its own interest rate and
range of maturities.
16
Depending on the program, limitations on the amount of advances are based on
either a fixed percentage of assets or the FHLB of Pittsburgh's assessment of
the Bank's creditworthiness. FHLB advances are generally available to meet
seasonal and other withdrawals of deposit accounts, to purchase mortgage-backed
securities, investment securities and to expand lending.
The following table sets forth certain information regarding the
borrowings of the Company as of the dates indicated.
September 30,
------------------------------------------------------------------------
2005 2004 2003
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Balance Rate Balance Rate Balance Rate
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Advances from FHLB of Pittsburgh $297,268 4.38% $265,953 4.34% $228,817 4.76%
The following table sets forth certain information concerning the
short-term borrowings of the Company for the periods indicated.
Year Ended September 30,
--------------------------------
2005 2004 2003
-------- -------- --------
(Dollars in Thousands)
Advances from FHLB of Pittsburgh:
Average balance outstanding $29,355 $20,267 $ 4,496
Maximum amount outstanding at any
month-end during the period 36,100 25,600 18,500
Weighted average interest rate
during the period 2.98% 1.38% 1.20%
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.
17
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.
Employees
The Company had 59 full-time employees and 39 part-time employees as of
September 30, 2005. 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.
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "1999 Act") which repealed Depression-era laws that
generally separated the business of banking from other financial services
including the business of insurance and securities. From time to time other
bills may be introduced in the United States Congress which could result in
additional or in less regulation of the business of the Company and the Bank. It
cannot be predicted at this time whether any such legislation actually will be
adopted or how such adoption would affect the business of the Company or the
Bank.
Regulation of the Company
General. The Company is a registered bank holding company pursuant to the
Bank Holding Company Act ("BHCA") and, as such, is subject to regulation and
supervision by the Federal Reserve Board and the Department. The Company is
required to file annually a report of its operations with, and will be subject
to examination by, the Federal Reserve Board and the Department.
BHCA Activities and Other Limitations. The BHCA prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of any bank, or increasing such ownership or control of any
bank, without prior approval of the Federal Reserve Board. The BHCA also
generally prohibits a bank holding company from acquiring any bank located
outside of the state in which the existing bank subsidiaries of the bank holding
company are located unless specifically authorized by applicable state law. No
approval under the BHCA is required; however, for a bank holding company already
lawfully owning or controlling 50% of the voting shares of a bank to acquire
additional shares of such bank.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring more than 5% of the voting shares of any company that is not a
bank and from engaging in any
18
business other than banking or managing or controlling banks. Under the BHCA,
the Federal Reserve Board is authorized to approve the ownership of shares by a
bank holding company in any company, the activities of which the Federal Reserve
Board has determined to be so closely related to banking or to managing or
controlling banks as to be a proper incident thereto. In making such
determinations, the Federal Reserve Board is required to weigh the expected
benefit to the public, such as greater convenience, increased competition or
gains in efficiency, against the possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices. The 1999 Act permits a bank holding
company to elect to be considered a financial holding company ("FHC"). A bank
holding company that makes an FHC election is permitted to engage in activities
that are financial in nature or incidental to such financial activities. The
1999 Act lists certain activities that are considered financial in nature and
permits the Federal Reserve Board to expand that list to include other
activities that are complementary to the activities on the preapproved list. The
preapproved activities include (1) securities underwriting, dealing and market
making; (2) insurance underwriting; (3) merchant banking; and (4) insurance
company portfolio investments. The Company has not made the financial holding
company election.
The Federal Reserve Board has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA. These
activities include operating a mortgage company, finance company, credit card
company, factoring company, trust company or savings association; performing
certain data processing operations; providing limited securities brokerage
services; acting as an investment or financial advisor; acting as an insurance
agent for certain types of credit-related insurance; leasing personal property
on a full-payout, non-operating basis; providing tax planning and preparation
services; operating a collection agency; and providing certain courier services.
The Federal Reserve Board also has determined that certain other activities,
including real estate brokerage and syndication, land development, property
management and underwriting of life insurance not related to credit
transactions, are not closely related to banking and a proper incident thereto.
However, under the 1999 Act certain of these activities are permissible for a
bank holding company that becomes an FHC.
