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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-29709
HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
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(Exact name of Registrant as specified in its charter)
Pennsylvania 23-3028464
- ---------------------------------- --------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
271 Main Street Harleysville, Pennsylvania 19438
- --------------------------------------------------------------------------------
(Address of principal officer) (Zip Code)
Registrant's telephone number, including area code: (215) 256-8828
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Common Stock, $.01 par value
----------------------------
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 made 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 of this
Form 10-K [ X ].
The aggregate market value of the 1,813,714 shares of the Registrant's Common
Stock held by non-affiliates (2,285,051 shares outstanding less 471,337 shares
held by affiliates), based upon the closing price of $14.375 for the Common
Stock on December 8, 2000, as reported by the Nasdaq Stock Market, was
approximately $26.1 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 8, 2000: 2,285,051
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, 2000 are incorporated by reference into Part II, Items
5-9 and Part IV, Item 14 of this Form 10-K.
(2) Portions of the definitive Proxy Statement for the 2001 Annual
Meeting of Stockholders are incorporated by reference into Part III,
Items 10-13 of this Form 10-K.
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 Harlyesvlle 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.
2
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 four
full-service offices located in Montgomery County, Pennsylvania. The Bank's
primary market area includes Montgomery County and, to a lesser extent, Bucks
County. As of September 30, 2000, the Company had $488.6 million of total
assets, $309.8 million of deposits and $31.4 million of stockholders' equity.
The Company's stockholders' equity constituted 6.43% of total assets as of
September 30, 2000.
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 construction loans
primarily on residential properties. In recent years, the Bank has engaged to a
significant extent in the origination of a variety of consumer loans. The Bank
also serves its customers through participation in the MAC System(R), a shared
automated teller machine ("ATM") network located throughout Pennsylvania and a
large portion of the east coast.
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 (215)
256-8828.
3
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, 2000, first mortgage loans on
residential properties, including loans on single-family and multi-family
residential properties and construction loans on such properties, amounted to
$213.0 million or 54.0% 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). The Company's portfolio of first mortgage loans on residential
properties had remained relatively stable as a percent of the total loan and
mortgage-backed securities portfolio in recent years until fiscal 1998 when the
balance of mortgage-backed securities increased by $60.2 million and comprised
24.0% of the portfolio at September 30, 1998 compared to 8.2% of the portfolio
at September 30, 1997. At September 30, 2000, mortgage-backed securities totaled
$123.7 million and comprised 31.3% of the portfolio.
As of September 30, 2000, loans secured by commercial real estate
comprised $807,000 or 0.2% 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 $55.3 million or 14.0% of the total loan and mortgage-backed
securities portfolio as of September 30, 2000.
As of September 30, 2000, the Company had $123.7 million, or 31.3%,
of the total loan and mortgage-backed securities 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.
4
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,
-------------------------------------------------------------------------------
2000 1999 1998
--------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
--------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
Real estate loans:
Residential:
Single-family $205,560 52.1% $193,067 50.4% $191,567 55.9%
Multi-family 1,016 0.3 1,056 0.3 873 0.3
Construction 6,580 1.7 3,885 1.0 6,785 2.0
Lot Loans 1,351 0.3 1,004 0.3 1,307 0.4
Mortgage-backed securities 123,744 31.3 124,694 32.4 82,488 24.0
Commercial 807 0.2 767 0.2 579 0.2
--------- ----- --------- ----- --------- -----
Total real estate loans and
mortgage-backed securities 339,058 86.0% 324,473 84.6% 283,599 82.8%
--------- ----- ------- ---- ------- ----
Consumer Loans:
Education loans 1,414 0.4% 1,348 0.4% 958 0.3%
Installment equity loans 44,727 11.3 49,240 12.8 49,827 14.5
Line of credit loans 7,889 2.0 7,176 1.9 7,006 2.0
Savings account loans 619 0.2 535 0.1 514 0.2
Automobile and other loans 641 0.2 661 0.2 669 0.2
---------- ------ ------- ----- --------- ----
Total consumer loans 55,290 14.0% 58,960 15.4% 58,974 17.2%
Total loans receivable and
mortgage-backed securities 394,348 100.0% 383,433 100.0% 342,573 100.0%
-------- ------ ------- ----- ------- -----
Less:
Loans in process (3,845) (2,533) (4,443)
Deferred Loan Fees (1,946) (1,905) (1,873)
Allowance for Loan Losses (2,038) (2,040) (2,040)
----- ------ ----------
Total loans receivable and
mortgage-backed securities, net
$386,519 $376,955 $334,217
======= ======= =======
5
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, 2000 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 Years(s) Ended September 30,
------------------------------------------------------------------------------------
Principal Balance
at September 30, 2003- 2006- 2011- 2016 and
2000 2001 2002 2005 2010 2015 Thereafter
-------------- ---------- ---------- ------------ ---------- ------------ --------------
(In Thousands)
Real estate loans:
Residential
Single-family $205,560 $ 3,949 $ 4,100 $ 13,949 $ 31,471 $ 37,180 $114,911
Multi-family 1,016 15 16 55 125 179 6,26
Construction 6,580 99 106 355 809 1,158 4,053
Lot Loans 1,351 73 80 273 612 313 --
Mortgage-backed securities 123,744 1,856 2,104 6,929 15,592 21,903 75,360
Commercial 807 29 31 111 256 380 --
Consumer and other loans 55,290 6,801 7,298 25,309 12,440 3,442 --
-------- -------- -------- -------- -------- -------- --------
Total(1) $394,348 $ 12,822 $ 13,735 $ 46,981 $ 61,305 $ 64,555 $194,950
======== ======== ======== ======== ======== ======== ========
(1) With respect to the $381.5 million of loans with principal maturities
contractually due after September 30, 2001, $268.2 million have fixed rates
of interest and $113.5 million have adjustable or floating rates of
interest.
