Harleysville Savings
FINANCIAL CORPORATION
2000 Annual Report
<PAGE>
Mission Statement
Harleysville Savings Bank's focus is to be your
trusted financial partner by providing quality
financial products and services to families and
individuals; 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.
<PAGE>
Selected Consolidated Financial and Other Data
Selected Balance Sheet Data:
(in thousands except per share data)
<TABLE>
<CAPTION>
As of September 30,
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Assets $488,554 $459,848 $417,533 $345,239 $315,495
Mortgage-backed securities held to maturity 116,304 116,778 78,793 18,303 16,262
Mortgage-backed securities available-for-sale 7,440 7,916 3,695 3,983 4,120
Loans receivable - net 262,774 252,260 251,729 244,503 233,216
Investment securities held to maturity 71,281 61,015 50,622 48,461 45,265
Investment securities available-for-sale 3,310 3,202 1,586 3,515 6,376
Other investments (1) 10,221 9,155 22,740 18,876 2,760
Deposits 309,836 303,660 289,827 273,773 249,260
FHLB advances and other borrowings 145,134 125,180 99,953 46,414 43,820
Total stockholders' equity 31,398 28,963 26,100 22,872 19,617
Book value per share 14.05 12.83 11.68 10.32 9.11
</TABLE>
<TABLE>
<CAPTION>
Selected Operations Data: Year Ended September 30,
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $33,182 $29,716 $27,129 $24,485 $20,969
Interest expense 22,795 20,199 17,949 15,362 12,964
------------- ------------- ------------- ------------- -------------
Net interest income 10,387 9,517 9,180 9,123 8,005
Provision for loan losses - 17 120 177 200
------------- ------------- ------------- ------------- -------------
Net interest income after provision
for loan losses 10,387 9,500 9,060 8,946 7,805
Gain (loss) on sales of loans and securities 40 35 101 (10) 11
Other income 512 451 453 423 341
FDIC special assessment 1,355
Other expense 5,380 4,858 4,528 4,161 4,404
------------- ------------- ------------- ------------- -------------
Income before taxes 5,559 5,128 5,086 5,198 2,398
Income tax expense 1,702 1,622 1,605 1,784 840
------------- ------------- ------------- ------------- -------------
Net income $ 3,857 $ 3,506 $ 3,481 $ 3,414 $ 1,558
============= ============= ============= ============= =============
Earnings per share - basic $ 1.72 $ 1.56 $ 1.57 $ 1.56 $ 0.73
Earnings per share - diluted 1.70 1.53 1.52 1.52 0.71
Dividends per share 0.44 0.36 0.32 0.29 0.24
Selected Other Data:
</TABLE>
<TABLE>
<CAPTION>
(based on monthly balances) Year Ended September 30,
2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Return on average assets 0.81% 0.81% 0.93% 1.04% 0.55% (2)
Return on average equity 12.82% 12.83% 14.24% 16.14% 8.07% (2)
Average equity to average assets 6.43% 6.32% 6.52% 6.42% 6.77%
Interest rate spread 1.92% 1.91% 2.15% 2.48% 2.52%
Net yield on interest-earning assets 2.24% 2.25% 2.50% 2.83% 2.87%
Ratio of non-performing assets to
total assets at end of period 0.04% 0.07% 0.04% 0.02% 0.09%
Ratio of interest-earning assets to
interest-bearing liabilities 107% 107% 107% 107% 108%
Full service banking offices at
end of period 4 4 4 4 4
</TABLE>
(1) Includes interest-bearing deposits at other depository institutions & stock
of the Federal Home Loan Bank of Pittsburgh.
(2) Calculations are after the FDIC special assessment. Before the assessment
of $831,365, net of tax, return on average assets was 0.84% and the return
on average equity was 12.34%.
1
<PAGE>
To our Stockholders:
We are pleased to report to you that fiscal 2000 brought another year
of strong earnings. Net income amounted to $3,857,000, an increase of 10% over
the previous record earned in fiscal 1999. This is the most that that
Harleysville Savings has earned in any year in its 85 year history.
Net income amounted to $1.70 per share. Return on average equity was
12.82% and return on average assets was .81% for the year. Stockholders' equity
increased to $14.05 per share from $12.83 per share a year ago. During fiscal
year 2000, assets increased 6.2% to $488 million.
Providing a fair and reasonable return for our stockholders is an
important goal in our mission statement. The increase in market value plus cash
dividends provided our stockholders with an overall return of 10.7% this past
fiscal year. The board of directors increased the regular quarterly cash
dividend from $.11 per share to $.12 per share, payable on November 22, 2000 to
stockholders of record on November 8, 2000.
Long-term investors have been rewarded during the thirteen year period
that Harleysville Savings has been a public company. Through market appreciation
and cash dividends, stockholders have experienced average yearly return in
excess of 16.5%. Since going public in 1987, Harleysville Savings has delivered
a total return of 728%, a return that was much higher than the S & P 500 index
of 543%. The cash dividend represents the 53rd consecutive quarterly cash
dividend paid and is the 13th consecutive year that the cash dividend has been
increased.
The most important financial goal in Harleysville Savings' Five Year
Strategic Plan is "Return on Equity". Management strongly believes that
achieving goals on a consistent basis for return on stockholders' equity creates
a solid foundation for long-term value. Management is proud of the fact that
"return on equity" goals that are commensurate with Harleysville Savings' risk
profile have been achieved in every year of our life as a public company and
have exceeded the levels reached by our savings institution peer banks in
results reported by America's Community Bankers.
Return on Average Equity - Harleysville vs Peers
Year HSFC Peer Bank HSFC Advantage
---- ---- --------- --------------
1995 13.51% 8.28% 5.23%
1996* 12.34% 8.22% 4.12%
1997 16.14% 10.22% 5.92%
1998 14.24% 11.12% 3.12%
1999 12.83% 9.52% 3.31%
Dec-99 12.97% 10.38% 2.59%
Mar-00 13.21% 9.66% 3.55%
Jun-00 12.77% N/A N/A
Sep-00 12.31% N/A N/A
* Percentages do not reflect the FDIC special assessment.
Source: America's Community Bankers Peer Group Report
N/A - Not available
We have steadfastly adhered to our mission of serving the personal
banking needs of families and individuals in our communities. We are committed
to being our customers' "Trusted Financial Partner" by providing quality
financial products and services.
In addition to maintaining the core values that have contributed so
significantly to Harleysville Savings achieving a reputation as a strong and
viable community banking institution for more than 85 years, we are excited
about the advances in new technology that allow us to give our valued customers
more convenient service and quality financial products.
* The public may now visit us at harleysvillesavings.com and our
customers may use our transactional OnLine Banking System to
transfer funds and access their account information.
* Our Access 24 Telephone Banking system gives our customers access
to their account information and the ability to move money between
accounts.
* We are expanding our ATM network with ATM machines at each branch
and a growing network of remote ATM's. We currently have eleven
convenient locations throughout our communities.
* Our checking account customers enjoy the benefit of using their
Harleysville Savings' MasterMoney Debit Card to get cash or make
purchases worldwide.
2
<PAGE>
* Our fifth full service office is being constructed at 640 E. Main
Street, Lansdale, PA and will be providing quality financial
products and services to customers in the Lansdale area by June,
2001.
* Business hours have been expanded at several of our present office
locations in order to provide more convenient hours to our
customers.
Even though many of the ways that Harleysville Savings does
business are changing, our core values remain intact. We believe that
our customers still want personal attention and it is our goal to
provide them with outstanding customer service. We believe that
Harleysville Savings will continue to excel because we can combine our
personal service with modern electronic delivery systems in a more cost
effective way than many of our competitors, who may be already burdened
with the overhead costs of large brick and mortar branch systems.
The success that Harleysville Savings has enjoyed is a tribute
to our greatest asset, the talented and experienced personnel who serve
our constituencies. Harleysville Savings has a group of employees
linked together by the common bond of pride and dedication, who work
diligently to deliver high quality service in a cost effective manner.
This consistent focus on operating efficiency is an important
contributor to our success. A well-trained and experienced staff
contributes significantly to Harleysville Savings' outstanding
efficiency ratios. Eleven of our employees were recognized this year
for long-term service. Receiving awards for five years were Elaine
Bergey, Marie Fazekas, Ruth Ann Kulp, Ann Tomaselli and Sherry
Williamson. Receiving awards for ten years were Bonnie Janzen and Sue
Keeler. Receiving awards for fifteen years were Kathy Clairmont and
Barbara Marcy. Receiving an award for twenty years was Bonnie Sames and
receiving an award for twenty-five years was Ron Geib.
The active management of Harleysville Savings' capital
position remains a high priority. We manage our capital position to
allow adequate resources for growth, while not allowing our capital to
be under-utilized. This past year you approved the formation of
Harleysville Savings Financial Corporation, a bank holding company. The
advantages of a holding company form of organization are already
evident in that we have been able to put into place a program to
repurchase shares of our common stock without incurring adverse tax
consequences. Also, maintaining a high quality loan portfolio has
enabled Harleysville Savings to more effectively utilize its capital
and retain more of its earnings in stockholder's equity rather than
write-offs for loan losses. This strategy has enabled management to
operate more efficiently and be successful with tighter net interest
margins than many of our bank peers.