Limitations on Transactions with Affiliates. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company of
a savings institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar transactions. In
addition to the restrictions imposed by Sections 23A and 23B, no savings
institution may (i) loan or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest
19
in any stocks, bonds, debentures, notes or similar obligations of any affiliate,
except for affiliates which are subsidiaries of the savings institution.
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 institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons and also requires prior board approval for certain loans. In addition,
the aggregate amount of extensions of credit by a savings institution to all
insiders cannot exceed the institution'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.
20
Financial Support of Affiliated Institutions. Under Federal Reserve Board
policy, the Company is expected to act as a source of financial strength to the
Bank and to commit resources to support the Bank in circumstances when it might
not do so absent such policy. The Congress attempted to clarify the application
of this "source-of-strength" doctrine by an amendment to Section 18 of the
Federal Deposit Insurance Act ("FDIA") that was included in the
Gramm-Leach-Bliley Act of 1999. The amendment describes the circumstances under
which a Federal banking agency would be protected from a claim by an affiliate
or a controlling shareholder of an insured depository institution seeking the
return of assets of such an affiliate or controlling shareholder. Under the
amended provision, a claim would not be permitted if (1) the insured depository
institution was under a written Federal directive to raise capital, (2) the
institution was undercapitalized, and (3) the subject Federal banking agency
followed the procedures set forth in Section 5(g) of the BHCA.
Sarbanes-Oxley Act of 2002. On July 30, 2002, the President signed into
law the Sarbanes-Oxley Act of 2002 implementing legislative reforms intended to
address corporate and accounting fraud. In addition to the establishment of a
new accounting oversight board which will enforce auditing, quality control and
independence standards and will be funded by fees from all publicly traded
companies, the bill restricts provision of both auditing and consulting services
by accounting firms. To ensure auditor independence, any non-audit services
being provided to an audit client will require preapproval by the company's
audit committee members. In addition, the audit partners must be rotated. The
bill requires chief executive officers and chief financial officers, or their
equivalent, to certify to the accuracy of periodic reports filed with the SEC,
subject to civil and criminal penalties if they knowingly or willfully violate
this certification requirement. In addition, under the Act, counsel will be
required to report evidence of a material violation of the securities laws or a
breach of fiduciary duty by a company to its chief executive officer or its
chief legal officer, and, if such officer does not appropriately respond, to
report such evidence to the audit committee or other similar committee of the
board of directors or the board itself.
Longer prison terms will also be applied to corporate executives who
violate federal securities laws, the period during which certain types of suits
can be brought against a company or its officers has been extended, and bonuses
issued to top executives prior to restatement of a company's financial
statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from insider trading during
retirement plan "blackout" periods, and loans to company executives are
restricted. In addition, a provision directs that civil penalties levied by the
SEC as a result of any judicial or administrative action under the Act be
deposited to a fund for the benefit of harmed investors. The Federal Accounts
for Investor Restitution ("FAIR") provision also requires the SEC to develop
methods of improving collection rates. The legislation accelerates the time
frame for disclosures by public companies, as they must immediately disclose any
material changes in their financial condition or operations. Directors and
executive officers must also provide information for most changes in ownership
in a company's securities within two business days of the change.
The Act also increases the oversight of, and codifies certain requirements
relating to audit committees of public companies and how they interact with the
company's "registered public accounting firm." Audit committee members must be
independent and are barred from accepting
21
consulting, advisory or other compensatory fees from the issuer. In addition,
companies must disclose whether at least one member of the committee is a
"financial expert" (as such term will be defined by the SEC) and if not, why
not. Under the Act, a registered public accounting firm is prohibited from
performing statutorily mandated audit services for a company if such company's
chief executive officer, chief financial officer, comptroller, chief accounting
officer or any person serving in equivalent positions has been employed by such
firm and participated in the audit of such company during the one-year period
preceding the audit initiation date. The Act also prohibits any officer or
director of a company or any other person acting under their direction from
taking any action to fraudulently influence, coerce, manipulate or mislead any
independent public or certified accountant engaged in the audit of the company's
financial statements for the purpose of rendering the financial statement's
materially misleading. The Act also requires the SEC to prescribe rules
requiring inclusion of an internal control report and assessment by management
in the annual report to shareholders. This will be required for the Company in
fiscal 2007. The Act requires the registered public accounting firm that issues
the audit report to attest to and report on management's assessment of the
company's internal controls. In addition, the Act requires that each financial
report required to be prepared in accordance with (or reconciled to) accounting
principles generally accepted in the United States of America and filed with the
SEC reflect all material correcting adjustments that are identified by a
registered public accounting firm in accordance with accounting principles
generally accepted in the United States of America and the rules and regulations
of the SEC.
