<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) February 24, 2000
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Harleysville Savings Financial Corporation
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-3028464
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(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
271 MAIN STREET, HARLEYSVILLE, PENNSYLVANIA 19401
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(Address of principal executive offices) (Zip Code)
(215) 256-8828
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
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ITEM 1. CHANGES IN CONTROL OF REGISTRANT.
After the close of business on February 24, 2000, Harleysville Savings
Financial Corporation (the "Company"), a Pennsylvania corporation, became a bank
holding company in accordance with the terms of an Agreement Plan of
Reorganization dated November 24, 1999 (the "Agreement"), by and between
Harleysville Savings Bank (the "Bank"), a Pennsylvania chartered stock savings
bank, Harleysville Interim Savings Bank ("Interim"), a Pennsylvania chartered
interim stock savings bank. Pursuant to the Agreement: (1) the Company was
organized as a wholly owned subsidiary of the Bank; (2) Interim was organized as
a wholly owned subsidiary of the Company; (3) Interim merged with and into the
Bank, with the Bank as the surviving institution, and (4) upon such merger, (i)
the outstanding shares of common stock, par value $1.00 per share, of the Bank
("Bank Common Stock") became, by operation of law, on a one-for-one basis,
common stock, par value $.01 per share, of the Company ("Company Common Stock")
(ii) the common stock of Interim held by the Company was converted into common
stock of the Bank and (iii) the common stock of the Company held by the Bank was
canceled. Accordingly, the Bank became a wholly owned subsidiary of the Company
and the shareholders of the Bank became shareholders of the Company.
The Bank Common Stock was previously registered under Section 12(g) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with the
Federal Deposit Insurance Corporation. Pursuant to Rule 12g-3(a) promulgated
under the Exchange Act, the Company Common Stock is deemed automatically
registered under Section 12(g) of the Exchange Act. In addition, the Company
Common Stock has been substituted for the Bank Common Stock on the Nasdaq
National Market under the symbol "HARL."
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
Not applicable.
(b) PRO FORMA FINANCIAL INFORMATION
Not applicable.
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(c) EXHIBITS
2.1 Agreement and Plan of Reorganization, dated November 24,
1999
3.1 Articles of Incorporation of Harleysville Savings
Financial Corporation
3.2 Bylaws of Harleysville Savings Financial Corporation
4.1 Form of stock certificate of Harleysville Savings
Financial Corporation
99.1 Press Release, dated February 24, 2000
99.2 Harleysville Savings Bank's Annual Report on Form 10-K
for the year ended September 30, 1999 as filed with the
Federal Deposit Insurance Corporation ("FDIC")
99.3 Harleysville Savings Bank's Annual Report to Stockholders
for the year ended September 30, 1999 as filed with the
FDIC
99.4 Harleysville Savings Bank's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1999 as filed with the
FDIC
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SIGNATURES
Under the requirements of the Securities Exchange Act of 1934,
Harleysville Savings Financial Corporation has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
HARLEYSVILLE SAVINGS FINANCIAL
CORPORATION
Date: February 25, 2000 By: /s/Edward J. Molnar
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Edward J. Molnar
President and Chief Executive
Officer
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EXHIBIT 2.1
AGREEMENT AND PLAN OF REORGANIZATION
Agreement and Plan of Reorganization, dated as of November 24, 1999
(the "Agreement"), by and between Harleysville Savings Bank ("Harleysville
Savings" or the "Surviving Bank"), a Pennsylvania-chartered stock savings bank,
and Harleysville Interim Savings Bank ("Interim"), a Pennsylvania-chartered
interim savings bank which will be organized for the sole purpose of
consummating the reorganization provided for herein, and Harleysville Savings
Financial Corporation (the "Company"), a Pennsylvania corporation.
WITNESSETH:
WHEREAS, the Board of Directors of Harleysville Savings has determined
that it is in the best interests of Harleysville Savings and its stockholders
for Harleysville Savings to be reorganized into a holding company form of
ownership; and
WHEREAS, Harleysville Savings has caused the Company to be organized
under Pennsylvania law as a wholly-owned subsidiary for the purpose of becoming
the holding company of Harleysville Saving; and
WHEREAS, the formation of a holding company by Harleysville Savings
will be facilitated by causing the Company to become the sole stockholder of a
newly-formed interim Pennsylvania-chartered stock savings bank, and then merging
the interim savings bank with and into Harleysville Savings, so that as part of
the merger all of the outstanding shares of common stock of Harleysville Savings
will be converted automatically into and become shares of common stock of the
Company, which would then become the sole stockholder of Harleysville Savings
(the "Merger"); and
WHEREAS, Interim is being organized by Harleysville Savings as an
interim Pennsylvania-chartered stock savings bank with the Company as its sole
stockholder in order to effect the Merger; and
WHEREAS, Harleysville Savings and Interim (the "Constituent Banks")
desire to provide for the terms and conditions of the Merger.
NOW, THEREFORE, Harleysville Savings, Interim and the Company hereby
agree as follows:
1. EFFECTIVE DATE. The Merger shall become effective as of the date of
the filing of the articles of merger relating to the Merger filed with the
Department of State of the Commonwealth of Pennsylvania pursuant to 7 P.S.
Section 1609(g), or any successor thereto (the "Effective Date").
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2. THE MERGER AND EFFECT THEREOF. Subject to the terms and conditions
set forth herein, including, without limitation, the prior approval of the
Department of Banking of the Commonwealth of Pennsylvania ("Department") and the
Board of Governors of the Federal Reserve System ("Federal Reserve Board") and
the expiration of all applicable waiting periods, Interim shall merge with and
into Harleysville Savings, which shall be the Surviving Bank. Upon consummation
of the Merger, the Surviving Bank shall be considered the same business and
corporate entity as each of the Constituent Banks and thereupon and thereafter
all the property, rights, powers and franchises of each of the Constituent Banks
shall vest in the Surviving Bank and the Surviving Bank shall be subject to and
be deemed to have assumed all of the debts, liabilities, obligations and duties
of each of the Constituent Banks and shall have succeeded to all of each of
their relationships, fiduciary or otherwise, as fully and to the same extent as
if such property, rights, privileges, powers, franchises, debts, obligations,
duties and relationships had been originally acquired, incurred or entered into
by the Surviving Bank. In addition, any reference to either of the Constituent
Banks in any contract, will or document, whether executed or taking effect
before or after the Effective Date, shall be considered a reference to the
Surviving Bank if not inconsistent with the other provisions of the contract,
will or document; and any pending action or other judicial proceeding to which
either of the Constituent Banks is a party shall not be deemed to have abated or
to have been discontinued by reason of the Merger, but may be prosecuted to
final judgment, order or decree in the same manner as if the Merger had not
occurred or the Surviving Bank may be substituted as a party to such action or
proceeding, and any judgment, order or decree may be rendered for or against it
that might have been rendered for or against either of the Constituent Banks if
the Merger had not occurred.
