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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20429
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-29709
HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-3028464
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
271 Main Street, Harleysville, Pennsylvania 19438
(Address of principal executive offices)
(Zip Code)
(215) 256-8828
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
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, 2,316,490 as of February 11, 2004
HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
AND SUBSIDIARY
Index
PAGE(S)
-------
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Financial Condition as of
December 31, 2003 Unaudited and September 30, 2003 1
Unaudited Condensed Consolidated Statements of Income for the Three
Months Ended December 31, 2003 and 2002 2
Unaudited Condensed Consolidated Statement of Comprehensive Income
for the Three Months Ended December 31, 2003 and 2002 3
Unaudited Condensed Consolidated Statement of Stockholders' Equity
for the Three Months Ended December 31, 2003 3
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 2003 and 2002 4
Notes to Unaudited Condensed Consolidated Financial Statements 5 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 - 13
Item 4. Control and Procedures 13
Part II OTHER INFORMATION
Item 1. - 6 14
Signatures 15 - 20
Harleysville Savings Financial Corporation
Condensed Consolidated Statements of Financial Condition
December 31, September 30,
2003 2003
------------- -------------
(Unaudited)
Assets
Cash and amounts due from depository institutions $ 1,620,164 $ 1,565,499
Interest bearing deposits in other banks 756,929 4,836,099
------------- -------------
Total cash and cash equivalents 2,377,093 6,401,598
Investment securities held to maturity (fair value -
December 31, $84,988,000; September 30, $84,473,000) 84,020,063 83,326,866
Investment securities available-for-sale at fair value 3,278,903 4,922,801
Mortgage-backed securities held to maturity (fair value -
December 31, $252,796,000; September 30, $225,994,000) 250,972,869 223,591,665
Mortgage-backed securities available-for-sale at fair value 7,744,164 6,655,571
Loans receivable (net of allowance for loan losses -
December 31, $1,988,000; September 30, $1,991,000) 316,065,146 297,346,404
Accrued interest receivable 3,077,254 2,801,340
Federal Home Loan Bank stock - at cost 14,578,200 13,782,100
Office properties and equipment 4,830,610 4,928,071
Deferred income taxes 350,208 369,635
Prepaid expenses and other assets 9,039,597 9,162,160
------------- -------------
TOTAL ASSETS $ 696,334,107 $ 653,288,211
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 391,871,761 $ 380,686,554
Advances from Federal Home Loan Bank 258,083,573 228,817,438
Accrued interest payable 1,127,868 1,070,969
Advances from borrowers for taxes and insurance 2,727,845 1,093,869
Accounts payable and accrued expenses 777,131 803,659
------------- -------------
Total liabilities 654,588,178 612,472,489
------------- -------------
Commitments (Note 9)
Stockholders' equity:
Preferred Stock: $.01 par value;
7,500,000 shares authorized; none issued
Common stock: $.01 par value; 15,000,000
shares authorized; issued and outstanding,
Dec. 2003, 2,316,490; Sept. 2003, 2,316,490 23,165 23,165
Paid-in capital in excess of par 7,516,160 7,584,949
Treasury stock, at cost (Dec. 2003, 39,699 shares; Sept. 2003, 49,651) (822,456) (1,028,772)
Retained earnings - partially restricted 34,975,375 34,220,406
Accumulated other comprehensive income 53,685 15,974
------------- -------------
Total stockholders' equity 41,745,929 40,815,722
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 696,334,107 $ 653,288,211
============= =============
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