We are pleased to report to you that the Y2K issue that was
addressed last year in this report is now history and that we
encountered absolutely no technology problems because of it.
On a more personal note, I want to recognize the service of
board member Sanford A. Alderfer, who will be retiring from our board
of directors in January 2001. Sanford has been an unselfish and
important board member for 36 years. Also retiring, after 28 years of
service, is Senior Vice President and Corporate Secretary, Diane P.
Moyer. Diane began her career with Harleysville Savings when it was
under $10 million in assets and has helped it to grow to nearly $500
million in assets today. We want to thank both Sanford and Diane for
their devoted service for these many years and wish them well in their
retirement.
In carrying out our mission, our desire is 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". By
doing so, we hope to remain focused on the core values that have
enabled this Company to be successful.
Looking ahead to the year 2001 and beyond, we are very
optimistic about the new opportunities that exist for Harleysville
Savings. Quality financial products, service and convenience are the
marks that will distinguish Harleysville Savings. 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
President and Chief Executive Officer
3
<PAGE>
Board of Directors
[GRAPHIC - PHOTO OF BOARD OF DIRECTORS]
Philip A. Clemens, David J. Friesen, George W. Meschter, Paul W. Barndt, Mark R.
Cummins, Edward J. Molnar, Sanford A. Alderfer
Senior Officers
[GRAPHIC - PHOTOS OF SENIOR OFFICERS]
Edward J. Molnar
President and
Chief Executive Officer
Ronald B. Geib
Executive Vice President and
Chief Operating Officer
Marian Bickerstaff
Senior Vice President and
Chief Lending Officer
Diane P. Moyer
Senior Vice President and
Corporate Secretary
Brendan J. McGill
Senior Vice President, Treasurer
and Chief Financial Officer
4
<PAGE>
Managers
[GRAPHIC - PHOTOS OF MANAGERS]
Adrian D. Gordon
Vice President
and Information Systems Manager
Sheri L. Strouse
Vice President
and Branch Administrator
Michelle A. Beck
Assistant Vice President
and Security Officer
Diane M. Carlson
Assistant Vice President
and Human Resource Manager
Kathlen Clairmont
Assistant Vice President
and West Norriton Office Manager
Nathanael J. Clemmer
Assistant Vice President
Controller, and
Accounting Department Manager
H. Frances Kline
Assistant Vice President
and Sumneytown Office
Manager
Kim A. Licata
Assistant Vice President
and Loan Customer Service
Manager
Lori N. McCausland
Assistant Vice President
and Loan Administration Manager
Denise L. Monaghan
Assistant Vice President
and Hartfiled Office Manager
5
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General
Harleysville Savings Financial Corporation (the "Company"), a bank holding
company, of which Harleysville Savings 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. 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, 2000, amounted to $488.6 million,
compared to $459.8 million and $417.5 million as of September 30, 1999 and 1998,
respectively. Deposits as of September 30, 2000, totaled $309.8 million,
compared to $303.7 million and $289.8 million at September 30, 1999 and 1998,
respectively. Stockholders' equity totaled $31.4 million as of September 30,
2000, compared to $29.0 million and $26.1 million at September 30, 1999 and
1998, respectively.
During fiscal 2000, net interest income increased $870,000 or 9.14% from the
prior fiscal year. This increase was the result of a 9.2% growth in the
interest-earning assets, 9.6% growth in interest-bearing liabilities and an
increase in the interest rate spread from 1.91% in fiscal 1999 to 1.92% in
fiscal 2000. Earnings for fiscal 2000 were $3.87 million compared to $3.51
million and $3.48 million for the years ended September 30, 1999 and 1998,
respectively. The Company's return on average assets (net income divided by
average total assets) was 0.81% during fiscal 2000 compared to .81% and .93%
during fiscal 1999 and 1998, respectively. Return on equity (net income divided
by average equity) was 12.82% during fiscal 2000 compared to 12.83% during
fiscal 1999 and 14.24% during fiscal 1998.
Results of Operations
The following table 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.
Interest Income
Interest income on loans increased by $271,000 or 1.8% in fiscal 1998, decreased
by $260,000 or 1.7% in fiscal 1999 and increased by $233,000 or 1.6% in fiscal
2000 from the respective prior years. During fiscal 1998, the Company
experienced an increase in the average balance of mortgage loans of $4.5 million
or 2.4% and an increase of 0.1% and the yield did not change. Likewise, during
fiscal 1999, the Company experienced an increase in the average balance of
mortgage loans of $1.9 million or 1.0% and the yield increased by .2%. During
fiscal 2000, the average balance of mortgage loans increased $6.7 million or
3.5% and the yield decreased by .1%. The increase in the balance of mortgage
loans reflects the Company's ability to originate mortgage loans despite an
increase in refinancing of existing loans. The majority of loans originated
during the year were adjustable rate mortgages. The interest income on
mortgage-backed securities reflected an increase of $26.3 million or 26.8% in
the average balance and a 0.7% increase in yield earned during fiscal 2000. 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 loans
during fiscal 1999 and 2000 to offset the lower interest rate spread. The
decrease in interest income on consumer and other loans reflected a small
decrease in the average balance of $2,000 or .03%, which was offset by a
increase in the yield to 7.70%.
Interest and dividends on investments increased by $295,000 or 7.2% in fiscal
1998 and decreased by $3,000 or 1.0% in fiscal 1999 over the respective prior
years. During fiscal 1998, the increase resulted from a $7.3 million or 11.6%
growth in the average balance offset by a 0.3% decrease in the yield earned.
During fiscal 1999, the decrease resulted from a $2.5 million or 3.6% growth in
the average balance and the yield decreased 0.2%. During fiscal 2000, the
average balance increased $8.0 million or 10.9% and the yield decreased 0.4% to
produce the $811,000 or 18.4% increase in interest and dividends on investments.
The increase in the average balance reflects funds that will be able to be
redeployed into higher earning assets as the market permits.
Interest Expense
Interest expense on deposits increased by $1.2 million or 9.5% in fiscal 1998,
by $13,000 or .09% in fiscal 1999 and increased by $868,000 or 6.1% in fiscal
2000 as compared to the respective prior years. In fiscal 1998, the average
balance increased $17.7 million or 6.8% in addition to a 0.1% increase in the
average rate paid. In fiscal 1999, the average balance increased $12.4 million
or 4.5% with a 0.2% decrease in the average rate paid. Likewise, in fiscal 2000,
the average balance increased $12.0 million or 4.1% with a 0.09% increase in the
average rate paid. The increase in the average balance reflects normal savings
activity for the Company. The average rate paid on deposits was 5.2% for the
year ended September 30, 2000, compared to 4.9% and 5.1% for the years ended
September 30, 1999 and 1998, respectively. During fiscal 2000, the treasury
rates increased. Thus, the average rate paid on deposits increased for the
financial industry. This has resulted in a higher cost of funds for the
financial industry. The successful results the stock market has experienced over
the past five years has provided a major source of competition for savings
deposits.
6
<PAGE>
<TABLE>
<CAPTION>
For The Year Ended September 30, As of
-------------------------------------------------------------------------------------
1998 1999
---------------------------------------- -------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------- ---------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $ 190,535 $ 15,092 7.92% $192,388 $ 14,832 7.71%
Mortgage-backed securities 46,360 2,985 6.44% 98,155 6,003 6.12%
Consumer and other loans 59,559 4,635 7.78% 59,910 4,468 7.46%
Investments 70,708 4,416 6.25% 73,255 4,413 6.02%
----------- ---------- ------------- ------------- ------------ ------------
Total interest-earning
assets 367,162 27,128 7.39% 423,708 29,716 7.01%
----------- ---------- ------------- ------------- ------------ ------------
Interest-bearing liabilities:
Deposits 277,901 14,182 5.10% 290,285 14,169 4.88%
Borrowings 64,435 3,767 5.85% 105,462 6,031 5.72%
----------- ---------- ------------- ------------- ------------ ------------
Total interest-bearing
liabilities 342,336 17,949 5.24% 395,747 20,200 5.10%
----------- ---------- ------------- ------------- ------------ ------------
Net interest income/interest
rate spread $ 9,179 2.15% $ 9,516 1.91%
========== ============= ============ ============
Net interest-earning assets/
net yield on interest-
earning assets (1) $ 24,826 2.50% $ 27,961 2.25%
=========== ============= ============= ============
Ratio of interest-earning
assets to interest-
bearing liabilities 107.3% 107.1%
============= ============
</TABLE>
<TABLE>
<CAPTION>
As of
Sept 30,
-----------------------------------------------------------
2000 2000
------------------------------------------- -------------
Average Yield/
Balance Interest Rate Rate
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $199,109 $ 15,065 7.57% 7.53%
Mortgage-backed securities 124,418 8,427 6.77% 7.01%
Consumer and other loans 58,009 4,467 7.70% 7.94%
Investments 81,215 5,223 6.43% 6.92%
------------ ------------ ------------- -------------
Total interest-earning
assets 462,751 33,182 7.17% 7.33%
------------ ------------ ------------- -------------
Interest-bearing liabilities:
Deposits 302,269 15,037 4.97% 5.27%
Borrowings 131,514 7,758 5.90% 6.10%
------------ ------------ ------------- -------------
Total interest-bearing
liabilities 433,783 22,795 5.25% 5.54%
------------ ------------ ------------- -------------
Net interest income/interest
rate spread $ 10,387 1.92% 1.79%
============ ============= =============
Net interest-earning assets/
net yield on interest-
earning assets (1) $ 28,968 2.24%
============ =============
Ratio of interest-earning
assets to interest-
bearing liabilities 106.7%
=============
</TABLE>
(1) Net interest income divided by average interest-earning assets (2) Loan fee
income is immaterial to this analysis
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.