3. CONVERSION OF STOCK.
(a) On the Effective Date, (i) each share of common stock, par
value $1.00 per share, of Harleysville Savings ("Harleysville Savings Common
Stock") issued and outstanding immediately prior to the Effective Date shall, by
virtue of the Merger and without any action on the part of the holder thereof,
be converted into one share of common stock, par value $.01 per share, of the
Company ("Company Common Stock"), (ii) each share of common stock, par value
$.01 per share, of Interim ("Interim Common Stock") issued and outstanding
immediately prior to the Effective Date shall, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into one
share of Harleysville Savings Common Stock, and (iii) each share of Company
Common Stock issued and outstanding immediately prior to the Effective Date
shall, by virtue of the Merger and without any action on the part of the holder
thereof, be cancelled. By voting in favor of this Agreement, the Company, as the
sole stockholder of Interim, shall have agreed (i) to issue shares of Company
Common Stock in accordance with the terms hereof and (ii) to cancel all
previously issued and outstanding shares of Company Common Stock upon the
effectiveness of the Merger.
(b) On and after the Effective Date, there shall be no
registrations of transfers on the stock transfer books of Interim or
Harleysville Savings of shares of Interim Common Stock or Harleysville Savings
Common Stock which were outstanding immediately prior to the Effective Date.
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4. EXCHANGE OF SHARES.
(a) At or after the Effective Date, each holder of a
certificate or certificates theretofore evidencing issued and outstanding shares
of Harleysville Savings Common Stock, upon surrender of the same to an agent,
duly appointed by the Company (the "Exchange Agent"), shall be entitled to
receive in exchange therefor a certificate or certificates representing the
number of full shares of Company Common Stock for which the shares of
Harleysville Savings Common Stock theretofore represented by the certificate or
certificates so surrendered shall have been converted as provided in Section 3
hereof. The Exchange Agent shall mail to each holder of record of an outstanding
certificate which immediately prior to the Effective Date evidenced shares of
Harleysville Savings Common Stock, and which is to be exchanged for Company
Common Stock as provided in Section 3 hereof, a form of letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to such certificate shall pass, only upon delivery of such certificate to the
Exchange Agent) advising such holder of the terms of the exchange effected by
the Merger and of the procedure for surrendering to the Exchange Agent such
certificate in exchange for a certificate or certificates evidencing Company
Common Stock.
(b) After the Effective Date, certificates representing shares
of Harleysville Savings Common Stock shall be treated as evidencing ownership of
the number of full shares of Company Common Stock into which the shares of
Harleysville Savings Common Stock represented by such certificates shall have
been converted by virtue of the Merger, notwithstanding the failure on the part
of the holder thereof to surrender such certificates.
(c) If any certificate evidencing shares of Company Common
Stock is to be issued in a name other than that in which the certificate
evidencing Harleysville Savings Common Stock surrendered in exchange therefor is
registered, it shall be a condition of the issuance thereof that the certificate
so surrendered shall be properly endorsed and otherwise in proper form for
transfer and that the person requesting such exchange pay to the Exchange Agent
any transfer or other tax required by reason of the issuance of a certificate
for shares of Company Common Stock in any name other than that of the registered
holder of the certificate surrendered or otherwise establish to the satisfaction
of the Exchange Agent that such tax has been paid or is not payable.
(d) If, between the date hereof and the Effective Date, the
shares of Harleysville Savings Common Stock shall be changed into a different
number or class of shares by reason of any reclassification, recapitalization,
split-up, combination, exchange of shares or readjustment, or a stock dividend
thereon shall be declared with a record date within said period, the exchange
ratio specified in Section 3(a) hereof shall be adjusted accordingly.
5. DISSENTING SHARES. Subject to the provisions of 7 P.S. Section 1607
of the Pennsylvania Banking Code ("Banking Code") and Subchapter D of the
Pennsylvania Business Corporation Law ("BCL"), or any successors thereto,
holders of shares of Harleysville Savings Common Stock shall have dissenter or
appraisal rights in connection with the Merger at set forth in the BCL.
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6. NAME OF SURVIVING BANK. The name of the Surviving Bank shall be
"Harleysville Savings Bank."
7. DIRECTORS OF THE SURVIVING BANK. Upon and after the Effective Date,
until changed in accordance with the Articles of Incorporation and Bylaws of the
Surviving Bank and applicable law, the number of directors of the Surviving Bank
shall be seven. The names and addresses of those persons who, upon and after the
Effective Date, shall be directors of the Surviving Bank are set forth in
Schedule A hereto, which is hereby incorporated herein by reference. Each such
director shall serve for the term which expires at the annual meeting of
stockholders of the Surviving Bank in the year set forth after his or her
respective name in Schedule A, and until a successor is elected and qualified.
8. OFFICERS OF THE SURVIVING BANK. Upon and after the Effective Date,
until changed in accordance with the Articles of Incorporation and Bylaws of the
Surviving Bank and applicable law, the officers of Harleysville Savings
immediately prior to the Effective Date shall be the officers of the Surviving
Bank.
9. OFFICES. Upon the Effective Date, all offices of Harleysville
Savings and Interim (which shall have no offices) shall be offices of the
Surviving Bank. As of the Effective Date, the home office of the Surviving Bank
shall remain at 271 Main Street, Harleysville, Pennsylvania 19438 and the
location of the other offices of the Surviving Bank shall be as set forth in
Schedule B hereto, which is hereby incorporated herein by reference, except for
the addition of offices authorized or the deletion of offices closed subsequent
to the date hereof and the Effective Date.
10. ARTICLES OF INCORPORATION AND BYLAWS. On and after the Effective
Date, the Articles of Incorporation and Bylaws of Harleysville Savings as in
effect immediately prior to the Effective Date shall be the Articles of
Incorporation and Bylaws of the Surviving Bank until amended in accordance with
the terms thereof and applicable law.
11. SAVINGS ACCOUNTS. Upon the Effective Date, all savings accounts of
Harleysville Savings, without reissue, shall be and become savings accounts of
the Surviving Bank without change in their respective terms, including, without
limitation, maturity, minimum required balances or withdrawal value.
12. STOCK COMPENSATION PLANS. By voting in favor of this Agreement,
the Company shall have approved adoption of Harleysville Savings' existing
Employee Stock Ownership Plan, 1987 Stock Compensation Program, 1995 Stock
Option Plan and 1995 Employee Stock Purchase Plan as plans of the Company.
13. STOCKHOLDER APPROVAL. The affirmative vote of the holders of
two-thirds of the issued and outstanding Harleysville Savings Common Stock shall
be required to approve this Agreement on behalf of Harleysville Savings and the
approval of the Company, as the sole holder of Interim Common Stock, shall be
required to approve this Agreement on behalf of Interim.
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14. REGISTRATION; OTHER APPROVALS. In addition to the approvals set
forth in Section 2 hereof, the parties' obligations to consummate the Merger
shall be subject to (i) the Company Common Stock to be issued hereunder in
exchange for Harleysville Savings Common Stock being registered under the
Securities Act of 1933 and registered or qualified under applicable state
securities laws, except in each case to the extent that the Company relies on an
applicable exemption therefrom, and (ii) the receipt of all other approvals,
consents or waivers as the parties may deem necessary or advisable.