Regulation of the Bank
General. The Bank is subject to extensive regulation and examination by
the Department and by the FDIC, which insures its deposits to the maximum extent
permitted by law. The federal and state laws and regulations which are
applicable to banks regulate, among other things, the scope of their business,
their investments, their reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral for
certain loans. There are periodic examinations by the Department and the FDIC to
test the Bank's compliance with various regulatory requirements. This regulation
and supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulation, whether by
the Department, the FDIC or the Congress could have a material adverse impact on
the Bank and their operations.
Pennsylvania Savings Bank Law. The Pennsylvania Banking Code of 1965, as
amended (the "Banking Code") contains detailed provisions governing the
organization, location of offices, rights and responsibilities of directors,
officers, employees and members, as well as corporate powers, savings and
investment operations and other aspects of the Bank and its affairs. The Banking
Code delegates extensive rulemaking power and administrative discretion to the
Department so that the supervision and regulation of state-chartered savings
banks may be flexible and readily responsive to changes in economic conditions
and in savings and lending practices.
22
One of the purposes of the Banking Code is to provide savings banks with
the opportunity to be competitive with each other and with other financial
institutions existing under other Pennsylvania laws and other state, federal and
foreign laws. A Pennsylvania savings bank may locate or change the location of
its principal place of business and establish an office anywhere in
Pennsylvania, with the prior approval of the Department.
The Department generally examines each savings bank not less frequently
than once every two years. Although the Department may accept the examinations
and reports of the FDIC in lieu of the Department's examination, the present
practice is for the Department to conduct individual examinations. The
Department may order any savings bank to discontinue any violation of law or
unsafe or unsound business practice and may direct any trustee, officer,
attorney or employee of a savings bank engaged in an objectionable activity,
after the Department has ordered the activity to be terminated, to show cause at
a hearing before the Department why such person should not be removed.
Interstate Acquisitions. The Interstate Banking Act allows federal
regulators to approve mergers between adequately capitalized banks from
different states regardless of whether the transaction is prohibited under any
state law, unless one of the banks' home states has enacted a law expressly
prohibiting out-of-state mergers before June 1997. This act also allows a state
to permit out-of-state banks to establish and operate new branches in this
state. The Commonwealth of Pennsylvania has "opted in" to this interstate merger
provision. Therefore, the prior requirement that interstate acquisitions would
only be permitted when another state had "reciprocal" legislation that allowed
acquisitions by Pennsylvania-based bank holding companies has been eliminated.
The new Pennsylvania legislation, however, retained the requirement that an
acquisition of a Pennsylvania institution by a Pennsylvania or a
non-Pennsylvania-based holding company must be approved by the Banking
Department.
FDIC Insurance Premiums. The deposits of the Bank are insured by the SAIF,
which is administered by the FDIC. Under current FDIC regulations, SAIF-insured
institutions are assigned to one of three capital groups which are based solely
on the level of an institution's capital. SAIF assessment rates are then tied to
the level of an institution's supervisory concern based on risk classifications
derived from the capital groups. Rates during the last six months of 2005 ranged
from zero for well capitalized, healthy institutions, such as the Bank, to 27
basis points for undercapitalized institutions with substantial supervisory
concerns.
In addition, all institutions with deposits insured by the FDIC are
required to pay assessments to fund interest payments on bonds issued by the
Financing Corporation, a mixed-ownership government corporation established to
recapitalize the predecessor to the SAIF. The assessment rate for the third
quarter of 2005 was 0.0134% 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
23
the Bank does not know of any practice, condition or violation that might lead
to termination of deposit insurance. At September 30, 2005, the Bank's
regulatory capital exceeded all of its capital requirements.
Capital Requirements. The FDIC has promulgated regulations and adopted a
statement of policy regarding the capital adequacy of state-chartered banks
which, like the Bank, are not members of the Federal Reserve System. The FDIC's
capital regulations establish a minimum 3.0% Tier I leverage capital requirement
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, 2005, the Bank met each of its
capital requirements.
