UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-29709
HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-3028464
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
271 Main Street, Harleysville, Pennsylvania 19438
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(Address of principal executive offices)
(Zip Code)
(215) 256-8828
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [_] Yes [X] No
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date:
Common Stock, $.01 Par Value, 3,921,177 as of August 11, 2006
HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
Index
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PAGE(S)
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Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Statements of Financial
Condition as of June 30, 2006 and September 30, 2005 1
Unaudited Condensed Consolidated Statements of Income for
the Three and Nine Months Ended June 30, 2006 and 2005 2
Unaudited Condensed Consolidated Statements of
Comprehensive Income for the Three and Nine Months
Ended June 30, 2006 and 2005 3
Unaudited Condensed Consolidated Statements of
Stockholders' Equity for the Nine Months Ended
June 30, 2006 and 2005 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended June 30, 2006 and 2005 5
Notes to Unaudited Condensed Consolidated Financial
Statements 6 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 16
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 16 - 17
Item 4. Controls and Procedures 17 - 18
Part II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 1A. Risk Factors 19
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other information 19
Item 6. Exhibits 19
Signatures -
Harleysville Savings Financial Corporation
Unaudited Condensed Consolidated Statements of Financial Condition
June 30, September 30,
2006 2005
------------- -------------
Assets
Cash and amounts due from depository institutions $ 1,526,695 $ 1,193,285
Interest-bearing deposits in other banks 7,769,333 6,741,695
------------- -------------
Total cash and cash equivalents 9,296,028 7,934,980
Investment securities held to maturity (fair value -
June 30, $108,927,000; September 30, $88,404,000) 110,915,724 87,364,445
Investment securities available-for-sale at fair value 4,567,051 2,835,244
Mortgage-backed securities held to maturity (fair value -
June 30, $219,597,000; September 30, $259,994,000) 229,622,377 263,963,765
Mortgage-backed securities available-for-sale at fair value 807,343 1,045,087
Loans receivable (net of allowance for loan losses -
June 30, $1,955,000; September 30, $1,968,000) 378,791,591 366,006,917
Accrued interest receivable 3,784,123 3,432,054
Federal Home Loan Bank stock - at cost 15,265,000 16,035,900
Office properties and equipment, net 8,058,890 5,829,694
Deferred income taxes 363,880 339,587
Prepaid expenses and other assets 13,709,369 12,202,792
------------- -------------
TOTAL ASSETS $ 775,181,376 $ 766,990,465
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 433,683,617 $ 418,979,655
Advances from Federal Home Loan Bank 286,241,566 297,268,488
Accrued interest payable 1,336,801 1,358,953
Advances from borrowers for taxes and insurance 5,029,316 1,135,429
Accounts payable and accrued expenses 876,204 672,124
------------- -------------
Total liabilities 727,167,504 719,414,649
------------- -------------
Commitments (Note 9)
Stockholders' equity:
Preferred Stock: $.01 par value;
12,500,000 shares authorized; none issued
Common stock: $.01 par value; 25,000,000
shares authorized; issued June 2006, 3,921,177; Sept. 2005, 3,904,136
and outstanding, June 2006, 3,840,158; Sept. 2005, 3,900,881 39,212 39,041
Paid-in capital in excess of par 7,972,297 7,610,511
Treasury stock, at cost (June 2006, 81,019 shares; Sept. 2005, 3,255 shares) (1,428,866) (60,107)
Retained earnings - partially restricted 41,469,370 39,995,584
Accumulated other comprehensive loss (38,141) (9,213)
------------- -------------
Total stockholders' equity 48,013,872 47,575,816
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 775,181,376 $ 766,990,465
============= =============
See notes to unaudited condensed consolidated financial statements.
page -1-
Harleysville Savings Financial Corporation
Unaudited Condensed Consolidated Statements of Income
For the Three Months Ended For the Nine Months Ended
June 30, June 30,
-----------------------------------------------------
2006 2005 2006 2005
---- ---- ---- ----
INTEREST INCOME:
Interest and fees on mortgage loans $ 4,029,498 $ 3,837,297 $11,914,305 $11,390,798
Interest on mortgage-backed securities 2,650,659 2,976,642 8,253,139 8,760,645
Interest and fees on consumer and other loans 1,445,980 1,187,392 4,175,349 3,354,950
Interest and dividends on tax-exempt investments 351,082 343,634 1,043,932 1,030,480
Interest and dividends on taxable investments 1,445,645 821,684 3,641,547 2,057,250
----------- ----------- ----------- -----------
Total interest income 9,922,864 9,166,649 29,028,272 26,594,123
----------- ----------- ----------- -----------
Interest Expense:
Interest on deposits 3,340,338 2,640,489 9,657,080 7,510,962
Interest on borrowings 3,280,298 3,215,587 9,756,035 9,198,880
----------- ----------- ----------- -----------
Total interest expense 6,620,636 5,856,076 19,413,115 16,709,842
----------- ----------- ----------- -----------
Net Interest Income 3,302,228 3,310,573 9,615,157 9,884,281
Provision for loan losses -- -- -- --
----------- ----------- ----------- -----------
Net Interest Income after Provision
for Loan Losses 3,302,228 3,310,573 9,615,157 9,884,281
----------- ----------- ----------- -----------
Non-interest Income:
Net gain on sales of securities 18,005 24,260 27,395 88,003
Net gain on sale of loans 16,672 16,672
Other Non-interest income 322,459 338,382 916,954 1,029,404
----------- ----------- ----------- -----------
Total non-interest income 340,464 379,314 944,349 1,134,079
----------- ----------- ----------- -----------
Non-interest Expenses:
Salaries and employee benefits 1,176,228 1,019,274 3,344,031 3,090,529
Occupancy and equipment 384,656 372,118 1,137,674 1,134,525
Deposit insurance premiums 13,656 14,416 41,132 43,527
Other 582,595 611,092 1,638,625 1,720,433
----------- ----------- ----------- -----------
Total non-interest expenses 2,157,135 2,016,900 6,161,462 5,989,014
----------- ----------- ----------- -----------
Income before Income Taxes 1,485,557 1,672,987 4,398,044 5,029,346
Income tax expense 386,000 428,500 1,056,177 1,287,400
----------- ----------- ----------- -----------
Net Income $ 1,099,557 $ 1,244,487 $ 3,341,867 $ 3,741,946
=========== =========== =========== ===========
Basic Earnings Per Share $ 0.29 $ 0.32 $ 0.86 $ 0.97
=========== =========== =========== ===========
Diluted Earnings Per Share $ 0.28 $ 0.32 $ 0.85 $ 0.95
=========== =========== =========== ===========
Dividends Per Share $ 0.16 $ 0.15 $ 0.48 $ 0.43
=========== =========== =========== ===========
See notes to unaudited condensed consolidated financial statements.