15. INCOME TAX MATTERS. The parties hereto shall have received an
opinion of counsel, satisfactory to them in form and substance, with respect to
the federal income tax consequences of the Agreement and the formation of a
holding company, as contemplated therein.
16. ABANDONMENT OF AGREEMENT. This Agreement may be abandoned by each
of Harleysville Savings, Interim or the Company at any time before the Effective
Date in the event that (a) any action, suit, proceeding or claim has been
instituted, made or threatened relating to the Agreement which shall make
consummation of the transaction contemplated hereby inadvisable in the opinion
of Harleysville Savings, Interim or the Company, (b) if ten percent or more of
the holders of Harleysville Savings Common Stock demand and perfect dissenters
rights under the BCL, or (c) for any other reason consummation of the
transaction contemplated hereby is inadvisable in the opinion of Harleysville
Savings, Interim or the Company. Such abandonment shall be effected by written
notice by Harleysville Savings, Interim or the Company to the others, authorized
or approved by the Board of Directors of the party giving such notice. Upon the
giving of such notice, this Agreement shall be terminated and there shall be no
liability hereunder or on account of such termination on the part of
Harleysville Savings, Interim or the Company or the directors, officers,
employees, agents or stockholders of each of them. In the event of abandonment
of this Agreement, Harleysville Savings shall pay the fees and expenses incurred
by itself, Interim and the Company in connection with this Agreement and the
Merger.
17. AMENDMENTS. To the extent permitted by law, this Agreement may be
amended by a subsequent writing signed by the parties hereto upon the approval
of the Board of Directors of each of the parties hereto; provided, however that
the provisions of Section 3 hereto relating to the consideration to be exchanged
for shares of Harleysville Savings Common Stock shall not be amended after the
meeting of stockholders of Harleysville Savings at which this Agreement is
considered so as to decrease the amount of change of such consideration without
the approval of such stockholders.
18. SUCCESSORS. This Agreement shall be binding on the successors of
Harleysville Savings, Interim and the Company.
19. COUNTERPARTS. This Agreement may be executed in one or more
counterparts.
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20. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the United States of America and, to the extent not
governed by such laws, the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, Harleysville Savings, Interim and the Company have
caused this Agreement to be executed by their duly authorized officers as of the
day and year first above written.
HARLEYSVILLE SAVINGS BANK
<TABLE>
<S> <C>
Attest:
/s/Diane P. Moyer By: /s/Edward J. Molnar
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Diane P. Moyer Edward J. Molnar
Secretary President and Chief Executive Officer
HARLEYSVILLE SAVINGS FINANCIAL
CORPORATION
Attest:
/s/Diane P. Moyer By: /s/Edward J. Molnar
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Diane P. Moyer Edward J. Molnar
Secretary President and Chief Executive Officer
HARLEYSVILLE INTERIM SAVINGS BANK
(In Organization)
Attest:
/s/Diane P. Moyer By: /s/Edward J. Molnar
- ----------------------- -------------------------------------
Diane P. Moyer Edward J. Molnar
Secretary President and Chief Executive Officer
</TABLE>
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SCHEDULE A
DIRECTORS OF THE SURVIVING BANK
<TABLE>
<CAPTION>
Terms
Name Residence Address Expires
- ---- ----------------- -------
<S> <C> <C>
Sanford A. Alderfer 10 Crescent Lane 2001
Harleysville, PA 19438
Paul W. Barndt 502 Walnut Street 2002
Green Lane, PA 18054
Philip A. Clemens 534 Montgomery Avenue 2002
Sounderton, PA 18964
Mark R. Cummins 59 Hunsberger Road 2001
Telford, PA 18969
David J. Friesen 485 Quarry Road 2003
Harleysville, PA 19438
George W. Meschter 129 Russull Circle 2003
Collegeville, PA 19426
Edward J. Molnar 305 Clemens Road 2002
Harleysville, PA 19438
</TABLE>
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SCHEDULE B
OFFICES OF THE SURVIVING BANK
HOME OFFICE
271 Main Street
Harleysville, Pennsylvania, 19438
OTHER OFFICES
3090 Main Street
Sumneytown, Pennsylvania 18084
2301 West Main Street
Norristown, Pennsylvania 19403
1550 Cowpath Road
Hatfield, Pennsylvania 19440
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EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
ARTICLE I
NAME
The name of the corporation is Harleysville Savings Financial
Corporation (hereinafter referred to as the "Corporation").
ARTICLE II
REGISTERED OFFICE
The address of the initial registered office of the Corporation in the
Commonwealth of Pennsylvania is 271 Main Street, Harleysville, Pennsylvania
19438.
ARTICLE III
NATURE OF BUSINESS
The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the Pennsylvania
Business Corporation Law of 1988, as amended (the "BCL"). The Corporation is
incorporated under the provisions of the BCL.
ARTICLE IV
CAPITAL STOCK
A. AUTHORIZED AMOUNT. The total number of shares of capital stock which
the Corporation has authority to issue is 22,500,000 of which 7,500,000 shall be
serial preferred stock, par value $.01 per share (hereinafter the "Preferred
Stock"), and 15,000,000 shall be common stock, par value $.01 per share
(hereinafter the "Common Stock"). Except to the extent required by governing
law, rule or regulation, the shares of capital stock may be issued from time to
time by the Board of Directors without further approval of stockholders. The
Corporation shall have the authority to purchase its capital stock out of funds
lawfully available therefor.
B. COMMON STOCK. Except as provided in this Article IV (or in any
resolution or resolutions adopted by the Board of Directors pursuant hereto),
the exclusive voting power of the Corporation shall be vested in the Common
Stock, with each holder thereof being entitled to one vote for each share of
such Common Stock standing in the holder's name on the books of the Corporation.
Subject to any rights and preferences of any class of stock having preference
over the Common Stock, holders of Common Stock shall be entitled to such
dividends as may be declared by the Board of
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Directors out of funds lawfully available therefor. Upon any liquidation,
dissolution or winding up of the affairs of the Corporation, whether voluntary
or involuntary, holders of Common Stock shall be entitled to receive pro rata
the remaining assets of the Corporation after the holders of any class of stock
having preference over the Common Stock have been paid in full any sums to which
they may be entitled.
C. AUTHORITY OF BOARD TO FIX TERMS OF PREFERRED STOCK. The Board of
Directors shall have the full authority permitted by law to divide the
authorized and unissued shares of Preferred Stock into series and to fix by
resolution full, limited, multiple or fractional, or no voting rights, and such
designations, preferences, qualifications, privileges, limitations,
restrictions, options, conversion rights, and other special or relative rights
of the Preferred Stock or any series thereof that may be desired.
D. PREEMPTIVE RIGHTS. Except as may be provided in a resolution or
resolutions of the Board of Directors providing for the issue of any series of
Preferred Stock, no holder of shares of capital stock of the Corporation as such
shall have any preemptive or preferential right to purchase or subscribe to any
part of any new or additional issue of capital stock of any class whatsoever of
the Corporation, or of securities convertible into capital stock of any class
whatsoever, whether now or hereafter authorized or issued.