<TABLE>
<CAPTION>
Fiscal 1999 Compared Fiscal 2000 Compared
to Fiscal 1998 to Fiscal 1999
Increase (Decrease) Increase (Decrease)
---------------------------------- --------------------------------
Volume Rate Total Volume Rate Total
---------- --------- --------- --------- -------- ----------
Interest income on interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans $ 146 $ (406) $ (260) $ 512 $ (279) $ 233
Mortgage-backed securities 3,175 (157) 3,018 1,729 695 2,424
Consumer and other loans 27 (195) (168) (144) 143 (1)
Investments 156 (159) (3) 500 310 810
---------- --------- --------- --------- -------- ----------
Total 3,504 (917) 2,587 2,597 869 3,466
---------- --------- --------- --------- -------- ----------
Interest expense on interest-bearing liabilities:
Deposits 618 (631) (13) 593 275 868
Borrowings 2,348 (85) 2,263 1,531 197 1,728
---------- --------- --------- --------- -------- ----------
Total 2,966 (716) 2,250 2,124 472 2,596
---------- --------- --------- --------- -------- ----------
Net change in net interest income $ 538 $ (201) $ 337 $ 473 $ 397 $ 870
========== ========= ========= ========= ======== ==========
</TABLE>
7
<PAGE>
Interest expense on borrowings increased by $1.4 million or 56.2% in fiscal
1998, increased by $2.3 million or 60.1% in fiscal 1999 and increased by $1.7
million or 28.6% in fiscal 2000 as compared to the respective prior years. The
increase in interest expense during fiscal 2000 was the result of a $26.1
million or 24.7% increase in the average balance of borrowings and an increase
of .18% in the average rate paid. Borrowings were primarily obtained during
fiscal 2000 to fund the purchase of mortgage-backed securities and long term
fixed-rate mortgages. Long term FHLB advances were used to match the maturity
terms of these mortgage products.
Net Interest Income
Net interest income increased by $56,000 or .6% in fiscal 1998, by $337,000 or
3.7% in fiscal 1999, and by $870,000 or 9.1% in fiscal 2000 over the respective
prior periods. The improvements in the net interest income in each year were due
to a higher amount of interest-earning assets offset by a reduction in the
interest rate spread.
Provision for Loan Losses
The provision for loan losses amounted to $120,000, and $17,000 for the years
ended September 30, 1998 and 1999, respectively. There was no provision made for
the year ended September 30, 2000. Management establishes reserves for losses on
slow loans and real estate acquired by foreclosure when it determines that
losses are anticipated to be incurred on the underlying properties. 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 specific reserves may be
required. The allowance for loan losses totaled $2.0 million or 0.8% of total
loans at September 30, 1999 and 2000.
Other Income
The Company's total other operating income decreased from $554,000 in fiscal
1998 to $486,000 in fiscal 1999 and increased to $552,000 in fiscal 2000. The
decrease from 1998 to 1999 reflected a slight decrease in other income and the
gain on sale of loans. The increase from 1999 to 2000 reflected an increase in
other income and gain on the sales of loans which was based on more loans being
sold in fiscal 2000.
Other income, which consists primarily of income from fees on demand accounts,
loan servicing fees, the sale of non-deposit products, insurance commissions and
loan late charges, increased by $29,000 or 6.9% and decreased by $2,000 or .4%
during fiscal years 1998 and 1999 respectively. During fiscal 2000, other income
increased by $61,000 or 13.6% over the prior comparable fiscal years. 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 to customers.
Other Expenses
Salaries and employee benefits increased by $145,000 or 6.9% in fiscal 1998, by
$152,000 or 6.8% in fiscal 1999 and by $341,000 or 14.3% in fiscal 2000 as
compared to prior respective fiscal years. The increased expenses of salaries
and employee benefits during the periods are attributable to increased staffing
needs, normal salary increases and increased employee benefit expenses.
Occupancy and equipment expense increased by $112,000 or 12.8% in fiscal 1998,
by $171,000 or 17.4% in fiscal 1999 and decreased by $122,000 or 10.6% in fiscal
2000 as compared to the prior respective fiscal years. The decrease during
fiscal 2000 was attributable to lower furniture and fixtures expense.
Deposit insurance premiums increased by $48,000 or 38.5% in fiscal 1998,
decreased by $1,000 or .5% in fiscal 1999, and decreased by $80,000 or 46.3% in
fiscal 2000 over the prior respective fiscal years. The increase during fiscal
1998 is due to the increase in the amount of the Company's insurable deposits
and the payment of the premiums for all four quarters compared with fiscal 1997,
where premiums were due for only three quarters. The slight decrease in 1999 is
the result of the average insurable deposit balance remaining relatively
constant. The decrease in 2000 is the result of the sharing of FICO bond
interest payments by all FDIC insured institutions, the premium was reduced an
additional 2.2 basis points effective January 1, 2000.
Other expenses, which consist primarily of advertising expenses, directors'
fees, ATM network fees, professional fees, checking account costs, stock holders
expense, and insurance premiums, increased by $63,000 or 5.8% in fiscal 1998,
increased by $8,000 or .7% in fiscal 1999, and increased by $383,000 or 33.5% in
fiscal 2000 over the prior respective fiscal years. The current year increase is
due to additional stockholders and audit expenses attributable to the formation
of the Financial Corporation. As to the additional increases, management
considers these normal increases after the effects of inflation and the growth
in the size of the Company.
Income Taxes
The Company recorded income tax provisions of $1.6 million for fiscal year 1998,
$1.6 million for fiscal year 1999 and $1.7 million for fiscal year 2000. Note 11
of the "Notes to Financial Statements" 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 in interest rates. The principal
determinant of the exposure of Harleysville Savings' 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. Harleysville Savings' asset and liability management
policies seek to increase the interest rate sensitivity by shortening the
repricing intervals and the maturities of the Company's interest-earning assets.
Although management of the Company believes that the steps taken have reduced
the Company's overall vulnerability to increases in interest rates, the Company
remains vulnerable to material and prolonged increases in interest rates during
periods in which its interest rate sensitive liabilities exceed its interest
rate sensitive assets.
8
<PAGE>
The authority and responsibility for interest rate management is vested in the
Company's Board of Directors. The Chief Executive Officer implements the Board
of Directors' policies during the day-to-day operations of the Company. Each
month, the Chief Executive Officer presents the Board of Directors with a report
which outlines the Company's asset and liability "gap" position in various time
periods. The "gap" is the difference between interest-earning assets and
interest-bearing liabilities which mature or reprice over a given time period.
He also meets weekly with the Company's other senior officers to review and
establish policies and strategies designed to regulate the Company's flow of
funds and coordinate the sources, uses and pricing of such funds. The first
priority in structuring and pricing the Company's assets and liabilities is to
maintain an acceptable interest rate spread while reducing the effects of
changes in interest rates and maintaining the quality of the Company's assets.
Harleysville Savings has been able to improve the interest rate sensitivity of
its assets as the result of origination of ARMs (Adjustable Rate Mortgages).
ARMs represented 22.7%, 20.8% and 55.9% of the total mortgage loan portfolio
originations during fiscal years 1998, 1999 and 2000, respectively. As of
September 30, 2000, approximately $76.1 million or 35.4% of the Company's
portfolio of real estate loans were ARMs, compared to being $70.5 million or
35.3% of the portfolio on September 30, 1999. The increase in the dollar amount
of ARMs was a result of higher interest rates that persisted throughout fiscal
2000 which resulted in the consumer favoring adjustable rate mortgages.
The following table summarizes the amount of interest-earning assets and
interest-bearing liabilities outstanding as of September 30, 2000, which are
expected to mature, prepay or reprice in each of the future time periods shown.
Except as stated below, the amounts of assets or liabilities shown which mature
or reprice during a particular period were determined in accordance with the
contractual terms of the asset or liability. Adjustable and floating-rate assets
are included in the period in which interest rates are next scheduled to adjust
rather than in the period in which they are due, and fixed-rate loans and
mortgage-backed securities are included in the periods in which they are
anticipated to be repaid.