page -2-
Harleysville Savings Financial Corporation
Unaudited Condensed Consolidated Statement of Comprehensive Income
Three Months Ended
2006 2005
------------------------------------------------------------------------------------------------------------------
Net Income $ 1,099,557 $ 1,244,487
Other Comprehensive Income
Unrealized (loss) gain on securities net of tax (29,841)(1) 21,601(1)
----------- -----------
Total Comprehensive Income $ 1,069,716 $ 1,266,088
=========== ===========
(1) Disclosure of reclassification amount, net of tax for the three months ended: 2006 2005
---- ----
Net unrealized (loss) gain arising during the three months ended $ (17,958) $ 37,613
Less: Reclassification adjustment for net gains included in net income 11,883 16,012
----------- -----------
Net unrealized (loss) gain on securities $ (29,841) $ 21,601
=========== ===========
Nine Months Ended
2006 2005
------------------------------------------------------------------------------------------------------------------
Net Income $ 3,341,867 $ 3,741,946
Other Comprehensive Income
Unrealized loss on securities net of tax (28,928)(2) (48,285)(2)
----------- -----------
Total Comprehensive Income $ 3,312,939 $ 3,693,661
=========== ===========
(2) Disclosure of reclassification amount, net of tax for the nine months ended: 2006 2005
---- ----
Net unrealized (loss) gain arising during the nine months ended $ (10,847) $ 9,797
Less: Reclassification adjustment for net gains included in net income 18,081 58,082
----------- -----------
Net unrealized loss on securities $ (28,928) $ (48,285)
=========== ===========
See notes to unaudited condensed consolidated financial statements.
page -3-
Harleysville Savings Financial Corporation
Unaudited Condensed Consolidated Statement of Stockholders' Equity
Retained Accumulated
Common Additional Earnings- Other Total
Stock Common Paid-in Treasury Partially Comprehensive Stockholders'
Shares Stock Capital Stock Restricted Loss Equity
----------------------------------------------------------------------------------------------------------------------------------
Balance at October 1, 2005 3,904,136 $ 39,041 $ 7,610,511 $ (60,107) $ 39,995,584 $ (9,213) $ 47,575,816
Net Income 3,341,867 3,341,867
Issuance of Common Stock 17,041 171 171
Dividends - $.48 per share (1,868,081) (1,868,081)
Option Compensation 77,225 77,225
Treasury stock purchased (1,681,657) (1,681,657)
Stock delivered under
employee stock plans (19,526) 169,601 150,075
Stock delivered under
Dividend Reinvestment Plan 304,087 143,297 447,384
Unrealized holding loss on available -
for sale securities, net of tax (28,928) (28,928)
--------- -------- ----------- ------------ ------------ ------------ ------------
Balance at June 30, 2006 3,921,177 $ 39,212 $ 7,972,297 $ (1,428,866) $ 41,469,370 $ (38,141) $ 48,013,872
========= ======== =========== ============ ============ ============ ============
Retained Accumulated
Common Additional Earnings- Other Total
Stock Common Paid-in Treasury Partially Comprehensive Stockholders'
Shares Stock Capital Stock Restricted Loss Equity
----------------------------------------------------------------------------------------------------------------------------------
Balance at October 1, 2004 2,316,490 $ 23,165 $ 7,426,853 $ (414,430) $ 37,244,200 $ 33,124 $ 44,312,912
Net Income 3,741,946 3,741,946
Issuance of Common Stock 35,282 356 170,045 170,401
Stock Split 1,544,327 15,440 (15,440)
Dividends - $.43 per share (1,667,922) (1,667,922)
Treasury stock purchased (204,100) (204,100)
Stock delivered under
employee stock plans (235,370) 514,174 278,804
Stock delivered under
Dividend Reinvestment Plan 168,715 104,356 273,071
Unrealized holding gain on available -
for sale securities, net of tax (48,285) (48,285)
--------- -------- ----------- ------------ ------------ ------------ ------------
Balance at June 30, 2005 3,896,099 $ 38,961 $ 7,514,803 $ -- $ 39,318,224 $ (15,161) $ 46,856,827
========= ======== =========== ============ ============ ============ ============
See notes to unaudited condensed consolidated financial statements.
page -4-
Harleysville Savings Financial Corporation
Unaudited Condensed Consolidated Statements of Cash Flows
Nine Months Ended June 30,
--------------------------
2006 2005
---- ----
Operating Activities:
Net Income $ 3,341,867 $ 3,741,946
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation 332,440 159,805
Increase (decrease) in deferred income taxes 14,900 (130)
Compensation charge on stock options 77,225
Amortization of deferred loan fees (35,195) (182,247)
Net gain on sale of loans (16,672)
Proceeds from the sale of loans held for sale 925,094
Origination of loans held for sale (908,422)
Realized loss on disposal of fixed assets 3,124
Net gain on sale of securities (27,395) (88,003)
Increase in cash surrender value (324,000) (335,000)
Net amortization of premiums and discounts 255,198 537,303
Increase bank owned life insurance (2,500,000)
Changes in assets and liabilities which provided (used) cash:
Increase in accounts payable and accrued
expenses 204,080 2,027,188
Increase in prepaid expenses and other assets (1,206,870) (1,936,829)
Decrease in accrued interest receivable (352,069) (377,068)
(Decrease) increase in accrued interest payable (22,152) 179,690
------------- -------------
Net cash provided by operating activities 2,261,153 1,226,655
------------- -------------
Investing Activities:
Purchase of investment securities held to maturity (23,749,535) (30,463,338)
Purchase of investment securities available for sale (2,064,820) (1,902,768)
Purchase of mortgage-backed securities held to maturity (2,011,250) (50,134,368)
Proceeds from maturities of investment securities held to maturity 316,618 16,303,834
Proceeds from sale of investment securities available for sale 327,357 5,014,125
Principal collected on long-term loans & mortgage-backed securities 100,099,282 109,130,994
Proceeds (purchase) of FHLB stock 770,900 (819,900)
Long-term loans originated or acquired (76,642,716) (81,808,936)
Purchases of premises and equipment (2,564,760) (310,408)
------------- -------------
Net cash used in investing activities (5,518,924) (34,990,765)
------------- -------------
Financing Activities:
Net decrease in demand deposits, NOW accounts
and savings accounts (2,317,137) (5,656,124)
Net increase in certificates of deposit 17,021,099 13,092,794
Cash dividends (1,868,081) (1,667,922)
Net (decrease) increase in FHLB advances (11,026,922) 23,354,653
Treasury stock delivered under employee stock plans 150,075 278,804
Stock delivered under Dividend Reinvestment Plan 447,384 273,071
Purchase of treasury stock (1,681,657) (204,100)
Net proceeds from issuance of stock 171 170,401
Net increase in advances from borrowers for taxes & insurance 3,893,887 3,734,993
------------- -------------
Net cash provided by financing activities 4,618,819 33,376,570
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,361,048 (387,540)
------------- -------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,934,980 4,718,784
------------- -------------
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,296,028 $ 4,331,244
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 1,066,927 $ 1,103,112
Interest expense 19,435,267 16,530,152
See notes to unaudited condensed consolidated financial statements.
page -5-
Harleysville Savings Financial Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -The unaudited condensed consolidated financial statements
include the accounts of Harleysville Savings Financial Corporation (the
"Company") and its subsidiary. Harleysville Savings Bank (the "Bank") is the
wholly owned subsidiary of the Company. All significant intercompany balances
and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and therefore do not
include information or footnotes necessary for a complete presentation of
financial condition, results of operations and cash flows in conformity with
accounting principles generally accepted in the United States of America.
However, all adjustments (consisting only of normal recurring adjustments)
which, in the opinion of management, are necessary for a fair presentation of
the consolidated financial statements have been included. The results of
operations for the three and nine months ended June 30, 2006 are not necessarily
indicative of the results which may be expected for the entire fiscal year
ending September 30, 2006 or any other period. The financial information should
be read in conjunction with the Annual Report on Form 10-K for the period ended
September 30, 2005.