ARTICLE V
INCORPORATOR
The name and mailing address of the sole incorporator is as follows:
<TABLE>
<CAPTION>
Number and
Class of
Shares
Name Address Subscribed For
- ---------------------------------- ------------------------------------------------ -------------------------
<S> <C> <C>
Harleysville Savings 271 Main Street 1,000 shares of
Bank Harleysville, Pennsylvania 19438 Common Stock
</TABLE>
ARTICLE VI
DIRECTORS
A. DIRECTORS AND NUMBER OF DIRECTORS. The business and affairs of the
Corporation shall be managed under the direction of a Board of Directors. Except
as otherwise increased from time to time by the exercise of the rights of the
holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation to elect additional directors, the
number of directors of the Corporation shall be determined as stated in the
Corporation's Bylaws, as may be amended from time to time.
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B. CLASSIFICATION AND TERM. The Board of Directors, other than those
who may be elected by the holders of any class or series of stock having
preference over the Common Stock as to dividends or upon liquidation, shall be
divided into three classes as nearly equal in number as possible, with one class
to be elected annually. The term of office of the initial directors shall be as
follows: the term of directors of the first class shall expire at the first
annual meeting of stockholders after the effective date of these Articles of
Incorporation; the term of office of the directors of the second class shall
expire at the second annual meeting of stockholders after the effective date of
these Articles of Incorporation; and the term of office of the third class shall
expire at the third annual meeting of stockholders after the effective date of
these Articles of Incorporation; and, as to directors of each class, when their
respective successors are elected and qualified. At each annual meeting of
stockholders, directors elected to succeed those whose terms are expiring shall
be elected for a term of office to expire at the third succeeding annual meeting
of stockholders (except to the extent necessary to ensure that the Board of
Directors shall be divided into three classes as nearly equal in number as
possible) and when their respective successors are elected and qualified.
C. NO CUMULATIVE VOTING. Stockholders of the Corporation shall not be
permitted to cumulate their votes for the election of directors.
D. VACANCIES. Except as otherwise fixed pursuant to the provisions of
Article IV hereof relating to the rights of the holders of any class or series
of stock having preference over the Common Stock as to dividends or upon
liquidation to elect directors, any vacancy occurring in the Board of Directors,
including any vacancy created by reason of an increase in the number of
directors, shall be filled by a majority vote of the directors then in office,
whether or not a quorum is present, or by a sole remaining director, and any
director so chosen shall serve until the term of the class to which he was
appointed shall expire and until his successor is elected and qualified. When
the number of directors is changed, the Board of Directors shall determine the
class or classes to which the increased or decreased number of directors shall
be apportioned, provided that no decrease in the number of directors shall
shorten the term of any incumbent director.
E. REMOVAL. Except as otherwise required by law, and subject to the
rights of any class or series of stock having preference over the Common Stock
as to dividends or upon liquidation to elect directors, any director (including
persons elected by directors to fill vacancies in the Board of Directors) may be
removed from office by stockholders only for cause and only upon the affirmative
vote of not less than a majority of the total votes eligible to be cast by
stockholders at a duly constituted meeting of stockholders called expressly for
such purpose. Cause for removal shall exist only if the director whose removal
is proposed has been either declared of unsound mind by an order of a court of
competent jurisdiction, convicted of a felony or of an offense punishable by
imprisonment for a term of more than one year by a court of competent
jurisdiction, or deemed liable by a court of competent jurisdiction for gross
negligence or misconduct in the performance of such director's duties to the
Corporation.
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ARTICLE VII
MEETINGS OF STOCKHOLDERS; ACTION WITHOUT A MEETING
A. SPECIAL MEETINGS OF STOCKHOLDERS Except as otherwise required by
law, and subject to the rights of the holders of any class or series of
Preferred Stock, special meetings of stockholders may be called only by the
Board of Directors of the Corporation pursuant to a resolution approved by the
affirmative vote of a majority of the directors then in office.
B. ACTION WITHOUT A MEETING. An action permitted to be taken by the
stockholders of the Corporation at a meeting of stockholders may be taken
without a meeting only if a unanimous written consent setting forth the action
so taken is signed by all stockholders who would be entitled to vote at a
meeting for such purpose and such consent is filed with the Secretary of the
Corporation as part of the corporate records.
ARTICLE VIII
LIABILITY OF DIRECTORS AND OFFICERS
The personal liability of the directors and officers of the Corporation
for monetary damages for conduct in their capacities as such shall be eliminated
to the fullest extent permitted by the BCL as it exists on the effective date of
these Articles of Incorporation or as such law may be thereafter in effect. No
amendment, modification or repeal of this Article VIII, nor the adoption of any
provision of these Articles of Incorporation inconsistent with this Article
VIII, shall adversely affect the rights provided hereby with respect to any
claim, issue or matter in any proceeding that is based in any respect on any
alleged action or failure to act prior to such amendment, modification, repeal
or adoption.
ARTICLE IX
RESTRICTIONS ON OFFERS AND ACQUISITIONS OF
THE CORPORATIONS' EQUITY SECURITIES
A. DEFINITIONS.
(a) ACQUIRE. The term "Acquire" includes every type of
acquisition, whether effected by purchase, exchange, operation of law or
otherwise.
(b) ACTING IN CONCERT. The term "Acting in Concert" means (a)
knowing participation in a joint activity or conscious parallel action towards a
common goal whether or not pursuant to an express agreement, or (b) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise.
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(c) AFFILIATE. An "Affiliate" of, or a Person "affiliated
with," a specified Person, means a Person that directly, or indirectly through
one or more intermediaries, controls, or is controlled by, or is under common
control with, the Person specified.
(d) ASSOCIATE. The term "Associate" used to indicate a
relationship with any Person means:
(i) Any corporation or organization (other than the
Corporation or a Subsidiary of the Corporation), or any
subsidiary or parent thereof, of which such Person is a
director, officer or partner or is, directly or indirectly,
the Beneficial Owner of 10% or more of any class of equity
securities;
(ii) Any trust or other estate in which such Person
has a 10% or greater beneficial interest or as to which such
Person serves as trustee or in a similar fiduciary capacity,
provided, however, such term shall not include any employee
stock benefit plan of the Corporation or a Subsidiary of the
Corporation in which such Person has a 10% or greater
beneficial interest or serves as a trustee or in a similar
fiduciary capacity;
(iii) Any relative or spouse of such Person (or any
relative of such spouse) who has the same home as such Person
or who is a director or officer of the Corporation or a
Subsidiary of the Corporation (or any subsidiary or parent
thereof); or
(iv) Any investment company registered under the
Investment Company Act of 1940 for which such Person or any
Affiliate or Associate of such Person serves as investment
advisor.