6
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, however, 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. Over the past several years, the Company has sold a
portion of the fixed-rate residential, conforming loans it originated in
connection with its "gap" management policy. Generally, adjustable rate
mortgages, non-conforming and jumbo mortgages, commercial real estate loans, and
consumer loans and lines of credit are originated for its portfolio.
During the years ended September 30, 1998, 1999 and 2000, the Company
did not sell any residential loans or mortgage-backed securities.
The Company's total loan originations increased by $21.6 million or
40.6% in fiscal 1998, decreased by $12.2 million or 16.3% in fiscal 1999 and
decreased by $2.6 million or 4.1% in fiscal 2000. Of the $31.1 million, $21.3
million and $29.7 million of single-family loans originated in fiscal 1998, 1999
and 2000, $13.6 million, $7.4 million and $3.6 million, respectively, were loans
originated to refinance property, $17.5 million, $13.5 million and $26.1
million, respectively, were loans to acquire residential property. During this
period, the Company's originations of consumer loans amounted to $35.2 million,
$31.3 million and $21.0 million or 47.0% , 50.0% and 35.0% of total loan
originations during fiscal 1998, 1999 and 2000, respectively. Management intends
to
7
continue to emphasize origination of consumer loans which may have adjustable
rates, and generally have shorter terms than residential real estate loans.
The following table shows total loans originated, sold and repaid
during the periods indicated.
Year Ended September 30,
2000 1999 1998
----------------------------------------------------------
(In Thousands)
Real estate loan originations:
Residential:
Single-family $29,712 $21,337 $31,120
Multi-family -- -- --
Construction 8,602 9,580 8,126
Lot loans 752 380 402
-------- --------- --------
Total real estate loan originations 39,066 31,297 39,648
Consumer loan originations(1) 21,025 31,349 35,179
------ ------ ------
Total loan originations 60,091 62,646 74,827
Purchases of mortgage-backed securities 13,038 68,220 67,963
------ ------ ------
Total loan originations, and purchases 73,129 130,866 142,790
Principal loan and mortgage-backed securities
repayments 58,845 87,126 66,714
Sales of loans and mortgage-backed securities 3,369 2,880 5,697
------- -------- ------
Total principal repayments and sales 62,214 90,006 72,411
------ ------ ------
Net increase in loans $10,915 $40,860 $70,379
====== ====== ======
(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 in accordance with the Company's written underwriting
policies as adopted by the Company's Board of Directors. The Company's Board of
Directors have granted loan approval authority to several officers and employees
of the Company, provided the loan meets the guidelines set out in its written
loan underwriting policies. Individual approval authority of $500,000 has been
granted to the Company's President and Chief Lending Officer, $250,000 to the
Assistant Vice President/Loan origination Manager, and $50,000 to a delegated
underwriter who is an employee of the Company. All approved loans are ratified
by the Board of Directors at the next succeeding board meeting. Any loan which
does not meet the guidelines set forth in the lending policies must be approved
by the Company's Board of Directors.
8
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,
2000, the largest aggregate amount of loans outstanding to any borrower,
including related entities, was $1.5 million which did not exceed the Company's
loan to one borrower limitation.
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 conforming to
the secondary market underwriting standards. Refinancings are limited to 80% or
less. Loans over $227,150 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.
All appraisals and other property valuations are performed by
independent fee appraisers approved by the Company's Board of Directors. On all
real estate loans, other than certain "streamlined refinances" the Company
requires borrowers to obtain title insurance, insuring the Company 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 are required to 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 FHLMC
guidelines, 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 $500,000, are held
for 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, 2000, $212.0 million or 53.8%
and $1.0 million or 0.3% of the Company's total loan and mortgage-backed
securities portfolio consisted of single-family (including construction loans)
and multi-family residential loans, respectively. As of September 30, 2000,
approximately $225.4 million or 66.5% 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, $113.5 million or 33.5% 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 year ended September 30, 2000, the Company originated
$18.2 million of ARM mortgages. ARMs represented 22.7%, 20.8% and 55.9% of the
Company's total mortgage loan
9
portfolio originations in fiscal 1998, 1999 and 2000, 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 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. Initial rates are generally fully indexed to the
one or three year treasury yield.
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 residences as well as
to selected local builders for construction of single-family dwellings. As of
September 30, 2000, $6.6 million or 1.7% 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. Permanent loans made in conjunction
with residential construction have maximum terms of 30.5 years. At the end of
the initial six month term of such a loan the Company requires the borrower to
begin to make principal repayments on the loan. 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 Copmpany 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.
10
Consumer and Other Loans. The Company actively originates consumer
loans to provide a wider range of financial services to its customers and to
improve the interest rate sensitivity of its interest-earning assets.