December 31,
--------------------------
2003 2002
---------- ----------
INTEREST INCOME:
Interest on mortgage loans $3,754,577 $4,476,742
Interest on mortgage-backed securities 2,502,995 2,385,908
Interest on consumer and other loans 827,367 921,644
Interest and dividends on tax-exempt investments 341,500 352,011
Interest and dividends on taxable investments 637,537 559,579
---------- ----------
Total interest income 8,063,976 8,695,884
---------- ----------
Interest Expense:
Interest on deposits 2,301,002 2,945,542
Interest on borrowings 2,870,437 2,780,170
---------- ----------
Total interest expense 5,171,439 5,725,712
---------- ----------
Net Interest Income 2,892,537 2,970,172
Provision for loan losses -- --
---------- ----------
Net Interest Income after Provision
for Loan Losses 2,892,537 2,970,172
---------- ----------
Other Income:
Gain on sales of loans 6,423 --
Gain on sales of securities 109,988 --
Other income 336,880 312,672
---------- ----------
Total other income 453,291 312,672
---------- ----------
Other Expenses:
Salaries and employee benefits 875,130 850,192
Occupancy and equipment 348,451 387,593
Deposit insurance premiums 14,582 15,074
Other 508,328 437,525
---------- ----------
Total other expenses 1,746,491 1,690,384
---------- ----------
Income before Income Taxes 1,599,337 1,592,460
Income tax expense 391,000 412,300
---------- ----------
Net Income $1,208,337 $1,180,160
========== ==========
Basic Earnings Per Share $ 0.53 $ 0.52
========== ==========
Diluted Earnings Per Share $ 0.52 $ 0.51
========== ==========
Dividends Per Share $ 0.20 $ 0.16
========== ==========
See notes to unaudited condensed consolidated financial statements.
page -2-
Harleysville Savings Financial Corporation
Unaudited Condensed Consolidated Statement of Comprehensive Income
Three Months Ended
December 31,
------------------------------
2003 2002
- ---------------------------------------------------------------------------------------------------------------
Net Income $1,208,337 $ 1,180,160
Other Comprehensive Income
Unrealized gain on securities net of tax
expense - 2003, ($19,427); 2002, ($34,878) 37,711(1) 67,704
---------- -----------
Total Comprehensive Income $1,246,048 $ 1,247,864
========== ===========
(1) Disclosure of reclassification amount, net of tax for the years ended: 2003
----------
Net unrealized gain arising during the year $ 110,303
Less: Reclassification adjustment for net gains included in net income 72,592
----------
Net unrealized gain on securities $ 37,711
==========
See notes to unaudited condensed consolidated financial statements.
Harleysville Savings Financial Corporation
Unaudited Condensed Consolidated Statement of Stockholders' Equity
Paid-in Retained Accumulated
Capital Earnings- Other Total
Common in Excess Treasury Partially Comprehensive Stockholders'
Stock of Par Stock Restricted Income Equity
- ------------------------------------------------------------------------------------------------------------------- -------------
Balance at October 1, 2003 $ 23,165 $ 7,584,949 $ (1,028,772) $ 34,220,406 $ 15,974 $ 40,815,722
============ ============ ============ ============ ============ ============
Net Income 1,208,337 1,208,337
Dividends - $.20 per share (453,368) (453,368)
Treasury stock delivered under
Dividend Reinvestment Plan 39,015 114,705 153,720
Treasury stock delivered under
employee stock plan (107,804) 91,611 (16,193)
Unrealized holding gain on available
-for- sale securities, net of tax 37,711 37,711
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2003 $ 23,165 $ 7,516,160 $ (822,456) $ 34,975,375 $ 53,685 $ 41,745,929
============ ============ ============ ============ ============ ============
See notes to unaudited condensed consolidated financial statements.
