HARLEYSVILLE SAVINGS
--------------------------------------------------
F I N A N C I A L C O R P O R A T I O N
--------------------------------------------------
[PHOTO] [PHOTO]
2 0 0 5 A N N U A L R E P O R T
[PHOTO] [PHOTO]
BOARD OF DIRECTORS
[PHOTO BOARD OF DIRECTORS]
Seated (L to R): Charlotte A. Hunsberger, Ronald B. Geib, Edward J. Molnar, Philip A. Clemens, David J. Friesen,
Standing (L to R): Mark R. Cummins, James L. Rittenhouse, Sanford L. Alderfer, George W. Meschter
SENIOR OFFICERS
[PHOTO] [PHOTO] [PHOTO] [PHOTO]
EDWARD J. MOLNAR RONALD B. GEIB MARIAN BICKERSTAFF BRENDAN J. MCGILL
Chairman and President and Senior Vice President Senior Vice President
Chief Executive Officer Chief Operating Officer and Chief Lending Officer and Chief Financial Officer
Selected Consolidated Financial and Other Data
Selected Balance Sheet Data:
As of September 30,
(in thousands, except per share data) 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------------------------------
Total Assets $ 766,990 $ 718,232 $ 653,288 $ 620,264 $ 558,388
Mortgage-backed securities held to maturity 263,964 261,292 223,592 163,815 167,727
Mortgage-backed securities available-for-sale 1,045 3,795 6,656 29,515 -
Loans receivable - net 366,007 338,584 297,346 295,354 290,213
Investment securities held to maturity 87,364 68,162 83,327 55,665 62,202
Investment securities available-for-sale 2,835 7,715 4,923 12,000 3,294
Other investments (1) 23,971 19,903 18,618 45,369 16,538
Deposits 418,980 405,231 380,687 371,947 350,147
FHLB advances and other borrowings 297,268 265,953 228,817 207,502 171,309
Total stockholders' equity 47,576 44,313 40,816 37,868 34,264
Book value per share (3) 12.20 11.56 10.81 10.05 9.19
Selected Operations Data:
Year Ended September 30,
2005 2004 2003 2002 2001
---------------------------------------------------------------------------------------------------------
Interest income $ 35,902 $ 32,636 $ 33,123 $ 35,218 $ 36,303
Interest expense 22,747 20,391 21,673 24,226 26,583
--------- --------- --------- --------- ---------
Net interest income 13,155 12,245 11,450 10,992 9,720
Provision for loan losses (40) - - - -
--------- --------- --------- --------- ---------
Net interest income after provision
for loan losses 13,195 12,245 11,450 10,992 9,720
Gain on sales of loans and securities 115 326 247 7 191
Other income 1,351 1,282 1,270 1,068 1,055
Other expense 7,965 7,399 6,897 6,434 5,832
--------- --------- --------- --------- ---------
Income before taxes 6,696 6,454 6,070 5,633 5,134
Income tax expense 1,693 1,604 1,476 1,218 1,219
--------- --------- --------- --------- ---------
Net income $ 5,003 $ 4,850 $ 4,594 $ 4,415 $ 3,915
========= ========= ========= ========= =========
Earnings per share - basic (3) $ 1.29 $ 1.28 $ 1.21 $ 1.18 $ 1.06
Earnings per share - diluted (3) 1.27 1.25 1.19 1.16 1.04
Dividends per share (3) 0.58 0.48 0.40 0.32 0.29
Selected Other Data:
Year Ended September 30,
2005 2004 2003 2002 2001
---------------------------------------------------------------------------------------------------------
Return on average assets (2) 0.67% 0.70% 0.72% 0.75% 0.74%
Return on average equity (2) 10.91% 11.44% 11.68% 12.31% 12.00%
Dividend payout ratio 44.96% 37.56% 32.67% 27.55% 27.27%
Average equity to average assets (2) 6.15% 6.17% 6.14% 6.10% 6.15%
Interest rate spread (2) 1.65% 1.64% 1.64% 1.71% 1.63%
Net yield on interest-earning assets (2) 1.82% 1.80% 1.84% 1.92% 1.90%
Ratio of non-performing assets to total
assets at end of period 0.03% 0.04% 0.04% 0.03% 0.05%
Ratio of interest-earning assets to
interest-bearing liabilities at end
of period 105.4% 105.6% 105.6% 105.2% 105.1%
Full service banking offices at end of period 5 5 5 5 5
(1) Includes interest-bearing deposits at other depository institutions &
stock of the Federal Home Loan Bank of Pittsburgh.
(2) All ratios are based on average monthly balances during the indicated
periods.
(3) The number of shares and per share information for all periods presented
has been restated to reflect the five for three stock split as of February
24, 2005.
2005 ANNUAL REPORT 1
Chairman's Report to the Stockholders
To our Stockholders:
We are pleased to report to you, that the Company experienced a ninth
consecutive year of record earnings results. Net income amounted to $5,004,000,
which is the most that Harleysville Savings has earned in any year in its
90-year history.
Net income for the year amounted to $1.27 per share on a diluted basis compared
to $1.25 per diluted share for the past fiscal year. Return on average equity
was 10.91% and return on average assets was .67% for the year. Stockholders'
equity increased to $12.20 per share compared to $11.56 per share a year ago.
During fiscal year 2005 assets increased 6.8% to $767 million.
Providing a fair and reasonable return for our stockholders is very important,
and is one of the four cornerstone principles in the Company's Mission
Statement. The Company's Board of Directors increased the cash dividend twice
during this past fiscal year, from $.132 per share to $.16 per share. This was
an increase of 21% and was the 73rd consecutive quarter that the Company has
paid a cash dividend and the 18th consecutive year that the cash dividend has
been increased. Stockholders also received a five-for-three stock split in
February. In a period of time when the market return for shares of banks and
thrifts overall was a negative 2.85% (SNL Financial Index), Harleysville
Savings' stockholders have experienced a total return of 3.7 % for the fiscal
year. Many of our stockholders are long-term investors who have enjoyed an
annual average return of 16.3% over the past five years and an average annual
return of 13.2% over the past ten years when taking into account market
appreciation and the payment of cash dividends.
[PICTURE]
Turning to market conditions that have influenced the financial performance of
the Company, the Federal Reserve Board (FOMC) has continued to increase short
term interest rates over the past year. Since June 30, 2004, the FOMC has
increased the federal funds rate twelve times from 1.00% to 4.00%. The FOMC has
turned their attention to inflationary concerns and many economists expect them
to continue raising short term interest rates several more times. The interest
rate yield curve (the difference between short term rates and long term rates)
has flattened considerably over this past year and it has been a challenge to
maintain the Company's net interest rate spread. Despite these challenges, net
interest income increased 7.4% to $13,155,000 for the twelve month period
compared to $12,245,000 for the same period last year.
During this past year, management has been laying the foundation to expand
relationships with small business customers in our market area to complement the
Company's retail business. As has been our practice with any new activity that
we have pursued over the years, management has invested a considerable amount of
time to establish a strong base of policies and operating procedures to assure
that the Company's key principles remain intact as we expand our business
opportunities. Those key principles that have contributed so much to our success
are:
High asset quality
Exceptional operating efficiencies
Effective capital management
Genuine quality customer service
High asset quality has been a distinguishing characteristic of Harleysville
Savings throughout its history as a public company. The Company's non-performing
and 90-day delinquent loans amounted to only $260,000 or 0.03% of assets as of
September 30, 2005. Loan loss reserves are in place to protect against possible
losses. The Company has $1,968,000 or $7.30 of reserves in place for every $1.00
of assets that are either classified as non-performing or are 90 days or more
delinquent. As we begin to expand our boundaries and establish relationships
with small business customers, high asset quality will be a major focus of our
activities.
2 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
[PICTURE]
Expanded small business relationships will enable the Company to leverage its
investment in new technology to implement the electronic processing of checks
for our customers. The Company's Information Systems Manager, Adrian Gordon, and
his team deserve credit for completing the task of installing the Company's
Check 21 Processing system by this past summer, which has enabled all of our
branches to process checks electronically for our customers. As more banks
throughout the country begin to exchange checks electronically, the cost of
producing substitute checks will drop and the efficiencies created by the
Company's new technology will result in even greater profitability for the
Company. Image technology brings check processing into the 21st century by
eliminating the need for hand delivery of checks. The Company will be well
positioned to take advantage of these opportunities as they develop because of
the technology advantages of electronic check image exchange.
On November 1st, construction was started for our newest branch location along
the rapidly expanding "Route 422 Corridor". Our Upper Providence Office will be
located at the intersection of Township Line Road and Ridge Pike in Upper
Providence Township. This strategically placed branch will be in the heart of an
expanded commercial area as new shopping centers are planned for each of the
other three corners of that busy intersection. We look forward to the Upper
Providence branch office to be doing business by the summer of 2006.
Customer expectations continue to motivate us to provide new products and
services. During this past year, we have expanded our product offerings to meet
those expectations in a number of ways: We offered a new Prime Money Market
Account with the interest rate tied to the prime rate; iSave checking and iSave
savings accounts for our teenage customers; a Rising Rate Certificate of Deposit
which offers our customers some protection against rising interest rates; Sage
Scholars which provides opportunity for our savings account customers to earn
Tuition Rewards; E-statement for our checking account customers; Bounce
Protection for our checking account customers; Live ATM card services; i-Pay for
our on-line banking system; and several new consumer loan products.
For many older Americans, it's difficult to keep up with the financial pressures
of the new economy and to live life to its fullest. We're dedicated to helping
seniors to continue living in the home where they're comfortable by turning the
equity they've built into extra cash. One of the ways that we are able to do
this is through the Reverse Mortgage product that is provided through our
relationship with Financial Freedom, the largest provider of reverse mortgages
in the USA.
2005 ANNUAL REPORT 3
[PICTURE]
Technology may continue to provide opportunity for efficiencies, but
Harleysville Savings would not enjoy the success it does without the outstanding
contribution from the Company's greatest asset, our talented and experienced
employees. Long-term employees bring stability and instill confidence that
develops strong customer relationships, which are paramount to building long
term success.
Fourteen of our employees were recognized this year for long-term service.
Receiving awards for five years were: Barbara Eyrich, Larry Fisher, Peggy
Keeley, Janine Losinno, Sonal Patel and Alicia Vaca. Receiving awards for ten
years were: Elaine Bergey, Janice Blair, Marie Fazekas, Ann Tomaselli, and
Sherry Williamson. Receiving an award for fifteen years was Sue Keeler.
Receiving an award for twenty years was Barbara Marcy and receiving an award for
30 years of service was Ron Geib.
The year 2005 was our 90th anniversary as a community financial institution and
we are proud of what our employees - both past and present - have accomplished
during those years. The old fashioned principles of honesty and integrity are
still important in what we do every day. That is why it has been and continues
to be our desire to follow a business philosophy that is consistent with the
Proverb that God has given us: "A good name is to be more desired than great
riches."
Looking ahead to the year 2006 and beyond, we are very optimistic about the new
opportunities that exist for Harleysville Savings. We live and work in a great
market area, which includes the county with the third highest population, and
has the second highest per capita income in the state of Pennsylvania.
Montgomery County's housing market and employment base are also among the
strongest in Pennsylvania.
We want to express our appreciation to you for the confidence that you have
expressed in the management of this Company. We hope to see you at our Annual
Stockholders' meeting in January.
Sincerely,
/s/ Edward J. Molnar
Edward J. Molnar
Chairman and Chief Executive Officer
4 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-Looking Statements
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," "except," "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 consolidated financial statements are prepared based on the
application of certain accounting policies, the most significant of which are
described in Note 2, Summary of Significant Accounting Policies. Certain of
these policies require numerous estimates and strategic or economic assumptions
that may prove inaccurate or subject to variations and may significantly affect
the Company's reported results and financial position for the period or in
future periods. Changes in underlying factors, assumptions, or estimates in any
of these areas could have a material impact on the Company's future financial
condition and results of operations.
Analysis And Determination of the Allowance for Loan Losses - The allowance for
loan losses is a valuation allowance for probable losses inherent in the loan
portfolio. The Company evaluates the need to establish allowances against losses
on loans on a monthly basis. When additional allowances are necessary, a
provision for loan losses is charged to earnings.
Our methodology for assessing the appropriateness of the allowance for loan
losses consists of three key elements: (1) specific allowances for certain
impaired or collateral-dependent loans; (2) a general valuation allowance on
certain identified problem loans; and (3) a general valuation allowance on the
remainder of the loan portfolio. Although we determine the amount of each
element of the allowance separately, the entire allowance for loan losses is
available for the entire portfolio.
Specific Allowance Required for Certain Impaired or Collateral-Dependent Loans:
We establish an allowance for certain impaired loans for the amounts by which
the discounted cash flows (or collateral value or observable market price) are
lower than the carrying value of the loan. Under current accounting guidelines,
a loan is defined as impaired when, based on current information and events, it
is probable that a creditor will be unable to collect all amounts due under the
contractual terms of the loan agreement.
General Valuation Allowance on Certain Identified Problem Loans - We also
establish a general allowance for classified loans that do not have an
individual allowance. We segregate these loans by loan category and assign
allowance percentages to each category based on inherent losses associated with
each type of lending and consideration that these loans, in the aggregate,
represent an above-average credit risk and that more of these loans will prove
to be uncollectible compared to loans in the general portfolio.
General Valuation Allowance on the Remainder of the Loan Portfolio - We
establish another general allowance for loans that are not classified to
recognize the inherent losses associated with lending activities, but which,
unlike specific allowances, has not been allocated to particular problem assets.