Originations of consumer loans as a percent of total loan originations amounted
to 47.0%, 50.0% and 35.0% during fiscal 1998, 1999 and 2000, 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, student loans
guaranteed by the Pennsylvania Higher Education Assistance Agency, 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
$52.6 million or 13.3% of the loan and mortgage-backed securities portfolio at
September 30, 2000. After taking into account first mortgage balances, the
Company will lend up to 80% of the value of owner-occupied property on fixed
rate terms up to fifteen years. This amount may be raised to 100% when
considering other factors, such as excellent credit history and income
stability. At September 30, 2000, the Company had outstanding approximately
2,600 home equity loans of which approximately 2,100 were installment equity
loans and 500 were line of credit loans. As of such date, the Company had an
outstanding balance on line of credit loans of approximately $7.9 million and
there was approximately $11.3 million of unused credit available on such loans.
Consumer loans generally involve more risk of collectibility than
mortgage loans because of the type and nature of the collateral and, in certain
cases, the absence of collateral. As continued payments are dependent on the
borrower's continuing financial stability, these loans may be more likely to be
adversely affected by job loss, divorce, personal bankruptcy or by adverse
economic conditions.
Loan Fee and Servicing Income. The Company receives fees both for the
origination of loans and for making commitments to originate and purchase
residential and commercial mortgage loans. The Company also receives servicing
fees with respect to residential mortgage loans it has sold. It also receives
loan fees related to existing loans, including late charges, and credit life
insurance premiums. 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 generally accepted accounting principles ("GAAP") 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 over the
estimated remaining terms of such loans using various methods which approximate
the interest method. The Company generated $403,000, $321,000 and $139,000 in
deferred loan fees in fiscal 1998, 1999 and 2000, respectively.
11
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, 2000, the Company was servicing $6.6 million of
loans for others, substantially all of which related to loans sold by the
Company to the FHLMC. The Company receives a servicing fee of .25% on such
loans.
Non-performing Loans and Real Estate Owned. When a borrower fails to
make a required loan payment, the Company attempts to cure the default by
contacting the borrower; generally, after a payment is more than 15 days past
due, at which time a late charge is assessed. Defaults are cured promptly in
most cases. If the delinquency on a mortgage loan exceeds 60 days and is not
cured through the Company's normal collection procedures, or an acceptable
arrangement is not worked out with the borrower, the Company will institute
measures to remedy the default. This may include commencing a foreclosure action
or, in special circumstances, accepting from the borrower a voluntary deed of
the secured property in lieu of foreclosure with respect to mortgage loans and
equity loans, or title and possession of collateral in the case of other
consumer loans. Substantial delays may occur in instituting and completing
residential foreclosure proceedings due to the extensive procedures and time
periods required to be complied with under Pennsylvania law.
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" account until it is sold. When property is
acquired, it is recorded at the lower of carrying or market value at the date of
acquisition and any write-down resulting therefrom 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 loans outstanding which
would have been recorded as loans accounted for on a non-accrual basis as of the
end of the period.
12
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 due to the value of the collateral securing such loans.
As of September 30,
-------------------------------------------
2000 1999 1998
---------- ---------- ---------
(Dollars in Thousands)
Residential real estate loans:
Non-accrual loans $-- $-- $--
Accruing loans 90 days overdue 184 299 156
Troubled debt restructurings -- -- --
---- ---- ----
Total 184 299 156
---- ---- ----
Consumer loans:
Non-accrual loans -- -- --
Accruing loans 90 days overdue -- -- 12
Troubled debt restructurings -- -- --
---- ---- ----
Total -- -- 12
---- ---- ----
Total non-performing loans:
Non-accrual loans -- --
Accruing loans 90 days overdue 184 299 168
Troubled debt restructurings -- -- --
---- ---- ----
Total $184 $299 $168
==== ==== ====
Total non-performing loans to total loans .07% .12% .07%
Total real estate owned, net of related reserves -- -- --
Total non-performing loans and other real
estate owned to total assets .04% .07% .04%
13
Management establishes reserves for losses on slow loans when it
determines that losses are anticipated to be incurred on the underlying
properties. The Company's provision for general loan losses of $119,817, $16,579
and $0, respectively, in fiscal 1998, 1999 and 2000 were based on the amount and
types of loans originated by it and its historical experience. 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 slow consumer
loans and commercial loans when it determines that losses are expected to be
incurred on the property securing the loans. 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 specific reserves may be required. The establishment of any such
reserves could affect net income.
The following table summarizes activity in the Company's allowance
for loan losses during the periods indicated.
Year Ended September 30,
-----------------------------------------
2000 1999 1998
--------- ---------- -----------
Allowances at beginning of year $2,040,000 $2,040,000 $1,925,000
Provision for loan losses charged to
operating expenses -- 16,579 119,817
Amounts charged off, net (1,869) (16,579) (4,817)
---------- ----------- -------------
Allowances at end of year $2,038,131 $2,040,000 $ 2,040,000
========= ========= ==========
Ratio of net charge-offs to average
loans outstanding -- -- --
Ratio of allowances to period-end loans .77% .81% .93%
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."
14
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, ARM 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, 2000 was $28.0 million.