The passbook accounts, negotiable order of withdrawal ("NOW") accounts and money
market deposit accounts, are included in the "Over 5 Years" categories based on
managements 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.
The following table does not necessarily indicate the impact of general interest
rate movements on Harleysville Savings' net interest income because the
repricing of certain categories of assets and liabilities is discretionary and
is subject to competitive and other pressures. As a result, certain assets and
liabilities indicated as repricing within a stated period may in fact reprice at
different rate levels.
<TABLE>
<CAPTION>
1 Year 1 to 3 3 to 5 Over 5
or less Years Years Years Total
------- ----- ----- ----- -----
Interest-earning assets:
<S> <C> <C> <C> <C> <C>
Mortgage loans $ 44,801 $ 34,467 $ 24,998 $ 103,651 $ 207,917
Mortgage-backed securities 46,390 19,566 11,551 46,237 123,744
Consumer and other loans 24,896 16,383 9,301 6,152 56,732
Investment securities and other investments 14,491 6,500 7,000 58,046 86,037
-------- -------- -------- --------- --------
Total interest-earning assets 130,578 76,916 52,850 214,086 474,430
-------- -------- -------- --------- --------
Interest-bearing liabilities:
Passbook and Club accounts - - - 16,529 16,529
NOW accounts - - - 2,396 2,396
Money Market Deposit accounts - - - 25,158 25,158
Choice Savings 6,193 18,578 24,771
Certificate accounts 164,656 70,148 6,178 - 240,982
Borrowed money 58,451 50,315 28,703 7,665 145,134
-------- -------- -------- --------- --------
Total interest-bearing liabilities 229,300 120,463 34,881 70,326 454,970
-------- -------- -------- --------- --------
Repricing GAP during the period $(98,722) $(43,547) $ 17,969 $ 143,760 $ 19,460
======== ======== ======== ========= ========
Cumulative GAP $(98,722) $(142,269) $(124,300) $ 19,460
======== ========= ========= ========
Ratio of GAP during the period to total assets -20.21% -8.91% 3.68% 29.43%
======== ========= ========= ========
Ratio of cumulative GAP to total assets -20.21% -29.12% -25.44% 3.98%
======== ========= ========= ========
</TABLE>
9
Liquidity and Capital Resources
The Company's assets increased from $417.5 million as of September 30, 1998, to
$459.8 million as of September 30, 1999, and to $488.6 million as of September
30, 2000. Stockholders' equity increased from $26.1 million as of September 30,
1998, to $29.0 million as of September 30, 1999, and to $31.4 million as of
September 30, 2000. As of September 30, 2000, stockholders' equity amounted to
6.4% of Harleysville Savings' total assets under generally accepted accounting
principles ("GAAP").
For a financial institution, liquidity is a measure of the ability to fund
customers' needs for loans and deposit withdrawals. 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 short-term
investments to meet its liquidity requirements. Harleysville Savings 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.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles 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.
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.
10
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the President, Board of Directors and Stockholders of Harleysville Savings
Financial Corporation and Subsidiary, Harleysville, Pennsylvania:
We have audited the consolidated statements of financial condition of
Harleysville Savings Financial Corporation and subsidiary (the "Company") as of
September 30, 2000 and 1999, 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, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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 the Company as of September 30,
2000 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 2000 in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
-------------------------
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
October 27, 2000
11
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Financial Condition
September 30,
2000 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and amounts due from depository institutions $ 1,224,634 $ 1,273,990
Interest bearing deposits in other banks 2,855,568 2,681,828
--------------------- -------------------
Total cash and cash equivalents 4,080,202 3,955,818
Investment securities held to maturity
(fair value - 2000, $69,463,000; 1999, $59,201,000) 71,280,841 61,014,582
Investment securities available-for-sale at fair value 3,309,736 3,201,932
Mortgage-backed securities held to maturity
(fair value - 2000, $114,182,000; 1999, $114,497,000) 116,303,730 116,778,337
Mortgage-backed securities available-for-sale at fair value 7,440,453 7,915,919
Loans receivable (net of allowance for loan losses -
2000, $2,038,000; 1999, $2,040,000) 262,774,378 252,259,611
Accrued interest receivable 3,246,714 2,895,109
Federal Home Loan Bank stock - at cost 7,365,200 6,472,900
Office properties and equipment,net 4,449,921 4,677,886
Deferred income taxes 306,761 304,060
Prepaid expenses and other assets 7,995,955 371,568
--------------------- -------------------
TOTAL ASSETS $ 488,553,891 $459,847,722
===================== ===================
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 309,835,810 $303,660,099
Advances from Federal Home Loan Bank 145,134,283 125,179,928
Accrued interest payable 824,672 601,813
Advances from borrowers for taxes and insurance 719,591 874,167
Accounts payable and accrued expenses 641,148 569,068
-------- -------
Total liabilities 457,155,504 430,885,075
--------------------- -------------------
Commitments
Stockholders' Equity:
Preferred Stock: $.01 par value;
7,500,000 shares authorized; none issued
Common stock: $.01 par value; 15,000,000
shares authorized; issued and outstanding,
2000, 2,285,051 shares; 1999, 2,256,750 shares 22,851 22,568
Paid-in capital in excess of par 7,119,387 6,829,794
Treasury stock, at cost (49,900 shares) (714,163) -
Retained earnings - partially restricted 25,076,313 22,211,041
Accumulated other comprehensive loss (106,001) (100,756)
--------------------- -------------------
Total stockholders' equity 31,398,387 28,962,647
--------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 488,553,891 $459,847,722
===================== ===================
</TABLE>
See notes to consolidated financial statements
12
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended September 30,
2000 1999 1998
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Interest on mortgage loans $15,064,856 $14,832,086 $15,091,871
Interest on mortgage-backed securities 8,426,701 6,002,879 2,985,183
Interest on consumer and other loans 4,466,858 4,468,156 4,635,388
Interest and dividends on investments 5,223,322 4,412,768 4,415,987
----------------- ----------------- -----------------
Total interest income 33,181,737 29,715,889 27,128,429
----------------- ----------------- -----------------
Interest Expense:
Interest on deposits 15,037,450 14,169,061 14,181,937
Interest on borrowings 7,757,625 6,030,367 3,766,997
----------------- ----------------- -----------------
Total interest expense 22,795,075 20,199,428 17,948,934
----------------- ----------------- -----------------
Net Interest Income 10,386,662 9,516,461 9,179,495
Provision for Loan Losses - 16,579 119,817
----------------- ----------------- -----------------
Net Interest Income after Provision for Loan Losses 10,386,662 9,499,882 9,059,678
----------------- ----------------- -----------------
Other Income:
Gain on sales of loans 40,245 35,120 101,052
Other income 512,071 450,842 452,644
----------------- ----------------- -----------------
Total other income 552,316 485,962 553,696
----------------- ----------------- -----------------
Other Expenses:
Salaries and employee benefits 2,729,174 2,388,307 2,236,046
Occupancy and equipment 1,030,401 1,152,407 981,434
Deposit insurance premiums 92,439 171,999 172,929
Other 1,528,087 1,145,036 1,137,201
----------------- ----------------- -----------------
Total other expenses 5,380,101 4,857,749 4,527,610
----------------- ----------------- -----------------
Income before Income Taxes 5,558,877 5,128,095 5,085,764
Income tax expense 1,701,980 1,622,000 1,605,000
----------------- ----------------- -----------------
Net Income $3,856,897 $3,506,095 $3,480,764
================= ================= =================
Earnings Per Share:
Basic $ 1.71 $ 1.56 $ 1.57
================= ================= =================
Diluted $ 1.70 $ 1.53 $ 1.52
================= ================= =================
Weighted Average Shares Outstanding:
Basic 2,252,308 2,244,055 2,225,802
================= ================= =================
Diluted 2,275,764 2,294,532 2,300,501
================= ================= =================
</TABLE>
See notes to consolidated financial statements
13
<PAGE>
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
2000 1999 1998
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $ 3,856,897 $ 3,506,095 $ 3,480,764
Other Comprehensive Income (Loss)
Unrealized (loss) gain on securities net of tax ( benefit) or
expense -- 2000, ($54,606); 1999, ($51,905); 1998, $9,579 (5,245) (119,351) 72,220
------- --------- ------
Total Comprehensive Income $ 3,851,652 $ 3,386,744 $ 3,552,984
============= =============== =============
</TABLE>
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Paid-in Retained Accumulated Employee
Capital Earnings- Other Stock Total
Common in Excess Partially Comprehensive Treasury Ownership Stockholders'
Stock of Par Restricted (Loss) Income Stock Plan Equity
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1997 16,616 6,199,372 16,769,611 (53,625) (60,026) 22,871,948
Net Income 3,480,764 3,480,764
Issuance of Common Stock 151 348,931 349,082
Dividends - $.44 per share (734,243) (734,243)
Repayment of ESOP debt 60,026 60,026
Change in unrealized holding loss
on available-for-sale securities, net
of tax 72,220 72,220
--------- ------------ ------------- ------------ ----------- --------- -------------
Balance at September 30, 1998 16,767 6,548,303 19,516,132 18,595 -- -- 26,099,797
Net Income 3,506,095 3,506,095
Issuance of Common Stock 207 287,085 287,292
Stock Split 5,594 (5,594) -
Dividends - $. 36 per share (811,186) (811,186)
Change in unrealized holding gain -
on available-for-sale securities, net
of tax
(119,351) (119,351)
--------- ------------ ------------- ------------ ----------- --------- -------------