This general valuation allowance is determined by segregating the loans by loan
category and assigning allowance percentages based on our historical loss
experience, delinquency trends and management's evaluation of the collectibility
of the loan portfolio. The allowance is adjusted for significant factors that,
in management's judgment, affect the collectibility of the portfolio as of the
evaluation date. These significant factors may include changes in lending
policies and procedures, changes in existing general economic and business
conditions affecting our primary lending areas, credit quality trends,
collateral value, loan volumes and concentrations, seasoning of the loan
portfolio, loss experience in particular segments of the portfolio, duration of
the current business cycle and bank regulatory examination results. The applied
loss factors are reevaluated monthly to ensure their relevance in the current
economic environment.
Overview
Harleysville Savings Financial Corporation (the "Company"), a bank holding
company, of which Harleysville Savings Bank (the "Bank"), is a wholly owned
subsidiary, was formed in February 2000. For purposes of this discussion, the
Company, including its wholly owned subsidiary, will be referred to as the
"Company." The Company's earnings are primarily dependent upon its net interest
income, which is determined by (i) the difference between yields earned on
interest-earning assets and rates paid on interest-bearing liabilities
("interest rate spread") and (ii) the relative amounts of interest-earning
assets and interest-bearing liabilities outstanding. The Company's interest rate
spread is affected by regulatory, economic and competitive factors that
influence interest rates, loan demand and deposit flows. The Company, like other
thrift institutions, is vulnerable to an increase in interest rates to the
extent that interest-bearing liabilities mature or reprice more rapidly than
interest-earning assets. To reduce the effect of adverse changes in interest
rates on its operations, the Company has adopted certain asset and liability
management strategies, described below.
2005 ANNUAL REPORT 5
The Company's earnings are also affected by, among other factors, other
non-interest income, other expenses and income taxes.
The Company's total assets at September 30, 2005, amounted to $767.0 million,
compared to $718.2 million as of September 30, 2004. Deposits as of September
30, 2005, totaled $419.0 million, compared to $405.2 million at September 30,
2004. Stockholders' equity totaled $47.6 million as of September 30, 2005,
compared to $44.3 million at September 30, 2004.
During fiscal 2005, net interest income after provision for loan losses
increased $951,000 or 7.8% from the prior fiscal year. This increase was the
result of 6.4% growth in the average interest-earning assets, which was offset
by a 6.7% growth in average interest-bearing liabilities, and a slight increase
in the interest rate spread from 1.64% in fiscal 2004 to 1.65% in fiscal 2005.
Earnings for fiscal 2005 were $5.0 million compared to $4.9 million and $4.6
million for the years ended September 30, 2004 and 2003, respectively. The
Company's return on average assets (net income divided by average total assets)
was 0.67% during fiscal 2005 compared to 0.70% and 0.72% during fiscal 2004 and
2003, respectively. Return on average equity (net income divided by average
equity) was 10.91% during fiscal 2005 compared to 11.44% during fiscal 2004 and
11.68% during fiscal 2003. This decline in return on average assets and return
on average equity during the three-year period was a direct result of increased
prepayments of higher yielding assets and the Company reinvesting those funds
into a shorter-term asset with a lower yield. The repositioning of the portfolio
into short-term assets will allow the Company to have more cash flow to reinvest
in a rising rate environment.
Recent Accounting Pronouncements - In December 2004, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 123R (revised 2004), "Share-Based Payment", which revises SFAS No.
123, "Accounting for Stock-Based Compensation", and supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees". This Statement requires an
entity to recognize the cost of employee services received in exchange for an
award of equity investment based on grant-date fair value of the award. That
cost will be recognized over the period during which an employee is required to
provide service in exchange for the award. Effective October 1, 2005 the Company
will be required to recognize compensation expense for the fair value of stock
options that are granted or vest after that date. Management determined based on
current option levels, the impact is not expected to be material on the
Company's consolidated financial statements.
In March 2005, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 107 which expressed the views of the SEC regarding
the interaction between SFAS No. 123R and certain SEC rules and regulations. SAB
No. 107 provides guidance related to the valuation of share-based payment
arrangements for public companies, including assumptions such as expected
volatility and expected term.
Results of Operations
The table on the next page sets forth for and as of the periods indicated,
information regarding: (i) the total dollar amounts of interest income from
interest-earning assets and the resulting average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resulting
average costs; (iii) net interest income; (iv) interest rate spread; (v) net
interest-earning assets; (vi) the net yield earned on interest-earning assets;
and (vii) the ratio of total interest-earning assets to total interest-bearing
liabilities. Average balances are calculated on a monthly basis.
Net Interest Income
Net interest income after provision for loan losses increased by $951,000 or
7.77% in fiscal 2005, and increased by $798,000 or 6.99% in fiscal 2004 over the
respective prior periods. The increase in the net interest income after
provision for loan losses in 2005 and 2004 was due to a higher amount of
interest-earning assets and an increase in the interest rate spread. The driving
factors will be discussed below in Interest Income and Interest Expense.
Interest Income
Interest income on mortgage loans increased by $413,000 or 2.8% in fiscal 2005
and decreased by $2.0 million or 11.9% in fiscal 2004 from the respective prior
years. During fiscal 2005, the average balance of mortgage loans increased $16.0
million or 6.5% and the yield decreased by 21 basis points. The decrease in the
yield of mortgage loans reflects the lower interest rate environment and the
increase in refinancing of existing loans at lower rates. During fiscal 2004,
the average balance of mortgage loans increased $17.6 million or 7.7% and the
yield decreased by 134 basis points. The majority of loans originated during the
2005 year were fixed rate mortgages. The increase in interest income on
mortgage-backed securities reflected an increase of $13.2 million or 5.1% in the
average balance, which was also benefited by a 28 basis point increase in yield
earned during fiscal 2005. During fiscal 2004, the increase in interest income
on mortgage-backed securities reflected an increase of $26.0 million or 11.2% in
the average balance, which was also benefited by a 5 basis point increase in
yield. The increase in the balance of mortgage-backed securities reflects the
need the Company had for mortgage-related products that the Company was not able
to originate in the local market area. The Company needed a higher volume of
mortgage-backed securities during fiscal 2004 and 2005 to offset the flat
interest rate spread. In 2005, the increase in interest income on consumer and
other loans reflected an increase in the average balance due to growth in home
equity loans of $13.2 million or 18.0%, and an increase in the yield to 5.35%.
In 2004, the increase in interest income on consumer and other loans reflected
an increase in the average balance due to growth in home equity loans of $10.9
million or 17.5%, which was partially offset by a decrease in the yield to
4.97%.
Interest and dividends on investments increased by $604,000 or 16.4% in fiscal
2005 over the respective prior years. During fiscal 2005, the increase resulted
from the average balance on investments increasing $1.3 million or 1.3% and a 55
basis point increase. The increase in the average balance in 2005 reflects funds
that were redeployed from normal cash flows. Interest and dividends on
investments increased by $178,000 or 5.1% in fiscal 2004 over the respective
prior years. During fiscal 2004, the increase resulted from an increase of 11
basis points and an increase in the average balance of $1.9 million or 1.9%.
Interest Expense
Interest expense on deposits increased $1.2 million or 13.6% in fiscal 2005 and
decreased by $1.5 million or 14.3% in fiscal 2004 as compared to the respective
prior years. In fiscal 2005, the average balance increased $14.7 million or 3.8%
with a
6 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
As of
Sept 30, For The Year Ended September 30,
---------------------------------------------------------------------------------------------------
2005 2005 2004 2003
-------- --------------------------- --------------------------- ----------------------------
Average Yield/ Average Yield/ Average Yield/
Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- --------------------------- --------------------------- ----------------------------
Interest-earning assets:
Mortgage loans (2) (3) 5.69% $ 263,400 $ 15,331 5.82% $ 247,358 $ 14,918 6.03% $ 229,772 $ 16,937 7.37%
Mortgage-backed securities 4.54% 271,554 11,666 4.30% 258,347 10,398 4.02% 232,383 9,230 3.97%
Consumer and other
loans (3) 5.68% 86,257 4,614 5.35% 73,098 3,633 4.97% 62,207 3,447 5.54%
Investments 4.14% 100,915 4,291 4.25% 99,652 3,687 3.70% 97,747 3,509 3.59%
-------- --------- -------- ------ --------- -------- ------ ---------- -------- ------
Total interest-earning
assets 5.04% 722,126 35,902 4.97% 678,455 32,636 4.81% 622,109 33,123 5.32%
-------- --------- -------- ------ --------- -------- ------ ---------- -------- ------
Interest-bearing liabilities:
Deposits 2.92% 401,920 10,337 2.57% 387,203 9,100 2.35% 370,823 10,624 2.87%
Borrowings 4.38% 283,522 12,410 4.38% 255,159 11,291 4.43% 218,415 11,048 5.06%
-------- --------- -------- ------ --------- -------- ------ ---------- -------- ------
Total interest-bearing
liabilities 3.53% 685,442 22,747 3.32% 642,362 20,391 3.17% 589,238 21,672 3.68%
-------- --------- -------- ------ --------- -------- ------ ---------- -------- ------
Net interest income/interest
rate spread 1.51% $ 13,155 1.65% $ 12,245 1.64% $ 11,451 1.64%
======== ======== ====== ======== ====== ======== ======
Net interest-earning assets/
net yield on interest-
earning assets (1) $ 36,684 1.82% $ 36,093 1.80% $ 32,871 1.84%
========= ====== ========= ====== ========== ======
Ratio of interest-earning
assets to interest-
bearing liabilities 105.4% 105.6% 105.6%
====== ====== ======
(1) Net interest income divided by average interest-earning assets.
(2) Loan fee income is immaterial to this analysis.
(3) There were no non-accruing loans at September 30, 2005, 2004 and 2003.
The following table shows, for the periods indicated, the changes in interest
income and interest expense attributable to changes in volume (changes in volume
multiplied by prior year rate) and changes in rate (changes in rate multiplied
by prior year volume). Changes in rate/volume (determined by multiplying the
change in rate by the change in volume) have been allocated to the change in
rate or the change in volume based upon the respective percentages of their
combined totals.
Fiscal 2005 Compared Fiscal 2004 Compared
to Fiscal 2004 to Fiscal 2003
Increase (Decrease) Increase (Decrease)
-----------------------------------------------------------
Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- -------
Interest income on interest-earning assets:
Mortgage loans (1) $ 946 $ (533) $ 413 $ 1,224 $(3,208) $(1,984)
Mortgage-backed securities 547 721 1,268 1,044 124 1,168
Consumer and other loans (1) 689 292 981 564 (379) 185
Investments 47 557 604 69 109 178
------- ------- ------- ------- ------- -------
Total 2,229 1,037 3,266 2,901 (3,354) (453)
------- ------- ------- ------- ------- -------
Interest expense on interest-bearing liabilities:
Deposits 355 882 1,237 453 (1,977) (1,524)
Borrowings 1,243 (124) 1,119 1,725 (1,482) 243
------- ------- ------- ------- ------- -------
Total 1,598 758 2,356 2,178 (3,459) (1,281)
------- ------- ------- ------- ------- -------
Net change in net interest income $ 631 $ 279 $ 910 $ 723 $ 105 $ 828
======= ======= ======= ======= ======= =======
(1) There were no non-accruing loans at September 30, 2005 and 2004.
2005 ANNUAL REPORT 7
22 basis point increase in the average rate paid. The increase in the average
balance reflects normal savings activity for the Company. In fiscal 2004, the
average balance increased $16.4 million or 4.4% with a 51 basis point decrease
in the average rate paid. The average rate paid on deposits was 2.6% for the
year ended September 30, 2005, compared to 2.4% for the year ended September 30,
2004 and 2.9% for 2003. The average rate paid on deposits, is a direct
reflection of the interest rate environment.
Interest expense on borrowings increased by $1.1 million or 7.2% in fiscal 2005
and increased by $243,000 or 2.2% in fiscal 2004 as compared to the respective
prior years. The increase in interest expense during fiscal 2005 was the result
of a $28.4 million or 11.1% increase in the average balance of borrowings
partially offset by a decrease of 5 basis points in the average rate paid.
Borrowings were primarily obtained during fiscal 2005 and 2004 to fund the
purchase of mortgage-backed securities and long-term fixed-rate mortgages.
Long-term FHLB advances were used to match the expected maturity terms of these
mortgage products.
Provision for Loan Losses
Management establishes reserves for losses on loans when it determines that
losses are probable. The adequacy of loan loss reserves is based upon a regular
monthly review of loan delinquencies and "classified assets", as well as local
and national economic trends. Although management has currently established no
specific reserves for losses, no assurance can be given as to whether future
provision may be required. The allowance for loan losses totaled $2.0 million at
September 30, 2005 and 2004 or 0.5% and 0.6% of total loans at September 30,
2005 and 2004, respectively. Due to the Company's loan portfolio status and its
analysis of quantitative and qualitative factors, no provision was made in 2005,
2004 and 2003.
Other Income
The Company's total other operating income decreased to $1.5 million in fiscal
2005 and increased to $1.6 million in fiscal 2004. The increase from 2003 to
2004 is attributed to a gain on the sale of an investment available for sale of
$266,000 in fiscal 2004 as compared to a gain of $230,000 in fiscal 2003.
Other income, which consists primarily of income from fees on demand accounts,
loan servicing fees, the sale of non-deposit products, insurance commissions,
and BOLI income, decreased by $27,000 or 2.9% during fiscal year 2005. During
fiscal 2004, other income increased by $31,000 or 3.5%. The fees, which comprise
other income, are set by the Company at a level, which is intended to cover the
cost of providing the related services and expenses to customers and employees.
Components of other income in 2005 remained relatively consistent with the
results of 2004. Based on the current services offered by the Company, we
anticipate other income to remain consistent in fiscal year 2006.
Other Expenses
Salaries and employee benefits increased by $265,000 or 7.3% in fiscal 2004 and
by $251,000 or 6.5% in fiscal 2005 as compared to prior respective fiscal years.
The increased expenses of salaries and employee benefits during the periods are
attributable to increased staffing needs due to normal growth; normal salary
increases and increased employee benefit expenses. The Company anticipates
normal increase in salaries and employee benefits in fiscal year 2006 due to
additional staffing needs, inflationary effects and stock option expense.