page -3-
Harleysville Savings Financial Corporation
Unaudited Condensed Consolidated Statements of Cash Flows
Three Months Ended December 31,
-------------------------------
2003 2002
------------ -------------
Operating Activities:
Net Income $ 1,208,337 $ 1,180,160
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 127,976 35,573
Increase in deferred income taxes (19,427) (117,012)
Proceeds from the sale of loans held for sale 794,147 146,000
Gain on sale of investments (109,988)
Gain on sale of loans (6,423) (702)
Amortization of deferred loan fees (194,102) (151,250)
Changes in assets and liabilities which (used) provided cash:
(Decrease) increase in accounts payable and accrued
expenses and income taxes payable (26,528) 197,720
Decrease in prepaid expenses and other assets 122,563 561,433
Increase in accrued interest receivable (275,914) (94,863)
Increase (decrease) increase in accrued interest payable 56,899 (9,715)
------------ -------------
Net cash provided by operating activities 1,677,540 1,747,344
------------ -------------
Investing Activities:
Purchase of investment securities held to maturity (3,989,750) (10,227,013)
Proceeds from maturities of investment securities 3,296,553 3,499,905
Purchase of FHLB stock (796,100) (747,100)
Long-term loans originated or acquired (40,278,825) (42,149,251)
Purchase of mortgage-backed securities held to maturity (52,610,249) (67,391,860)
Purchase of mortgage-backed securities available for sale (5,010,238) (14,511,075)
Principal collected on long-term loans & mortgage-backed securities 51,947,602 114,770,974
Purchases of premises and equipment (30,515) (106,424)
------------ -------------
Net cash used in investing activities (47,471,522) (16,861,844)
------------ -------------
Financing Activities:
Net increase in demand deposits, NOW accounts
and savings accounts 7,260,515 4,686,572
Net increase (decrease) in certificates of deposit 3,924,692 (3,900,046)
Cash dividends (453,368) (361,676)
Net increase (decrease) in FHLB advances 29,266,135 (5,313,070)
Use of treasury stock 137,527 135,197
Net increase in advances from borrowers for taxes & insurance 1,633,976 1,522,000
------------ -------------
Net cash provided by (used in) financing activities 41,769,477 (3,231,023)
------------ -------------
DECREASE IN CASH AND CASH EQUIVALENTS (4,024,505) (18,345,523)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,401,598 36,302,904
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,377,093 $ 17,957,381
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 104,631 $ 48,201
Interest expense 5,114,540 5,735,427
See notes to unaudited condensed consolidated financial statements.
page -4-
Notes to Unaudited Condensed Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying unaudited 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 have
been included. The results of operations for the three months ended December 30,
2003 are not necessarily indicative of the results which may be expected for the
entire fiscal year or any other period.
Use of Estimates in Preparation of Financial Statements - The preparation of
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
statement 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 2002, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 148, Accounting for Stock-Based Compensation --Transition and
Disclosure, an amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No.
123 to provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. This Statement is effective for
financial statements for fiscal years ending after December 15, 2002. The
Company has elected to continue application of APB Opinion No. 25 and related
interpretations for stock options and, accordingly no compensation expense has
been recorded in the consolidated financial statements. 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 to stock-based
employee compensation.
For the Three Months Ended
December 31, 2003 December 31, 2002
----------------- -----------------
Net income $1,208,337 $1,180,160
Less: Stock based compensation expense -- --
---------- ----------
Proforma net income $1,208,337 $1,180,160
Earnings per share:
Basic - as reported $ 0.53 $ 0.52
Basic - pro forma 0.53 0.52
Diluted - as reported $ 0.52 $ 0.51
Diluted - pro forma 0.52 0.51
New Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities. This Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. This Statement is effective for contracts entered into or modified
after June 30, 2003, except for the provision of this statement that relate to
SFAS No.133 Implementation Issues that have been effective for fiscal quarters
that began prior to June 15, 2003 and for hedging relationships designated after
June 30, 2003. All provisions are to be applied prospectively except for the
provision of this Statement that relate to SFAS No. 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003.
These provisions are to be applied in accordance with their respective effective
dates. The adoption of this Statement has not had a material impact on the
Company's results of operations or financial condition for contracts entered
into or modified after June 30, 2003.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). This Statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003, except for mandatory redeemable financial instruments of
nonpublic entities. Currently, the Company has no financial instruments entered
into or modified after May 31, 2003 that require application of this Statement.