Balance at September 30, 1999 22,568 6,829,794 22,211,041 (100,756) -- -- 28,962,647
Net Income 3,856,897 3,856,897
Issuance of Common Stock 283 289,593 289,876
Dividends - $.44 per share (991,625) (991,625)
Treasury stock purchased (49,900 shares) $ (714,163) (714,163)
Change in unrealized holding loss -
on available-for-sale securities, net -
of tax -
(5,245) (5,245)
--------- ------------ ------------- ------------ ----------- --------- -------------
Balance at September 30, 2000 $ 22,851 $7,119,387 $25,076,313 $ (106,001) $ (714,163) $ - $ 31,398,387
========= ============ ============= ============ =========== ========= =============
</TABLE>
14
<PAGE>
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended September 30,
2000 1999 1998
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net Income $ 3,856,897 $ 3,506,095 $ 3,480,764
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Provision for loan losses 16,579 119,817
Depreciation 426,771 309,410 277,904
Deferred income taxes 3,557 90,000 7,641
Realized gain on sales of loans (40,245) (35,120) (101,052)
Realized gain on sale of real estate owned (13,606)
Proceeds from the sale of loans held for sale 3,369,004 2,879,561 5,696,900
Amortization of deferred loan fees (139,351) (320,711) (402,699)
Changes in assets and liabilities which provided (used) cash:
Increase (decrease) in accounts payable and accrued expenses
and income taxes payable 72,080 131,111 (773,331)
(Increase) decrease in prepaid expenses and other assets (7,624,387) 93,249 285,724
(Increase) decrease in accrued interest receivable (351,605) 220,098 (293,512)
Increase in accrued interest payable 222,859 77,072 260,871
-------------- -------------- --------------
Net cash (used in) provided by operating activities (218,026) 6,967,344 8,559,027
-------------- -------------- --------------
Investing Activities:
Purchase of mortgage-backed securities held to maturity (13,038,000) (63,346,162) (68,025,542)
Purchase of mortgage-backed securities available-for-sale (4,902,126)
Purchase of investment securities held to maturity (11,747,185) (47,859,407) (41,562,507)
Purchase of investment securities available-for-sale (112,069) (1,549,213)
Proceeds from maturities of investment securities available-for-sale 2,000,000
Purchase of FHLB stock (892,300) (1,475,200) (2,488,200)
Proceeds from maturities of investment securities 1,480,926 37,466,988 39,401,215
Principal collected on long-term loans & mortgage-backed securities 60,356,491 84,653,788 70,048,479
Long-term loans originated or acquired (60,199,446) (62,646,388) (74,827,218)
Purchases of premises and equipment (198,806) (947,658) (662,251)
Proceeds from sale of real estate owned 133,221
-------------- -------------- --------------
Net cash used in investing activities (24,217,168) (60,605,378) (76,116,024)
-------------- -------------- --------------
Financing Activities:
Net (decrease) increase in demand deposits, NOW accounts
and savings accounts (5,527,563) 20,773,715 4,815,751
Net increase (decrease) in certificates of deposit 11,703,274 (6,940,988) 11,238,374
Cash dividends (991,625) (811,186) (734,243)
Net increase in FHLB advances 19,954,355 25,226,820 53,599,175
Purchase of treasury stock (714,163)
Net proceeds from issuance of stock 289,876 287,292 349,082
Net (decrease) increase in advances from borrowers for taxes and insurance (154,576) 184,273 (14,438)
-------------- -------------- --------------
Net cash provided by financing activities 24,559,578 38,719,926 69,253,701
-------------- -------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 124,384 (14,918,108) 1,696,704
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,955,818 18,873,926 17,177,222
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,080,202 $ 3,955,818 $18,873,926
============== ============== ==============
Supplemental Disclosure of Cash Flow Information- Cash paid during the period
for:
Interest (credited and paid) $22,572,216 $ 20,122,356 $17,688,063
Non cash transfer from loans to real estate owned 119,615
</TABLE>
See notes to consolidated financial statements
15
<PAGE>
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 though 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.
Harleysville Savings Financial Corporation (the "Company"), is a bank holding
company that is regulated by the Federal Reserve Bank of Philadelphia.
Harleysville Savings 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 Banks wholly owned
subsidiary. Intercompany accounts and transactions have been eliminated in
consolidation.
Investments and Mortgage-Backed Securities - The Company 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 as a separate
component of stockholders' equity until realized.
Interest on Loans - Interest on loans is recognized as income when earned. The
Company does not recognize interest on loans deemed to be uncollectible.
Allowance for Loan Losses - Allowances for loan losses primarily include charges
to reduce the recorded balances of mortgage loans receivable. The charges can
represent a general reserve on the entire mortgage portfolio or specific
reserves for individual loans.
Allowances are provided for specific loans when losses are probable and can
be estimated. When this occurs, management considers the remaining principal
balance and estimated net realizable value of the property collateralizing the
loan. Current and future operating and/or sales conditions are considered. These
estimates are susceptible to changes that could result in material adjustments
to results of operations. Recovery of the carrying value of such loans is
dependent, to a great extent, on economic, operating and other conditions that
may be beyond management's control.
Loan loss reserves are established as an allowance for losses based on the
perceived risk of loss in 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. An adjustment to
the carrying value of a loan through the provision for loan losses occurs when
it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan.
Real Estate Owned - Real estate owned is initially recorded at the lower of
carrying value of the loan or fair value at the date of foreclosure less
estimated costs to dispose. 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 - Office properties and equipment are recorded
at cost. Depreciation is computed using the straight-line method over the
expected useful lives of the assets. The costs of maintenance and repairs are
expensed as they are incurred, and renewals and betterments are capitalized.
Deferred Loan Fees - The Company recognizes loan fees and certain direct loan
origination costs in accordance with Financial Accounting Standards ("SFAS") No.
91, Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Indirect Costs of Leases. SFAS No. 91 requires the deferral
of all loan fee income, net of certain direct loan origination costs. Net
deferred loan fees are accreted into income as a yield adjustment over the life
of the loan using the interest method. SFAS No. 91 permits the deferral only of
direct loan origination costs relating to successful loan origination efforts,
not idle time or overcapacity.
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 SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. 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
16
<PAGE>
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 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 APB Opinion No. 25.
Accounting for Comprehensive Income - During 1999, the Company adopted SFAS No.
130, Reporting Comprehensive Income, which requires disclosure of, 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.
Accounting for 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. On January 27, 1999, the Company's Board of Directors declared
a special four-for-three stock split effective February 24, 1999, to
stockholders of record on February 10, 1999. Accordingly, earnings per share for
the year ended September 30, 1998 has been restated to reflect the increased
number of shares outstanding. The weighted average shares outstanding used to
calculate earnings per share were as follows:
Year Ended September 30,
2000 1999 1998
------------------------------------------------------------------------------
Average shares
outstanding - basic 2,252,308 2,244,055 2,225,802
Increase in shares due
to options - diluted 23,456 50,477 74,699
--------- --------- ---------
Adjusted shares
outstanding - diluted 2,275,764 2,294,532 2,300,501
--------- --------- ---------
Cash Surrender Value of Life Insurance - The Company is the beneficiary of
insurance policies on the lives of officers and some employees of the bank. The
Company has recognized the amount that could be realized under the insurance
policies as an asset in the statement of financial condition.
Accounting for Derivative Instruments and Hedging Activities - In June 1998,
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was
issued. This statement requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company adopted the provisions of SFAS No.
133, 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. The Company believes that it has properly identified all
derivative instruments and any embe3dded derivative instruments. Currently, no
embedded derivative 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. The adoption of
SFAS No. 133 on October 1, 2000 did not have a material effect on the Company's
financial position or results of operations.
Interest Rate Risk - The Company is engaged principally in providing first
mortgage loans to individuals and commercial enterprises. At September 30, 2000,
the Company's assets that earned interest at fixed interest rates were funded
primarily with short-term liabilities that have interest rates that vary with
market rates over time.
At September 30, 2000, the Company had interest-earning assets of
approximately $474,430,000 having a weighted average effective yield of 7.33%
and interest-bearing liabilities of approximately $454,970,000 having a weighted
average effective interest rate of 5.54%. The shorter duration of the
interest-sensitive liabilities indicates that the Company is exposed to interest
rate risk because, in a rising rate environment, liabilities will be repricing
faster at higher interest rates, thereby reducing the fair value of long-term
assets and net interest income.