Occupancy and equipment expense increased by $73,000 or 8.4% in fiscal 2005 and
decreased by $36,000 or 4.0% in fiscal 2004 as compared to the prior respective
fiscal years. The increase in 2005 and 2004 were attributable to the normal
activity of the Company.
The Company anticipates occupancy and equipment expense to increase in fiscal
year 2006 due to normal asset growth and the opening of a new branch.
Other expenses, which consist primarily of advertising expenses, directors'
fees, ATM network fees, professional fees, checking account costs, stockholders
expense, and insurance premiums, increased by $282,000 or 16.4% in fiscal 2004,
and increased by $264,000 or 13.2% in fiscal 2005 over the prior respective
fiscal years.
Income Taxes
The Company recorded income tax provisions of $1.7 million, $1.6 million and
$1.5 million for fiscal years 2005, 2004 and 2003, respectively. The primary
reason for the increase in the income tax provision in fiscal 2005 was an
increase in income. See Note 12 of the "Notes to Financial Statements" which
provides an analysis of the provision for income taxes.
Asset and Liability Management
The Company has instituted programs designed to decrease the sensitivity of its
earnings to material and prolonged increases or decreases in interest rates. The
principal determinant of the exposure of the Company's earnings to interest rate
risk is the timing difference between the repricing or maturity of the Company's
interest-earning assets and the repricing or maturity of its interest-bearing
liabilities. If the maturities of such assets and liabilities were perfectly
matched, and if the interest rates borne by its assets and liabilities were
equally flexible and moved concurrently, neither of which is the case, the
impact on net interest income of rapid increases or decreases in interest rates
would be minimized. The Company's asset and liability management policies seek
to increase the interest rate sensitivity by shortening the repricing intervals
and the maturities of the Company's interest-earning assets. Although management
of the Company believes that the steps taken have reduced the Company's overall
vulnerability to increases and decreases in interest rates, the Company remains
vulnerable to material and prolonged increases and decreases in interest rates
during periods in which its interest rate sensitive liabilities exceed its
interest rate sensitive assets and interest rate sensitive assets exceed
interest rate sensitive liabilities, respectively.
The authority and responsibility for interest rate management is vested in the
Company's Board of Directors. The Chief Financial Officer implements the Board
of Directors' policies during the day-to-day operations of the Company. Each
month, the Chief Financial Officer presents the Board of Directors with a
report, which outlines the Company's asset and liability "gap" position in
various time periods. The "gap" is the difference between interest-earning
assets and interest-bearing liabilities which mature or reprice over a given
time period. The Chief Financial Officer also meets weekly with the Company's
other senior officers to review and establish policies and strategies
8 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
1 Year 1 to 3 3 to 5 Over 5
or Less Years Years Years Total
--------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Mortgage loans $ 36,500 $ 56,208 $ 42,584 $ 135,649 $ 270,941
Mortgage-backed securities 90,034 89,236 43,727 42,012 265,009
Consumer and other loans 60,557 23,859 8,257 9,966 102,639
Investment securities and other investments 31,118 3,907 20,313 70,328 125,666
--------- --------- --------- --------- ---------
Total interest-earning assets 218,209 173,210 114,881 257,955 764,255
--------- --------- --------- --------- ---------
Interest-bearing liabilities:
Passbook and Club accounts - - - 3,807 3,807
NOW accounts - - - 27,366 27,366
Money Market Deposit accounts 24,663 - - 51,918 76,581
Certificate accounts 101,502 167,141 32,945 - 301,588
Borrowed money 60,857 96,123 24,926 115,362 297,268
--------- --------- --------- --------- ---------
Total interest-bearing liabilities 187,022 263,264 57,871 198,453 706,610
--------- --------- --------- --------- ---------
Repricing GAP during the period $ 31,187 $ (90,054) $ 57,010 $ 59,502 $ 57,645
========= ========= ========= ========= =========
Cumulative GAP $ 31,187 $ (58,867) $ (1,857) $ 57,645
========= ========= ========= =========
Ratio of GAP during the period to total assets 4.07% (-11.74)% 7.43% 7.76%
========= ========= ========= =========
Ratio of cumulative GAP to total assets 4.07% (-7.68)% (-0.24)% 7.52%
========= ========= ========= =========
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 above table summarizes the amount of interest-earning assets and
interest-bearing liabilities outstanding as of September 30, 2005, which are
expected to mature, prepay or reprice in each of the future time periods shown.
Except as stated below, the amounts of assets or liabilities shown which mature
or reprice during a particular period were determined in accordance with the
contractual terms of the asset or liability. Adjustable and floating-rate assets
are included in the period in which interest rates are next scheduled to adjust
rather than in the period in which they are due, and fixed-rate loans and
mortgage-backed securities are included in the periods in which they are
anticipated to be repaid. However, many of our assets can prepay at any time
without a penalty unlike many of our liabilities that have a contractual
maturity.
The passbook accounts, negotiable order of withdrawal ("NOW") accounts and a
potion of the money market deposit accounts, are included in the "Over 5 Years"
categories based on management's beliefs that these funds are core deposits
having significantly longer effective maturities based on the Company's
retention of such deposits in changing interest rate environments.
Generally, during a period of rising interest rates, a positive gap would result
in an increase in net interest income while a negative gap would adversely
affect net interest income. Conversely, during a period of falling interest
rates, a positive gap would result in a decrease in net interest income while a
negative gap would positively affect net interest income. However, the above
table does not necessarily indicate the impact of general interest rate
movements on the Company's net interest income because the repricing of certain
categories of assets and liabilities is discretionary and is subject to
competitive and other pressures. As a result, certain assets and liabilities
indicated as repricing within a stated period may in fact reprice at different
rate levels in a different period.
Liquidity and Capital Resources
The Company's assets increased to $767.0 million as of September 30, 2005, from
$718.2 million as of September 30, 2004. Stockholders' equity increased to $47.6
million as of September 30, 2005, from $44.3 million as of September 30, 2004.
As of September 30, 2005, stockholders' equity amounted to 6.2% of the Banks
total assets under accounting principles generally accepted in the United States
of America ("GAAP").
For a financial institution, liquidity is a measure of the ability to fund
customers' needs for loans, deposit withdrawals and repayment of borrowings.
Harleysville Savings regularly evaluates economic conditions in order to
maintain a strong liquidity position. One of the most significant factors
considered by management when evaluating liquidity requirements is the stability
of the Company's core deposit base. In addition to cash, the Company maintains a
portfolio of cash flows generating investments to meet its liquidity
requirements. The Company also relies upon cash flow from operations and other
financing activities, generally short-term and long-term debt. Liquidity is also
provided by investing activities including the repayment and maturity of loans
and investment securities as well as the management of asset sales when
considered necessary. The Company also has access to and sufficient assets to
secure lines of credit and other borrowings in amounts adequate to fund any
unexpected cash requirements.
2005 ANNUAL REPORT 9
As of September 30, 2005, the Company had a remaining borrowing capacity with
the Federal Home Loan Bank of Pittsburgh of approximately $265,548,000. To the
extent that the Company cannot meet its liquidity needs with normal cash flows
and deposit growth, the Company will be able to utilize the available borrowing
capacity provided by the Federal Home Loan Bank of Pittsburgh to fund asset
growth and loan commitments. Management believes that the opening of our sixth
branch in the spring of 2006 will have not have a material impact on our
liquidity. At September 30, 2005 the Company had exposures to limited recourse
arrangements with respect to the Company's sale of whole loans. At September 30
2005, the exposure, which represents a portion of credit risk associated with
the sold interests, amounted to $83,000. The exposure is for the life of the
related loans and payable, on our proportional share, as losses are incurred.
The Company's contractual cash obligations at September 30, 2005 were as
follows:
Less Than 1 to 3 4 to 5 After
Total 1 Year Years Years 5 Years
-------------------------------------------------------------------------------------------------
Lease Agreements $ 498,065 $ 94,174 $ 192,581 $ 104,332 $ 106,978
FHLB Debt 297,268,488 36,043,911 94,560,309 40,787,297 125,876,971
Funding Commitments 55,757,387 55,757,387
Purchase Obligations 106,174 106,174
------------- ------------ ------------ ------------ -------------
$ 353,630,114 $ 92,001,646 $ 94,752,890 $ 40,891,629 $ 125,983,949
============= ============ ============ ============ =============
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein have
been prepared in accordance with GAAP which require the measurement of financial
position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation.
Unlike most industrial companies, virtually all of the assets and liabilities of
a financial institution are monetary in nature. As a result, interest rates have
a more significant impact on a financial institution's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the prices of goods and
services, since prices are affected by inflation to a larger extent than
interest rates.
10 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Harleysville Savings Financial
Corporation and Subsidiary - Harleysville, Pennsylvania:
We have audited the accompanying consolidated statements of financial condition
of Harleysville Savings Financial Corporation and Subsidiary (the "Company") as
of September 30, 2005 and 2004, and the related consolidated statements of
income, comprehensive income, stockholders' equity, and cash flows for each of
the three years in the period ended September 30, 2005. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of their internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Harleysville Savings Financial
Corporation and Subsidiary as of September 30, 2005 and 2004, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 2005, in conformity with accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
December 12, 2005
2005 ANNUAL REPORT 11
Consolidated Statements of Financial Condition
September 30,
2005 2004
-------------------------------------------------------------------------------------------------------
Assets
Cash and amounts due from depository institutions $ 1,193,285 $ 1,679,171
Interest bearing deposits in other banks 6,741,695 3,039,613
------------- -------------
Total cash and cash equivalents 7,934,980 4,718,784
Investment securities held to maturity
(fair value - 2005, $88,404,000; 2004, $69,439,000) 87,364,445 68,161,572
Investment securities available-for-sale at fair value 2,835,244 7,714,840
Mortgage-backed securities held to maturity
(fair value - 2005, $259,994,000; 2004, $262,560,000) 263,963,765 261,291,730
Mortgage-backed securities available-for-sale at fair value 1,045,087 3,795,274
Loans receivable (net of allowance for loan losses -
2005, $1,968,000; 2004, $1,977,000) 366,006,917 338,584,205
Accrued interest receivable 3,432,054 3,069,038
Federal Home Loan Bank stock - at cost 16,035,900 15,184,100
Office properties and equipment, net 5,829,694 5,748,975
Deferred income taxes 339,587 385,545
Prepaid expenses and other assets 12,202,792 9,577,465
------------- -------------
Total Assets $ 766,990,465 $ 718,231,528
============= =============
-------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 418,979,655 $ 405,230,639
Advances from Federal Home Loan Bank 297,268,488 265,952,993
Accrued interest payable 1,358,953 1,126,113
Advances from borrowers for taxes and insurance 1,135,429 1,058,007
Accounts payable and accrued expenses 672,124 550,864
------------- -------------
Total liabilities 719,414,649 673,918,616
------------- -------------
Commitments and contingencies (Note 16 & 17)
Stockholders' Equity:
Preferred Stock: $.01 par value;
12,500,000 shares authorized; none issued
Common stock: $.01 par value; 25,000,000
shares authorized; issued and outstanding,
2005, 3,904,136 shares and 2004, 3,860,817 shares 39,041 23,165
Additional Paid-in capital 7,610,511 7,426,853
Treasury stock, at cost (2005, 3,255 shares; 2004, 28,938 shares) (60,107) (414,430)
Retained earnings - partially restricted 39,995,584 37,244,200
Accumulated other comprehensive (loss) income (9,213) 33,124
------------- -------------
Total stockholders' equity 47,575,816 44,312,912
------------- -------------
Total Liabilities And Stockholders' Equity $ 766,990,465 $ 718,231,528
============= =============
See notes to consolidated financial statements.
12 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
Consolidated Statements of Income
Year Ended September 30,
2005 2004 2003
-------------------------------------------------------------------------------------------------------
Interest Income:
Interest and fees on mortgage loans $ 15,331,323 $ 14,918,198 $ 16,935,926
Interest on mortgage-backed securities 11,665,529 10,397,548 9,230,294
Interest on consumer and other loans 4,614,316 3,633,483 3,446,943
Interest on taxable investments 1,993,697 2,308,680 2,022,455
Interest on tax-exempt investments 2,285,188 1,363,650 1,468,170
Dividends on investment securities 12,387 14,550 18,790
------------ ------------ ------------
Total interest and dividend income 35,902,440 32,636,109 33,122,578
------------ ------------ ------------
Interest Expense:
Interest on deposits 10,336,704 9,100,454 10,624,397
Interest on borrowings 12,410,032 11,290,735 11,048,328
------------ ------------ ------------
Total interest expense 22,746,736 20,391,189 21,672,725
------------ ------------ ------------
Net Interest Income 13,155,704 12,244,920 11,449,853
Provision for Loan Losses (40,407) - -
------------ ------------ ------------
Net Interest Income, after Provision for Loan Losses 13,196,111 12,244,920 11,449,853
------------ ------------ ------------
Other Income:
Gain on sales of loans 16,672 61,024 15,581
Gain on sales of investments and
mortgage-backed securities 97,905 265,602 230,270
Increase in cash surrender value 450,500 354,000 375,000
Other income 900,304 927,558 896,116
------------ ------------ ------------
Total other income 1,465,381 1,608,184 1,516,967
------------ ------------ ------------
Other Expenses:
Salaries and employee benefits 4,146,584 3,895,117 3,630,175
Occupancy and equipment 937,228 864,469 900,054
Deposit insurance premiums 57,263 58,643 60,722
Data processing 562,932 583,591 590,409
Other 2,261,238 1,997,363 1,715,672
------------ ------------ ------------
Total other expenses 7,965,245 7,399,183 6,897,032
------------ ------------ ------------
Income before Income Taxes: 6,696,247 6,453,921 6,069,788
Income tax expenses 1,692,527 1,603,824 1,475,885
------------ ------------ ------------
Net Income $ 5,003,720 $ 4,850,097 $ 4,593,903
============ ============ ============
Earnings Per Share:
Basic $ 1.29 $ 1.28 $ 1.21
============ ============ ============
Diluted $ 1.27 $ 1.25 $ 1.19
============ ============ ============
Weighted Average Shares Outstanding:
Basic 3,871,255 3,802,937 3,783,693
============ ============ ============
Diluted 3,940,701 3,890,212 3,868,838
============ ============ ============
See notes to consolidated financial statements.