The following table sets forth the Company's investment portfolio at
carrying value as of the dates indicated.
As of September 30,
-----------------------------------------
2000 1999 1998
-------- ------- --------
(In Thousands)
Interest-bearing deposits at
other depository institutions $2,856 $2,681 $17,742
Tax exempt obligations 15,381 8,121 8,121
ARM mutual funds 3,310 3,202 1,586
U.S. Government Securities
available-for-sale -- -- --
U.S. Government and agency
obligations held to maturity 55,900 52,892 42,501
FHLB of Pittsburgh stock 7,365 6,473 4,998
------- ------- -------
Total $84,812 $73,369 $74,948
====== ====== ======
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. Due to changes in regulatory and economic conditions in
recent years, the Company has increasingly emphasized deregulated fixed-rate
certificate accounts and other authorized types of 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
15
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 "MAC" ATM network.
The following table shows the distribution of, and certain other
information relating to, the Company's deposits by type as of the dates
indicated.
As of September 30,
--------------------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------- -------------------------
Percent Percent Percent
of of of
Amount Deposits Amount Deposits Amount Deposits
--------- --------- --------- ----------- ----------- -----------
(Dollars in Thousands)
Passbook and club
accounts $ 2,396 0.8% $ 2,707 0.9% $ 3,256 1.1%
NOW accounts 10,749 3.5 11,812 3.9 9,862 3.4
Checking accounts 5,781 1.9 5,372 1.8 5,128 1.8
Money market demand
accounts 49,420 16.0 54,055 17.8 34,872 12.0
Certificates of deposit:
6 month 8,520 2.7 7,159 2.4 4,449 1.5
9 month 4,246 1.4 8,762 2.9 11,603 4.0
12 month 32,121 10.4 16,867 5.6 19,615 6.8
15 month 4,660 1.5 7,047 2.3 9,231 3.2
17 month 40,896 13.2 14,946 4.9
18 month 51,037 16.5 52,442 17.2 53,337 18.4
24 month 28,820 9.3 47,099 15.5 62,879 21.7
27 month 5,045 1.6 2,970 1.0
36 month 16,519 5.3 24,511 8.1 25,332 8.7
60 month 12,928 4.2 13,195 4.3 15,357 5.3
Other 2,638 0.9 3,052 1.0 3,162 1.1
Retirement accounts:
Money market deposit
accounts 509 0.2 435 0.1 489 0.2
Certificates of deposit 33,551 10.8 31,229 10.3 31,255 10.8
-------- ------ -------- ------ -------- ------
Total deposits $309,836 100.0% $303,660 100.0% $289,827 100.0%
======= ===== ======= ===== ======= =====
16
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.
17
The following table presents certain information concerning the
Company's deposit accounts as of September 30, 2000 and the scheduled quarterly
maturities of its certificates of deposit.
Percentage of Weighted
Total Average
Amount Deposits Nominal Rate
----------- -------------- -------------
(Dollars in Thousands)
Passbook and club accounts $ 2,396 0.8% 3.78%
NOW accounts 10,749 3.5 1.25
Checking accounts 5,781 1.9 0.04
Money market deposits accounts(1) 49,929 16.1 2.54
------ ---- ----
Total $68,855 22.3% 2.17%
------ ---- ----
Certificate accounts maturing by quarter:
December 31, 2000 54,868 17.7% 5.16%
March 31, 2001 55,457 17.9 5.78
June 30, 2001 35,185 11.4 5.94
September 30, 2001 19,444 6.3 6.07
December 31, 2001 20,298 6.6 6.16
March 31, 2002 21,036 6.8 6.24
June 30, 2002 9,345 3.0 6.26
September 30, 2002 5,703 1.8 6.12
December 31, 2002 3,257 1.1 5.99
March 31, 2003 3,462 1.1 5.90
June 30, 2003 3,107 1.0 5.91
September 30, 2003 3,940 1.3 5.39
Total certificate accounts(1) 240,982 77.7 5.77
------- ----- ------
Total deposits $309,837 100.0% 4.97%
======= ===== ======
- ------------
(1) Includes retirement accounts.
18
Management of the Company expects, based on historical experience and
its pricing policies, to retain a significant portion of the $164.7 million of
certificates of deposit which mature during the 12 months ended September 30,
2001.
The following table sets forth the net deposit flows of the Company
during the periods indicated.
Year Ended September 30,
----------------------------------
2000 1999 1998
---------- -------- --------
(In Thousands)
(Decrease)/Increase before interest credited $ (6,391) $ 1,747 $ 4,046
Interest credited 12,567 12,086 12,008
------ ------ ------
Net deposit increase $ 6,176 $13,833 $16,054
======= ====== ======
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, 2000 which mature during the periods
indicated.
Amounts at September 30, 2000 Maturing
----------------------------------------------------------------
As of
September 30, One Year or
2000 Less Two Years Three Years Thereafter
------------ ------------ -------------- ------------- ------------
(In Thousands)
Certificate accounts:
4.01% to 6.00% $ 145,523 $ 117,130 $ 14,953 $ 7,818 $ 5,622
6.01% to 8.00% 95,459 47,470 41,287 6,009 693
-------- -------- ------- ------- -------
Total certificate
accounts(1) $ 240,982 $ 164,600 $ 56,240 $ 13,827 $ 6,315
======== ======== ======= ====== ======
- ------------
(1) Includes retirement accounts.