The adoption of this Statement has not had material impact on the Company's
results of operations or financial condition.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others. This Interpretation elaborates on
the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. This Interpretation also incorporates, without change,
the guidance in FASB Interpretation No. 34, Disclosure of Indirect Guarantees of
Indebtedness of Others, which is being superseded. The initial recognition and
initial measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements in
this Interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The Company currently has no guarantees
that would be required to be recognized, measured or disclosed under this
Interpretation.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest
Entities. The Interpretation clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The FASB has published a revision to Interpretation 46 (FIN 46R) to clarify some
of the provisions of FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, and it's subsequent revision to exempt certain entities from
its requirements. The Company is not a party to any variable interest entities
covered by the Interpretation.
page -5-
2. INVESTMENT SECURITIES HELD TO MATURITY
A comparison of amortized cost and approximate fair value of investment
securities, by maturities, is as follows:
December 31, 2003
- ---------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------------------
U.S. Government agencies
Due after 1 years through 5 years $ 998,892 $ (5,892) $ 993,000
Due after 5 years through 10 years 22,798,847 $ 199,606 (41,453) 22,957,000
Due after 10 years through 15 years 34,912,910 75,800 (759,710) 34,229,000
Tax Exempt Obligations
Due after 10 years through 15 years 3,643,328 251,098 (426) 3,894,000
Due after 15 years 21,666,086 1,249,309 (395) 22,915,000
----------- ---------- --------- -----------
Total Investment Securities $84,020,063 $1,775,813 $(807,876) $84,988,000
=========== ========== ========= ===========
September 30, 2003
- ---------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------------------
U.S. Government agencies
Due after 1 years through 5 years $ 3,000,000 $ 4,000 $ 3,004,000
Due after 5 years through 10 years 15,881,650 190,972 $ (31,622) 16,041,000
Due after 10 years through 15 years 39,154,746 180,293 (713,039) 38,622,000
Tax Exempt Obligations
Due after 10 years through 15 years 3,636,130 270,870 3,907,000
Due after 15 years 21,654,340 1,244,660 22,899,000
----------- ---------- --------- -----------
Total Investment Securities $83,326,866 $1,890,795 $(744,661) $84,473,000
=========== ========== ========= ===========
The Company has the positive intent and the ability to hold these securities to
maturity. At December 31, 2003, neither a disposal, nor conditions that could
lead to a decision not to hold these securities to maturity were reasonably
foreseen. The Company reviewed the unrealized loss position, and factors related
to such losses and has concluded there is no other than temporary impairment.
page -6-
3. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
A comparison of amortized cost and approximate fair value of investment
securities is as follows:
December 31, 2003
- ---------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------------------
Equities $ 951,014 $ 85,234 $ (1,629) $ 1,034,619
ARM Mutual Funds 2,244,284 -- -- 2,244,284
----------- ---------- --------- -----------
Total Investment Securities $ 3,195,298 $ 85,234 $ (1,629) $ 3,278,903
=========== ========== ========= ===========
September 30, 2003
- ---------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------------------
Equities $ 1,061,228 $ 56,533 $ (6,611) $ 1,111,150
Mutual Funds 3,811,651 3,811,651
----------- ---------- --------- -----------
Total Investment Securities $ 4,872,879 $ 56,533 $ (6,611) $ 4,922,801
=========== ========== ========= ===========
4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
A comparison of amortized cost and approximate fair value of mortgage-backed
securities is as follows:
December 31, 2003
- -----------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------
Collateralized mortgage obligations $ 23,893,236 $ 49,467 $(108,703) $ 23,834,000
FHLMC pass-through certificates 84,418,147 710,289 (178,436) 84,950,000
FNMA pass-through certificates 124,548,741 952,838 (557,579) 124,944,000
GNMA pass-through certificates 18,112,745 955,609 (354) 19,068,000
------------ ---------- --------- ------------
Total Mortgage-backed Securities $250,972,869 $2,668,203 $(845,072) $252,796,000
============ ========== ========= ============
September 30, 2003
- -----------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------
Collateralized mortgage obligations $ 28,584,778 $ 51,196 $(158,974) $ 28,477,000
FHLMC pass-through certificates 55,503,939 711,406 (121,345) 56,094,000
FNMA pass-through certificates 117,081,660 1,173,281 (346,941) 117,908,000
GNMA pass-through certificates 22,421,288 1,093,712 -- 23,515,000
------------ ---------- --------- ------------
Total Mortgage-backed Securities $223,591,665 $3,029,595 $(627,260) $225,994,000
============ ========== ========= ============
The Company has the positive intent and the ability to hold these securities to
maturity. At December 31, 2003, neither a disposal, nor conditions that could
lead to a decision not to hold these securities to maturity were reasonably
foreseen. The Company reviewed the unrealized loss position, and factors related
to such losses and has concluded there is no other than temporary impairment.
5. MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE
A comparison of amortized cost and approximate fair value of mortgage-backed
securities is as follows:
December 31, 2003
- -----------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------
FNMA pass-through certificates $ 7,746,429 $ 376 $ (2,641) $ 7,744,164
------------ ---------- --------- ------------
Total Mortgage-backed Securities $ 7,746,429 $ 376 $ (2,641) $ 7,744,164
============ ========== ========= ============
September 30, 2003
- -----------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------
FNMA pass-through certificates $ 6,681,291 $ 4,865 $ (30,585) $ 6,655,571
------------ ---------- --------- ------------
Total Mortgage-backed Securities $ 6,681,291 $ 4,865 $ (30,585) $ 6,655,571
============ ========== ========= ============
The Company reviewed the unrealized loss position, and factors related to such
losses and has concluded there is no other than temporary impairment.
page -7-
6. LOANS RECEIVABLE
Loans receivable consist of the following:
December 31, 2003 September 30, 2003
----------------- ------------------
Residential Mortgages $ 243,940,987 $ 237,184,337
Commercial Mortgages 951,596 1,015,228
Construction 9,383,526 10,027,955
Education 471
Savings Account 706,804 733,048
Home Equity 39,124,823 29,725,909
Automobile and other 538,389 578,193
Line of Credit 30,934,768 29,420,476
------------- -------------
Total 325,580,893 308,685,617
Undisbursed portion of loans in process (6,240,271) (7,828,925)
Deferred loan fees (1,287,829) (1,519,616)
Allowance for loan losses (1,987,647) (1,990,672)
------------- -------------
Loans receivable - net $ 316,065,146 $ 297,346,404
============= =============
The total amount of loans being serviced for the benefit of others was
approximately $3.2 million and $2.6 million at December 31, 2003 and September
30, 2003, respectively.
The following schedule summarizes the changes in the allowance for loan losses:
Three Months Ended December 31,
-------------------------------
2003 2002
----------- -----------
Balance, beginning of period $ 1,990,672 $ 2,034,832
Amounts charged-off (3,088) (3,251)
Loan recoveries 63 --
----------- -----------
Balance, end of period $ 1,987,647 $ 2,031,581
=========== ===========
7. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classification as
follows:
December 31, 2003 September 30, 2003
----------------- ------------------
Land and buildings $ 5,349,486 $ 5,404,864
Furniture, fixtures and equipment 3,679,834 3,658,034
Branch office in construction 64,094
Automobiles 24,896 24,896
------------- -------------
Total 9,118,310 9,087,794
Less accumulated depreciation (4,287,700) (4,159,723)
------------- -------------
Net $ 4,830,610 $ 4,928,071
============= =============
8. DEPOSITS
Deposits are summarized as follows:
December 31, 2003 September 30, 2003
----------------- ------------------
NOW accounts $ 19,994,735 $ 17,340,055
Checking accounts 10,998,137 10,047,306
Money Market Demand accounts 100,804,517 96,969,856
Passbook and Club accounts 3,847,697 4,027,354
Certificate accounts 256,226,675 252,301,983
------------- -------------
Total deposits $ 391,871,761 $ 380,686,554
============= =============
The aggregate amount of certificate accounts in denominations of more than
$100,000 at December 31, 2003 amounted to approximately $23.7 million.
page -8-
9. COMMITMENTS
At December 31, 2003, the following commitments were outstanding:
Origination of fixed-rate mortgage loans $ 6,571,500
Origination of adjustable-rate mortgage loans 1,337,500
Unused line of credit loans 33,664,069
Loans in process 6,240,271
-----------
Total $47,813,340
===========
10. DIVIDEND
On January 28, 2004, the Board of Directors declared a cash dividend of $.20 per
share payable on February 25, 2004 to the stockholders' of record at the close
of business on February 11, 2004.