2005 ANNUAL REPORT 13
Consolidated Statements of Comprehensive Income
2005 2004 2003
-------------------------------------------------------------------------------------------------------------------
Net Income $ 5,003,720 $ 4,850,097 $ 4,593,903
Other Comprehensive (Loss) Income
Unrealized (loss) gain on securities net of tax (benefit) or
expense -- 2005, $(25,930); 2004, $10,909; 2003, ($21,529) (42,337)(1) 17,150(1) (33,840)(1)
----------- ----------- -----------
Total Comprehensive Income $ 4,961,383 $ 4,867,247 $ 4,560,063
=========== =========== ===========
2005 2004 2003
----------- ----------- -----------
(1) Disclosure of reclassification amount, net of tax for the years
ended:
Net unrealized gain arising during the year $ 22,280 $ 192,447 $ 118,138
Less: Reclassification adjustment for net gains included in net
income
Net of tax expense -- 2005,$33,288; 2004,$90,305; 2003, $78,292 64,617 175,297 151,978
----------- ----------- -----------
Net unrealized (loss) gain on securities $ (42,337) $ 17,150 $ (33,840)
=========== =========== ===========
Consolidated Statements of Stockholders' Equity
Retained Accumulated
Common Additional Earnings- Other Total
Stock Common Paid-in Partially Comprehensive Treasury Stockholders'
Shares Stock Capital Restricted Income (Loss) Stock Equity
---------------------------------------------------------------------------------------------------------------------------------
Balance at October 1, 2002 2,316,500 $ 23,165 $ 7,551,849 $ 31,124,031 $ 49,814 $ (881,227) $ 37,867,632
Net Income 4,593,903 4,593,903
Dividends - $.40 per share (1,497,528) (1,497,528)
Treasury stock purchased (808,842) (808,842)
Treasury stock delivered under
employee stock plans (116,581) 327,978 211,397
Treasury stock delivered under
Dividend Reinvestment Plan 149,681 333,319 483,000
Change in unrealized holding gain
on available-for-sale securities,
net of tax (33,840) (33,840)
-------- ----------- ------------ ------------- ------------ -------------
Balance at September 30, 2003 2,316,500 23,165 7,584,949 34,220,406 15,974 (1,028,772) 40,815,722
Net Income 4,850,097 4,850,097
Dividends - $.48 per share (1,826,303) (1,826,303)
Treasury stock purchased (251,580) (251,580)
Treasury stock delivered under
employee stock plans (296,533) 490,384 193,851
Treasury stock delivered under
Dividend Reinvestment Plan 138,437 375,538 513,975
Change in unrealized holding gain
on available-for-sale securities,
net of tax 17,150 17,150
-------- ----------- ------------ ------------- ------------ -------------
Balance at September 30, 2004 2,316,500 23,165 7,426,853 37,244,200 33,124 (414,430) 44,312,912
Net Income 5,003,720 5,003,720
Issuance of Common Stock 436 459,995 460,431
Stock split 15,440 (15,440)
Dividends - $.58 per share (2,252,336) (2,252,336)
Treasury stock purchased (328,280) (328,280)
Treasury stock delivered under
employee stock plans (272,586) 578,247 305,661
Treasury stock delivered under
Dividend Reinvestment Plan 11,689 104,356 116,045
Change in unrealized holding gain
on available-for-sale securities,
net of tax (42,337) (42,337)
-------- ----------- ------------ ------------- ------------ -------------
Balance at September 30, 2005 3,904,136 $ 39,041 $ 7,610,511 $ 39,995,584 $ (9,213) $ (60,107) $ 47,575,816
======== =========== ============ ============= ============ =============
See notes to consolidated financial statements.
14 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
Year Ended September 30,
2005 2004 2003
--------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 5,003,720 $ 4,850,097 $ 4,593,903
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 436,400 483,864 534,657
Deferred income taxes 67,768 (24,745) (217,709)
Realized gain on sales of loans (16,672) (61,024) (15,581)
Realized gain on sales of mortgage-backed securities - - (158,735)
Realized gain on sale of investment securities (97,905) (265,602) (71,535)
Realized loss on disposal of fixed assets 49,233 4,293 15,772
Origination of loans held for sale (908,522) (2,517,314) (1,386,196)
Proceeds from the sale of loans held for sale 921,129 2,578,338 1,401,777
Amortization of deferred loan fees (138,102) (459,366) (1,892,505)
Net amortization of premiums and discounts 675,869 922,291 (2,160,770)
Increase in cash surrender value (450,500) (354,000) (375,000)
Changes in assets and liabilities which provided (used) cash:
Increase (decrease) in accounts payable and accrued expenses 121,260 (252,795) (118,863)
(Increase) decrease in prepaid expenses and other assets (2,131,804) (86,150) 345,263
(Increase) decrease in accrued interest receivable (363,016) (267,698) 35,108
Increase in accrued interest payable 232,840 55,144 29,077
------------- ------------- -------------
Net cash provided by operating activities 3,401,698 4,605,333 558,663
------------- ------------- -------------
Investing Activities:
Purchase of mortgage-backed securities held to maturity (62,026,532) (116,190,554) (244,183,784)
Purchase of mortgage-backed securities available-for-sale - (5,010,238) (33,701,343)
Purchase of investment securities held to maturity (35,852,191) (5,989,750) (47,301,420)
Purchase of investment securities available-for-sale (770,525) (2,792,039) (1,412,139)
Purchase of FHLB stock (851,800) (1,402,000) (3,285,600)
Proceeds from the sale of mortgage-backed securities available-for-sale 13,015,313
Proceeds from the sale of investment securities available-for-sale 5,650,121 2,600,639 422,447
Proceeds from maturities of investment securities 16,239,738 18,554,405 19,605,284
Principal collected on long-term loans & mortgage-backed securities 147,947,065 182,398,317 399,483,983
Long-term loans originated or acquired (113,398,481) (137,421,587) (161,190,721)
Purchases of premises and equipment (566,351) (1,309,061) (465,470)
------------- ------------- -------------
Net cash used in investing activities (43,628,956) (66,561,868) (59,013,450)
------------- ------------- -------------
Financing Activities:
Net (decrease) increase in demand deposits, NOW accounts and savings
accounts (18,710,587) 7,717,536 18,969,196
Net increase (decrease) in certificates of deposit 32,459,603 16,826,549 (10,229,620)
Cash dividends (2,252,336) (1,826,303) (1,497,528)
Net increase in FHLB advances 31,315,495 37,135,555 21,315,092
Purchase of treasury stock (328,280) (251,580) (808,842)
Treasury stock delivered under Dividend Reinvestment and employee stock
plan 421,706 707,826 694,397
Net proceeds from issuance of stock 460,431 - -
Net increase (decrease) in advances from borrowers for taxes and insurance 77,422 (35,862) 110,786
------------- ------------- -------------
Net cash provided by financing activities 43,443,454 60,273,721 28,553,481
------------- ------------- -------------
Increase (Decrease) in cash and cash equivalents 3,216,196 (1,682,814) (29,901,306)
Cash and cash equivalents at beginning of year 4,718,784 6,401,598 36,302,904
------------- ------------- -------------
Cash and cash equivalents at end of year $ 7,934,980 $ 4,718,784 $ 6,401,598
============= ============= =============
Supplemental Disclosure of Cash Flow Information-
Cash paid during the period for:
Interest (credited and paid) $ 22,513,896 $ 20,446,333 $ 21,701,802
Income Tax 1,527,721 1,553,000 1,461,000
See notes to consolidated financial statements.
2005 ANNUAL REPORT 15
Notes to Consolidated Financial Statements
1. Nature of Operations and Organizational Structure
On February 25, 2000, Harleysville Savings Bank (the "Bank") completed its
Agreement and Plan of Reorganization ("Agreement") pursuant to which the Bank
was reorganized into a holding company form of ownership. The Agreement was
subject to approval by the Pennsylvania Department of Banking, the Board of
Governors of the Federal Reserve System and approved by the stockholders of the
Bank. Harleysville Savings Financial Corporation (the "Company") was
incorporated under the laws of the Commonwealth of Pennsylvania. It was formed
for the purpose of becoming the bank holding company of the Bank through the
issuance and exchange of its stock pursuant to the Agreement and the concurrent
acquisition of 100% of the common stock of the Bank. In connection with the
Reorganization, each share of the Bank's common stock, ("Bank Common Stock"),
was converted into one share of the Company's common stock, ("Company Common
Stock"). The result of the Reorganization of the Bank was that the Company
became the owner of all of the outstanding shares of Bank Common Stock and each
stockholder of the Bank became the owner of one share of the Company Common
Stock for each share of bank Common Stock held by him or her immediately prior
thereto.
The Company is a bank holding company that is regulated by the Federal Reserve
Bank of Philadelphia. The Bank is a wholly owned subsidiary and is regulated by
the FDIC and the Pennsylvania Department of Banking. The Bank is principally in
the business of attracting deposits through its branch offices and investing
those deposits, together with funds from borrowings and operations, primarily in
single family residential and consumer loans.
2. Summary of Significant Accounting Policies
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of the Company, the Bank, and the Bank's wholly owned
subsidiary, HSB Inc., a Delaware subsidiary which was formed in order to
accommodate the transfer of certain assets, Freedom Financial LLC that allows
the Company to offer non deposit products and HARL LLC that allows the Bank to
invest in equity investments. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates in Preparation of the Consolidated Financial Statements - The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statement and the reported amounts of
income and expenses during the reporting period. The most significant of these
estimates and assumptions in the Company's consolidated financial statements is
the allowance for loan losses. Actual results could differ from those estimates.
Cash and Cash Equivalents - For purposes of the consolidated statements of cash
flows, cash and cash equivalents include cash and balances due from banks.
Interest-Bearing Deposits in Banks - Interest-bearing deposits in banks are
carried at cost.
Investments and Mortgage-Backed Securities - The Company classifies and accounts
for debt and equity securities as follows:
Held to Maturity - Debt securities that management has the positive intent and
ability to hold until maturity are classified as held to maturity and are
carried at their remaining unpaid principal balance, net of unamortized premiums
or unaccreted discounts. Premiums are amortized and discounts are accreted using
the interest method over the estimated remaining term of the underlying
security.
Available for Sale - Debt and equity securities that will be held for indefinite
periods of time, including securities that may be sold in response to changes in
market interest or prepayment rates, needs for liquidity and changes in the
availability of and the yield of alternative investments are classified as
available for sale. These assets are carried at fair value. Fair value is
determined using published quotes as of the close of business. Unrealized gains
and losses are excluded from earnings and are reported net of tax in other
comprehensive income until realized. Realized gains and losses on the sale of
investment securities are recorded as of trade date, reported in the
consolidated statement of income and determined using the adjusted cost of the
specific security sold.
In March 2004, the Financial Accounting Standards Board ("FASB") Emerging Issues
Task Force ("EITF") reached consensus on several issues being addressed in EITF
Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments". The consensus provides guidance for
evaluating whether an investment is other-than-temporarily impaired and was
effective for other-than-temporary impairment evaluations made in reporting
periods beginning after June 15, 2004. The disclosure provisions of EITF 03-1
continue to be effective for the Company's consolidated financial statements for
the year ended September 30, 2005.
On November 3, 2005, the FASB issued FASB Staff Position ("FSP") Nos. FAS 115-1
and FAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments". This FSP addresses the determination as to
when an investment is considered impaired, whether that impairment is other than
temporary, and the measurement of an impairment loss. This FSP also includes
accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. This FSP nullifies certain requirements of EITF Issue 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments", and supersedes EITF Topic No. D-44, "Recognition of
Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost
Exceeds Fair Value". The guidance in this FSP amends FASB Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". The FSP is
effective for reporting periods beginning after December 15, 2005. Management is
in the process of evaluating the impact of the adoption of this guidance.
16 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
For all securities that are in an unrealized loss position for an extended
period of time and for all securities whose fair value is significantly below
amortized cost, the Company performs an evaluation of the specific events
attributable to the market decline of the security. The Company considers the
length of time and extent to which the security's market value has been below
cost as well as the general market conditions, industry characteristics, and the
fundamental operating results of the issuer to determine if the decline is
other-than-temporary. The Company also considers as part of the evaluation its
intent and ability to hold the security until its market value has recovered to
a level at least equal to the amortized cost. When the Company determines that a
security's unrealized loss is other-than-temporary, a realized loss is
recognized in the period in which the decline in value is determined to be
other-than-temporary. The write-downs are measured based on public market
prices of the security at the time the Company determines the decline in value
was other-than-temporary.
Loans - The Company grants mortgage and consumer loans to customers. A
substantial portion of the loan portfolio is represented by mortgage loans
throughout Pennsylvania. The ability of the Company's debtors to honor their
contracts is dependent upon the real estate and general economic conditions in
this area.
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off are reported at their outstanding unpaid
principal balances adjusted for charge-offs, the allowance for loan losses, and
any deferred fees or costs on originated loans. Interest income is accrued on
the unpaid principal balance.