(e) BENEFICIAL OWNER (INCLUDING BENEFICIALLY OWNED). A Person
shall be considered the "Beneficial Owner" of any shares of stock (whether or
not owned of record):
(i) With respect to which such Person or any
Affiliate or Associate of such Person directly or indirectly
has or shares (A) voting power, including the power to vote or
to direct the voting of such shares of stock, and/or (B)
investment power, including the power to dispose of or to
direct the disposition of such shares of stock;
(ii) Which such Person or any Affiliate or Associate
of such Person has (A) the right to acquire (whether such
right is exercisable immediately or only after the passage of
time) pursuant to any agreement, arrangement or understanding
or upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise, and/or (B) the right to
vote pursuant to any agreement, arrangement or understanding
(whether such right is exercisable immediately or only after
the passage of time); or
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(iii) Which are Beneficially Owned within the meaning
of (i) or (ii) of this Article IXA(e) by any other Person with
which such first-mentioned Person or any of its Affiliates or
Associates either (A) has any agreement, arrangement or
understanding, written or oral, with respect to acquiring,
holding, voting or disposing of any shares of stock of the
Corporation or any Subsidiary of the Corporation or acquiring,
holding or disposing of all or substantially all, or any
Substantial Part, of the assets or business of the Corporation
or a Subsidiary of the Corporation, or (B) is Acting in
Concert. For the purpose only of determining whether a Person
is the Beneficial Owner of a percentage specified in this
Article IX of the outstanding Voting Shares, such shares shall
be deemed to include any Voting Shares which may be issuable
pursuant to any agreement, arrangement or understanding or
upon the exercise of conversion rights, exchange rights,
warrants, options or otherwise and which are deemed to be
Beneficially Owned by such Person pursuant to the foregoing
provisions of this Article IXA(e), but shall not include any
other Voting Shares which may be issuable in such manner.
(f) OFFER. The term "Offer" shall mean every offer to buy or
acquire, solicitation of an offer to sell, tender offer or request or invitation
for tender of, a security or interest in a security for value; provided that the
term "Offer" shall not include (i) inquiries directed solely to the management
of the Corporation and not intended to be communicated to stockholders which are
designed to elicit an indication of management's receptivity to the basic
structure of a potential acquisition with respect to the amount of cash and or
securities, manner of acquisition and formula for determining price, or (ii)
non-binding expressions of understanding or letters of intent with the
management of the Corporation regarding the basic structure of a potential
acquisition with respect to the amount of cash and or securities, manner of
acquisition and formula for determining price.
(g) PERSON. The term "Person" shall mean any individual,
partnership, corporation, association, trust, group or other entity. When two or
more Persons act as a partnership, limited partnership, syndicate, association
or other group for the purpose of acquiring, holding or disposing of shares of
stock, such partnership, syndicate, associate or group shall be deemed a
"Person."
(h) SUBSTANTIAL PART. The term "Substantial Part" as used with
reference to the assets of the Corporation or of any Subsidiary means assets
having a value of more than 10% of the total consolidated assets of the
Corporation and its Subsidiaries as of the end of the Corporation's most recent
fiscal year ending prior to the time the determination is being made.
(i) SUBSIDIARY. "Subsidiary" means any corporation of which a
majority of any class of equity security is owned, directly or indirectly, by
the Person in question.
(j) VOTING SHARES. "Voting Shares" shall mean shares of the
Corporation entitled to vote generally in an election of directors.
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(k) CERTAIN DETERMINATIONS WITH RESPECT TO ARTICLE IX. A
majority of the directors shall have the power to determine for the purposes of
this Article IX, on the basis of information known to them and acting in good
faith: (A) the number of Voting Shares of which any Person is the Beneficial
Owner, (B) whether a Person is an Affiliate or Associate of another, (C) whether
a Person has an agreement, arrangement or understanding with another as to the
matters referred to in the definition of "Beneficial Owner" as hereinabove
defined, and (D) such other matters with respect to which a determination is
required under this Article IX.
(l) DIRECTORS, OFFICERS OR EMPLOYEES. Directors, officers or
employees of the Corporation or any Subsidiary thereof shall not be deemed to be
a group with respect to their individual acquisitions of any class of equity
securities of the Corporation solely as a result of their capacities as such.
B. RESTRICTIONS. For a period of five years from the effective date of
the reorganization of Harleysville Savings Bank (the "Bank") as a subsidiary of
the Corporation, no Person shall directly or indirectly Offer to acquire or
acquire the Beneficial Ownership of (i) more than 10% of the issued and
outstanding shares of any class of an equity security of the Corporation, or
(ii) any securities convertible into, or exercisable for, any equity securities
of the Corporation if, assuming conversion or exercise by such Person of all
securities of which such Person is the Beneficial Owner which are convertible
into, or exercisable for, such equity securities (but of no securities
convertible into, or exercisable for, such equity securities of which such
Person is not the Beneficial Owner), such Person would be the Beneficial Owner
of more than 10% of any class of an equity security of the Corporation.
C. EXCLUSIONS. The foregoing restrictions shall not apply to (i) any
Offer with a view toward public resale made exclusively to the Corporation by
underwriters or a selling group acting on its behalf, (ii) any tax qualified
employee benefit plan or arrangement established by the Corporation or a
Subsidiary of the Corporation and any trustee of such a plan or arrangement, and
(iii) any other Offer or acquisition approved in advance by the affirmative vote
of 80% of the members of the Corporation's Board of Directors then in office.
D. REMEDIES. In the event that shares are acquired in violation of this
Article IX, all shares Beneficially Owned by any Person in excess of 10% shall
be considered "Excess Shares" and shall not be counted as shares entitled to
vote and shall not be voted by any Person or counted as Voting Shares in
connection with any matters submitted to stockholders for a vote, and the Board
of Directors may cause such Excess Shares to be transferred to an independent
trustee for sale on the open market or otherwise, with the expenses of such
trustee to be paid out of the proceeds of the sale.
ARTICLE X
APPLICABILITY OF CERTAIN PROVISIONS OF THE BCL
Section 1715 and Subchapter G, "Control-Share Acquisitions," of Chapter
25 of the BCL, and in each case any successor to such provisions, shall not
apply to the Corporation.
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ARTICLE XI
AMENDMENT
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in these Articles of Incorporation, in the manner now or
hereafter prescribed by law, and all rights conferred upon stockholders herein
are granted subject to this reservation. No amendment, addition, alteration,
change or repeal of these Articles of Incorporation shall be made unless it is
first approved by the Board of Directors of the Corporation pursuant to a
resolution adopted by the affirmative vote of a majority of the directors then
in office, and, to the extent required by applicable law, thereafter is approved
by the holders of a majority (except as provided below) of the shares of the
Corporation entitled to vote generally in an election of directors, voting
together as a single class, as well as such additional vote of the Preferred
Stock as may be required by the provisions of any series thereof.
Notwithstanding anything contained in these Articles of Incorporation to the
contrary, the affirmative vote of the holders of at least 75% of the shares of
the Corporation entitled to vote generally in an election of directors, voting
together as a single class, as well as such additional vote of the Preferred
Stock as may be required by the provisions of any series thereof, shall be
required to amend, adopt, alter, change or repeal any provision inconsistent
with Articles VI, VII, VIII, IX and XI hereof which is not approved by the
affirmative vote of 80% of the Corporation's Board of Directors then in office.