11. EARNINGS PER SHARE
The following average shares were used for the computation of earnings per
share:
For the Three Months Ended
December 31,
--------------------------------
2003 2002
--------- ---------
Basic 2,269,265 2,263,380
Diluted 2,327,971 2,309,409
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:
December 31, September 30,
2003 2003
Weighted Weighted
Interest Interest
Maturing Period Amount Rate Amount Rate
- --------------------------------------------------------------------------------
1 to 12 months $ 42,830,567 1.81% $ 23,896,414 2.79%
13 to 24 months 24,951,921 5.32% 26,555,770 5.39%
25 to 36 months 23,365,168 3.88% 11,477,325 3.82%
37 to 48 months 2,500,000 4.32% 10,786,600 4.66%
49 to 60 months 72,435,917 4.82% 59,101,329 5.07%
61 to 72 months 5,000,000 5.60% 10,000,000 5.55%
73 to 84 months 15,000,000 6.08% -- 0.00%
85 to 120 months 72,000,000 4.70% 87,000,000 4.94%
------------------------------------------------
Total $258,083,573 4.34% $228,817,438 4.76%
================================================
The advances are collateralized by Federal Home Loan Bank ("FHLB") stock and
substantially all first mortgage loans. The Company has a line of credit of
which $20.5 million out of $30.0 was used at December 31, 2003.and none was used
as of September 30, 2002. Included in the table above at December 31, 2003 and
September 30, 2002 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.
13. REGULATORY CAPITAL REQUIREMENTS
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 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 December 31, 2003,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2003, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
The Bank's actual capital amounts and ratios are also presented in the table.
To Be Considered Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2003
Tier 1 Capital (to assets) $41,597,000 6.05% $27,498,000 4.00% $34,373,000 5.00%
Tier 1 Capital (to risk weighted assets) 41,597,000 13.73% 12,115,000 4.00% 18,172,000 6.00%
Total Capital (to risk weighted assets) 43,623,000 14.40% 24,230,000 8.00% 30,287,000 10.00%
As of September 30, 2003
Tier 1 Capital (to assets) $40,630,000 6.20% $26,193,000 4.00% $32,742,000 5.00%
Tier 1 Capital (to risk weighted assets) 40,630,000 14.37% 11,313,000 4.00% 16,969,000 6.00%
Total Capital (to risk weighted assets) 42,644,000 15.08% 22,626,000 8.00% 28,282,000 10.00%
page -9-
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.
Critical Accounting Policies and Judgments
The Company's condensed consolidated financial statements are prepared based on
the application of certain accounting policies, the most significant of which
are described in Note 1, Summary of Significant Accounting Policies. Certain of
these policies require numerous estimates and strategic or economic assumptions
that may prove inaccurate or subject to variations and may significantly affect
the Company's reported results and financial position for the period or in
future periods. Changes in underlying factors, assumptions, or estimates in any
of these areas could have a material impact on the Company's future financial
condition and results of operations.
Allowance for Loan Losses - The allowance for loan losses is increased by
charges to income and decreased by charge-offs (net of recoveries). The
Company's periodic evaluation of the allowance is based on known and inherent
risks in the portfolio, past loan loss experience, current economic conditions,
trends within the Company's market area and other relevant factors. The first
step in determining the allowance for loan losses is recognizing a specific
allowance on individual impaired loans. Special mention, nonaccrual, substandard
and doubtful residential and other consumer loans are considered for impairment.