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, 2000, the Bank had FHLB advances with
maturities of one year or less totaling $21.0 million at an interest rate of
6.71% and FHLB advances with maturities of 13 months to 10 years totaling $124.1
million at interest-rates ranging from 5.13% to 6.5%. Such advances are made
pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. 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
19
to meet seasonal and other withdrawals of deposit accounts to purchase
mortgage-backed 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,
----------------------------------------------------------------------------------
2000 1999 1998
----------------------- ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Balance Rate Balance Rate Balance Rate
---------- ---------- ------------ ---------- ------------ ----------
(Dollars in Thousands)
Advances from FHLB of Pittsburgh $145,134 6.10% $125,180 5.76% $99,953 5.86%
The following table sets forth certain information concerning the
short-term borrowings of the Company for the periods indicated.
Year Ended September 30,
---------------------------------------
2000 1999 1998
--------- --------- ---------
Dollars in Thousands)
Advances from FHLB of Pittsburgh:
Average balance outstanding $6,550 $6,575 $4,584
Maximum amount outstanding at any
month-end during the period 14,600 11,700 5,001
Weighted average interest rate
during the period 6.34% 5.44% 5.99%
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.
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 47 full-time employees and 35 part-time employees as
of September 30, 2000. 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.
21
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. The Company is
also a financial holding company ("FHC") under the provisions of the 1999 Act.
BHCA Activities and Other Limitations. The BHCA prohibits a bank
holding company from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any bank, or increasing such ownership or
control of any bank, without prior approval of the Federal Reserve Board. The
BHCA also generally prohibits a bank holding company from acquiring any bank
located outside of the state in which the existing bank subsidiaries of the bank
holding company are located unless specifically authorized by applicable state
law. No approval under the BHCA is required, however, for a bank holding company
already lawfully owning or controlling 50% of the voting shares of a bank to
acquire additional shares of such bank.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. In making such determinations, the Federal Reserve Board is
required to weigh the expected benefit to the public, such as greater
convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices. A bank holding
company that becomes an FHC under the 1999 Act 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 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
22
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 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.
23
Tier II capital generally consists of hybrid capital instruments; perpetual
preferred stock which is not eligible to be included as Tier I capital; term
subordinated debt and intermediate-term preferred stock; and, subject to
limitations, general allowances for loan losses. Assets are adjusted under the
risk-based guidelines to take into account different risk characteristics, with
the categories ranging from 0% (requiring no additional capital) for assets such
as cash to 100% for the bulk of assets which are typically held by a bank
holding company, including multi-family residential and commercial real estate
loans, commercial business loans and consumer loans. Single-family residential
first mortgage loans which are not past-due (90 days or more) or non-performing
and which have been made in accordance with prudent underwriting standards are
assigned a 50% level in the risk-weighing system, as are certain
privately-issued mortgage-backed securities representing indirect ownership of
such loans. Off-balance sheet items also are adjusted to take into account
certain risk characteristics.
In addition to the risk-based capital requirements, the Federal
Reserve Board requires bank holding companies to maintain a minimum leverage
capital ratio of Tier I capital to total assets of 3.0%. Total assets for this
purpose does not include goodwill and any other intangible assets and
investments that the Federal Reserve Board determines should be deducted from
Tier I capital. The Federal Reserve Board has announced that the 3.0% Tier I
leverage capital ratio requirement is the minimum for the top-rated bank holding
companies without any supervisory, financial or operational weaknesses or
deficiencies or those which are not experiencing or anticipating significant
growth. Other bank holding companies will be expected to maintain Tier I
leverage capital ratios of at least 4.0% to 5.0% or more, depending on their
overall condition.
Financial Support of Affiliated Institutions. Under Federal Reserve
Board policy, the Company is expected to act as a source of financial strength
to the Bank and to commit resources to support the Bank in circumstances when it
might not do so absent such policy. The Congress attempted to clarify the
application of this "source-of-strength" doctrine by an amendment to Section 18
of the 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.
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
24
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the Department, the FDIC or the Congress
could have a material adverse impact on the Bank and their operations.
Pennsylvania Savings Bank Law. The Pennsylvania Banking Code of 1965,
as amended (the "Banking Code") contains detailed provisions governing the
organization, location of offices, rights and responsibilities of directors,
officers, employees and members, as well as corporate powers, savings and
investment operations and other aspects of the Bank and its affairs. The Banking
Code delegates extensive rulemaking power and administrative discretion to the
Department so that the supervision and regulation of state-chartered savings
banks may be flexible and readily responsive to changes in economic conditions
and in savings and lending practices.
One of the purposes of the Banking Code is to provide savings banks
with the opportunity to be competitive with each other and with other financial
institutions existing under other Pennsylvania laws and other state, federal and
foreign laws. A Pennsylvania savings bank may locate or change the location of
its principal place of business and establish an office anywhere in
Pennsylvania, with the prior approval of the Department.
The Department generally examines each savings bank not less
frequently than once every two years. Although the Department may accept the
examinations and reports of the FDIC in lieu of the Department's examination,
the present practice is for the Department to conduct individual examinations.