THE UNDERSIGNED, being the sole incorporator hereinbefore named, for
the purpose of forming a corporation pursuant to the Pennsylvania Business
Corporation Law of 1988, as amended, through these Articles of Incorporation,
has caused these Articles of Incorporation to be signed by its President and
Chief Executive Officer, who hereby declares and certifies that the facts herein
stated are true and who has hereunto set his hand this 22nd day of November
1999.
ATTEST HARLEYSVILLE SAVINGS BANK
/s/ Diane P. Moyer By: /s/ Edward J. Molnar
- ------------------------------- ----------------------------------
Diane P. Moyer, Secretary Edward J. Molnar, President
and Chief Executive Officer
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Exhibit 3.2
BYLAWS
OF
HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
SECTION I
OFFICES
1.1 REGISTERED OFFICE AND REGISTERED AGENT. The registered office of
Harleysville Savings Financial Corporation ("Corporation") shall be located in
the Commonwealth of Pennsylvania at such place as may be fixed from time to time
by the Board of Directors upon filing of such notices as may be required by law,
and the registered agent shall have a business office identical with such
registered office.
1.2 OTHER OFFICES. The Corporation may have other offices within or
outside the Commonwealth of Pennsylvania at such place or places as the Board of
Directors may from time to time determine.
SECTION II
STOCKHOLDERS' MEETINGS
2.1 PLACE OF MEETINGS. All meetings of the stockholders shall be held
at such place within or without the Commonwealth of Pennsylvania as shall be
determined by the Board of Directors.
2.2 ANNUAL MEETINGS. The annual meeting of the stockholders for the
election of directors and for the transaction of such other business as may
properly come before the meeting shall be held each year on the fourth Wednesday
of January at the hour of 9:30 a.m., if not a legal holiday, and if a legal
holiday, then on the day following, at the same hour, or at such other date and
time as may be determined by the Board of Directors and stated in the notice of
such meeting.
2.3 ORGANIZATION AND CONDUCT. Each meeting of the stockholders shall
be presided over by the Chairman, or if the Chairman is not present, by the
Vice-Chairman, or if both are not present, the President, or if all of the above
are not present, by such other director as designated by the Board of Directors.
The Secretary, or in his absence a temporary Secretary, shall act as secretary
of each meeting of the stockholders. In the absence of the Secretary and any
temporary Secretary, the chairman of the meeting may appoint any person present
to act as secretary of the meeting. The chairman of any meeting of the
stockholders, unless prescribed by law or regulation or unless the Board of
Directors has otherwise determined, shall determine the order of the business
and the procedure at the meeting, including such regulation of the manner of
voting and the conduct of discussions as shall be deemed appropriate by him in
his sole discretion.
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2.4 NOTICE.
(a) Written notice of every meeting of stockholders shall be given by,
or at the direction of, the Secretary of the Corporation or other authorized
person to each stockholder of record entitled to vote at the meeting at least
(i) ten days prior to the day named for a meeting that will consider a
fundamental change under Chapter 19 of the Pennsylvania Business Corporation Law
("BCL"), or any successor thereto, or (ii) five days prior to the day named for
a meeting in any other case. A notice of meeting shall specify the place, day
and hour of the meeting, and in the case of a special meeting the general nature
of the business to be transacted thereat, as well as any other information
required by law.
(b) When a meeting of stockholders is adjourned, it shall not be
necessary to give any notice of the adjourned meeting or of the business to be
transacted at an adjourned meeting, other than by announcement at the meeting at
which the adjournment is taken, unless the Board of Directors fixes a new record
date for the adjourned meeting or notice of the business to be transacted is
required to be given by applicable law and such notice previously has not been
given.
2.5 RECORD DATE. The Board of Directors may fix in advance a record
date for the purpose of determining stockholders entitled to notice of or to
vote at any meeting of stockholders, or any adjournment thereof, such date to be
not more than 90 days and not less than (i) ten days in the case of a meeting
that will consider a fundamental change under Chapter 19 of the BCL, or any
successor thereto, or (ii) five days in the case of a meeting for any other
purpose, prior to the date of the meeting established by the Board of Directors.
2.6 VOTING LIST. The officer or agent having charge of the transfer
books for shares of the Corporation shall make a complete list of the
stockholders entitled to vote at any meeting of stockholders, arranged in
alphabetical order, with the address of and number of shares held by each. The
list shall be produced and kept open at the time and place of the meeting and
shall be subject to the inspection of any stockholder during the whole time of
the meeting for the purposes thereof.
2.7 QUORUM. Except as otherwise required by law:
(a) The presence of stockholders entitled to vote at least a majority
of the votes that all stockholders are entitled to cast on a particular matter
to be acted upon at a meeting of stockholders shall constitute a quorum for the
purposes of consideration and action on the matter.
(b) The stockholders present at a duly organized meeting can continue
to do business until adjournment notwithstanding the general withdrawal of
enough stockholders to leave less than a quorum.
2.8 VOTING OF SHARES.
(a) Except as otherwise provided in these Bylaws or to the extent that
voting rights of the shares of any class or classes are limited or denied by the
Articles of Incorporation, each
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stockholder, on each matter submitted to a vote at a meeting of stockholders,
shall have one vote for each share of stock registered in his name on the books
of the Corporation.
(b) Except as otherwise provided by law or paragraph (c) of this
Section 2.8, any corporate action to be taken by vote of the stockholders of the
Corporation shall be authorized by receiving the affirmative vote of a majority
of the votes cast by all stockholders entitled to vote thereon and, if any
stockholders are entitled to vote thereon as a class, upon receiving the
affirmative vote of a majority of the votes cast by stockholders entitled to
vote as a class.
(c) Directors are to be elected by a plurality of votes cast by the
shares entitled to vote in the election at a meeting at which a quorum is
present. If, at any meeting of the stockholders, due to a vacancy or vacancies
or otherwise, directors of more than one class of the Board of Directors are to
be elected, each class of directors to be elected at the meeting shall be
elected in a separate election by a plurality vote.
2.9 PROXIES. Every stockholder entitled to vote at a meeting of
stockholders may authorize another person to act for him by a proxy duly
executed by the stockholder or his duly authorized attorney-in-fact. The
presence of, or vote or other action at a meeting of stockholders, by a proxy of
a stockholder shall constitute the presence of, or vote or other action by, the
stockholder for all purposes. No proxy shall be valid after three years from the
date of execution unless a longer time is expressly provided therein.