Use of Estimates in Preparation of Financial Statements - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statement and the reported amounts of
income and expenses during the reporting period. The most significant of these
estimates is the allowance for loan losses. Actual results could differ from
those estimates.
Reclassification - Certain items in the 1999 and 1998 financial statements have
been reclassified to conform with the presentation in the 2000 consolidated
financial statements.
17
<PAGE>
3. INVESTMENT SECURITIES HELD TO MATURITY
A comparison of cost and approximate fair value of investment securities, by
maturities, is as follows:
<TABLE>
<CAPTION>
September 30, 2000
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Agencies
Due after 2 years through 5 years $16,500,000 $ (386,000) $16,114,000
Due after 5 years through 10 years 21,980,911 $ 38,090 (971,001) 21,048,000
Due after 10 years through 15 years 17,418,624 43,263 (703,887) 16,758,000
Tax Exempt Obligations
Due after 15 years 15,381,306 232,610 (70,916) 15,543,000
-------------- ------------ -------------- -------------
Total Investment Securities $71,280,841 $ 313,963 $(2,131,804) $69,463,000
============== ============ ============== =============
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
---------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Agencies
Due after 3 years through 5 years $11,500,000 $ (246,000) $11,254,000
Due after 5 years through 10 years 25,002,578 $ 1,281 (1,113,859) 23,890,000
Due after 10 years through 15 years 16,389,395 53,218 (491,613) 15,951,000
Tax Exempt Obligations
Due after 15 years 8,122,609 84,835 (101,444) 8,106,000
-------------- ------------ -------------- -------------
Total Investment Securities $61,014,582 $ 139,334 $(1,952,916) $59,201,000
============== ============ ============== =============
</TABLE>
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 $998
thousand at September 30, 2000 and 1999.
The Company has the positive intent and the ability to hold these securities to
maturity. At September 30, 2000, 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 cost and approximate fair value of investment securities, by
maturities, is as follows:
<TABLE>
<CAPTION>
September 30, 2000
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Losses Fair Value
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ARM Mutual Funds $3,354,154 $ - $ (44,418) $ 3,309,736
--------------- -------------- -------------- -----------------
Total Investment Securities $3,354,154 $ - $ (44,418) $ 3,309,736
=============== ============== ============== =================
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Losses Fair Value
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ARM Mutual Funds $3,242,085 $ - $ (40,153) $ 3,201,932
--------------- -------------- -------------- -----------------
Total Investment Securities $3,242,085 $ - $ (40,153) $ 3,201,932
=============== ============== ============== =================
</TABLE>
18
<PAGE>
5. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
A comparison of cost and approximate fair value of mortgage-backed securities is
as follows:
<TABLE>
<CAPTION>
September 30,2000
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Collateralized mortgage obligations $52,482,502 $138,918 $ (996,420) $ 51,625,000
FHLMC pass-through certificates 9,935,756 26,355 (110,111) 9,852,000
FNMA pass-through certificates 21,402,545 33,968 (565,513) 20,871,000
GNMA pass-through certificates 32,482,927 1,654 (650,581) 31,834,000
------------------ -------------- ---------------- ----------------
Total Mortgage-Backed Securities $116,303,730 $200,895 $(2,322,625) $114,182,000
================== ============== ================ ==================
</TABLE>
<TABLE>
<CAPTION>
September 30,1999
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Collateralized mortgage obligations $43,559,590 $ 96,166 $ (908,756) $ 42,747,000
FHLMC pass-through certificates 9,136,261 52,811 (94,072) 9,095,000
FNMA pass-through certificates 26,224,652 79,902 (710,554) 25,594,000
GNMA pass-through certificates 37,857,834 22,070 (818,904) 37,061,000
----------
------------------ -------------- ----------------
Total Mortgage-Backed Securities $116,778,337 $250,949 $(2,532,286) $114,497,000
================== ============== ================ ==================
</TABLE>
The Company has the positive intent and ability to hold these securities to
maturity. At September 30, 2000, neither a disposal nor conditions that could
lead to a decision not to hold these securities to maturity, were reasonably
foreseen.
6. MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE
A comparison of cost and approximate fair value of mortgage-backed securities is
as follows:
<TABLE>
<CAPTION>
September 30,2000
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC pass-through certificates $2,835,053 $ - $ (93,580) $ 2,741,473
GNMA pass-through certificates 4,721,589 - (22,609) 4,698,980
---------- -------- ---------
---------------
Total Mortgage-Backed Securities $7,556,642 $ - $ (116,189) $ 7,440,453
================ =============== ============== ==================
</TABLE>
<TABLE>
<CAPTION>
September 30,1999
------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC pass-through certificates $3,125,446 $ - $ (101,662) $ 3,023,784
GNMA pass-through certificates 4,902,981 - (10,846) 4,892,135
---------- -------- ---------
---------------
Total Mortgage-Backed Securities $8,028,427 $ - $ (112,508) $ 7,915,919
================ =============== ============== ==================
</TABLE>
19
<PAGE>
7. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
September 30,
2000 1999
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Residential Mortgages $207,928,146 $195,126,790
Commercial Mortgages 807,156 766,627
Construction 6,579,523 3,885,232
Education 1,414,011 1,347,591
Savings Account 618,884 535,036
Home Equity 44,727,366 49,240,261
Automobile and other 639,693 660,504
Line of Credit 7,888,612 7,175,891
------------------ ------------------
Total 270,603,391 258,737,932
Undisbursed portion of loans in process (3,844,612) (2,533,342)
Deferred loan fees (1,946,270) (1,904,979)
Allowance for loan losses (2,038,131) (2,040,000)
------------------ ------------------
Loans Receivable - net $262,774,378 $252,259,611
================== ==================
</TABLE>
The Company originates and purchases both adjustable and fixed interest rate
loans and mortgage-backed securities. At September 30, 2000, the composition of
these loans and mortgage-backed securities, in thousands, is as follows:
<TABLE>
<CAPTION>
Fixed-Rate Adjustable-Rate
Term to Maturity Book Value Term to Maturity Book Value
--------------------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C>
1 year or less $ 1,418 1 year or less $ 65,438
1-3 years 7,449 1-3 years 13,695
3-5 years 13,488 3-5 years 12,648
5-15 years 51,163 5-15 years 21,736
over 15 years 195,113
------------------ ------------------
$ 268,631 $ 113,517
================== ==================
</TABLE>
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, 2000, 1999 and 1998, the Company was servicing loans for others
amounting to approximately $6,586,000 , $7,550,000 and $9,500,000, 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 recorded upon receipt and includes
servicing fees from investors and certain charges collected from borrowers, such
as late payment fees. In connection with the loans serviced for others, the
Company held borrowers' escrow balances of approximately $31,000, $48,000, and
$32,000 at September 30, 2000, 1999, and 1998, respectively.
Loans to officers and directors at September 30, 2000 and 1999, were
approximately $233,867 and $256,100, respectively. Additional loans and
repayments for the year ended September 30, 2000, were $0 and $6,200,
respectively,
and for the year ended September 30, 1999, were approximately $6,300 and
$18,300, 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,
2000 1999 1998
------------------------------------------------------------------------------
Balance, beginning of year $ 2,040,000 $ 2,040,000 $ 1,925,000
Provision for loan losses - 16,579 119,817
Amounts charged off, net (1,869) (16,579) (4,817)
------------ -------------- --------------
Balance, end of year $ 2,038,131 $ 2,040,000 $ 2,040,000
============ ============== ==============
The provision for loan losses charged to expense is based upon past loan and
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, 2000, 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
20
<PAGE>
September 30, 2000 and 1999, 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, 2000 and 1999, amounted to approximately $184,000 and $313,000,
respectively. The loans were collectively evaluated for impairment.
8. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
September 30,
2000 1999
-------------------------------------------------------------------------------
Investments and interest-bearing deposits $ 1,110,222 $ 863,305
Mortgage-backed securities 719,097 685,581
Loans receivable 1,417,395 1,346,223
------------- ------------
Total $ 3,246,714 $ 2,895,109
============= ============
9. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classifications as
follows:
September 30,
2000 1999
--------------------------------------------------------------------------------
Land and buildings $ 4,176,671 $ 4,139,005
Furniture, fixtures and equipment 2,898,061 2,740,822
Automobiles 56,164 52,263
-------------- ----------------
Total 7,130,896 6,932,090
Less accumulated depreciation (2,680,975) (2,254,204)
-------------- ----------------
Net $ 4,449,921 $ 4,677,886
============== ================
10. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
September 30,
2000 1999
Weighted Weighted
Interest Interest
Amount Rate Amount Rate
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NOW accounts $10,748,610 1.25% $11,811,986 1.23%
Checking accounts 5,780,503 0.04% 5,372,003 0.00%
Money Market Deposit accounts 49,928,562 2.54% 54,490,438 3.60%
Passbook and Club accounts 2,395,877 3.78% 2,706,688 2.59%
Certificate accounts 240,982,258 5.79% 229,278,984 5.28%
--------------- --------- --------------- ---------
Total Deposits $309,835,810 5.18% $303,660,099 4.70%
=============== ========= =============== =========
</TABLE>
At September 30, 2000, the amounts of scheduled maturities of certificate
accounts were as follows:
For the year ended September 30: 2001 $164,654,610
2002 56,383,345
2003 13,765,926
2004 3,932,427
2005 2,245,950
------------------
$240,982,258
==================
21
<PAGE>
The aggregate amount of certificate accounts in denominations of $100,000 or
more at September 30, 2000 amounted to approximately $17.1 million. Deposits in
excess of $100,000 are not federally insured.