The Department may order any savings bank to discontinue any violation of law or
unsafe or unsound business practice and may direct any trustee, officer,
attorney or employee of a savings bank engaged in an objectionable activity,
after the Department has ordered the activity to be terminated, to show cause at
a hearing before the Department why such person should not be removed.
Interstate Acquisitions. The Interstate Banking Act allows federal
regulators to approve mergers between adequately capitalized banks from
different states regardless of whether the transaction is prohibited under any
state law, unless one of the banks' home states has enacted a law expressly
prohibiting out-of-state mergers before June 1997. This act also allows a state
to permit out-of-state banks to establish and operate new branches in this
state. The Commonwealth of Pennsylvania has "opted in" to this interstate merger
provision. Therefore, the prior requirement that interstate acquisitions would
only be permitted when another state had "reciprocal" legislation that allowed
acquisitions by Pennsylvania-based bank holding companies has been eliminated.
The new Pennsylvania legislation, however, retained the requirement that an
acquisition of a Pennsylvania institution by a Pennsylvania or a
non-Pennsylvania-based holding company must be approved by the Banking
Department.
25
FDIC Insurance Premiums. The deposits of the Bank are insured by the
SAIF, which is administered by the FDIC. The FDIC also administers the Bank
Insurance Fund ("BIF") which generally provides insurance for commercial bank
deposits. Each of the SAIF and the BIF are required by law to attain and
maintain a reserve ratio of 1.25% of insured deposits. As the result of the BIF
achieving a fully funded status, the FDIC promulgated a regulation in November
1995, which reduced deposit premiums paid by BIF-insured banks in the lowest
risk category from 27 basis points to zero (subject to an annual minimum of
$2,000).
Under the Federal Deposit Insurance Act ("FDIA"), insurance of
deposits may be terminated by the FDIC upon a finding that the institution has
engaged or is engaging in unsafe and unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or written agreement
entered into with the FDIC. The management of the Bank does not know of any
practice, condition or violation that might lead to termination of deposit
insurance. At September 30, 2000, 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
26
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 and lease losses. Allowance for loan and lease
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, 2000,
the Bank met each of its capital requirements.
A bank which has less than the minimum leverage capital requirement
shall, within 60 days of the date as of which it fails to comply with such
requirement, submit to its FDIC regional director for review and approval a
reasonable plan describing the means and timing by which the bank shall achieve
its minimum leverage capital requirement. A bank which fails to file such plan
with the FDIC is deemed to be operating in an unsafe and unsound manner, and
could subject the bank to a cease-and-desist order from the FDIC. The FDIC's
regulation also provides that any insured depository institution with a ratio of
Tier I capital to total assets that is less than 2.0% is deemed to be operating
in an unsafe or unsound condition pursuant to Section 8(a) of the FDIA and is
subject to potential termination of deposit insurance. However, such an
institution will not be subject to an enforcement proceeding thereunder solely
on account of its capital ratios if it has entered into and is in compliance
with a written agreement with the FDIC to increase its Tier I leverage capital
ratio to such level as the FDIC deems appropriate and to take such other action
as may be necessary for the institution to be operated in a safe and sound
manner. The FDIC capital regulation also provides, among other things, for the
issuance by the FDIC or its designee(s) of a capital directive, which is a final
order issued to a bank that fails to maintain minimum capital to restore its
capital to the minimum leverage capital requirement within a specified time
period. Such directive is enforceable in the same manner as a final
cease-and-desist order.
The Bank is also subject to more stringent Department capital
guidelines. Although not adopted in regulation form, the Department utilizes
capital standards requiring a minimum of 6% leverage capital and 10% risk-based
capital. The components of leverage and risk-based capital are substantially the
same as those defined by the FDIC.
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 FDICIA, generally limits the activities and
equity investments of FDIC-insured,
27
state-chartered banks to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met.
The FDIC has adopted final regulations pertaining to the other
activity restrictions imposed upon insured savings banks and their subsidiaries
by Section 24. Pursuant to such regulations, insured savings banks engaging in
impermissible activities may seek approval from the FDIC to continue such
activities. Savings banks not engaging in such activities but that desire to
engage in otherwise impermissible activities may apply for approval from the
FDIC to do so, however, if such bank fails to meet the minimum capital
requirements or the activities present a significant risk to the FDIC insurance
funds, such application will not be approved by the FDIC.
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.
The foregoing references to laws and regulations are brief summaries
thereof which do not purport to be complete and which are qualified in their
entirety by reference to such laws and regulations.
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.
28
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. Savings institutions such as the Bank are
permitted to establish a reserve for bad debts and to make annual additions to
the reserve. As an institution with less than $500 million in assets, the Bank
has elected to use the experience method for computing additions to its bad debt
reserve.
Under the experience method, the deductible annual addition to the
Bank's bad debt reserves is the amount necessary to increase the balance of the
reserve at the close of the taxable year to the greater of (a) the amount which
bears the same ratio to loans outstanding at the close of the taxable year as
the total net bad debts sustained during the current and five preceding taxable
years bear to the sum of the loans outstanding at the close of those six years
or (b) the lower of (i) the balance in the reserve account at the close of the
last taxable year prior to the most recent adoption of the experience method
(the "base year"), except that for taxable years beginning after 1987, the base
year is the last taxable year beginning before 1988, or (ii) if the amount of
loans outstanding at the close of the taxable year is less than the amount of
loans outstanding at the close of the base year, the amount which bears the same
ratio to loans outstanding at the close of the taxable year as the balance of
the reserve at the close of the base year bears to the amount of loans
outstanding at the close of the base year.