2.10 PROPOSALS. At an annual meeting of the stockholders, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting, business must be (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, or (b) otherwise properly brought
before the meeting by a stockholder. For business to be properly brought before
an annual meeting by a stockholder, the stockholder must have given timely
notice thereof in writing to the Secretary of the Corporation. To be timely a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation not later than ninety days prior
to the anniversary date of the mailing of proxy materials by the Corporation in
connection with the immediately preceding annual meeting of stockholders of the
Corporation or, in the case of the first annual meeting of stockholders of the
Corporation following its acquisition of all of the outstanding capital stock of
Harleysville Savings Bank, not later than ninety days prior to the anniversary
date of the mailing of proxy materials by Harleysville Savings Bank in
connection with the immediately preceding annual meeting of stockholders of
Harleysville Savings Bank prior to such acquisition. A stockholder's notice to
the Secretary shall set forth as to each matter the stockholder proposes to
bring before the annual meeting (a) a brief description of the business desired
to be brought before the annual meeting, (b) the name and address, as they
appear on the Corporation's books, of the stockholder proposing such business,
(c) the class and number of shares of the Corporation which are beneficially
owned by the stockholder, and (d) any material interest of the stockholder in
such business. The chairman of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions
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of this Section 2.10, and if he should so determine, he shall so declare to the
meeting and any such business not properly brought before the meeting shall not
be transacted. This provision is not a limitation on any other applicable laws
and regulations.
2.11 JUDGES OF ELECTION.
(a) For each meeting of stockholders, the Board of Directors may
appoint judges of election, who need not be stockholders, to act at the meeting
or any adjournment thereof. If judges of election are not so appointed, the
presiding officer of the meeting may, and on the request of any stockholder
shall, appoint judges of election at the meeting. The number of judges shall be
one or three. A person who is a candidate for office to be filled at the meeting
shall not act as a judge.
(b) The judges of election shall determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum, the authenticity, validity and effect of proxies,
receive votes or ballots, hear and determine all challenges and questions in any
way arising in connection with the right to vote, count and tabulate all votes,
determine the result and do such acts as may be proper to conduct the election
or vote with fairness to all stockholders. The judges of election shall perform
their duties impartially, in good faith, to the best of their ability and as
expeditiously as is practical. If there are three judges of election, the
decision, act or certificate of a majority shall be effective in all respects as
the decision, act or certificate of all.
SECTION III
BOARD OF DIRECTORS
3.1 NUMBER AND POWERS. The business affairs of the Corporation shall
be managed under the direction of a Board of Directors of not less than five nor
more than 15, as set from time to time by resolution of the Board of Directors.
Directors need not be stockholders or residents of the Commonwealth of
Pennsylvania. In addition to the powers and authorities expressly conferred upon
it by these Bylaws and the Articles of Incorporation, all such powers of the
Corporation as are not by statute or by the Corporation's Articles of
Incorporation or by these Bylaws directed or required to be exercised or done by
the stockholders may be exercised by or under the authority of the Board of
Directors.
3.2 CLASSIFICATION AND TERMS. The classification and terms of the
directors shall be as set forth in the Corporation's Articles of Incorporation,
which provisions are incorporated herein with the same effect as if they were
set forth herein.
3.3 VACANCIES. All vacancies in the Board of Directors shall be
filled in the manner provided in the Corporation's Articles of Incorporation,
which provisions are incorporated herein with the same effect as if they were
set forth herein.
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3.4 REMOVAL OF DIRECTORS. Directors may be removed in the manner
provided in the Corporation's Articles of Incorporation, which provisions are
incorporated herein with the same effect as if they were set forth herein.
3.5 REGULAR MEETINGS. Regular meetings of the Board of Directors or
any committee may be held without notice at the principal place of business of
the Corporation or at such other place or places, either within or without the
Commonwealth of Pennsylvania, as the Board of Directors or such committee, as
the case may be, may from time to time appoint or as may be designated in the
notice of the meeting. A regular meeting of the Board of Directors shall be held
without notice immediately after the annual meeting of stockholders.
3.6 SPECIAL MEETINGS.
(a) Special meetings of the Board of Directors may be called
at any time by the Chairman, the Vice-Chairman, the President or by a majority
of the authorized number of directors, to be held at the principal place of
business of the Corporation or at such other place or places as the Board of
Directors or the person or persons calling such meeting may from time to time
designate. Written notice of all special meetings of the Board of Directors
shall be given to each director by five days' service of the same. Such notice
need not specify the business to be transacted at, nor the purpose of, the
meeting.
(b) Special meetings of any committee may be called at any
time by such person or persons and with such notice as shall be specified for
such committee by the Board of Directors, or in the absence of such
specification, in the manner and with the notice required for special meetings
of the Board of Directors.
3.7 ACTION OF DIRECTORS BY COMMUNICATIONS EQUIPMENT. One or more
persons may participate in a meeting of directors, or of a committee thereof, by
means of a conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other.
3.8 QUORUM OF AND ACTION BY DIRECTORS. A majority of the Board of
Directors then in office shall be necessary at all meetings to constitute a
quorum for the transaction of business and the acts of a majority of the
directors present and voting at a meeting at which a quorum is present shall be
the acts of the Board of Directors. Every director of the Corporation shall be
entitled to one vote.
3.9 REGISTERING DISSENT. A director who is present at a meeting of
the Board of Directors or of a committee thereof, at which action on a corporate
matter is taken on which the director is generally competent to act, shall be
presumed to have assented to such action unless his dissent is entered in the
minutes of the meeting, or unless he files his written dissent to such action
with the person acting as the secretary of the meeting before the adjournment
thereof, or unless he delivers
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his dissent in writing to the Secretary of the Corporation immediately after
the adjournment of the meeting. Such right to dissent shall not apply to a
director who voted in favor of such action.
3.10 ACTION BY DIRECTORS WITHOUT A MEETING. Any action which may be
taken at a meeting of the directors, or of a committee thereof, may be taken
without a meeting if, prior or subsequent to the action, a consent or consents
in writing, setting forth the action so taken or to be taken, is signed by all
of the directors in office, or by all of the members of the committee, as the
case may be, and filed with the Secretary of the Corporation. Such consent shall
have the same effect as a unanimous vote.
3.11 COMPENSATION OF DIRECTORS. The Board of Directors shall have the
authority to fix the compensation of directors for their services as directors
and a director may be a salaried officer of the Corporation.
3.12 NOMINATIONS OF DIRECTORS. Subject to the rights of holders of
any class or series of stock having a preference over the common stock as to
dividends or upon liquidation, nominations for the election of directors may
be made by the Board of Directors or committee appointed by the Board of
Directors or by any stockholder entitled to vote generally in an election of
directors. However, any stockholder entitled to vote generally in an election
of directors may nominate one or more persons for election as directors at a
meeting only if written notice of such stockholder's intent to make such
nomination or nominations has been given, either by personal delivery or by
United States mail, postage prepaid to the Secretary of the Corporation not
later than (i) ninety days prior to the anniversary date of the mailing of
proxy materials by the Corporation in connection with the immediately
preceding annual meeting of stockholders of the Corporation or, in the case
of the first annual meeting of stockholders of the Corporation following its
acquisition of all of the outstanding capital stock of Harleysville Savings
Bank, not later than ninety days prior to the anniversary date of the mailing
of proxy materials by Harleysville Savings Bank in connection with the
immediately preceding annual meeting of stockholders of Harleysville Savings
Bank prior to such acquisition, and (ii) with respect to an election to be
held at a special meeting of stockholders for the election of directors, the
close of business on the tenth day following the date on which notice of such
meeting is first given to stockholders. Each such notice shall set forth: (a)
the name and address of the stockholder who intends to make the nomination
and of the person or persons to be nominated; (b) a representation that the
stockholder is a holder of record of stock of the Corporation entitled to
vote at such meeting and intends to appear in person or by proxy at the
meeting to nominate the person or persons specified in the notice; (c) a
description of all arrangements or understandings between the stockholder and
each nominee and any arrangements or understandings between the stockholder
and each nominee and any other person or persons (naming such person or
persons) pursuant to which the nomination or nominations are to be made by
the stockholder; (d) such other information regarding each nominee proposed
by such stockholder as would be required to be included in a proxy statement
filed pursuant to the proxy rules of the Securities and Exchange Commission;
and (e) the consent of each nominee to serve as a director of the Corporation
if so elected. The presiding officer of the meeting may refuse to acknowledge
the nomination of any person not made in compliance with the foregoing
procedures.