Use of Estimates in Preparation of Consolidated Financial Statements - The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. The most significant of these estimates is
the allowance for loan losses. Actual results could differ from those estimates.
Accounting for Stock Options - In December 2004, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 123R (revised 2004), "Share-Based Payment", which revises SFAS No.
123, "Accounting for Stock-Based Compensation", and supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees". This Statement requires an
entity to recognize the cost of employee services received in exchange for an
award of equity investment based on grant-date fair value of the award. That
cost will be recognized over the period during which an employee is required to
provide service in exchange for the award. The Company adopted the modified
prospective method provisions of SFAS No. 123R. Effective October 1, 2005, the
Company was required to recognize compensation expense for the fair value of
stock options that were granted or vest after that date. Upon adoption of SFAS
No. 123R, the Company was required to recognize through earnings, the fair value
of the remaining unvested portion of options granted prior to January 1, 2002.
For fiscal year 2006, the Company expects to recognize approximately $113,000 of
pre-tax expense relating to the options. The following table illustrates the
effect on net income and earnings per share if the Company had applied the fair
value recognition provisions of SFAS No. 123, using Binomial Option Pricing
Model, to stock-based employee compensation for the nine months ended June 2005
and the actual impact for the nine months ended June 2006.
For the Nine Months Ended
June 30, 2006 June 30, 2005
------------- -------------
Net income available to shareholders $ 3,341,867 $ 3,741,946
Add: Total stock-based employee compensation
expense included in reported net income (net
of tax) 50,969
Deduct: Total stock-based employee compensation
expensed determined under fair value method ( net
of tax) (50,969) (41,693)
----------- -----------
Proforma net income $ 3,341,867 $ 3,700,253
Earnings per share:
Basic - as reported $ 0.86 $ 0.97
Basic - pro forma $ 0.86 $ 0.96
Diluted - as reported $ 0.85 $ 0.95
Diluted - pro forma $ 0.85 $ 0.94
Recent Accounting Pronouncements - In June 2005, the FASB has issued Statement
No. 154, "Accounting Changes and Error Corrections", a replacement of APB
Opinion No. 20 and FASB Statement No.3. The Statement applies to all voluntary
changes in accounting principle, and changes the requirements for accounting for
and reporting of a change in accounting principle. Statement 154 requires
retrospective application to prior periods' financial statements of a voluntary
change in accounting principle unless it is impracticable. APB Opinion 20
previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. Statement 154 improves
financial reporting because its requirements enhance the consistency of
financial information between periods. Statement 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The impact of this new pronouncement will depend on the Company
changing an accounting principle and will be evaluated at that time.
In November 2005, the FASB issued FASB Staff Position (FSP) 115-1/124-1, "The
Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments". This FSP provides additional guidance on when an investment in a
debt or equity security should be considered impaired and when that impairment
should be considered other-than-temporary and recognized as a loss in earnings.
Specifically, the guidance clarifies that an investor should recognize an
impairment loss no later than when the impairment is deemed
other-than-temporary, even if a decision to sell has not been made. The FSP also
requires certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. The Company is applying the
guidance in this FSP in fiscal 2006 and there was no material affect to the
results of operations or the statement of financial position.
On December 19, 2005, the FASB issued FSP 94-6-1, "Terms of Loan Products That
May Give Rise to a Concentration of Credit Risk". FSP 94-6-1 addresses whether,
under existing guidance, non-traditional loan products represent a concentration
of credit risk and what disclosures are required for entities that originate,
hold, guarantee, service, or invest in loan products whose terms may give rise
to a concentration of credit risk. Non-traditional loan products expose the
originator, holder, investor, guarantor, or servicer to higher credit risk than
traditional loan products. Typical features of non-traditional loan products may
include high loan-to-value ratios and interest or principal repayments that are
less than the repayments for fully amortizing loans of an equivalent term. FSP
94-6-1 was effective upon its issuance and it did not have a material impact on
the Company's financial position or disclosures.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments. This statement amends FASB Statements No. 133, Accounting
for Derivative Instruments and Hedging Activities, and No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
This statement resolves issues addressed in Statement 133 Implementation Issue
No. D1, Application of Statement 133 to Beneficial Interest in Securitized
Financial Assets. This Statement is effective for all financial instruments
acquired or issued after the beginning of an entity's first fiscal year that
begins after September 15, 2006. The Company is still continuing to evaluate the
impact of this pronouncement and does not expect that the guidance will have a
material effect on the Company's financial position or results of operations.
In March 2006, the FASB issued SFAS No. 156 Accounting for Servicing of
Financial Assets an amendment of FASB Statement No. 140 ("SFAS 140" and "SFAS
156"). SFAS 140 establishes, among other things, the accounting for all
separately recognized servicing assets and servicing liabilities. SFAS 156
amends SFAS 140 to require that all separately recognized servicing assets and
servicing liabilities be initially measured at fair value, if practicable. This
Statement permits, but does not require, the subsequent measurement of
separately recognized servicing assets and servicing liabilities at fair value.
Under this Statement, an entity can elect subsequent fair value measurement to
account for its separately recognized servicing assets and servicing
liabilities. Adoption of this Statement is required as of the beginning of the
first fiscal year that begins after September 15, 2006. Upon adoption, the
Company will apply the requirements for recognition and initial measurement of
servicing assets and servicing liabilities prospectively to all transactions.
The Company will adopt SFAS 156 for the fiscal year beginning October 1, 2006
and is evaluating the impact of this pronouncement.
In July 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income
Taxes-an interpretation of FASB Statement No.109" ("FIN 48"). FIN 48 clarifies
the recognition threshold and measurement of a tax position taken on a tax
return. FIN 48 is effective for fiscal years beginning after December 15, 2006.
FIN 48 also requires expanded disclosure with respect to the uncertainty in
income taxes. We are currently evaluating the requirements of FIN 48 and the
impact this interpretation may have on our financial statements.
Reclassification - Certain items in the 2005 financial statements have been
reclassified to conform with the presentation in the 2006 consolidated financial
statements. Such reclassifications did not have a material impact on the overall
presentation of the financial statements.
page -6-
2. INVESTMENT SECURITIES HELD TO MATURITY
A comparison of amortized cost and approximate fair value of investment
securities held to maturity with gross unrealized gains and losses, by
maturities, is as follows:
June 30, 2006
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
------------------------------------------------------------------------------------------------------
U.S. Government Agencies
Due after 1 years through 5 years $ 12,000,000 $ (369,000) $ 11,631,000
Due after 5 years through 10 years 26,426,513 $ 2,213 (825,726) 25,603,000
Due after 10 years through 20 years 47,622,290 (1,990,290) 45,632,000
Tax-Exempt Obligations
Due after 10 years through 15 years 16,879,780 803,220 17,683,000
Due after 15 years 7,987,141 390,859 8,378,000
------------ ------------ ------------ ------------
Total Investment Securities $110,915,724 $ 1,196,292 $ (3,185,016) $108,927,000
============ ============ ============ ============
A summary of investment securities with unrealized losses, aggregated by
category, at June 30, 2006 is as follows:
Less than 12 Months 12 Months or Longer Total Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
---------- ----------------- ---------- ----------------- ---------- -----------------
US Government agencies $ 51,761,320 $ (1,651,659) $ 30,441,530 $ (1,533,357) $ 82,202,850 $ (3,185,016)
------------- ------------- ------------- ------------- ------------- -------------
Total $ 51,761,320 $ (1,651,659) $ 30,441,530 $ (1,533,357) $ 82,202,850 $ (3,185,016)
============= ============= ============= ============= ============= =============
At June 30, 2006, investment securities in a gross unrealized loss position for
twelve months or longer consisted of 11 U.S. Government Agency Securities that
at such date had an aggregate depreciation of 4.8% from the Company's amortized
cost basis. Management believes that the estimated fair value of the securities
disclosed above is primarily dependent upon the movement in market interest
rates. Management evaluated the length of time and the extent to which the
market value has been less than cost; the financial condition and near term
prospects of the issuers, including any specific events which may influence the
operations of the issuers such as changes in technology that may impair the
earnings potential of the issuers. The Company has the ability and intent to
hold these securities until the anticipated recovery of fair value occurs.