24
A bank which has less than the minimum leverage capital requirement shall,
within 60 days of the date as of which it fails to comply with such requirement,
submit to its FDIC regional director for review and approval a reasonable plan
describing the means and timing by which the bank shall achieve its minimum
leverage capital requirement. A bank which fails to file such plan with the FDIC
is deemed to be operating in an unsafe and unsound manner, and could subject the
bank to a cease-and-desist order from the FDIC. The FDIC's regulation also
provides that any insured depository institution with a ratio of Tier I capital
to total assets that is less than 2.0% is deemed to be operating in an unsafe or
unsound condition pursuant to Section 8(a) of the FDIA and is subject to
potential termination of deposit insurance. However, such an institution will
not be subject to an enforcement proceeding thereunder solely on account of its
capital ratios if it has entered into and is in compliance with a written
agreement with the FDIC to increase its Tier I leverage capital ratio to such
level as the FDIC deems appropriate and to take such other action as may be
necessary for the institution to be operated in a safe and sound manner. The
FDIC capital regulation also provides, among other things, for the issuance by
the FDIC or its designee(s) of a capital directive, which is a final order
issued to a bank that fails to maintain minimum capital to restore its capital
to the minimum leverage capital requirement within a specified time period. Such
directive is enforceable in the same manner as a final cease-and-desist order.
The Bank is also subject to more stringent Department capital guidelines.
Although not adopted in regulation form, the Department utilizes capital
standards requiring a minimum of 6% leverage capital and 10% risk-based capital.
The components of leverage and risk-based capital are substantially the same as
those defined by the FDIC.
Loans-to-One Borrower Limitation. Under federal regulations, with certain
limited exceptions, a Pennsylvania chartered savings bank may lend to a single
or related group of borrowers on an "unsecured" basis an amount equal to 15% of
its unimpaired capital and surplus. An additional amount may be lent, equal to
10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain securities
and bullion, but generally does not include real estate.
Activities and Investments of Insured State-Chartered Banks. Section 24 of
the FDIA, as amended by the Federal Deposit Insurance Corporation Improvement
Act of 1991, generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks. Under regulations dealing with equity investments, an insured state bank
generally may not directly or indirectly acquire or retain any equity investment
of a type, or in an amount, that is not permissible for a national bank. An
insured state bank is not prohibited from, among other things, (i) acquiring or
retaining a majority interest in a subsidiary, (ii) investing as a limited
partner in a partnership the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation or new construction of a qualified
housing project, provided that such limited partnership investments may not
exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the voting
stock of a company that solely provides or reinsures directors', trustees' and
officers' liability insurance coverage or bankers' blanket bond group insurance
coverage for insured depository institutions, and (iv) acquiring or retaining
the voting shares of a depository institution if certain requirements are met.
25
The FDIC has adopted final regulations pertaining to the other activity
restrictions imposed upon insured savings banks and their subsidiaries by
Section 24. Pursuant to such regulations, insured savings banks engaging in
impermissible activities may seek approval from the FDIC to continue such
activities. Savings banks not engaging in such activities but that desire to
engage in otherwise impermissible activities may apply for approval from the
FDIC to do so; however, if such bank fails to meet the minimum capital
requirements or the activities present a significant risk to the FDIC insurance
funds, such application will not be approved by the FDIC. The FDIC has
authorized the bank's subsidiary HARL, LLC, to invest up to 15% of its capital
in the equity securities of bank holding companies, banks or thrifts. $859,000
was invested by HARL, LLC as of September 30, 2005 in such equity securities.
Regulatory Enforcement Authority. FIRREA included substantial enhancement
to the enforcement powers available to federal banking regulators. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities. FIRREA
significantly increased the amount of and grounds for civil money penalties and
requires, except under certain circumstances, public disclosure of final
enforcement actions by the federal banking agencies.
Federal and State Taxation
General. The Bank is subject to federal income taxation in the same
general manner as other corporations with some exceptions, including
particularly the reserve for bad debts discussed below. The following discussion
of federal taxation is intended only to summarize certain pertinent federal
income tax matters and is not a comprehensive description of the tax rules
applicable to the Bank.