Interest expense on savings deposits is composed of the following:
September 30,
2000 1999 1998
--------------------------------------------------------------------------------
NOW accounts and MMDA accounts $ 1,927,618 $ 1,706,721 $ 1,045,554
Passbook and Club accounts 53,360 58,320 72,328
Certificate accounts 13,056,472 12,404,020 13,064,055
------------- ------------- -------------
Total $ 15,037,450 $ 14,169,061 $ 14,181,937
============= ============= =============
11. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consist of the following:
September 30,
2000 1999
Weighted Weighted
Interest Interest
Maturing Period Amount Rate Amount Rate
-------------------------------------------------------------------------------
1 to 12 months $ 21,000,000 6.71% $ 10,300,000 5.44%
13 to 24 months 8,737,521 6.48% 6,493,431 6.40%
25 to 36 months 12,837,096 6.34% 19,694,729 6.34%
37 to 48 months 7,553,686 6.50% 5,074,137 6.51%
49 to 60 months 9,759,185 5.42% 10,436,527 5.48%
61 to 72 months 40,775,291 6.43% 22,549,949 5.98%
73 to 84 months 4,250,767 5.13% 4,900,846 5.13%
85 to 108 months 40,220,737 5.47% 45,730,309 5.42%
-------------- --------- -------------- ----------
Total $ 145,134,283 6.10% $ 125,179,928 5.76%
============== ========= ============== ==========
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 $12 million of the available $16.5
million was used at September 30, 2000, which has been included in the above
table. At September 30, 1999, $1.8 million of the available $12 million was
used. The line of credit carries a variable market interest rate which was 6.77%
and 5.63% at September 30, 2000, and 1999, respectively.
12. INCOME TAXES
As of October 1, 1996, the Company changed its method of computing reserves for
bad debts to the experience method. The bad debt deduction allowable under this
method is available to small banks with assets less than $500 million.
Generally, this method allows the Bank to deduct an annual addition to the
reserve for bad debts equal to the increase in the balance of the Bank's reserve
for bad debts at the end of the year to an amount equal to the percentage of
total loans at the end of the year, computed using the ratio of the previous six
years net chargeoffs divided by the sum of the previous six years total
outstanding loans at year end.
A thrift institution required to change its method of computing reserves for bad
debts will treat such change as a change in a method of accounting determined
solely with respect to the "applicable excess reserves" of the institution. The
amount of the applicable excess reserves will be taken into account ratably over
a six-taxable year period, beginning with the first taxable year beginning after
December 31, 1995. For financial reporting purposes, the Bank has not incurred
any additional tax expense. At September 30, 2000 and 1999, under SFAS No. 109,
deferred taxes were provided on the difference between the book reserve at
September 30, 2000 and 1999, respectively, and the applicable excess reserve in
the amount equal to the Bank's increase in the tax reserve from December 31,
1987, to September 30, 1996. Retained earnings at September 30, 2000, and 1999
includes approximately $1,325,000 representing bad debt deductions for which no
deferred income taxes have been provided.
22
<PAGE>
The expense for income taxes differs from that computed at the statutory federal
corporate tax rate as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
2000 1999 1998
Percentage Percentage Percentage
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
At statutory rate $ 1,890,018 34.0% $ 1,743,552 34.0% $ 1,720,660 34.0%
Adjustments resulting from:
State tax-net of federal
tax benefit 528 -- 3,960 -- 16,500 0.3
Tax exempt income
Other (188,566) (3.4) (125,512) (2.4) (132,160) (2.6)
---- ----------- ---- ---------- ----
Expense per consolidated
statements of income $ 1,701,980 30.6% $ 1,622,000 31.6% $ 1,605,000 31.7%
=========== ==== =========== ==== =========== ====
</TABLE>
Income tax expense is summarized as follows:
Year Ended September 30,
2000 1999 1998
------------------------------------------------------------------------
Current $ 1,701,980 $ 1,622,000 $ 1,695,000
Deferred -- -- (90,000)
----------- ----------- -----------
Total Income Tax Expense $ 1,701,980 $ 1,622,000 $ 1,605,000
=========== =========== ===========
Items that gave rise to significant portions of the deferred tax accounts are as
follows:
--------------------------------------------------------------------------------
September 30,
2000 1999
------------ ----------
Deferred Tax Assets:
Deferred Loan Fees $ 54,917 $ 80,803
Unrealized Loss on Investment Securities 54,607 51,905
Allowance for Loan Losses 486,533 383,952
-------- --------
Sub-Total 596,057 516,660
-------- --------
Deferred Tax Liabilities:
Property (176,885) (119,011)
Other (112,411) (93,589)
--------- --------
Sub-Total (289,296) (212,600)
--------- ---------
Total $ 306,761 $ 304,060
========== =========
Income taxes paid were approximately $1,826,500,$1,704,000, and $1,908,000 for
the years ended September 30, 2000, 1999, and 1998, respectively.
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 Company 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 judgements 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, 2000, that the Bank meets all capital adequacy requirements to
which it is subject.
As of September 30, 2000, 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.
23
<PAGE>
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
To Be Considered Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Purposes Action Provisions
As of September 30, 2000 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Tier 1 Capital (to assets) $ 31,475,071 6.44% $ 19,542,156 4.00% $ 24,427,695 5.00%
Tier 1 Capital (to risk weighted assets) 31,475,071 14.05% 8,960,240 4.00% 13,440,360 6.00%
Total Capital (to risk weighted assets) 33,513,071 14.96% 17,920,480 8.00% 22,400,600 10.00%
As of September 30, 1999 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Tier 1 Capital (to assets) $ 29,036,902 6.31% $ 18,393,909 4.00% $ 22,992,386 5.00%
Tier 1 Capital (to risk weighted assets) 29,036,902 14.18% 8,189,800 4.00% 12,284,700 6.00%
Total Capital (to risk weighted assets) 31,076,902 15.18% 16,379,600 8.00% 20,474,500 10.00%
</TABLE>
14. PROFIT SHARING PLAN
The Company has a defined contribution plan covering all full-time employees
meeting certain eligibility requirements. Contributions are at the discretion of
the Company's Board of Directors. Profit sharing expense was $177,234, $219,088
and $202,767 for the years ended September 30, 2000, 1999, and 1998,
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.
As of September 30, 1999, an aggregate of 159,680 shares were authorized and
outstanding of which 139,306 had been issued and 20,374 were unissued. As of
September 30, 2000, an aggregate of 140,483 shares were authorized and
outstanding of which 120,609 had been issued and 19,873 were unissued.
A summary of transactions under this plan follows:
<TABLE>
<CAPTION>
Year Ended September 30,
2000 1999 1998
Weighted Weighted Weighted
Average Average Average
Options Price Options Price Options Price
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 139,306 $ 11.34 98,434 $ 13.92 102,651 $ 12.72
Exercised (19,197) 8.70 (7,341) 8.72 (7,780) 11.91
Canceled (6,250) 12.75 (5,500) 12.62 (3,750) 13.34
Stock Split - 32,813
Granted 6,750 13.50 20,900 16.42 7,313 28.35
---------- ------------ --------- ----------- ------------ ------------
Outstanding, end of year 120,609 $ 11.81 139,306 $ 11.34 98,434 $ 13.92
========== ============ ========= =========== ============ ============
Options exercisable, end of year 63,001 $ 10.49 57,551 $ 9.66 32,199 $ 12.05
========== ============ ========= =========== ============ ============
</TABLE>
24
<PAGE>
Had compensation cost for the Company's two stock option plans been determined
based on the fair value at the dates of awards under those plans consistent with
the method of SFAS No. 123, the Company's net income and income per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended September 30,
2000 1999 1998
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income: As reported $ 3,856,897 $ 3,506,095 $ 3,480,764
Pro forma 3,846,658 3,466,417 3,454,544
Net income per common and common equivalent share:
Diluted As reported $ 1.70 $ 1.53 $ 1.52
Pro forma 1.69 1.51 1.50
Significant assumptions used to calculate the above are as follows:
Risk free interest rate of return 5.50% 5.00% 5.50%
Expected option life 84 months 84 months 84 months
Expected volatility 11.00% 11.00% 11.00%
Expected dividends 2.50% 2.00% 2.00%
</TABLE>
The Company also has established an Employee Stock Purchase Plan (the "Purchase
Plan") whereby employees shall elect to make contributions to the Purchase Plan
in an aggregate amount not less than 2% nor 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. As of September 30, 1999, 42,523 shares were
available for future purchase under the Purchase Plan. During 2000, 4,059 shares
were issued to employees. At September 30, 2000, there were 38,464 shares
available for future purchase.