Management does not believe any individual unrealized loss as of June 30, 2006
represents an other-than-temporary impairment.
September 30, 2005
Gross Gross
Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
--------------------------------------------------------------------------------------------------
U.S. Government Agencies
Due after 1 years through 5 years $12,000,000 $ (197,000) $11,803,000
Due after 5 years through 10 years 25,703,340 $ 77,445 (207,785) 25,573,000
Due after 10 years through 15 years 24,862,533 5,200 (497,733) 24,370,000
Tax-Exempt Obligations
Due after 10 years through 15 years 13,050,956 949,044 14,000,000
Due after 15 years 11,747,616 910,384 12,658,000
----------- ----------- ----------- -----------
Total Investment Securities $87,364,445 $ 1,942,073 $ (902,518) $88,404,000
=========== =========== =========== ===========
A summary of investment securities with unrealized losses, aggregated by
category, at September 30, 2005 is as follows:
Less than 12 Months 12 Months or Longer Total Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
---------- ----------------- ---------- ----------------- ---------- -----------------
US Government agencies $ 31,567,124 $ (284,269) $ 21,339,331 $ (618,249) $ 52,906,455 $ (902,518)
------------- ------------- ------------- ------------- ------------- -------------
Total $ 31,567,124 $ (284,269) $ 21,339,331 $ (618,249) $ 52,906,455 $ (902,518)
============= ============= ============= ============= ============= =============
At September 30, 2005, investment securities in a gross unrealized loss position
for twelve months or longer consisted of eight US Government Agency Securities
that at such date had an aggregate depreciation of 2.8% from the Company's
amortized cost basis. Management believes that the estimated fair value of the
securities disclosed above is primarily dependent upon the movement in market
interest rates. Management evaluated the length of time and the extent to which
the market value has been less than cost; the financial condition and near term
prospects of the issuers, including any specific events which may influence the
operations of the issuers such as changes in technology that may impair the
earnings potential of the issuers. The Company has the ability and intent to
hold these securities until the anticipated recovery of fair value occurs.
Management does not believe any individual unrealized loss as of September 30,
2005 represented an other-than-temporary impairment.
page -7-
3. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
A comparison of amortized cost and approximate fair value of investment
securities available-for-sale with gross unrealized gains and losses is as
follows:
June 30, 2006
Gross Gross
Amortized Unrealized Unrealized
Cost Gain Losses Fair Value
------------------------------------------------------------------------------------
Equity Securities $ 1,050,664 $ (79,944) $ 970,720
Mutual Funds 3,596,331 3,596,331
----------- ----------- ----------- -----------
Total Investment Securities $ 4,646,995 $ (79,944) $ 4,567,051
=========== =========== =========== ===========
There were no securities in a loss position greater than twelve months.
A summary of investment with unrealized losses, aggregated by category, at June
30,2005 is as follows:
Less than 12 Months 12 Months or Longer Total Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
---------- ----------------- ---------- ----------------- ---------- -----------------
Equities $ 970,720 $ (79,944) $ -- $ -- $ 970,720 $ (79,944)
------------- ------------- ------------- ------------- ------------- -------------
Total $ 970,720 $ (79,944) $ -- $ -- $ 970,720 $ (79,944)
============= ============= ============= ============= ============= =============
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. For securities in an unrealized loss position, management
evaluated the length of time and the extent to which the market value has been
less than cost; the financial condition and near term prospects of the issuers,
including any specific events which may influence the operations of the issuers
such as changes in technology that may impair the earnings potential of the
issuers or the discontinuance of a segment of the business that may effect the
future earnings potential. The Company has the ability and intent to hold these
securities until the anticipated recovery of fair value occurs. Management
believes that the securities are temporarily impaired.
September 30, 2005
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------------------------------------------------------------------------------
Equity Securities $ 906,113 $ 9,830 $ (56,723) $ 859,220
Money Market Mutual Funds 1,976,024 1,976,024
---------- ---------- ---------- ----------
Total Investment Securities $2,882,137 $ 9,830 $ (56,723) $2,835,244
========== ========== ========== ==========
There were no securities in a loss position greater than twelve months. For
securities in an unrealized loss position, management evaluated the length of
time and the extent to which the market value has been less than cost; the
financial condition and near term prospects of the issuers, including any
specific events which may influence the operations of the issuers such as
changes in technology that may impair the earnings potential of the issuers or
the discontinuance of a segment of the business that may effect the future
earnings potential. The Company has the ability and intent to hold these
securities until the anticipated recovery of fair value occurs. Management does
not believe any individual unrealized loss as of September 30, 2005 represented
an other-than-temporary impairment.
page -8-
4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
A comparison of amortized cost and approximate fair value of mortgage-backed
securities held to maturity with gross unrealized gains and losses is as
follows:
June 30,2006
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
------------------------------------------------------------------------------------------------
Collateralized mortgage obligations $ 15,529,796 $ 68,356 $ (538,152) $ 15,060,000
FHLMC pass-through certificates 103,617,348 39,029 (4,884,377) 98,772,000
FNMA pass-through certificates 105,465,058 49,651 (4,831,709) 100,683,000
GNMA pass-through certificates 5,010,175 71,825 5,082,000
------------ ------------ ------------ ------------
Total Mortgage-Backed Securities $229,622,377 $ 228,861 $(10,254,238) $219,597,000
============ ============ ============ ============
A summary of mortgage-backed securities with unrealized losses, aggregated by
category, at June 30, 2006 is as follows:
Less than 12 Months 12 Months or Longer Total Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
---------- ----------------- ---------- ----------------- ---------- -----------------
Mortgage-backed securities
held to maturity $ 69,556,220 $ (2,977,393) $ 135,780,606 $ (7,276,845) $ 205,336,826 $ (10,254,238)
------------- ------------- ------------- ------------- ------------- -------------
Total $ 69,556,220 $ (2,977,393) $ 135,780,606 $ (7,276,845) $ 205,336,826 $ (10,254,238)
============= ============= ============= ============= ============= =============
At June 30, 2006, mortgage-related securities in a gross unrealized loss
position for twelve months or longer consisted of 61 securities that at such
date had an aggregate depreciation of 5.1% from the Company's amortized cost
basis. Management does not believe any individual unrealized loss as of June 30,
2006 represents an other-than-temporary impairment. The unrealized losses
reported for mortgage-related securities relate primarily to securities issued
by the Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation and private institutions. The majority of the unrealized losses
associated with mortgage-related securities are primarily attributable to
changes in interest rates and not due to the deterioration of the
creditworthiness of the issuer. The Company has the ability and intent to hold
these securities until the securities mature.