Interest Income on Loans - Interest on loans is recognized as income when
earned. The accrual of interest on mortgage loans is discontinued at the time
the loan is 90 days delinquent unless the credit is well-secured and in process
of collection. Other personal loans are typically charged off no later than 180
days past due. In all cases, loans are placed on nonaccrual or charged-off at an
earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual
or charged off is reversed against interest income. The interest on these loans
is accounted for on the cash-basis or cost-recovery method, until qualifying for
return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
Deferred Loan Fees - Loan origination fees, net of certain direct origination
costs, are deferred and the balance is amortized to income as an adjustment over
the life of the loan using the interest method.
Allowance for Loan Losses - The allowance for loan losses is established as
losses are estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance. An allowance for
loan losses is maintained at a level that management considers adequate to
provide for losses based upon evaluation of known and inherent risks in the loan
portfolio. The loan loss reserves are established as an allowance for estimated
losses based on the probable losses of the loan portfolio. In assessing risk,
management considers historical experience, volume and composition of lending
conducted by the Company, industry standards, status of nonperforming loans,
general economic conditions as they relate to the Company's market area, and
other factors related to the collectibility of the Company's loan portfolio.
The allowance for loan losses consists of three elements: (1) specific
allowances for impaired loans; (2) a general valuation allowance on all
classified loans which are not impaired; and (3) a general valuation allowance
on the remainder of the loan portfolio. This is consistent with the regulatory
method of classifying reserves. Although the amount of each element of the
allowance is determined separately, the entire allowance for loan losses is
available for the entire portfolio. An allowance for impaired loans is
established in the amounts by which the discounted cash flows (or collateral
value or observable market price) are lower than the carrying value of the loan.
A general allowance is established for classified loans that are not impaired.
These loans are segregated by loan category, and allowance percentages are
assigned to each category based on inherent losses associated with each type of
lending and consideration that these loans, in the aggregate, represent an
above-average credit risk and that more of these loans will prove to be
uncollectible compared to loans in the general portfolio.
The general allowance for loans that are not classified is established to
recognize the inherent losses associated with lending activities, but which,
unlike specific allowances, has not been allocated to particular problem assets.
This general valuation allowance is determined by segregating non-classified
loans by loan category and assigning allowance percentages to each category. The
allowance percentages have been derived using percentages commonly applied under
the regulatory framework for the Company and similarly sized institutions. The
percentages are adjusted for significant factors that, in management's judgment,
could affect the collectibility of the portfolio as of the evaluation date.
These significant factors may include changes in lending policies and
procedures, changes in existing general economic and business conditions
affecting our primary lending areas, credit quality trends, collateral value,
loan volumes and concentrations, seasoning of the loan portfolio, loss
experience in particular segments of the portfolio, duration of the current
business cycle, and bank regulatory examination results. The applied loss
factors are reevaluated monthly to ensure their relevance in the current
economic environment.
Real Estate Owned - Real estate owned is carried at the lower of carrying value
of the loan or fair value of the property based on an appraisal. Costs relating
to the development and improvement of the property are capitalized, and those
relating to holding the property are charged to expense.
Office Properties and Equipment - Land is carried at cost. Office properties and
equipment are recorded at cost, less accumulated depreciation. Depreciation is
computed using the straight-line method over the expected useful lives of the
assets that range from four to fifty years. The costs of maintenance and repairs
are expensed as they are incurred, and renewals and betterments are capitalized.
FHLB Stock - The Company reports its investment in FHLB stock at cost in the
consolidated statements of financial condition as the Company does not have the
ability to influence the FHLB.
Cash Surrender Value Of Life Insurance - The Bank funded the purchase of
insurance policies on the lives of officers and employees of the Bank. The
Company has recognized any increase in cash surrender value of life insurance,
net of
2005 ANNUAL REPORT 17
insurance costs, in the consolidated statements of income as other income. The
cash surrender value of the insurance policies is recorded as an asset in other
assets in the consolidated statements of financial condition.
Long-Lived Assets - Management evaluates the carrying amount of long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Measurement of an
impaired loss for long-lived assets would be based the fair value of the asset.
For the years ended September 30, 2005, 2004 and 2003, the Company did not
recognize an impairment.
Income Taxes - Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on deferred taxes
of a change in tax rates is recognized in income in the period that includes the
enactment date.
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -
The Company accounts for transfers and servicing of financial assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" (a replacement of FASB Statement No. 125). This Statement
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but it carries
over most of SFAS No. 125 provisions without reconsideration.
The Statement requires an entity to recognize the financial and servicing assets
it controls and the liabilities it has incurred, derecognize financial assets
when control has been surrendered, and derecognize liabilities when
extinguished. It requires that servicing assets and other retained interests in
the transferred assets be measured by allocating the previous carrying amount
between the asset sold, if any, and retained interest, if any, based on their
relative fair values at the date of transfer. It also provides implementation
guidance for servicing of financial assets, securitizations, loan syndications
and participations and transfers of loan receivables with recourse.
Accounting for Derivative Instruments and Hedging Activities - The Company
adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" as amended by SFAS Nos. 137 and 138, and as interpreted
by the FASB and the Derivatives Implementation Group through "Statement 133
Implementation Issues", as of October 1, 2000. In April 2003, the FASB issued
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities". This Statement amended and clarified accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. This Statement was
effective for contracts entered into or modified after June 30, 2003, except for
the provision of this statement that relate to SFAS 133 Implementation Issues
that had been effective for fiscal quarters that began prior to June 15, 2003
and for hedging relationships designated after June 30, 2003. All provisions
were to be applied prospectively except for the provision of this Statement that
relate to SFAS 133 Implementation Issues that had 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. Currently, no embedded
derivatives require bifurcation. The Company currently does not employ hedging
activities that require designation as either fair value or cash flow hedges, or
hedges of a net investment in a foreign operation.
Treasury Stock - The Company records treasury stock purchases at cost. Gains and
losses on subsequent reissuance of shares are credited or charged to capital in
excess of par value using the average-cost method.
In March, July and September of 2005, the Company repurchased 10,000, 5,000 and
2,000 shares of common stock respectively at $20.41, $17.90 and $17.34 per
share, respectively, for its treasury at a total cost of $328,280.
Accounting for Stock Options - The Company accounts for stock-based compensation
in accordance with the Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." This method calculates compensation
expense using the intrinsic value method, which recognizes as expense the
difference between the market value of the stock and the exercise price at grant
date. The Company has not recognized any compensation expense under this method.
The Company adopted the reporting disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation", which requires the Company to
disclose the pro forma effects of accounting for stock-based compensation using
the fair value method as described in the accounting requirements of SFAS No.
123. As permitted by SFAS No. 123, the Company continues to account for
stock-based compensation under the intrinsic value method described in APB
Opinion No. 25. In December 2002, the FASB issued 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. The Company has elected to continue application of
Accounting Principals Board Opinion No. 25 Accounting for Stock Issued to
Employees 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, using Binomial Option Pricing Model, to stock-based employee compensation.
18 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
Year Ended September 30,
2005 2004 2003
-------------------------------------------------------------------------------
Net income: As reported $ 5,003,720 $ 4,850,097 $ 4,593,903
Deduct: Stock-based employee
compensation expense determined
under the fair value based method
for all awards, net of related tax
effects 42,594 37,773 30,531
----------- ----------- -----------
Pro forma net income $ 4,961,126 $ 4,812,324 $ 4,563,372
Earnings per share:
Basic-as reported $ 1.29 $ 1.28 $ 1.21
Basic-pro forma 1.28 1.27 1.21
Diluted-as reported $ 1.27 $ 1.25 $ 1.19
Diluted-pro forma 1.26 1.24 1.18
Significant assumptions used to
calculate the above are as follows:
Risk free interest rate of return 1% 1% 1.25%
Expected option life 84 months 84 months 84 months
Expected volatility 10% 10% 10%
Expected dividends 3% 3% 3%
Stock Split - On January 26, 2005, the Board of Directors declared a declared a
cash dividend of $.25 ($.15 post split) per share and a five for three stock
split payable on February 23, 2005 to the stockholders of record at the close of
business on February 9, 2005. The number of shares and per share information has
been restated to reflect the five for three stock split. The shares of
Harleysville Savings Financial Corporation traded on February 24, 2005 on a post
split basis.
Earnings Per Share - Basic earnings per common share is computed based on the
weighted average number of shares outstanding. Diluted earnings per share is
computed based on the weighted average number of shares outstanding, increased
by the number of common shares that are assumed to have been purchased with the
proceeds from the exercise of stock options (treasury stock method). These
purchases were assumed to have been made at the average market price of the
common stock. The weighted average shares outstanding used to calculate earnings
per share were as follows:
Year Ended September 30,
2005 2004 2003
------------------------------------------------------------------------------
Average shares outstanding - basic 3,871,255 3,802,937 3,783,693
Increase in shares due to dilutive options 69,446 87,275 85,145
--------- --------- ---------
Average shares outstanding - diluted 3,940,701 3,890,21 3,868,838
========= ========= =========
Other Comprehensive Income - The Company presents, as a component of
comprehensive income, amounts from transactions and other events, which are
currently excluded from the statement of income and are recorded directly to
stockholders' equity. The Company's other comprehensive income consists of net
unrealized holding gains or losses on securities available-for-sale, net of
income taxes.
Interest Rate Risk - The Company is engaged principally in providing first
mortgage loans to individuals and commercial enterprises. At September 30, 2005,
the Company's assets that earned interest at fixed and variable interest rates
were funded primarily with long-term liabilities that have interest rates that
are fixed.
The Company is vulnerable to a decrease in interest rates to the extent that
interest-earning assets mature or reprice more rapidly than interest-bearing
liabilities. In the current market, the Company primarily originates long-term
fixed rate loans secured by single-family residences and purchases short-term
investments. The source of these funds has been long-term advances.
At September 30, 2005, the Company had interest-earning assets of approximately
$722,126,000 having a weighted average effective yield of 4.97% and
interest-bearing liabilities of approximately $685,422,000 having a weighted
average effective interest rate of 3.32%.
Recent Accounting Pronouncements - In December 2004, FASB issued SFAS No. 123R
(revised 2004), "Share-Based Payment", which revises SFAS No. 123, "Accounting
for Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees". This Statement requires an entity to recognize
the cost of employee services received in exchange for an award of equity
investment based on grant-date fair value of the award. That cost will be
recognized over the period during which an employee is required to provide
service in exchange for the award. Effective October 1, 2005 the Company will be
required to recognize compensation expense for the fair value of stock options
that are granted or vest after that date. Management determined based on current
option levels, the impact is not expected to be material on the Company's
consolidated financial statements.
In March 2005, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 107 which expressed the views of the SEC regarding
the interaction between SFAS No. 123R and certain SEC rules and regulations. SAB
No. 107 provides guidance related to the valuation of share-based payment
arrangements for public companies, including assumptions such as expected
volatility and expected term.
Reclassification - Certain items in the 2004 and 2003 financial statements have
been reclassified to conform with the presentation in the 2005 consolidated
financial statements.
2005 ANNUAL REPORT 19
3. Investment Securities Held to Maturity
A comparison of amortized cost and approximate fair value of investment
securities with gross unrealized gains and losses, by maturities, is as follows:
September 30, 2005
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
-----------------------------------------------------------------------------------------------
U.S. Government Agencies
Due after 1 years through 5 years $ 12,000,000 $ (197,000) $ 11,803,000
Due after 5 years through 10 years 25,703,340 $ 77,445 (207,785) 25,573,000
Due after 10 years through 15 years 24,862,533 5,200 (497,733) 24,370,000
Tax Exempt Obligations
Due after 10 years through 15 years 13,050,956 949,044 - 14,000,000
Due after 15 years 11,747,616 910,384 - 12,658,000
------------ ----------- ---------- ------------
Total Investment Securities $ 87,364,445 $ 1,942,073 $ (902,518) $ 88,404,000
============ =========== ========== ============
A summary of investment with unrealized losses, aggregated by category, at
September 30, 2005 is as follows:
Less than 12 Months 12 Months or Longer Total Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
-------------------------------- -------------------------------- --------------------------------
US Government agencies $ 31,567,124 $ (284,269) $ 21,339,331 $ (618,249) $ 52,906,455 $ (902,518)
------------ ----------------- ------------ ----------------- ------------ -----------------
Total $ 31,567,124 $ (284,269) $ 21,339,331 $ (618,249) $ 52,906,455 $ (902,518)
============ ================= ============ ================= ============ =================
At September 30, 2005, investment securities in a gross unrealized loss position
for twelve months or longer consisted of 8 US Government Agency Securities that
at such date had an aggregate depreciation of 2.8% from the Company's amortized
cost basis. Management believes that the estimated fair value of the securities
disclosed above is primarily dependent upon the movement in market interest
rates. Management evaluated the length of time and the extent to which the
market value has been less than cost; the financial condition and near term
prospects of the issuer, including any specific events which may influence the
operations of the issuer such as changes in technology that may impair the
earnings potential of the investment or the discontinuance of a segment of the
business that may effect the future earnings potential. The Company has the
ability and intent to hold these securities until the anticipated recovery of
fair value occurs. Management does not believe any individual unrealized loss as
of September 30, 2005 represents an other-than-temporary impairment.
September 30, 2004
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
-----------------------------------------------------------------------------------------------
U.S. Government Agencies
Due after 1 years through 5 years $ 999,347 $ (347) $ 999,000
Due after 5 years through 10 years 15,278,032 $ 186,208 (21,240) 15,443,000
Due after 10 years through 15 years 26,918,369 22,286 (402,655) 26,538,000
Tax Exempt Obligations
Due after 10 years through 15 years 6,932,105 453,895 - 7,386,000
Due after 15 years 18,033,719 1,039,281 - 19,073,000
------------ ----------- ---------- ------------
Total Investment Securities $ 68,161,572 $ 1,701,670 $ (424,242) $ 69,439,000
============ =========== ========== ============
A summary of investment with unrealized losses, aggregated by category, at
September 30, 2004 is as follows:
Less than 12 Months 12 Months or Longer Total Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
-------------------------------- -------------------------------- --------------------------------
US Government agencies $ 22,509,680 $ (424,242) $ - $ - $ 22,509,680 $ (424,242)
------------ ----------------- ------------ ----------------- ------------ -----------------
Total $ 22,509,680 $ (424,242) $ - $ - $ 22,509,680 $ (424,242)
============ ================= ============ ================= ============ =================
There were no securities in a loss position greater then twelve months.