Legislation adopted in August 1996 (i) repealed the provision of the
Code which authorized the use of the percentage of taxable income method by
qualifying savings institutions to determine deductions for bad debts, effective
for taxable years beginning after 1995, and (ii) requires that a savings
institution recapture for tax purposes (i.e. take into income) over a six-year
period its applicable excess reserves, which for a savings institution such as
the Bank which is a "small bank," as defined in the Code, generally is the
excess of the balance of its bad debt reserves as of the close of its last
taxable year beginning before January 1, 1996 over the balance of such reserves
as of the close of its last taxable year beginning before January 1, 1988, which
recapture would be suspended for any tax year that begins after December 31,
1995 and before January 1, 1998 (thus a maximum of two years) in which a savings
institution originates an amount of residential loans which is not less than the
average of the principal amount of such loans made by a savings institution
during its six most recent taxable years beginning before January 1, 1996. The
Bank does not believe that these provisions will have a material adverse effect
on the Bank's financial condition or operations.
The above-referenced legislation also repealed certain provisions of
the Code that only apply to thrift institutions to which Section 593 applies:
(i) the denial of a portion of certain tax credits to a thrift institution; (ii)
the special rules with respect to the foreclosure of property securing loans of
a thrift institution; (iii) the reduction in the dividends received deduction of
a thrift institution ; and (iv) the ability of a thrift institution to use a net
operating loss to offset its income from a residual interest in a real estate
mortgage investment conduit. It is not anticipated that the repeal of these
provisions will have a material adverse effect on the Bank's financial condition
or operations.
29
Distributions. If the Bank distributes cash or property to its
stockholders, and the distribution is treated as being from its accumulated
pre-1988 tax bad debt reserves, the distribution will cause the Bank to have
additional taxable income. A distribution to stockholders is deemed to have been
made from accumulated bad debt reserves to the extent that (a) the reserves
exceed the amount that would have been accumulated on the basis of actual loss
experience, and (b) the distribution is a "non-dividend distribution." A
distribution in respect of stock is a non-dividend distribution to the extent
that, for federal income tax purposes, (i) it is in redemption of shares, (ii)
it is pursuant to a liquidation of the institution, or (iii) in the case of a
current distribution, together with all other such distributions during the
taxable year, it exceeds the Bank's current and post-1951 accumulated earnings
and profits. The amount of additional taxable income created by a non-dividend
distribution is an amount that when reduced by the tax attributable to it is
equal to the amount of the distribution.
Minimum Tax. The Code imposes an alternative minimum tax at a rate of
20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The alternative minimum tax is
payable to the extent such AMTI is in excess of an exemption amount. The Code
provides that an item of tax preference is the excess of the bad debt deduction
allowable for a taxable year pursuant to the percentage of taxable income method
over the amount allowable under the experience method. The other items of tax
preference that constitute AMTI include (a) tax exempt interest on newly-issued
(generally, issued on or after August 8, 1986) private activity bonds other than
certain qualified bonds and (b) for taxable years beginning after 1989, 75% of
the excess (if any) of (i) adjusted current earnings as defined in the Code,
over (ii) AMTI (determined without regard to this preference and prior to
reduction by net operating losses). Net operating losses can offset no more than
90% of AMTI. Certain payments of alternative minimum tax may be used as credits
against regular tax liabilities in future years.
Net Operating Loss Carryovers. A financial institution may carry back
net operating losses to the preceding three taxable years and forward to the
succeeding 15 taxable years. Effective for net operating losses arising in tax
years beginning after October 1, 1997, the carryback period is reduced from
three years to two years and the carryforward period is extended from 15 years
to 20 years. At September 30, 2000, 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").
30
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 generally
accepted accounting principles, as shown on its books. For fiscal years
beginning in 1983, and thereafter, NOLs may be carried forward and allowed as a
deduction for three succeeding years. This Act exempts the Bank from all other
corporate taxes imposed by Pennsylvania for state tax purposes, and from all
local taxes imposed by political subdivisions thereof, except taxes on real
estate and real estate transfers.
Subsidiary
The Bank is the only direct wholly owned subsidiary of the Company.
The Bank formed HSB, Inc., a Delaware company, as a wholly owned subsidiary of
the Bank during fiscal 1997. HSB, Inc. was formed in order to accommodate the
transfer of certain assets that are legal investments for the Bank and to
provide for a greater degree of protection to claims of creditors. The laws of
the State of Delaware and the court system create a more favorable environment
for the proposed business affairs of the subsidiary. HSB, Inc. currently manages
the investment securities for the Bank, which as of September 30, 2000 amounted
to approximately $91.0 million.
31
Item 2. Properties
As of September 30, 2000, the Company conducted its business from its
main office in Harleysville, Pennsylvania and three other full service branch
offices. The Company is also part of the MAC ATM System, which provides
customers with access to their deposits at locations throughout Pennsylvania,
Delaware, New York and New Jersey.