16. COMMITMENTS
At September 30, 2000, the Company had approximately $4.7 million in outstanding
commitments to originate mortgage loans, $1,944,000 of which were at fixed rates
ranging from 7.38 to 9.00%. The unfunded line of credit commitments at September
30, 2000 were $11.3 million. The amounts of undisbursed portions of loans in
process at September 30, 2000 were $3.8 million. Also, at September 30, 2000,
the Company had no outstanding futures or options positions.
The Company leases land for one of its branch offices. Minimum rental
commitments at September 30, 2000, are summarized below:
Fiscal Rental
Year Amount
------ ------
2001 23,000
2002 23,000
2003 23,000
2004 23,000
2005 23,000
--------------
Total $ 115,000
==============
17. 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, 2000. Furthermore, the Bank may not repurchase any of its stock if the
effect thereof would cause the Bank's net worth to be reduced below (i) the
amount required for the liquidation account or (ii) the regulatory capital
requirements.
25
<PAGE>
18. FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, Disclosures about Fair
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.
<TABLE>
<CAPTION>
September 30,
2000 1999
Carrying Estimated Fair Carrying Estimated Fair
Amount Value Amount Value
-------------- ---------------- -------------- -----------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 4,080,202 $ 4,080,202 $ 3,955,818 $ 3,955,818
Investment securities held to maturity 71,280,841 69,463,000 61,014,582 59,201,000
Investment securities available-for-sale at fair value 3,309,736 3,309,736 3,201,932 3,201,932
Mortgage-backed securities held to maturity 116,303,730 114,182,000 116,778,337 114,497,000
Mortgage-backed securities available-for-sale at fair value - - 7,915,919 7,915,919
Loans receivable - net 262,774,378 263,147,068 252,259,611 254,824,930
Federal Home Loan Bank Stock 7,365,200 7,365,200 6,472,900 6,472,900
Liabilities:
Passbook, Club and NOW accounts 18,924,990 18,924,990 19,890,677 19,890,677
Money Market Demand accounts 49,928,562 49,928,562 54,490,438 54,490,438
Certificate accounts 240,982,258 236,187,198 229,278,984 229,435,398
Advances from Federal Home Loan Bank 145,134,283 143,911,167 125,179,928 123,687,895
Off Balance Sheet Items:
Commitments 19,800,000 19,800,000 13,600,000 13,600,000
</TABLE>
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. The fair value of loans is estimated based on present value
using approximate current entry-value interest rates applicable to each category
of such financial instruments. 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 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, 2000. 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.
26
<PAGE>
19. Parent Company Financial Information
Condensed financial statements of Harleysville Savings Financial Corporation are
as follows:
<TABLE>
<CAPTION>
September 30, 2000
<S> <C>
Condensed Statements of Financial Condition
Assets
Cash $ 1,469,111
Investment in subsidiary 29,929,276
---------------
Total Assets $ 31,398,387
===============
Liabilities & Stockholders' Equity
Liabilities
Stockholders' equity $ 31,398,387
---------------
Total liabilities & stockholders' equity $ 31,398,387
===============
Condensed Statement of Income (for the period February 25, 2000 to September 30, 2000)
Income:
Equity in undistributed income of subsidiary $ 2,908,857
---------------
Net income $ 2,908,857
===============
Condensed Statement of Cash Flows (for the period February 25, 2000 to September
30, 2000)
Net income $ 2,908,857
Undistributed income of HSB (2,908,857)
---------------
Net cash provided by operating activities --
---------------
Investing activities:
Dividends received from subsidiaries 2,547,183
---------------
Net cash provided by investing activities 2,547,183
---------------
Financing activities:
Acquisition of treasury stock (714,163)
Proceeds from issuance of common stock 129,394
Dividends paid (493,303)
---------------
Net cash used in financing activities (1,078,072)
Net change in cash and cash equivalents 1,469,111
---------------
Cash and cash equivalents at the beginning of the period --
Cash and cash equivalents at the end of the period $ 1,469,111
===============
</TABLE>
27
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 $2.42 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, 2000, was $15.06 per share. There
were 2,252,308 shares outstanding as of September 30, 2000, held by
approximately 1,000 stockholders.
CASH DIVIDENDS
For the Quarter Ended HIGH LOW CLOSE DECLARED
------------------------------------------------------------------------------
September 30, 1998 24.56 22.04 22.04 0.08
December 31, 1998 22.59 17.63 17.63 0.09
March 31, 1999 18.63 15.66 17.00 0.09
June 30, 1999 17.00 15.00 15.75 0.09
September 30, 1999 16.13 14.00 14.00 0.09
December 31, 1999 14.00 12.25 13.38 0.11
March 31, 2000 14.75 14.00 14.00 0.11
June 30, 2000 15.13 14.50 14.50 0.11
September 30, 2000 15.75 15.00 15.06 0.11
Corporate Information
<TABLE>
<CAPTION>
<S> <C>
Auditors General Counsel
Deloitte & Touche James J. Garrity
1700 Market Street, 24th floor Wisler, Pearlstine, Talone, Craig, Garrity & Potash
Philadelphia, PA 19103-3984 Office Court at Walton Point
(215) 246-2300 484 Norristown Road
Blue Bell, PA 19422
(610) 825-8400
Annual Meeting
Family Heritage Restaurant
Franconia, PA Investor Information
Wednesday, January 24, 2001 Investors, Analysts and others seeking
9:30 A.M. financial information may contact:
Corporate Secretary
Market Makers Harleysville Savings Financial Corporation
F.J. Morrissey & Co., Inc. 271 Main Street
Ryan Beck & Co., Inc. Harleysville, PA 19438
Spear, Leeds & Kellogg (215) 256-8828
Special Counsel Transfer Agent
Elias, Matz, Tiernan & Herrick Direct questions regarding dividend
734 15th Street, N.W. checks, address and name changes or
Washington, DC 20005 lost certificates to:
(202) 347-0300
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Dividend Reinvestment Plan web site: www.rtco.com
The Company has a Dividend Reinvestment and Stock email: [email protected]
Purchase Plan. Interested stockholders can
obtain more information regarding the Plan by
contacting:
Registrar and Transfer Company Upon request, the Company's Annual
10 Commerce Drive Report or form 10-K for the year ended
Cranford, NJ 07016 September 30, 2000, Registrar and
(800) 525-7686, extension 2542 Transfer Company and the exhibits
thereto required to be filed with 10
Commerce Drive the Securities and
Exchange Commission under Cranford, NJ
07016 the Securities Act of 1934 will be
furnished (800) 525-7686, extension 2542
without charge to any stockholder.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Board of Directors
<S> <C> <C>
Sanford A. Alderfer Paul W. Barndt Philip A. Clemens
Rounder Founder Chairman/CEO
Sanford A. Alderfer, Inc. The Barndt Agency, Inc. Clemens Family Corporation
Harleysville, PA Sumneytown, PA Hartfield, PA
David J. Friesen, CPA George W. Meschter Edward J. Molnar
Director of Development President President/CEO
Penn View Christian School Meschter Insurance Group Harleysville Savings Financial Corporation
Souderton, PA Collegeville, PA Harleysville, PA
Mark R. Cummins, CPA, CFA
Executive Vice President,
CIO and Treasurer
Harleysville Insurnance Companies
Harleysville, PA
</TABLE>
<TABLE>
<CAPTION>
Officers
<S> <C> <C>
Edward J. Molnar Ronald B. Geib Marian Bickerstaff
President and Executive Vice President and Senior Vice President and
Chief Executive Officer Corporate Secretary Chief Lending Officer
Brendan J. McGill Diane P. Moyer
Senior Vice President, Senior Vice President and
Treasurer and Corporate Secretary
Chief Financial Officer
</TABLE>
Managers
<TABLE>
<CAPTION>
<S> <C> <C>
Adrian D. Gordon Sheri L. Strouse Michell A. Beck
Vice President and Vice President and Assistant Vice President and
Branch Administrator Sumneytown Office Manager
Information Systems Manager
Nathaneal J. Clemmer H. Frances Kline
Kathleen Clairmont Assistant Vice President, Assistant Vice President
Assistant Vice President and Controller, and Accounting Sumneytown Office Manager
West Norriton Office Manager Department Manager
Kim A. Licata Lori N. McCausland Denise L. Monaghan
Assistant Vice President Assistant Vice President and Assistant Vice President and
Loan Customer Service Manager Loan Administration Manager Hartfield Office Manager
Diane M. Carlson
Assistant Vice President and
Human Resource Manager
</TABLE>
<PAGE>
Harleysville Office
271 Main Street
Harleysville, PA 19438
(215) 256-8828
Hatfield Office
1550 Cowpath Road
Hatfield, PA 19440
(215) 234-8053
Sumneytown Office
3090 Main Street
Sumneytown, PA 18084
West Norriton Office
32301 West Manin Street
Norristown, PA 19403
(610) 631-0887