Management evaluated the length of time and the extent to which the market value
has been less than cost; the financial condition and near term prospects of the
issuer, including any specific events which may influence the operations of the
issuer such as changes in technology that may impair the earnings potential of
the investment or the discontinuance of a segment of the business that may
effect the future earnings potential. The Company has the ability and intent to
hold these securities until the anticipated recovery of fair value occurs.
Management does not believe any individual unrealized loss as of September 30,
2004 represents an other-than-temporary impairment.
20 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
At September 2005 and 2004, U.S. Government Agencies include structured note
securities with periodic interest rate adjustments and are callable periodically
by the issuing agency. These structured notes were comprised of step-up bonds
with par values of $31.7 million and $38.7 million respectively, at September
30, 2005 and 2004. The Company has the positive intent and the ability to hold
these securities to maturity. At September 30, 2005, neither a disposal, nor
conditions that could lead to a decision not to hold these securities to
maturity were reasonably foreseen.
4. Investment Securities Available-For-Sale
A comparison of amortized cost and approximate fair value of investment
securities with gross unrealized gains and losses, by maturities, is as follows:
September 30, 2005
Gross Gross
Amortized Unrealized Unrealized
Cost Gain Losses Fair Value
-----------------------------------------------------------------------------------------------
Equity Securities $ 906,113 $ 9,830 $ (56,723) $ 859,220
Money Market Mutual Funds 1,976,024 - - 1,976,024
------------ ----------- ---------- ------------
Total Investment Securities $ 2,882,137 $ 9,830 $ (56,723) $ 2,835,244
============ =========== ========== ============
A summary of investment with unrealized losses, aggregated by category, at
September 30, 2005 is as follows:
Less than 12 Months 12 Months or Longer Total Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
-------------------------------- -------------------------------- --------------------------------
Unrealized Losses
Equity Securities $ 751,220 $ (56,723) $ - $ - $ 751,220 $ (56,723)
------------ ----------------- ------------ ----------------- ------------ -----------------
Total $ 751,220 $ (56,723) $ - $ - $ 751,220 $ (56,723)
============ ================= ============ ================= ============ =================
There were no securities in a loss position greater then twelve months.
Management evaluated the length of time and the extent to which the market value
has been less than cost; the financial condition and near term prospects of the
issuer, including any specific events which may influence the operations of the
issuer such as changes in technology that may impair the earnings potential of
the investment or the discontinuance of a segment of the business that may
effect the future earnings potential. The Company has the ability and intent to
hold these securities until the anticipated recovery of fair value occurs.
Management does not believe any individual unrealized loss as of September 30,
2005 represents an other-than-temporary impairment.
September 30, 2004
Gross Gross
Amortized Unrealized Unrealized
Cost Gain Losses Fair Value
-----------------------------------------------------------------------------------------------
Equity Securities $ 971,110 $ 58,377 $ - $ 1,029,487
Money Market Mutual Funds 6,685,353 - - 6,685,353
------------ ----------- ---------- ------------
Total Investment Securities $ 7,656,463 $ 58,377 $ - $ 7,714,840
============ =========== ========== ============
Proceeds from the sale of investments available for sale during the year ended
September 30, 2005 were $5,650,000 resulting in a gross gain of $98,000 and a
net tax gain of $65,000. Proceeds from the sale of investments available for
sale during the year ended September 30, 2004 were $2,601,000 resulting in a
gross gain of $266,000 and a net tax gain of $176,000. Proceeds from the sale of
investments available for sale during the year ended September 30, 2003 were
$422,000 resulting in a gross gain of $71,000 and a net tax gain of $47,000.
5. Mortgage-Backed Securities Held to Maturity
A comparison of amortized cost and approximate fair value of mortgage-backed
securities with gross unrealized gains and losses, by maturities, is as follows:
September 30, 2005
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
-----------------------------------------------------------------------------------------------
Collateralized mortgage obligations $ 17,089,874 $ 36,738 $ (278,612) $ 16,848,000
FHLMC pass-through certificates 118,663,486 128,502 (2,047,988) 116,744,000
FNMA pass-through certificates 121,596,729 161,648 (2,216,377) 119,542,000
GNMA pass-through certificates 6,613,676 246,324 6,860,000
------------ ----------- ----------- ------------
Total Mortgage-Backed Securities $263,963,765 $ 573,212 $(4,542,977) $259,994,000
============ =========== =========== ============
2005 ANNUAL REPORT 21
A summary of investment with unrealized losses, aggregated by category, at
September 30, 2005 is as follows:
Less than 12 Months 12 Months or Longer Total Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
-------------------------------- -------------------------------- --------------------------------
Mortgage-backed
securities held to
maturity $178,406,095 $ (2,751,178) $ 58,493,074 $ (1,791,799) $236,899,169 $ (4,542,977)
------------ ----------------- ------------ ----------------- ------------ -----------------
Total $178,406,095 $ (2,751,178) $ 58,493,074 $ (1,791,799) $236,899,169 $ (4,542,977)
============ ================= ============ ================= ============ =================
At September 30, 2005, mortgage-related securities in a gross unrealized loss
position for twelve months or longer consisted of 27 securities that at such
date had an aggregate depreciation of 3.0% from the Company's amortized cost
basis. Management evaluated the length of time and the extent to which the
market value has been less than cost; the financial condition and near term
prospects of the issuer, including any specific events which may influence the
operations of the issuer such as changes in technology that may impair the
earnings potential of the investment or the discontinuance of a segment of the
business that may effect the future earnings potential. The Company has the
ability and intent to hold these securities until the anticipated recovery of
fair value occurs. Management does not believe any individual unrealized loss as
of September 30, 2005 represents an other-than-temporary impairment.
September 30, 2004
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
-----------------------------------------------------------------------------------------------
Collateralized mortgage obligations $ 8,733,300 $ 42,446 $ (71,746) $ 8,704,000
FHLMC pass-through certificates 118,448,507 717,032 (189,539) 118,976,000
FNMA pass-through certificates 123,234,413 831,713 (641,126) 123,425,000
GNMA pass-through certificates 10,875,510 579,490 - 11,455,000
------------ ----------- ---------- ------------
Total Mortgage-Backed Securities $261,291,730 $ 2,170,681 $ (902,411) $262,560,000
============ =========== ========== ============
A summary of investment with unrealized losses, aggregated by category, at
September 30, 2004 is as follows:
Less than 12 Months 12 Months or Longer Total Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
-------------------------------- -------------------------------- --------------------------------
Mortgage-backed
securities held to
maturity $107,763,021 $ (902,411) $ - $ - $107,763,021 $ (902,411)
------------ ----------------- ------------ ----------------- ------------ -----------------
Total $107,763,021 $ (902,411) $ - $ - $107,763,021 $ (902,411)
============ ================= ============ ================= ============ =================
There were no securities in a loss position greater then twelve months.
Management evaluated the length of time and the extent to which the market value
has been less than cost; the financial condition and near term prospects of the
issuer, including any specific events which may influence the operations of the
issuer such as changes in technology that may impair the earnings potential of
the investment or the discontinuance of a segment of the business that may
effect the future earnings potential. The Company has the ability and intent to
hold these securities until the anticipated recovery of fair value occurs.
Management does not believe any individual unrealized loss as of September 30,
2004 represents an other-than-temporary impairment.
6. Mortgage-Backed Securities Available-For-Sale
A comparison of amortized cost and approximate fair value of mortgage-backed
securities with gross unrealized gains and losses, by maturities, is as follows:
September 30, 2005
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
-----------------------------------------------------------------------------------------------
FNMA pass-through certificates $ 1,012,154 $ 32,933 $ - $ 1,045,087
------------ ----------- ---------- ------------
Total Mortgage-Backed Securities $ 1,012,154 $ 32,933 $ - $ 1,045,087
============ =========== ========== ============
September 30, 2004
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
-----------------------------------------------------------------------------------------------
FNMA pass-through certificates $ 3,803,463 $ 2,518 $ (10,707) $ 3,795,274
------------ ----------- ---------- ------------
Total Mortgage-Backed Securities $ 3,803,463 $ 2,518 $ (10,707) $ 3,795,274
============ =========== ========== ============
A summary of investment with unrealized losses, aggregated by category, at
September 30, 2004 is as follows:
Less than 12 Months 12 Months or Longer Total Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
-------------------------------- -------------------------------- --------------------------------
Mortgage-backed
securities available
for sale $ 2,350,371 $ (10,707) $ - $ - $ 2,339,664 $ (10,707)
------------ ----------------- ------------ ----------------- ------------ -----------------
Total $ 2,350,371 $ (10,707) $ - $ - $ 2,339,664 $ (10,707)
============ ================= ============ ================= ============ =================
22 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
There were no securities in a loss position greater then twelve months.
Management evaluated the length of time and the extent to which the market value
has been less than cost; the financial condition and near term prospects of the
issuer, including any specific events which may influence the operations of the
issuer such as changes in technology that may impair the earnings potential of
the investment or the discontinuance of a segment of the business that may
effect the future earnings potential. The Company has the ability and intent to
hold these securities until the anticipated recovery of fair value occurs.
Management does not believe any individual unrealized loss as of September 30,
2004 represents an other-than-temporary impairment.
7. Loans Receivable
Loans receivable consist of the following:
September 30,
2005 2004
-------------------------------------------------------------------------------
Residential Mortgages $ 270,940,562 $ 256,512,743
Commercial Mortgages 2,003,219 2,141,481
Construction 7,639,300 7,970,663
Savings Account 921,400 811,032
Home Equity 59,724,004 46,256,556
Automobile and other 771,538 732,062
Line of Credit 31,579,680 32,329,416
------------- -------------
Total 373,579,703 346,753,953
Undisbursed portion of loans in process (4,933,753) (5,237,847)
Deferred loan fees (671,426) (955,052)
Allowance for loan losses (1,967,607) (1,976,849)
------------- -------------
Loans Receivable - net $ 366,006,917 $ 338,584,205
============= =============
The Company originates both adjustable and fixed interest rate loans and
purchases both adjustable and fixed interest rate mortgage-backed securities. At
September 30, 2005, the composition of these loans and mortgage-backed
securities, in thousands, is as follows:
Fixed-Rate Adjustable-Rate
Term to Maturity Book Value Term to Maturity Book Value
-----------------------------------------------------------------
1 year or less $ 13,237 1 year or less $ 45,047
1-3 years 18,722 1-3 years 3,988
3-5 years 30,234 3-5 years 2,878
5-15 years 288,790 -
over 15 years 230,759 -
---------- -------------
$ 581,742 $ 51,913
========== =============
The adjustable rate loans have interest rate adjustment limitations and are
generally indexed to the 1-year U.S. Treasury Securities rate. Future market
factors may affect the correlation of the interest rate adjustment with the
rates the Company pays on the short-term deposits that have been primarily
utilized to fund these loans. At September 30, 2005 and 2004, the Company was
servicing loans for others amounting to approximately $4,730,000 and $2,582,000,
respectively. Servicing loans for others generally consists of collecting
mortgage payments, maintaining escrow accounts, disbursing payments to investors
and foreclosure processing. Loan servicing income is recognized over the life of
the loan. In connection with the loans serviced for others, the Company held
borrowers' escrow balances of approximately $36,000, $37,000, and $19,000 at
September 30, 2005, 2004, and 2003, respectively. Loans to officers and
directors at September 30, 2005 and 2004, were approximately $459,000 and
$455,000, respectively. Additional loans and repayments for the year ended
September 30, 2005, were $70,000 and $127,000, respectively, and for the year
ended September 30, 2004, were approximately $114,000 and $85,000, respectively.
The Company provides loans primarily in its local market area to borrowers that
share similar attributes. This concentration of credit exposes the Company to a
higher degree of risk in this regard.
The following schedule summarizes the changes in the allowance for loan losses:
Year Ended September 30,
2005 2004 2003
-------------------------------------------------------------------------------
Balance, beginning of year $ 1,976,849 $ 1,990,672 $ 2,034,832
Recoveries 83,707 1,571 -
Charged off (92,949) (15,394) (44,160)
------------ ------------ -----------
Balance, end of year $ 1,967,607 $ 1,976,849 $ 1,990,672
============ ============ ===========
The activity in the recoveries and charge off accounts was primarily the result
of the Company's Bounce protection program. This program extends credit
automatically to our depositors. If the account is not brought current by the
depositor the loan is charged off. If the customer subsequently brings the
account current, a recovery is recognized.
2005 ANNUAL REPORT 23
The provision for loan losses charged to expense is based upon past loss
experiences and an evaluation of potential losses in the current loan portfolio,
including the evaluation of impaired loans under SFAS No. 114. A loan is
considered to be impaired when, based upon current information and events, it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan. An insignificant delay or insignificant
shortfall in amount of payments does not necessarily result in the loan being
identified as impaired. For this purpose, delays less than 90 days are
considered to be insignificant. As of September 30, 2005, 100% of the impaired
loan balance was measured for impairment based on the fair value of the loans'
collateral. Impairment losses are included in the provision for loan losses.
SFAS No. 114 does not apply to large groups of smaller balance homogeneous loans
that are collectively evaluated for impairment, except for those loans
restructured under a troubled debt restructuring. Loans collectively evaluated
for impairment include consumer loans and residential real estate loans. At
September 30, 2005 and 2004, the Company's impaired loans consisted of smaller
balance residential mortgage loans collectively evaluated for impairment.
Non-performing loans (which include loans in excess of 90 days delinquent) at
September 30, 2005 and 2004, amounted to approximately $260,000 and $291,000,
respectively. The non-performing loans are still accruing interest. The loans
were collectively evaluated for impairment.