Net Book
Value of
Property and
Leasehold
Owned Lease Improvements
or Expiration at September
County Address Leased Date 30, 2000 Deposits
- ------------ --------------------------- ---------- --------------- --------------------- ---------------
(In Thousands)
Montgomery 271 Main Street
Harleysville, Pennsylvania Owned -- $1,297 $132,880
Montgomery Sumneytown Pike and
Perkiomenville Road
Sumneytown, Pennsylvania Owned -- 94 34,192
Montgomery 1550 Hatfield Valley Road
Hatfield, Pennsylvania Leased January 996 72,443
2064(1)
Montgomery 2301 West Main Street
Norristown, Pennsylvania Owned -- 580 70,321
------ -------
Total $2,967 $309,836
===== =======
- ------------
(1) The land at this office is leased, however, the Bank owns the building.
32
Item 3. Legal Proceedings.
- ---------------------------
The Company is not involved in any legal proceedings except
nonmaterial litigation incidental to the ordinary course of business.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
Not Applicable.
PART II.
Item 5. Market for The Company's Common Stock Related Stockholder Matters.
- -------------------------------------------------------------------------
The information required herein is incorporated by reference from
page 28 of the Company's 2000 Annual Report to Stockholders ("Annual Report").
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 6 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.
Item 8. Financial Statements and Supplementary Data.
- -----------------------------------------------------
The information required herein is incorporated by reference from
pages 12 to 27 of the Annual Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
---------------------------------------------------------------
Not Applicable
33
PART III.
Item 10. Directors and Principal Officers of the Company.
- ---------------------------------------------------------
The information required by Item 10 of Form 10-K with respect to
identification of directors and executive officers 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 24, 2001 (the "Proxy Statement"), a copy of
which will be filed with the Securities and Exchange Commission before the
meeting date.
Item 11. Executive Compensation.
The information required by Item 11 of Form 10-K is incorporated by
reference from the information contained in the sections captioned "Management
Compensation" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------------------------------------------------------------------------
The information required by Item 12 of Form 10-K is incorporated by
reference from the information contained in the section captioned "Beneficial
Ownership of Common Stock by Beneficial Owners and Management" in the Proxy
Statement.
Item 13. Certain Relationships and Related Transactions.
- --------------------------------------------------------
The information required by Item 13 of Form 10-K is incorporated by
reference from the information contained in the section captioned "Indebtedness
of Management" in the Proxy Statement.
34
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- ------------------------------------------------------------------------
(a) Contents
(1) The following financial statements are incorporated by reference
from Item 8 hereof (see Exhibit 13):
Independent Auditors' Report
Consolidated Statements of Financial Condition as of September 30, 2000
and 1999
Consolidated Statements of Income for the Years Ended September 30,
2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended September 30,
2000, 1999, and 1998
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
35
(c) Exhibits
(2) 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 Common Stock Certificate (1)
10.1 Stock Compensation Program* (2)
10.2 1995 Employee Stock Purchase Plan* (3)
10.3 1995 Stock Option Plan* (3)
10.4 2000 Stock Option Plan* (4)
10.5 Profit Sharing Incentive Plan* (5)
10.6 Employment Agreements with Edward J. Molnar, Ronald
B. Geib, and Marian Bickerstaff* (2)
13 Annual Report to Stockholders Filed herewith
22 Subsidiaries of the Registrant - Reference is made to "Item
1. Business - Subsidiaries" of this Form 10-K for the
required information --
23 Consent of Deloitte & Touche Filed herewith
- -----------------
* Denotes management compensation plan or arrangement
(1) Incorporated herein by reference to the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission ("SEC") on
February 25, 2000.
(2) Incorporated herein by reference to Harleysville Savings Bank's
Registration Statement on Form 10 filed with the Federal Home Loan Bank
Board, the predecessor to the Office of Thrift Supervision ("OTS"), on
July 1, 1987.
(3) Incorporated herein by reference to Harleysville Savings Bank's
definitive proxy statement dated December 19, 1995 filed with the
Federal Deposit Insurance Corporation.
(4) Incorporated by reference to the Company's definitive proxy statement
dated December 19, 2000 filed with the SEC.
(5) Incorporated herein by reference to Harleysville Savings Bank's Annual
Report on Form 10-K for the fiscal year ended September 30, 1989 filed
with the OTS.
36
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 20, 2000 By:/s/ Edward J. Molnar
------------------------
Edward J. Molnar
President, 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 20, 2000
- ------------------------------------
Edward J. Molnar
President, Chief Executive
Officer and Director
/s/ Brendan J. McGill December 20, 2000
- ------------------------------------
Brendan J. McGill
Senior Vice President, Treasurer
and Chief Financial Officer
/s/ Sandford A. Alderfer December 20, 2000
- ------------------------------------
Sanford A. Alderfer
Director
/s/ Paul W. Barndt December 20, 2000
- ------------------------------------
Paul W. Barndt
Director
37
/s/ Philip A. Clemens December 20, 2000
- ----------------------------------
Philip A. Clemens
Director
/s/ Mark R. Cummins December 20, 2000
- -------------------------------
Mark R. Cummins
Director
/s/ David J. Friesen December 20, 2000
- ----------------------------------
David J. Friesen
Director
/s/ George W. Meschter December 20, 2000
- -------------------------------
George W. Meschter
Director
38