September 30,2005
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
------------------------------------------------------------------------------------------------
Collateralized mortgage obligations $ 17,089,874 $ 36,738 $ (278,612) $ 16,848,000
FHLMC pass-through certificates 118,663,486 128,502 (2,047,988) 116,744,000
FNMA pass-through certificates 121,596,729 161,648 (2,216,377) 119,542,000
GNMA pass-through certificates 6,613,676 246,324 6,860,000
------------ ------------ ------------ ------------
Total Mortgage-Backed Securities $263,963,765 $ 573,212 $ (4,542,977) $259,994,000
============ ============ ============ ============
A summary of mortgage-backed securities with unrealized losses, aggregated by
category, at September 30, 2005 is as follows:
Less than 12 Months 12 Months or Longer Total Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
---------- ----------------- ---------- ----------------- ---------- -----------------
Mortgage-backed securities
held to maturity $ 178,406,095 $ (2,751,178) $ 58,493,074 $ (1,791,799) $ 236,899,169 $ (4,542,977)
------------- ------------- ------------- ------------- ------------- -------------
Total $ 178,406,095 $ (2,751,178) $ 58,493,074 $ (1,791,799) $ 236,899,169 $ (4,542,977)
============= ============= ============= ============= ============= =============
At September 30, 2005, mortgage-related securities in a gross unrealized loss
position for twelve months or longer consisted of 27 securities that at such
date had an aggregate depreciation of 3.0% from the Company's amortized cost
basis. For securities in an unrealized loss position, management evaluated the
length of time and the extent to which the market value has been less than cost;
the financial condition and near term prospects of the issuers, including any
specific events which may influence the operations of the issuers such as
changes in technology that may impair the earnings potential of the issuers. The
Company has the ability and intent to hold these securities until the
anticipated recovery of fair value occurs. Management does not believe any
individual unrealized loss as of September 30, 2005 represented an
other-than-temporary impairment.
page -9-
5. MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE
A comparison of amortized cost and approximate fair value of mortgage-backed
securities available-for-sale with gross unrealized gains and losses is as
follows:
June 30,2006
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------------------------------------------------------------------------------
FNMA pass-through certificates $ 785,187 $ 22,156 $ 807,343
---------- ---------- ---------- ----------
Total Mortgage-Backed Securities $ 785,187 $ 22,156 $ 807,343
========== ========== ========== ==========
September 30,2005
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------------------------------------------------------------------------------
FNMA pass-through certificates $1,012,154 $ 32,933 $1,045,087
---------- ---------- ---------- ----------
Total Mortgage-Backed Securities $1,012,154 $ 32,933 $1,045,087
========== ========== ========== ==========
6. LOANS RECEIVABLE
Loans receivable consist of the following:
June 30, 2006 September 30, 2005
------------- ------------------
Residential Mortgages $ 278,826,159 $ 270,940,562
Commercial Mortgages 5,143,610 2,003,219
Construction 4,621,175 7,639,300
Savings Account 986,247 921,400
Home Equity 67,344,574 59,724,004
Automobile and other 730,005 771,538
Line of Credit 26,598,411 31,579,680
------------- -------------
Total 384,250,181 373,579,703
Undisbursed portion of loans in process (2,912,593) (4,933,753)
Deferred loan fees (591,053) (671,426)
Allowance for loan losses (1,954,944) (1,967,607)
------------- -------------
Loans receivable - net $ 378,791,591 $ 366,006,917
============= =============
The total amount of loans being serviced for the benefit of others was
approximately $4.1 million and $4.7 million at June 30, 2006 and September 30,
2005, respectively. Commercial mortgage loans consist of five or more units.
The following schedule summarizes the changes in the allowance for loan losses:
Nine Months Ended Year Ended
June 30, 2006 September 30, 2005
------------- ------------------
Balance, beginning of period $ 1,967,607 $ 1,976,849
Provision for loan losses -- --
Amounts charged-off (16,377) (92,949)
Loan recoveries 3,714 83,707
----------- -----------
Balance, end of period $ 1,954,944 $ 1,967,607
=========== ===========
he activity in the recoveries and charge off accounts was primarily the result
of the Company's Bounce Protection program. This program extends credit
automatically to our depositors. If the account is not brought current by the
depositor the loan is charged off. If the customer subsequently brings the
account current, a recovery is recognized.
page -10-
7. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classification as
follows:
June 30, 2006 September 30, 2005
------------- ------------------
Land $ 1,159,031 $ 184,788
Buildings 7,553,703 6,383,356
Furniture, fixtures and equipment 3,596,123 3,433,247
Automobiles 24,896 24,896
------------- -------------
Total 12,333,753 10,026,287
Less accumulated depreciation (4,274,863) (4,196,593)
------------- -------------
Net $ 8,058,890 $ 5,829,694
============= =============
8. DEPOSITS
Deposits are summarized as follows:
June 30, 2006 September 30, 2005
------------- ------------------
Non-interest bearing checking $ 10,015,087 $ 9,618,764
NOW accounts 17,127,643 18,282,489
Checking accounts 20,137,856 9,102,649
Money Market Demand accounts 64,311,230 76,581,019
Passbook and Club accounts 3,482,567 3,806,599
Certificate accounts 318,609,234 301,588,135
------------- -------------
Total deposits $ 433,683,617 $ 418,979,655
============= =============
The aggregate amount of certificate accounts in denominations of more than
$100,000 at June 30, 2006 and September 30, 2005 amounted to approximately $42.1
million and $39.7 million, respectively. Amounts in excess of $100,000 may not
be federally insured.
9. COMMITMENTS
At June 30, 2006, the following commitments were outstanding:
Origination of fixed-rate mortgage loans $10,865,903
Unused line of credit loans 41,441,541
Loans in process 2,912,593
-----------
Total $55,220,037
===========
10. DIVIDENDS
On July 19, 2006, the Company's Board of Directors declared a cash dividend of
$.16 per share payable on August 23, 2006 to the stockholders of record at the
close of business on August 9, 2006.
page -11-
11. EARNINGS PER SHARE
The following average shares were used for the computation of earnings per
share:
For the Three Months Ended For the Nine Months Ended
June 30, June 30,
-------------------------------------------------------------
2006 2005 2006 2005
---- ---- ---- ----
Basic 3,850,573 3,890,153 3,882,257 3,872,400
Diluted 3,884,694 3,936,829 3,914,062 3,936,929
The difference between the number of shares used for computation of basic
earnings per share and diluted earnings per share represents the dilutive effect
of stock options.
12. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consists of the following:
June 30, September 30,
2006 2005
Weighted Weighted
Interest Interest
Maturing Period Amount Rate Amount Rate
------------------------------------------------------------------------------
1 to 12 months $ 56,865,731 4.70% $ 36,043,911 3.73%
13 to 24 months 41,761,302 4.84% 25,446,061 3.66%
25 to 36 months 42,255,788 4.20% 69,114,248 4.83%
37 to 48 months 15,924,422 4.43% 31,484,966 3.89%
49 to 60 months 30,000,000 5.67% 9,302,331 3.97%
61 to 72 months 53,236,213 4.58% 40,208,732 5.35%
73 to 84 months 21,198,109 4.04% 60,668,239 4.47%
85 to 120 months 25,000,000 4.01% 25,000,000 3.80%
---------------------------------------------------------
Total $ 286,241,566 4.60% $ 297,268,488 4.38%
=========================================================
The advances are collateralized by Federal Home Loan Bank ("FHLB") stock and
substantially all first mortgage loans. The Company has a line of credit with
the FHLB of which $33.5 million out of $40.0 million was used at June 30, 2006
and $21.0 million was used as of September 30, 2005. Included in the table above
at June 30, 2006 and September 30, 2005 are convertible advances whereby the
FHLB has the option at a predetermined strike rate to convert the fixed interest
rate to an adjustable rate tied to London Interbank Offered Rate ("LIBOR"). The
Company then has the option to repay these advances if the FHLB converts the
interest rate. These advances are included in the periods in which they mature.
The Company has a total FHLB borrowing capacity of $559.9 million of which
$286.2 million was used as of June 30, 2006.
13. REGULATORY CAPITAL REQUIREMENTS
Harleysville Savings Bank (the "Bank") is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Bank's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Quantitative measures
established by regulation to ensure capital adequacy require the Bank to
maintain minimum amounts and ratios (set forth in the table below) of total Tier
1 capital (as defined in the regulations) to risk weighted assets (as defined),
and of Tier 1 capital (as defined) to assets (as defined). Management believes,
as of June 30, 2006, that the Bank meets all capital adequacy requirements to
which it is subject.
As of June 30, 2006, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the following table. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
The Bank's actual capital amounts and ratios are also presented in the following
table.
To Be Considered Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------------------------------------------------------------------
As of June 30, 2006
Tier 1 Capital (to assets) $ 47,824,555 6.23% $30,720,320 4.00% $ 38,400,400 5.00%
Tier 1 Capital (to risk weighted assets) 47,824,555 13.08% 14,628,960 4.00% 21,943,440 6.00%
Total Capital (to risk weighted assets) 49,779,789 13.61% 29,257,920 8.00% 36,572,400 10.00%
As of September 30, 2005
Tier 1 Capital (to assets) $ 47,524,213 6.26% $30,376,680 4.00% $ 37,970,850 5.00%
Tier 1 Capital (to risk weighted assets) 47,524,213 13.31% 14,283,160 4.00% 21,424,740 6.00%
Total Capital (to risk weighted assets) 49,491,820 13.86% 28,566,320 8.00% 35,707,900 10.00%
page -12-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains certain forward-looking statements and information relating
to the Company that are based on the beliefs of management as well as
assumptions made by and information currently available to management. In
addition, in those and other portions of this document, the words "anticipate,"
"believe," "estimate," "intend," "should" and similar expressions, or the
negative thereof, as they relate to the Company or the Company's management, are
intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future-looking events and are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected or intended. The Company does not
intend to update these forward-looking statements.
The Company's primary business consists of attracting deposits from the general
public through a variety of deposit programs and investing such deposits
principally in first mortgage loans secured by residential properties in the
Company's primary market area. The Company also originates a variety of consumer
loans, predominately home equity loans and lines of credit also secured by
residential properties in the Company's primary lending area. The Company serves
its customers through its full-service branch network as well as through remote
ATM locations, the Internet and telephone banking.
Critical Accounting Policies and Judgments
------------------------------------------
The Company's consolidated financial statements are prepared based on the
application of certain accounting policies. Certain of these policies require
numerous estimates and strategic or economic assumptions that may prove
inaccurate or subject to variations and may significantly affect the Company's
reported results and financial position for the period or in future periods.
Changes in underlying factors, assumptions, or estimates in any of these areas
could have a material impact on the Company's future financial condition and
results of operations.
Analysis and Determination of the Allowance for Loan Losses - The allowance for
loan losses is a valuation allowance for probable losses inherent in the loan
portfolio. The Company evaluates the need to establish allowances against losses
on loans on a monthly basis. When additional allowances are necessary, a
provision for loan losses is charged to earnings.
Our methodology for assessing the appropriateness of the allowance for loan
losses consists of three key elements: (1) specific allowances for certain
impaired or collateral-dependent loans; (2) a general valuation allowance on
certain identified problem loans; and (3) a general valuation allowance on the
remainder of the loan portfolio. Although we determine the amount of each
element of the allowance separately, the entire allowance for loan losses is
available for the entire portfolio.
Specific Allowance Required for Certain Impaired or Collateral-Dependent Loans:
We establish an allowance for certain impaired loans for the amounts by which
the collateral value or observable market price are lower than the carrying
value of the loan. Under current accounting guidelines, a loan is defined as
impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due under the contractual terms
of the loan agreement. At June 30, 2006, no loans were considered impaired.
General Valuation Allowance on Certain Identified Problem Loans - We also
establish a general allowance for classified loans that do not have an
individual allowance. We segregate these loans by loan category and assign
allowance percentages to each category based on inherent losses associated with
each type of lending and consideration that these loans, in the aggregate,
represent an above-average credit risk and that more of these loans will prove
to be uncollectible compared to loans in the general portfolio.
General Valuation Allowance on the Remainder of the Loan Portfolio - We
establish another general allowance for loans that are not classified to
recognize the inherent losses associated with lending activities, but which,
unlike specific allowances, has not been allocated to particular problem assets.
This general valuation allowance is determined by segregating the loans by loan
category and assigning allowance percentages based on our historical loss
experience, delinquency trends and management's evaluation of the collectibility
of the loan portfolio. The allowance may be adjusted for significant factors
that, in management's judgment, affect the collectibility of the portfolio as of
the evaluation date. These significant factors may include changes in lending
policies and procedures,
page -13-
changes in existing general economic and business conditions affecting our
primary lending areas, credit quality trends, collateral value, loan volumes and
concentrations, seasoning of the loan portfolio, recent loss experience in
particular segments of the portfolio, duration of the current business cycle and
bank regulatory examination results. The applied loss factors are reevaluated
monthly to ensure their relevance in the current economic environment.
Changes in Financial Position for the Nine-Month Period Ended June 30, 2006
Total assets at June 30, 2006 were $775.2 million, an increase of $8.2 million
for the nine-month period then ended. The increase was primarily the result of
increases in investment securities held to maturity of $23.6 million, loans
receivable of $12.8 million, office property and equipment of $2.2 million and
prepaid expense and other assets of $1.5 million. These increases were partially
offset by a decrease in mortgage-backed securities held to maturity of $34.3
million and Federal Home Loan Bank stock of $771,000.
As of June 30, 2006, total deposits increased by $14.7 million to $433.7
million. Advances from borrowers for taxes and insurance also increased by $3.9
million. There was also a decrease in advances from Federal Home Loan Bank of
$11.0 million due to the growth of deposits and normal cash flows.
Comparisons of Results of Operations for the Three and Nine Month Period Ended
--------------------------------------------------------------------------------
June 30, 2006 with the Three and Nine Month Period Ended June 30, 2005.
----------------------------------------------------------------------
Net Interest Income
-------------------
Net interest income was $3.30 million for the three-month period ended June 30,
2006 compared to $3.31 million for the comparable period in 2005. The decrease
in the net interest income for the three-month period ended June 30, 2006 when
compared to the same period in 2005 is attributed to the decrease in interest
rate spread to 1.58% in 2006 from 1.63% in 2005. The decrease in net interest
income was also a result of an increase in the average rate paid on interest-
bearing liabilities to 3.75% in 2006 from 3.37% in 2005 and an increase in the
average balance of interest bearing liabilities to $706.4 million in 2006 from
$695.0 million in 2005. This was partially offset by an increase in the yield
earned on assets to 5.33% in 2006 from 5.00% in 2005 along with an increase in
the average balance of interest earning assets to $744.6 million in 2006 from
$733.2 million in 2005.