8. Accrued Interest Receivable
Accrued interest receivable consists of the following:
September 30,
2005 2004
-------------------------------------------------------------------------------
Investments and interest-bearing deposits $ 1,022,126 $ 763,024
Mortgage-backed securities 1,036,830 1,020,426
Loans receivable 1,373,098 1,285,588
----------- -----------
Total $ 3,432,054 $ 3,069,038
=========== ===========
9. Office Properties and Equipment
Office properties and equipment are summarized by major classifications as
follows:
September 30,
2005 2004
-------------------------------------------------------------------------------
Land $ 184,788 $ 184,788
Buildings 6,383,356 6,304,262
Furniture, fixtures and equipment 3,433,247 3,102,835
Automobiles 24,896 24,896
----------- -----------
Total 10,026,287 9,616,781
Less accumulated depreciation (4,196,593) (3,867,806)
----------- -----------
Net $ 5,829,694 $ 5,748,975
=========== ===========
Depreciation expense for the years ended September 30, 2005, 2004, and 2003
amounted to approximately $436,000, $484,000, and $535,000, respectively.
10. Deposits
Deposits are summarized as follows:
September 30,
2005 2004
Weighted Weighted
Interest Interest
Amount Rate Amount Rate
-------------------------------------------------------------------------------
NOW accounts $ 18,282,489 0.25% $ 19,838,879 0.15%
Non-interest
Checking accounts 9,618,764 0.00% 8,335,991 0.00%
Interest Checking
accounts 9,102,649 2.47% 3,431,273 0.75%
Money Market
Deposit accounts 76,581,019 1.32% 100,448,760 1.03%
Passbook and Club
accounts 3,806,599 0.78% 4,047,204 0.67%
Certificate accounts 301,588,135 3.52% 269,128,532 3.09%
------------- ---- ------------- ----
Total Deposits $ 418,979,655 2.85% $ 405,230,639 2.33%
============= ==== ============= ====
At September 30, 2005, the amounts of scheduled maturities of certificate
accounts were as follows:
For the year ended September 30: 2006 $ 101,561,820
2007 106,179,890
2008 60,900,378
2009 30,955,488
2010 1,990,559
-------------
Total $ 301,588,135
=============
24 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
The aggregate amount of certificate accounts in denominations of $100,000 or
more at September 30, 2005 and 2004 amounted to approximately $39.7 million and
$28.1 million, respectively. Deposits in excess of $100,000 are not federally
insured.
The following table sets forth the maturity of certificate deposits in excess of
$100,000 as of September 30, 2005.
Amount
(In thousands)
1 to 3 months $ 2,237
4 to 6 months 4,907
7 to 12 months 6,306
Thereafter 26,257
--------------
Total $ 39,707
==============
Interest expense on savings deposits is composed of the following:
September 30,
2005 2004 2003
-------------------------------------------------------------------------------
NOW accounts and MMDA accounts $ 1,245,110 $ 1,093,438 $ 1,380,039
Passbook and Club accounts 26,325 22,734 36,472
Certificate accounts 9,065,269 7,984,282 9,207,886
------------ ------------ -----------
Total $ 10,336,704 $ 9,100,454 $10,624,397
============ ============ ===========
11. Advances from Federal Home Loan Bank
Advances from the Federal Home Loan Bank consist of the following:
September 30,
2005 2004
Weighted Weighted
Interest Interest
Maturing Period Amount Rate Amount Rate
-------------------------------------------------------------------------------
1 to 12 months $ 36,043,911 3.73% $ 40,428,147 3.40%
13 to 24 months 25,446,061 3.66% 9,545,900 3.55%
25 to 36 months 69,114,248 4.83% 28,476,845 3.59%
37 to 48 months 31,484,966 3.89% 54,582,988 5.08%
49 to 60 months 9,302,331 3.97% 34,950,243 3.77%
61 to 72 months 40,208,732 5.35% 15,000,000 6.08%
73 to 84 months 60,668,239 4.47% 25,968,870 4.89%
85 to 120 months 25,000,000 3.80% 57,000,000 4.43%
------------- ---- ------------- ----
Total $ 297,268,488 4.38% $ 265,952,993 4.34%
============= ==== ============= ====
The advances are collateralized by Federal Home Loan Bank stock and
substantially all first mortgage loans.
The Company has a line of credit of which $21.0 million and $19.1 million of the
available $40.0 million was used at September 30, 2005 and 2004, respectively.
The average balance outstanding on the line of credit for September 30, 2005 and
2004 was $29.4 million and $20.3 million, respectively. The maximum amount
outstanding at any time for 2005 and 2004 was $36.1 million and $25.6 million,
respectively. The weighted average interest rate during 2005 and 2004 was 2.98%
and 1.38%, respectively.
2005 ANNUAL REPORT 25
12. Income Taxes
The Company computes its reserve for bad debts under the specific charge-off
method. The bad debt deduction allowable under this method is available to large
banks with assets greater than $500 million. Generally, this method allows the
Company to deduct an annual addition to the reserve for bad debts equal to its
net charge-offs. Retained earnings at September 30, 2005 and 2004 includes
approximately $1,325,000 representing bad debt deductions for which no deferred
income taxes have been provided.
The expense for income taxes differs from that computed at the statutory federal
corporate tax rate as follows:
Year Ended September 30,
2005 2004 2003
Percentage Percentage Percentage
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
------------------------------------------------------------------------------------------------------------
At statutory rate $ 2,276,724 34.0% $ 2,184,643 34.0% $ 2,063,728 34.0%
Adjustments resulting from:
Tax-exempt income (595,428) (8.9) (572,457) (8.9) (596,865) (9.8)
State tax-net of federal
tax benefit 69,588 1.0 29,057 0.5 27,654 0.5
Other (58,357) (0.8) (37,419) (0.6) (18,632) (0.3)
----------- ---- ----------- ---- ----------- ----
Expense per consolidated
statements of income $ 1,692,527 25.3% $ 1,603,824 25.0% $ 1,475,885 24.4%
=========== ==== =========== ==== =========== ====
Income tax expense is summarized as follows:
Year Ended September 30,
2005 2004 2003
-------------------------------------------------------------------
Current $ 1,624,759 $ 1,628,569 $ 1,693,594
Deferred 67,768 (24,745) (217,709)
----------- ----------- -----------
Total Income Tax Expense $ 1,692,527 $ 1,603,824 $ 1,475,885
=========== =========== ===========
Items that gave rise to significant portions of the deferred tax accounts are as
follows:
September 30,
2005 2004
-------------------------------------------------------------------
Deferred Tax Assets:
Deferred Loan Fees $ 87,919 $ 87,330
Allowance for Loan Losses 668,986 672,129
Unrealized loss on investment securities 4,746 -
Other 9,846 -
--------- ---------
Sub-Total 771,497 759,459
--------- ---------
Deferred Tax Liabilities:
Unrealized gain on investment securities - (17,064)
Property (431,910) (352,645)
Other - (4,205)
--------- ---------
Sub-Total (431,910) (373,914)
--------- ---------
Total $ 339,587 $ 385,545
========= =========
Income taxes paid were approximately $1,528,000, $1,533,000, and $1,461,000 for
the years ended September 30, 2005, 2004, and 2003, respectively.
26 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
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 September 30, 2005,
that the Bank meets all capital adequacy requirements to which it is subject. As
of September 30, 2005, 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 September 30, 2005
Tier 1 Capital (to assets) $ 47,524,213 6.26% $ 30,376,680 4.00% $ 37,970,850 5.00%
Tier 1 Capital (to risk weighted assets) 47,524,213 13.31% 14,283,160 4.00% 21,424,740 6.00%
Total Capital (to risk weighted assets) 49,491,820 13.86% 28,566,320 8.00% 35,707,900 10.00%
As of September 30, 2004
Tier 1 Capital (to assets) $ 44,124,545 6.20% $ 28,480,960 4.00% $ 35,601,200 5.00%
Tier 1 Capital (to risk weighted assets) 44,124,545 13.69% 12,890,920 4.00% 19,336,380 6.00%
Total Capital (to risk weighted assets) 46,127,545 14.31% 25,781,840 8.00% 32,227,300 10.00%
14. Retirement Savings Plan
The Company has an employee stock ownership pension plan and a qualified 401 (k)
retirement savings plan covering all full-time employees meeting certain
eligibility requirements. Contributions for both plans are at the discretion of
the Company's Board of Directors. Contributions expense related to the plans was
$260,528, $241,185 and $201,793 for the years ended September 30, 2005, 2004,
and 2003, respectively.
15. Stock Options
In 1987, the Company established a stock compensation program for executive
officers and other selected full-time employees and directors of the Company.
The 1987 program consists of four plans that are available for grant: Plan I -
incentive stock options; Plan II - compensatory stock options; Plan III - stock
appreciation rights; and Plan IV - performance share awards.
In January 1996, the stockholders approved the 1995 Stock Option Plan. This plan
consists of two parts: Plan I - incentive stock options and Plan II -
compensatory stock options.
In January 2001, the stockholders approved the 2000 Stock Option Plan. This plan
consists of two parts: Plan I - incentive stock options and Plan II -
compensatory stock options.
A summary of transactions under this plan follows:
Year Ended September 30,
2005 2004 2003
Weighted Weighted Weighted
Average Average Average
Options Price Options Price Options Price
-------------------------------------------------------------------------------------------------
Outstanding, beginning of year 201,982 $ 10.96 209,802 $ 8.99 213,680 $ 8.14
Exercised (69,133) 9.16 (42,320) 6.73 (27,212) 7.12
Canceled (2,917) 13.50 (2,500) 11.17 (13,833) 10.50
Granted 39,100 17.78 37,000 17.16 37,167 13.13
------- -------- -------- -------- -------- --------
Outstanding, end of year 169,032 $ 13.23 201,982 $ 10.96 209,802 $ 8.99
======= ======== ======== ======== ======== ========
Options exercisable, end of year 98,267 $ 11.98 130,315 $ 9.41 123,968 $ 7.52
======= ======== ======== ======== ======== ========
2005 ANNUAL REPORT 27
A summary of the exercise price range at September 30, 2005 is as follows:
Exercise Weighted Weighted Average
Number of Price Average Remaining Exercise Price
Option Shares Range Contractual Life per Share
------------- --------------- ----------------- ----------------
66,682 $ 5.81 - 11.48 4.87 years $ 9.13
102,350 $ 12.06 - 17.79 8.08 years 15.90
------------- --------------- ----------------- ----------------
169,032 $ 5.81 - 17.79 6.81 years $ 13.23
============= =============== ================= ================
The Company also has established an Employee Stock Purchase Plan (the "Purchase
Plan") whereby employees may elect to make contributions to the Purchase Plan in
an aggregate amount not less than 2% no more than 10% of such employee's total
compensation. These contributions would then be used to purchase stock during an
offering period determined by the Company's Salary and Benefits Committee. The
purchase price of the stock would be the lesser of 85% of the market price on
the first day or the last day of the offering period. The SFAS No. 123 impact of
the Purchase Plan on pro forma net income and income per share was deemed to be
immaterial. During 2005 and 2004, 3,729 and 6,927 shares were issued to
employees, respectively. At September 30, 2005 and 2004, there were 31,081 and
36,898 shares available for future purchase. The Company suspended participation
in the Purchase Plan in March 2005 and the plan is not currently active.
16. Commitments
At September 30, 2005, the Company had approximately $10.8 million in
outstanding commitments to originate mortgage loans, of which $8.8 million were
at fixed rates ranging from 5.25% to 6.50% and adjustable rates of $2.0 million
ranging from 4.75 to 5.38%. The unfunded line of credit commitments at September
30, 2005 were $39.9 million. The amounts of undisbursed portions of loans in
process at September 30, 2005 were $4.9 million. At September 30, 2005 the
Company had exposures to limited recourse arrangements with respect to the
Company's sale of whole loans. At September 30, 2005, the exposure, which
represents a portion of credit risk associated with the sold interests, amounted
to $83,000. The exposure is for the life of the related loans and payable, on
our proportional share, as losses are incurred. Also, at September 30, 2005, the
Company had no outstanding futures or options positions.
The Company leases land for two of its branch offices. Minimum rental
commitments at September 30, 2005, are summarized below:
Fiscal Rental
Year Amount
------ ---------
2006 94,174
2007 94,174
2008 98,407
2009 104,332
2010 106,978
---------
Total $ 498,065
=========
17. Legal Contingencies
Various legal claims also arise from time to time in the normal course of
business which, in the opinion of management, will have no material effect on
the Company's consolidated financial statements.
18. Conversion To A Stock Savings Bank
At the time of conversion, in 1987, the Bank established a liquidation account
in an amount equal to the Bank's net worth as reflected in the latest
consolidated statement of financial condition of the Bank contained in the
offering circular utilized in the conversion. The function of the liquidation
account is to establish a priority on liquidation and, except with respect to
the payment of cash dividends on, or the re-purchase of, any of the common stock
by the Bank, the existence of the liquidation account will not operate to
restrict the use or application of any of the net worth accounts of the Bank. In
the event of a complete liquidation of the Bank (and only in such event), each
eligible account holder will be entitled to receive a pro rata distribution from
the liquidation account, based on such holder's proportionate amount of the
total current adjusted balances from deposit accounts then held by all eligible
account holders, before any liquidation distribution may be made with respect to
stockholders. The liquidation account was approximately $2,300,000 at September
30, 2005. Furthermore, the Company may not repurchase any of its stock if the
effect thereof would cause the Company's net worth to be reduced below (i) the
amount required for the liquidation account or (ii) the regulatory capital
requirements.