Method of Accounting. For federal income tax purposes, the Bank currently
reports its income and expenses on the accrual method of accounting and uses a
tax year ending September 30 for filing its federal income tax returns.
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, 2005 and 2004 includes approximately $1,325,000 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
26
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, 2005, the Bank had no net operating loss
carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. The corporate dividends-received
deduction is 80% in the case of dividends received from corporations with which
a corporate recipient does not file a consolidated tax return, and corporations
which own less than 20% of the stock of a corporation distributing a dividend
may deduct only 70% of dividends received or accrued on their behalf. However, a
corporation may deduct 100% of dividends from a member of the same affiliated
group of corporations.
Other Matters. The Company's federal income tax returns for its tax years
1993 and beyond are open under the statute of limitations and are subject to
review by the Internal Revenue Service ("IRS").
Pennsylvania Taxation. The Bank is subject to tax under the Pennsylvania
Mutual Thrift Institutions Tax Act, which imposes a tax at the rate of 11.5% on
the Bank's net earnings, determined in accordance with accounting principles
generally accepted in the United States of America, as shown on its books. For
fiscal years beginning in 1983, and thereafter, net operating losses may be
carried forward and allowed as a deduction for three succeeding years. This Act
exempts the Bank
27
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, 2005 amounted
to approximately $141.1 million. The Bank formed two limited liability companies
in 2002, Freedom Financial Solutions LLC ("FFS") and HARL LLC ("HARL"). FFS was
established to engage in the sale of insurance products through a third party.
HARL was established for the purpose of investing in FDIC insured financial
institutions/holding company equity securities.
28
Item 2. Properties.
-------------------
As of September 30, 2005, the Company conducted its business from its main
office in Harleysville, Pennsylvania and four 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 Property
and Leasehold
Lease Improvements at
Owned or Expiration September 30,
County Address Leased Date 2005 Deposits
------------ -------------------------- ---------- ---------------- --------------- ----------
(In Thousands)
Montgomery 271 Main Street
Harleysville, Pennsylvania Owned -- $1,131 $147,530
Montgomery 640 East Main Street
Lansdale, Pennsylvania Leased May 2043(1) 932 38,742
Montgomery 1550 Hatfield Valley Road
Hatfield, Pennsylvania Leased January 2064(1) 854 87,334
Montgomery 2301 West Main Street
Norristown, Pennsylvania Owned -- 572 95,210
Montgomery 3090 Main Street
Sumneytown, Pennsylvania Owned -- 336 50,164
------ --------
Total $3,825 $418,980
====== ========
----------
(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 required herein is incorporated by reference from page
31 of the Company's 2005 Annual Report to Stockholders ("Annual Report") and
from Part III, Item 12 hereof.
(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 indicated periods.
Total Number of Maximum Number
Shares Purchased as of Shares that May
Average Part of Publicly Yet Be Purchased
Total Number of Price Paid Announced Plans Under the Plans
Period Shares Purchased per Share or Programs or Programs(1)
-------------------- ---------------- ---------- ------------------- ------------------
July 1-31, 2005 5,000 $ 17.90 5,000 137,667
August 1-31, 2005 -- -- --
September 1-30, 2005 2,000 17.34 2,000 135,667
------- ------- ------- -------
Total 7,000 $ 17.74 7,000 135,667
======= ======= ======= =======
----------
(1) On June 18, 2003, the Company announced its current program to repurchase
up to 5.0% of the outstanding shares of Common Stock of the Company, or
191,667 shares. The program does not have an expiration date and all
shares are purchased in the open market.
Item 6. Selected Financial Data.
--------------------------------
The information required herein is incorporated by reference from page 1
of the Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations.
--------------
The information required herein is incorporated by reference from pages 5
to 10 of the Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
--------------------------------------------------------------------
The information required herein is incorporated by reference from pages 8
to 10 of the Annual Report.
30
Item 8. Financial Statements and Supplementary Data.
----------------------------------------------------
The information required herein is incorporated by reference from pages 12
to 30 of the Annual Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
-----------------------------------------------------------------------
Financial Disclosure.
---------------------
Not Applicable.
Item 9A. Controls and Procedures.
---------------------------------
Our management evaluated, with the participation of our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of September 30, 2005. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
regulations and are operating in an effective manner.