Total interest income was $9.9 million for the three-month period ended June 30,
2006 compared to $9.2 million for the comparable period in 2005. For the nine
month period ended June 30, 2006, total interest income was $29.0 million
compared to $26.6 million for the comparable period in 2005. The increase is
primarily the result of the increased average yield for the interest-earning
assets to 5.33% and 5.20% for the three and nine-month period ended June 30,
2006, respectively, from 5.00% and 4.95% for the comparable periods in 2005. The
increase is also attributed to an increase in the average balance of interest
earning assets to $744.6 million and $743.8 million for the three and nine-month
period ended June 30, 2006, respectively, from $733.2 million and $716.9 million
for the comparable periods in 2005.
Total interest expense increased to $6.6 million for the three-month period
ended June 30, 2006 from $5.9 million for the comparable period in 2005. For the
nine-month period ended June 30, 2006, total interest expense increased to $19.4
million from $16.7 million for the comparable period in 2005. These increases
occurred primarily as a result of a increase in the average rate paid on
interest-bearing liabilities to 3.75% and 3.67% for the three and nine-month
periods ended June 30, 2006, respectively, from 3.37% and 3.27% for the
comparable periods ended June 30, 2005. The increase is also attributed to an
increase in the average balance of interest bearing liabilities to $706.4
million and $705.7 million for the three and nine-month periods ended June 30,
2006, respectively, from $695.0 million and $680.6 million for the comparable
periods in 2005.
Non-interest Income
-------------------
Non-interest income decreased to $340,000 for the three-month period ended June
30, 2006 from $379,000 for the comparable period in 2005. For the nine-month
period ended June 30, 2006, non-interest income decreased to $944,000 from $1.1
million for the comparable period in 2005. The three-month and the nine-month
decrease are due to lower gains from the sale of investments and loans available
for sale.
page -14-
Non-interest Expenses
---------------------
During the quarter ended June 30, 2006, non-interest expenses increased by
$140,000 or 6.9% to $2.2 million when compared to the same period in 2005. For
the nine-month period ended June 30, 2006, non-interest expenses increased by
$172,000 or 2.9% compared to the comparable period in 2005. Management believes
these are normal increases in the cost of operations after considering the
effects of inflation and the impact of the 2.6% growth in average assets of the
Company when compared to the same periods in 2005. The annualized ratio of
expenses to average assets for the three and nine month periods ended June 30,
2006 was 1.12% and 1.07%, respectively.
Income Taxes
------------
The Company made provisions for income taxes of $386,000 and $1.1 million for
the three and nine-month periods ended June 30, 2006, respectively, compared to
$429,000 and $1.3 million for the comparable periods in 2005. These provisions
are based on the levels of taxable income which decreased for the three and nine
months ended June 30, 2006 when compared to the same periods in 2005.
Liquidity and Capital Recourses
-------------------------------
As of June 30, 2006, the Company had $55.2 million in commitments to fund loan
originations, disburse loans in process and meet other obligations. Management
anticipates that the majority of these commitments will be funded within the
next six months by means of normal cash flows, FHLB borrowings and new deposits.
The amount of certificate accounts, which are scheduled to mature during the 12
months ending June 30, 2007, is $189.0 million. Management expects that a
substantial portion of these maturing deposits will remain as accounts in the
Company. The Company invests excess funds in overnight deposits and other
short-term interest-earning assets, which provide liquidity to meet lending
requirements. The Company also has available borrowings with the Federal Home
Loan Bank of Pittsburgh up to the Company's maximum borrowing capacity, which
was $559.9 million at June 30, 2006 of which $286.2 million was outstanding at
June 30, 2006.
The Bank's net income for the nine months ended June 30, 2006 of $3.3 million
increased the Bank's stockholders' equity to $48.0 million or 6.2% of total
assets. This amount is well in excess of the Bank's minimum regulatory capital
requirement.
Recent Accounting Pronouncements
--------------------------------
In June 2005, the FASB has issued Statement No. 154, "Accounting Changes and
Error Corrections", a replacement of APB Opinion No. 20 and FASB Statement No.3.
The Statement applies to all voluntary changes in accounting principle, and
changes the requirements for accounting for and reporting of a change in
accounting principle. Statement 154 requires retrospective application to prior
periods' financial statements of a voluntary change in accounting principle
unless it is impracticable. APB Opinion 20 previously required that most
voluntary changes in accounting principle be recognized by including in net
income of the period of the change the cumulative effect of changing to the new
accounting principle. Statement 154 improves financial reporting because its
requirements enhance the consistency of financial information between periods.
Statement 154 is effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005. The impact of this new
pronouncement will depend on the Company changing an accounting principle and
will be evaluated at that time.
In November 2005, the FASB issued FASB Staff Position (FSP) 115-1/124-1, "The
Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments". This FSP provides additional guidance on when an investment in a
debt or equity security should be considered impaired and when that impairment
should be considered other-than-temporary and recognized as a loss in earnings.
Specifically, the guidance clarifies that an investor should recognize an
impairment loss no later than when the impairment is deemed
other-than-temporary, even if a decision to sell has not been made. The FSP also
requires certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. The Company is applying the
guidance in this FSP in fiscal 2005 and there was no material affect to the
results of operations or the statement of financial position.
On December 19, 2005, the FASB issued FSP 94-6-1, "Terms of Loan Products That
May Give Rise to a Concentration of Credit Risk". FSP 94-6-1 addresses whether,
under existing guidance, non-traditional loan products represent a concentration
of credit risk and what disclosures are required for entities that originate,
hold, guarantee, service, or invest in loan products whose terms may give rise
to a concentration of credit risk. Non-traditional loan products expose the
originator, holder, investor, guarantor, or servicer to higher credit risk than
traditional loan
page -15-
products. Typical features of non-traditional loan products may include high
loan-to-value ratios and interest or principal repayments that are less than the
repayments for fully amortizing loans of an equivalent term. FSP 94-6-1 was
effective upon its issuance and it did not have a material impact on the
Company's financial position or disclosures.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments. This statement amends FASB Statements No. 133, Accounting
for Derivative Instruments and Hedging Activities, and No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
This statement resolves issues addressed in Statement 133 Implementation Issue
No. D1, Application of Statement 133 to Beneficial Interest in Securitized
Financial Assets. This Statement is effective for all financial instruments
acquired or issued after the beginning of an entity's first fiscal year that
begins after September 15, 2006. The Company is still continuing to evaluate the
impact of this pronouncement and does not expect that the guidance will have a
material effect on the Company's financial position or results of operations.
In March 2006, the FASB issued SFAS No. 156 Accounting for Servicing of
Financial Assets an amendment of FASB Statement No. 140 ("SFAS 140" and "SFAS
156"). SFAS 140 establishes, among other things, the accounting for all
separately recognized servicing assets and servicing liabilities. SFAS 156
amends SFAS 140 to require that all separately recognized servicing assets and
servicing liabilities be initially measured at fair value, if practicable. This
Statement permits, but does not require, the subsequent measurement of
separately recognized servicing assets and servicing liabilities at fair value.