An allowance is recognized for loan losses in the remainder of the loan
portfolio based on known and inherent risk characteristics in the portfolio,
past loss experience and prevailing market conditions. Because evaluating losses
involves a high degree of management judgment, a margin is included for the
imprecision inherent in making these estimates. While management believes that
the allowance is adequate to absorb estimated credit losses in its existing loan
portfolio, future adjustments may be necessary in circumstances that differ
substantially from the assumptions used in evaluating the adequacy of the
allowance for loan losses.
Changes in Financial Position for the Three Month Period Ended December 31, 2003
Total assets at December 31, 2003 were $696.3 million, an increase of $43.1
million or 6.6% for the three month period. This increase was primarily the
result of an increase in mortgage-backed securities held to maturity, loan
receivables, mortgage-backed securities available for sale, Federal Home Loan
Bank stock, investment securities held to maturity of $27.4 million, $18.7
million, $1.1 million, $796,000 and $693,000 respectively. This growth is one of
the ways the Company manages it's capital based on its business plan. The
increase was partially offset by decrease cash and cash equivalents, investment
securities available for sale and other assets of $4.0 million, $1.6 million and
$123,000 respectively.
During the three-month period ended December 31, 2003, total deposits increased
by $11.2 million to $391.9 million. Advances from borrowers for taxes and
insurance also increased by $1.6 million. There was also an increase in advances
from Federal Home Loan Bank of $29.3 million, which was used for the origination
of loans and the purchase of mortgage-backed securities. This growth is a result
of current market conditions and the execution of our business plan.
Comparisons of Results of Operations for the Three Month Period Ended December
31, 2003 with the Three Month Period Ended December 31, 2002
Net Interest Income
The decrease in the net interest income for the three month period ended
December 31, 2003 when compared to the same period in 2002 can be attributed to
the decrease in interest rate spread from 1.77% in 2002 to 1.57% in 2003. The
decrease in the interest rate spread was partially offset by an increase in the
interest earning assets of $65.9 million.
page -10-
Total interest income was $8.1 million for the three month period ended December
31, 2003 compared to $8.7 million for the comparable period in 2002. The
increase in the average balance of interest-earning assets was offset by a
decrease in the average yield for the interest-earning assets to 4.84% for the
three month period ended December 31, 2003 from 5.79% for the comparable period
in 2002.
Total interest expense decreased to $5.2 million for the three month period
ended December 31, 2003 from $5.7 million for the comparable period in 2002.
This decrease was the result of a decrease in the average cost on
interest-bearing liabilities to 3.27% for the three month period ended December
31, 2003 from 4.02% for the comparable period ended December 31, 2002. This
decrease is the result of a lower level of interest paid on deposits for the
three month period ended December 31, 2003 when compared to the same period
ended December 31, 2002. This was partially offset by an increase in the average
interest-bearing liabilities to $632.4 million for the three month period ended
December 31, 2003 from $570.0 million for the comparable period ended December
31, 2002.
Other Income
Other income increased to $453,000 for the three month period ended December 31,
2003 from $313,000 for the comparable period in 2002. The increase is due to an
increase in fee generating services, related to the origination of mortgages,
offered by the Company and the sale of loans and investments available for sale.
Other Expenses
For the three month period ended December 31, 2003, other expenses increased by
$56,000 or 3.32% to $1.7 million. Management believes these are reasonable
increases in the cost of operations after considering the effects of inflation,
the impact of the 12.6% growth in the assets of the Company. The annualized
ratio of expenses to average assets for the three month period ended December
31, 2003 and 2002 was 1.02% and 1.09%, respectively.
Income Taxes
The Company made provisions for income taxes of $391,000 for the three-month
period ended December 31, 2003 compared to $412,000 for the comparable period in
2002. The primary reason for the decrease in the percentage of tax expense in
2003 was the decrease in amount of taxable income resulting from a increase in
the percentage of tax-exempt securities to total assets.
Liquidity and Capital Recourses
As of December 31, 2003, the Company had $47.8 million in commitments to fund
loan originations, disburse loans in process and meet other obligations.
Management anticipates that the majority of these commitments will be funded
within the next six months by means of normal cash flows and new deposits. The
amount of certificate accounts, which are scheduled to mature during the 12
months ending December 31, 2004, is $122.8 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 $478.8 million at December 31, 2003 of which $258.1 million was outstanding
at December 31, 2003.