28 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
19. Fair Market Value of Financial Instruments
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret the market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
September 30,
2005 2004
Carrying Estimated Fair Carrying Estimated Fair
Amount Value Amount Value
--------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 7,934,980 $ 7,934,980 $ 4,718,784 $ 4,718,784
Investment securities held to maturity 87,364,445 88,404,000 68,161,572 69,439,000
Investment securities available-for-sale at fair value 2,835,244 2,835,244 7,714,840 7,714,840
Mortgage-backed securities held to maturity 263,963,765 259,994,000 261,291,730 262,560,000
Mortgage-backed securities available-for-sale at fair value 1,045,087 1,045,087 3,795,274 3,795,274
Loans receivable - net 366,006,917 363,642,590 338,584,205 337,999,592
Federal Home Loan Bank Stock 16,035,900 16,035,900 15,184,100 15,184,100
Liabilities:
Passbook, Club and NOW accounts 40,810,501 40,810,501 35,653,347 35,653,347
Money Market Demand accounts 76,581,019 76,581,019 100,448,760 100,448,760
Certificate accounts 301,588,135 299,156,071 269,128,532 259,853,072
Advances from Federal Home Loan Bank 297,268,488 298,554,899 265,952,993 256,177,581
The carrying amounts of cash and short-term instruments approximate fair values.
The carrying amounts of interest-bearing deposits maturing within ninety days
approximate their fair values. The fair value of investment securities and
mortgage-backed securities is based on quoted market prices, dealer quotes, and
prices obtained from independent pricing services. For variable-rate loans that
reprice frequently and with no significant change in credit risk, fair values
are based on carrying values. Fair values for certain mortgage loans (e.g.,
one-to-four family residential) and other consumer loans are based on quoted
market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. Fair values for
non-performing loans are estimated using discounted cash flow analyses or
underlying collateral values, where applicable. Although Federal Home Loan Bank
Stock (FHLB) is an equity interest in FHLB, it is carried at cost because it
does not have a readily determinable fair value as its ownership is restricted
and it lacks a market. The estimated fair value approximates the carrying
amount.
The fair value of NOW and money market deposits and savings accounts is the
amount reported in the consolidated financial statements. The fair value of
savings certificates and advances from Federal Home Loan Bank are based on a
present value estimate using rates currently offered for instruments of similar
remaining maturity. Fair values for off-balance sheet lending commitments are
based on fees currently charged to enter similar agreements.
The fair value estimates presented herein are based on pertinent information
available to management as of September 30, 2005 and 2004. Although management
is not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since that date and, therefore, current estimates
of fair value may differ significantly from the amounts presented herein.
20. Parent Company Condensed Financial Information
Condensed financial statements of Harleysville Savings Financial Corporation
are as follows:
Condensed Statements of Financial Condition
September 30,
2005 2004
--------------------------------------------------------------------------------
Assets
Cash $ 19,441 $ 126,447
Investment in subsidiary 47,603,551 44,230,233
------------ ------------
Total Assets $ 47,622,992 $ 44,356,680
============ ============
Liabilities & Stockholders' Equity
Liabilities
Other Liabilities $ 47,176 $ 43,768
Stockholders' equity 47,575,816 44,312,912
------------ ------------
Total liabilities & stockholders' equity $ 47,622,992 $ 44,356,680
============ ============
2005 ANNUAL REPORT 29
Condensed Statement of Income
Year Ended September 30,
2005 2004 2003
------------ ------------ ------------
Income:
Equity in undistributed income of subsidiary $ 5,375,655 $ 5,150,997 $ 4,832,221
Other expense 371,935 300,900 238,318
------------ ------------ ------------
Net income $ 5,003,720 $ 4,850,097 $ 4,593,903
============ ============ ============
Condensed Statement of Cash Flows
Year Ended September 30,
2005 2004 2003
------------ ------------ ------------
Net income $ 5,003,720 $ 4,850,097 $ 4,593,903
Increase (decrease) in other Liabilities 3,408 7,506 (3,916)
Undistributed income of Harleysville Savings Bank (5,375,655) (5,150,997) (4,832,221)
------------ ------------ ------------
Net cash used by operating activities (368,527) (293,394) (242,234)
------------ ------------ ------------
Investing activities:
Dividends received from subsidiaries 1,960,000 1,696,000 1,905,100
------------ ------------ ------------
Net cash provided by investing activities 1,960,000 1,696,000 1,905,100
------------ ------------ ------------
Financing activities:
Acquisition of treasury stock (328,280) (251,580) (808,841)
Use of treasury stock 571,223 707,826 694,397
Proceeds from issuance of common stock 310,914 - -
Dividends paid (2,252,336) (1,826,303) (1,497,528)
------------ ------------ ------------
Net cash used in financing activities (1,698,479) (1,370,057) (1,611,972)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (107,006) 32,549 50,894
Cash and cash equivalents at the beginning of the period 126,447 93,898 43,004
------------ ------------ ------------
Cash and cash equivalents at the end of the period $ 19,441 $ 126,447 $ 93,898
============ ============ ============
21. Quarterly Financial Data (Unaudited)
Unaudited quarterly financial data for the years ended September 30, 2005 and
2004 is as follows:
2005 2004
---------------------------------- ----------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
QTR QTR QTR QTR QTR QTR QTR QTR
---------------------------------- ----------------------------------
Interest Income $ 8,586 $ 8,848 $ 9,167 $ 9,281 $ 8,064 $ 8,105 $ 8,087 $ 8,349
Interest Expense 5,351 5,503 5,856 6,037 5,171 5,005 5,047 5,169
---------------------------------- ----------------------------------
Net Interest Income 3,235 3,345 3,311 3,244 2,893 3,100 3,040 3,180
Provision for loan loss (40)
---------------------------------- ----------------------------------
Net interest income after
provision for loan losses 3,235 3,345 3,311 3,284 2,893 3,100 3,040 3,180
Non-interest income 407 341 379 359 452 434 322 430
Non-interest expense 1,959 2,012 2,017 1,976 1,746 1,888 1,891 1,873
---------------------------------- ----------------------------------
Income before income taxes 1,683 1,674 1,673 1,667 1,599 1,646 1,471 1,737
Income tax expense 428 432 429 405 391 411 350 452
---------------------------------- ----------------------------------
Net income $ 1,255 $ 1,242 $ 1,244 $ 1,262 $ 1,208 $ 1,235 $ 1,121 $ 1,285
================================== ==================================
Per Common Share:
Earnings per share - basic $ 0.33 $ 0.32 $ 0.32 $ 0.32 $ 0.32 $ 0.32 $ 0.29 $ 0.34
Earnings per share - diluted $ 0.32 $ 0.32 $ 0.32 $ 0.32 $ 0.31 $ 0.32 $ 0.29 $ 0.33
Earnings per share is computed independently for each period presented.
Consequently, the sum of the quarters may not equal the total earnings per share
for the year.
The number of shares and per share information for all periods presented has
been restated to reflect the five for three stock split.
30 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
Market and Corporate Information
Market Information
Harleysville Savings Financial Corporation's Common Stock is traded in the
Over-the-Counter Market and quoted on the NASDAQ National Market System under
the symbol "HARL". The Common Stock was issued at an adjusted price of $1.45 per
share in connection with the Company's conversion from mutual to stock form and
the Common Stock commenced trading on the NASDAQ National Market System on
September 3, 1987. Prices shown below reflect the prices reported by the NASDAQ
systems. The closing price on September 30, 2005, was $17.15 per share. There
were 3,900,881 shares outstanding as of September 30, 2005, held by
approximately 1,000 stockholders.
Cash Dividends
For The Quarter Ended High Low Close Declared
-------------------------------------------------------------------------------
September 30, 2003 $ 16.55 $ 15.00 $ 15.83 $ 0.11
December 31, 2003 18.15 15.40 17.94 0.12
March 31, 2004 20.70 16.89 18.00 0.12
June 30, 2004 20.10 15.69 16.42 0.12
September 30, 2004 18.00 15.45 17.25 0.12
December 31, 2004 18.12 16.35 18.06 0.13
March 31, 2005 26.00 16.50 18.75 0.15
June 30, 2005 20.00 16.00 17.70 0.15
September 30, 2005 18.25 17.00 17.15 0.15
-------------------------------------------------------------------------------
Corporate Information
Auditors
Deloitte & Touche LLP
1700 Market Street
Philadelphia, PA 19103-3984
(215) 246-2300
Annual Meeting
Indian Valley Country Club
Telford, PA 18969
Wednesday, January 25, 2006
9:30 A.M.
Market Makers
Boenning & Scattergood, Inc.
Midwest Res. First Tennessee
Ryan Beck & Co., Inc.
Special Counsel
Elias, Matz, Tiernan & Herrick LLP.
734 15th Street, N.W.
Washington, DC 20005
(202) 347-0300
Dividend Reinvestment Plan
The Company has a Dividend Reinvestment and Stock
Purchase Plan. Interested stockholders can
obtain more information regarding the Plan by
contacting:
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
(800) 525-7686, extension 2542
General Counsel
James J. Garrity
Wisler, Pearlstine, Talone, Craig, Garrity & Potash
Office Court at Walton Point
484 Norristown Road
Blue Bell, PA 19422
(610) 825-8400
Investor Information
Investors, Analysts and others seeking
financial information may contact:
Chief Financial Officer
Harleysville Savings Financial Corporation
271 Main Street
Harleysville, PA 19438
(215) 256-8828
Transfer Agent
Direct questions regarding dividend
checks, address and name changes or
lost certificates to:
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
web site: www.rtco.com
email: invrel@rtco.com
Upon request, the Company's Annual Report or form 10-K for the year ended
September 30, 2005, and the exhibits thereto required to be filed with the
Securities and Exchange Commission under the Securities Act of 1934 will be
furnished without charge to any stockholder.
2005 ANNUAL REPORT 31
BOARD OF DIRECTORS
Sanford L. Alderfer
President
Sanford Alderfer
Auction Co., Inc.
Hatfield, PA
Ronald B. Geib
President/COO
Harleysville Savings
Financial Corporation
Harleysville, PA
James J. Rittenhouse, CPA
Shareholder in the firm
Detweiler, Hershey &
Associates, P.C.
Souderton, PA
Philip A. Clemens
Chairman/CEO
Clemens Family Corporation
Hatfield, PA
Charlotte A. Hunsberger, Esq.
Partner
Bricker, Landis & Hunsberger
Souderton, PA
Mark R. Cummins, CPA, CFA
Executive Vice President,
CIO, and Treasurer
Harleysville Insurance Companies
Harleysville, PA
George W. Meschter
President
Meschter Insurance Group
Collegeville, PA
David J. Friesen, CPA
Director of Development
Penn View Christian School
Souderton, PA
Edward J. Molnar
Chairman/CEO
Harleysville Savings
Financial Corporation
Harleysville, PA
OFFICERS
Edward J. Molnar
Chairman and
Chief Executive Officer
Ronald B. Geib
President and
Chief Operating Officer
Marian Bickerstaff
Senior Vice President
Chief Lending Officer
and Corporate Secretary
Brendan J. McGill
Senior Vice President,
Chief Financial Officer
and Treasurer
MANAGERS
Helena C. Baron
Assistant Vice President
and Lansdale
Office Manager
Adrian D. Gordon
Vice President
and Information
Systems Manager
Denise L. Monaghan
Assistant Vice President
and Loan Administration
Manager
Sherry C. Williamson
Assistant Vice President
and Upper Providence
Office Manager
Michelle A. Beck
Assistant Vice President
and Security Officer
Dawn L. Hufnagle
Assistant Vice President
and Sumneytown
Office Manager
Paul F. Pendrak
Assistant Vice President
and Hatfield
Office Manager
Diane M. Carlson
Assistant Vice President and
Human Resource Manager
Kim A. Licata
Assistant Vice President
and Loan Customer
Service Manager
Anne J. Rostosky
Assistant Vice President
and Harleysville
Office Manager
Kathleen Clairmont
Assistant Vice President
and West Norriton
Office Manager
M. Shane Michalak
Vice President, Controller
and Accounting
Department Manager
Sheri Strouse
Vice President and
Branch Administrator
32 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
MANAGERS
[PHOTO] [PHOTO]
MICHELLE A. BECK ADRIAN D. GORDON DENISE L. MONAGHAN KIM A. LICATA
Assistant Vice President Vice President and Information Assistant Vice President Assistant Vice President and
and Security Officer System Manager and Hatfield Office Manager Loan Customer Service Manager
[PHOTO] KATHLEEN CLAIRMONT
Assistant Vice President and
West Norriton Office Manager
SHERI STROUSE
Vice President and Branch Administrator
SHERRY L. WILLIAMSON
Assistant Vice President
and Upper Providence Office Manager
ANNE J. ROSTOSKY
Assistant Vice President and
and Harleysville Office Manager
[PHOTO] PAUL F. PENDRAK
Assistant Vice President
and Hatfield Office Manager
DAWN L. HUFNAGLE
Assistant Vice President
and Sumneytown Office Manager
HELENA C. BARON
Assistant Vice President
and Lansdale Office Manager
DIANE M. CARLSON
Assistant Vice President
and Human Resource Manager
M I S S I O N S T A T E M E N T
Harleysville Savings Financial Corporation's focus is to be your trusted
financial partner by providing quality financial products and services; by
providing a rewarding place for our employees to work; by being a responsible
corporate citizen of the community; and by achieving a fair and reasonable
return for our stockholders.
HARLEYSVILLE OFFICE HATFIELD OFFICE LANSDALE OFFICE SUMNEYTOWN OFFICE WEST NORRITON OFFICE
271 Main Street 1550 Cowpath Road 640 East Main Street 3090 Main Street 2301 West Main Street
Harleysville, PA 19438 Hatfield, PA 19440 Lansdale, PA 19446 Sumneytown, PA 18084 Norristown, PA 19403
(215) 256-8828 (215) 362-0750 (215) 855-1011 (215) 234-8053 (610) 631-0887
h a r l e y s v i l l e s a v i n g s . c o m