No change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934)
occurred during the fourth fiscal quarter of fiscal 2005 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Item 9B. Other Information.
---------------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
------------------------------------------------------------
The information required herein is incorporated by reference from the
information contained in the section captioned "Information with Respect to
Nominees for Director, Directors Whose Terms Continue and Executive Officers" in
the Company's definitive Proxy Statement for the Annual Meeting of Stockholders
to be held January 25, 2006 (the "Proxy Statement"), a copy of which will be
filed with the Securities and Exchange Commission before the meeting date.
The Company has adopted a Code of Conduct and Ethics that applies to its
principal executive officer and principal financial officer, as well as other
officers and employees of the Company and the Bank. A copy of the Code of
Ethics, was included as an exhibit to the Company's Form 10-K for the year ended
September 30, 2003 and filed with the Securities and Exchange Commission, may
also be found on the Company's website at www.harleysvillesavingsbank.com.
31
Item 11. Executive Compensation.
--------------------------------
The information required herein is incorporated by reference from the
information contained in the section 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" and "Management Compensation
- Equity Compensation Plan Information" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
--------------------------------------------------------
The information required herein is incorporated by reference from the
information contained in the section captioned "Management Compensation -
Indebtedness of Management" 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" in the Proxy Statement.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
-------------------------------------------------
(a) (1) The following financial statements are incorporated by reference from
Item 8 hereof (see Exhibit 13.0):
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition as of September 30, 2005
and 2004
Consolidated Statements of Income for the Years Ended September 30, 2005,
2004 and 2003
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the Years Ended September 30,
2005, 2004 and 2003
Notes to Consolidated Financial Statements
32
(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. Exhibits Location
--------- ------------------------------------------------------------------------- --------------------
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
4.0 Common Stock Certificate (1)
10.1 1995 Employee Stock Purchase Plan* (3)
10.2 1995 Stock Option Plan* (3)
10.3 2000 Stock Option Plan* (2)
10.4 Profit Sharing Incentive Plan* (3)
10.5 Employment Agreements with Edward J. Molnar, Ronald B. Geib,
and Marian Bickerstaff* (2)
13.0 Annual Report to Stockholders Filed herewith
22.0 Subsidiaries of the Registrant - Reference is made to "Item 1. Business
- Subsidiaries" of this Form 10-K for the required information --
23.0 Consent of Deloitte & Touche LLP Filed herewith
31.1 Certification of Chief Executive Officer Filed herewith
31.2 Certification of Chief Financial Officer Filed herewith
32.0 Section 1350 Certification of the Chief Executive Officer and Chief Filed herewith
Financial Officer
99.0 Code of Conduct and Ethics (3)
----------
* 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 February
25, 2000.
(2) Incorporated by reference to the Company's definitive proxy statement
dated December 19, 2000 filed with the SEC.
(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.
(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.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HARLEYSVILLE SAVINGS
FINANCIAL CORPORATION
December 21, 2005 By: /s/ Edward J. Molnar
------------------------------------
Edward J. Molnar
Chief Executive Officer and Director
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.
/s/ Edward J. Molnar December 21, 2005
------------------------------------
Edward J. Molnar
Chief Executive Officer
and Director
(principal executive officer)
/s Brendan J. McGill December 21, 2005
----------------------------------
Brendan J. McGill
Senior Vice President, Treasurer
and Chief Financial Officer
(principal financial and principal
accounting officer)
/s/ Sanford L. Alderfer December 21, 2005
----------------------------------
Sanford L. Alderfer
Director
/s/ Philip A. Clemens December 21, 2005
----------------------------------
Philip A. Clemens
Director
/s/ Mark R. Cummins December 21, 2005
----------------------------------
Mark R. Cummins
Director
/s/ David J. Friesen December 21, 2005
----------------------------------
David J. Friesen
Director
/s/ Ronald B. Geib December 21, 2005
----------------------------------
Ronald B. Geib
Director, President and
Chief Operating Officer
/s/ Charlotte A. Hunsberger December 21, 2005
----------------------------------
Charlotte A. Hunsberger
Director
/s/ George W. Meschter December 21, 2005
----------------------------------
George W. Meschter
Director
/s/ James L. Rittenhouse December 21, 2005
----------------------------------
James L. Rittenhouse
Director