The Bank's net income for the quarter ended December 31, 2003 of $1,293,000
increased the Bank's stockholders' equity to $41.8 million or 6.1% of total
assets. This amount is well in excess of the Bank's minimum regulatory capital
requirement.
page -11-
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 Executive Officer presents the Board of Directors with a
report, which outlines the Company's asset and liability "gap" position in
various time periods. The "gap" is the difference between interest-earning
assets and interest-bearing liabilities which mature or reprice over a given
time period. He also meets weekly with the Company's other senior officers to
review and establish policies and strategies designed to regulate the Company's
flow of funds and coordinate the sources, uses and pricing of such funds. The
first priority in structuring and pricing the Company's assets and liabilities
is to maintain an acceptable interest rate spread while reducing the effects of
changes in interest rates and maintaining the quality of the Company's assets.
The following table summarizes the amount of interest-earning assets and
interest-bearing liabilities outstanding as of December 31, 2003, 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 Harleysville Savings' 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.
page -12-
1 Year 1 to 3 3 to 5 Over 5
or less Years Years Years Total
--------- --------- -------- -------- --------
Interest-earning assets
Mortgage loans $ 53,853 $ 70,541 $ 43,538 $ 74,752 $242,684
Mortgage-backed securities 71,031 67,570 69,367 50,749 258,717
Consumer and other loans 48,948 15,943 5,434 3,056 73,381
Investment securities and other investments 23,947 1,317 3,397 92,891 121,552
--------- --------- -------- -------- --------
Total interest-earning assets 197,779 155,371 121,736 221,448 696,334
--------- --------- -------- -------- --------
Interest-bearing liabilities
Passbook and Club accounts -- -- -- 3,848 3,848
NOW and checking accounts -- -- -- 22,832 22,832
Money Market Deposit accounts 27,941 -- -- 52,585 80,526
Choice Savings 5,070 15,209 20,279
Certificate accounts 122,796 86,238 47,193 -- 256,227
Borrowed money 62,733 51,829 51,518 92,000 258,080
--------- --------- -------- -------- --------
Total interest-bearing liabilities 218,540 138,067 98,711 186,474 641,792
--------- --------- -------- -------- --------
Repricing GAP during the period $ (20,761) $ 17,304 $ 23,025 $ 34,974 $ 54,542
========= ========= ======== ======== ========
Cumulative GAP $ (20,761) $ (3,457) $ 19,568 $ 54,542
========= ========= ======== ========
Ratio of GAP during the period to total assets -3.02% 2.52% 3.35% 5.09%
========= ========= ======== ========
Ratio of cumulative GAP to total assets -3.02% -0.50% 2.85% 7.94%
========= ========= ======== ========
Item 4. Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer
and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this report.Based
on such evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
regulations and are operating in an effective manner.
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred
during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
page -13-
Part II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of Stockholders was held on January
28, 2004
(c) There were 2,271,261 shares of Common Stock of the
Company eligible to be voted at the Annual Meeting and
1,940,951 shares were represented at the meeting by the
holders thereof, which constituted a quorum. The items
voted upon at the Annual Meeting and the vote for each
proposal were as follows:
1 Election of directors for a three-year term:
FOR WITHHELD
--- --------
Sanford L. Alderfer 1,939,645 737
Mark R. Cummins 1,939,951 431
Ronald B. Geib 1,938,686 1,696
Name of each director whose term of office
continued:
David J. Friesen
George W. Meschter
Paul W. Barndt
Philip A. Clemens
Edward J. Molnar
2 Proposal to ratify the appointment by the board of
Deloitte & Touche, LLP as the Company's
independent auditors for the year ending September
30, 2004
FOR AGAINST ABSTAIN
--- ------- -------
1,937,469 1,563 1,350
Each of the proposals were adopted by the stockholders
of the Company.
Item 1,2,3
and 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K
None
page -14-