Under this Statement, an entity can elect subsequent fair value measurement to
account for its separately recognized servicing assets and servicing
liabilities. Adoption of this Statement is required as of the beginning of the
first fiscal year that begins after September 15, 2006. Upon adoption, the
Company will apply the requirements for recognition and initial measurement of
servicing assets and servicing liabilities prospectively to all transactions.
The Company will adopt SFAS 156 for the fiscal year beginning October 1, 2006
and is evaluating the impact of this pronouncement.
In July 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income
Taxes-an interpretation of FASB Statement No.109" ("FIN 48"). FIN 48 clarifies
the recognition threshold and measurement of a tax position taken on a tax
return. FIN 48 is effective for fiscal years beginning after December 15, 2006.
FIN 48 also requires expanded disclosure with respect to the uncertainty in
income taxes. We are currently evaluating the requirements of FIN 48 and the
impact this interpretation may have on our financial statements.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
The Company has instituted programs designed to decrease the sensitivity of its
earnings to material and prolonged increases in interest rates. The principal
determinant of the exposure of the Company's earnings to interest rate risk is
the timing difference between the repricing or maturity of the Company's
interest-earning assets and the repricing or maturity of its interest-bearing
liabilities. If the maturities of such assets and liabilities were perfectly
matched, and if the interest rates borne by its assets and liabilities were
equally flexible and moved concurrently, neither of which is the case, the
impact on net interest income of rapid increases or decreases in interest rates
would be minimized. The Company's asset and liability management policies seek
to increase the interest rate sensitivity by shortening the repricing intervals
and the maturities of the Company's interest-earning assets. Although management
of the Company believes that the steps taken have reduced the Company's overall
vulnerability to increases in interest rates, the Company remains vulnerable to
material and prolonged increases in interest rates during periods in which its
interest rate sensitive liabilities exceed its interest rate sensitive assets.
The authority and responsibility for interest rate management is vested in the
Company's Board of Directors. The Chief Executive Officer implements the Board
of Directors' policies during the day-to-day operations of the Company. Each
month, the Chief Financial Officer ("CFO") presents the Board of Directors with
a report, which outlines the Company's asset and liability "gap" position in
various time periods. The "gap" is the difference between interest- earning
assets and interest-bearing liabilities which mature or reprice over a given
time period.
The CFO also meets weekly with the Company's other senior officers to review and
establish policies and strategies designed to regulate the Company's flow of
funds and coordinate the sources, uses and pricing of such funds. The first
priority in structuring and pricing the Company's assets and liabilities is to
maintain an acceptable interest rate spread while reducing the effects of
changes in interest rates and maintaining the quality of the Company's assets.
page -16-
The following table summarizes the amount of interest-earning assets and
interest-bearing liabilities outstanding as of June 30, 2006, which are expected
to mature, prepay or reprice in each of the future time periods shown. Except as
stated below, the amounts of assets or liabilities shown which mature or reprice
during a particular period were determined in accordance with the contractual
terms of the asset or liability. Adjustable and floating-rate assets are
included in the period in which interest rates are next scheduled to adjust
rather than in the period in which they are due, and fixed-rate loans and
mortgage-backed securities are included in the periods in which they are
anticipated to be repaid.
The passbook accounts, negotiable order of withdrawal ("NOW") accounts, interest
bearing accounts, and money market deposit accounts, are included in the "Over 5
Years" categories based on management's beliefs that these funds are core
deposits having significantly longer effective maturities based on the Company's
retention of such deposits in changing interest rate environments.
Generally, during a period of rising interest rates, a positive gap would result
in an increase in net interest income while a negative gap would adversely
affect net interest income. Conversely, during a period of falling interest
rates, a positive gap would result in a decrease in net interest income while a
negative gap would positively affect net interest income. However, the following
table does not necessarily indicate the impact of general interest rate
movements on the Company's net interest income because the repricing of certain
categories of assets and liabilities is discretionary and is subject to
competitive and other pressures. As a result, certain assets and liabilities
indicated as repricing within a stated period may in fact reprice at different
rate levels.
1 Year 1 to 3 3 to 5 Over 5
or less Years Years Years Total
--------- --------- --------- --------- ---------
Interest-earning assets
Mortgage loans $ 37,564 $ 58,471 $ 44,299 $ 138,492 $ 278,826
Mortgage-backed securities 77,984 77,746 38,097 36,603 230,430
Consumer and other loans 58,350 26,798 9,309 10,967 105,424
Investment securities and other investments 35,935 2,292 24,529 87,581 150,337
--------- --------- --------- ---------
Total interest-earning assets 209,833 165,307 116,234 273,643 765,017
--------- --------- --------- --------- ---------
Interest-bearing liabilities
Passbook and Club accounts -- -- -- 3,483 3,483
NOW and checking accounts -- -- -- 37,265 37,265
Money Market Deposit accounts 17,182 -- -- 37,840 55,022
Choice Savings 2,322 6,967 9,289
Certificate accounts 188,952 123,691 5,966 -- 318,609
Borrowed money 80,725 71,542 45,385 88,590 286,242
--------- --------- --------- --------- ---------
Total interest-bearing liabilities 289,181 195,233 51,351 174,145 709,910
--------- --------- --------- --------- ---------
Repricing GAP during the period $ (79,348) $ (29,926) $ 64,883 $ 99,498 $ 55,107
========= ========= ========= ========= =========
Cumulative GAP $ (79,348) $(109,274) $ (44,391) $ 55,107
========= ========= ========= =========
Ratio of GAP during the period to total assets -10.24% -3.86% 8.37% 12.84%
========= ========= ========= =========
Ratio of cumulative GAP to total assets -10.24% -14.10% -5.73% 7.11%
========= ========= ========= =========
Item 4. Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer
and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this report. Based
on such evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports that we file or
submit under the
page -17-
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and regulations and are
operating in an effective manner.
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred
during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
page -18-
Part II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 1A. Risk Factors
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents the repurchasing activity of the stock
repurchase program during the quarter ended June 30, 2006:
Total
Number of
Shares
Purchased Maximum
as Part of Number of Shares
Total Average Publicly that May Yet Be
Number of Price Announced Purchased Under
Shares Paid Plans or the Plans or
Period Purchased per Share Programs Programs
April 1 - -- -- -- 73,373
30, 2006
May 1 - 33,586 17.58 33,586 39,787
31, 2006
June 1 -
30, 2006
---------- ---------- ---------- ----------
33,586 17.58 33,586 39,787
========== ========== ==========
Total
Notes to this table:
(a) On June 18, 2003, the Company announced its current program to
repurchase up to 5.0% of the outstanding shares of Common Stock of the
Company, or 191,667 shares.
(b) The program does not have an expiration date and all shares have been
purchased in the open market.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
No.
31.1 Certification of Chief Executive
Officer
31.2 Certification of Chief Financial
Officer
32.0 Section 1350 Certification of Chief
Executive Officer and Chief Financial Officer
page -19-
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
Date: August 11, 2006 By: /s/ Edward J. Molnar
------------------------------------------
Edward J. Molnar
Chief Executive Officer
Date: August 11, 2006 By: /s/ Brendan J. McGill
------------------------------------------
Brendan J. McGill
Senior Vice President
Treasurer and Chief Financial Officer