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SECTION IV
EXECUTIVE AND OTHER COMMITTEES
4.1 EXECUTIVE COMMITTEE.
(a) The Board of Directors may appoint from the Board of Directors an
Executive Committee of not less than three members, and may delegate to such
committee, except as otherwise provided by law or the Articles of Incorporation,
the powers of the Board of Directors in the management of the business and
affairs of the Corporation in the intervals between meetings of the Board of
Directors in all cases in which specific directions shall not have been given by
the Board, as well as the power to authorize the seal of the Corporation to be
affixed to all papers which may require it.
(b) Meetings of the Executive Committee shall be held at such times and
places as the Chairman of the Executive Committee may determine. The Executive
Committee, by a vote of a majority of its members, may appoint a Chairman and
fix its rules of procedure, determine its manner of acting and specify what
notice, if any, of meetings shall be given, except as otherwise set forth in
these Bylaws or as the Board of Directors shall by resolution otherwise provide.
(c) The Executive Committee shall keep minutes of all business
transacted by it. All completed action by the Executive Committee shall be
reported to the Board of Directors at its meeting next succeeding such action or
at its meeting held in the month following the taking of such action, and shall
be subject to revision or alteration by the Board of Directors.
4.2 AUDIT COMMITTEE. The Board of Directors shall designate not less
than three members of the Board of Directors who are not employed by the
Corporation to constitute an Audit Committee, which shall receive and evaluate
internal and independent auditor's reports, monitor the Corporation's adherence
in accounting and financial reporting to generally accepted accounting
principles and perform such other duties as may be delegated to it by the Board
of Directors. Meetings of the Audit Committee shall be held at such times and
places as the Chairman of the Audit Committee may determine. The Audit
Committee, by a vote of a majority of its members, may fix its rules of
procedure, determine its manner of acting and specify what notice, if any, of
meetings shall be given, except as otherwise set forth in these Bylaws or as the
Board of Directors shall by resolution otherwise provide.
4.3 OTHER COMMITTEES. The Board may, by resolutions passed by a
majority of the Board of Directors, designate members of the Board to constitute
other committees, which shall in each case consist of one or more directors and
shall have and may execute such powers as may be determined and specified in the
respective resolutions appointing them. A majority of all the members of any
such committee may fix its rules of procedure, determine its manner of acting
and fix the time and place of its meetings and specify what notice thereof, if
any, shall be given, except as otherwise set forth in these Bylaws or as the
Board of Directors shall by resolution otherwise provide.
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4.4 TERM. A majority of the Board of Directors shall have the power
to change the membership of any committee of the Board of Directors at any time,
to fill vacancies therein and to discharge any such committee or to remove any
member thereof, either with or without cause, at any time.
SECTION V
OFFICERS
5.1 DESIGNATIONS. The Board of Directors shall annually appoint a
Chairman of the Board, a Vice-Chairman of the Board, a President, a Secretary, a
Treasurer and such other officers as the Board of Directors may from time to
time deem appropriate.
5.2 POWERS AND DUTIES. The officers of the Corporation shall have
such authority and perform such duties as are specified in these Bylaws and
as the Board of Directors may from time to time authorize or determine. In
the absence of action by the Board of Directors, the officers shall have such
powers and duties as generally pertain to their respective offices.
5.3 CHAIRMAN OF THE BOARD. The Chairman of the Board, who shall be
chosen from among the directors, shall preside at all meetings of the Board
of Directors and stockholders. He shall supervise the carrying out of the
policies adopted or approved by the Board of Directors.
5.4 VICE-CHAIRMAN OF THE BOARD. The Vice-Chairman of the Board,
who shall be chosen from among the directors, shall preside at all meetings
of the Board of Directors and stockholders at which the Chairman of the Board
is absent. In the absence of the Chairman, the Vice Chairman shall also
supervise the carrying out of the policies adopted or approved by the Board
of Directors.
5.5 PRESIDENT. The President shall, in the absence of the Chairman
of the Board and the Vice-Chairman of the Board, preside at all meetings of
the Board of Directors and stockholders. The President shall have general
executive powers and shall have and may exercise any and all other powers and
duties pertaining by law, regulations or practice to the office of President,
or imposed by these Bylaws.
5.6 SECRETARY. The Secretary shall keep the minutes of the
meetings of the stockholders and the Board of Directors and shall give notice
of all such meetings as required in these Bylaws, the Corporation's Articles
of Incorporation or by law. The Secretary shall have custody of such minutes,
the seal of the Corporation and the stock certificate records of the
Corporation, except to the extent some other person is authorized to have
custody and possession thereof by a resolution of the Board of Directors.
5.7 TREASURER. The Treasurer shall keep, or cause to be kept, the
fiscal accounts of the Corporation, including an account of all monies
received or disbursed.
8
<PAGE>
5.8 TERM; REMOVAL. Each officer of the Corporation shall hold
office for a term of one year and until his successor has been selected and
qualified or until his earlier death resignation or removal. Any officer or
agent of the Corporation may be removed at any time, with or without cause,
by the Board of Directors, but such removal shall be without prejudice to the
contract rights, if any, of the person so removed. Election or appointment of
an officer or agent shall not of itself create contract rights.
5.9 COMPENSATION. The officers of the Corporation shall receive
such salary or compensation as may be determined by or under authority of the
Board of Directors.
5.10 DELEGATION. In the case of absence or inability to act of any
officer of the Corporation and of any person herein authorized to act in his
place, the Board of Directors may from time to time delegate the powers or
duties of such officer to any other officer or any director or other person
whom it may select.
5.11 VACANCIES. Vacancies in any office arising from any cause may
be filled by the Board of Directors at any regular or special meeting of the
Board.
5.12 BONDS. The Board of Directors may, by resolution, require any
and all of the officers to give bonds to the Corporation, with sufficient
surety or sureties, conditioned for the faithful performance of the duties of
their respective offices, and to comply with such other conditions as may
from time to time be required by the Board of Directors.
SECTION VI
INDEMNIFICATION
6.1 THIRD PARTY ACTIONS. The Corporation shall indemnify any
person who was or is a party, or is threatened to be made a party, to any
threatened, pending or completed action or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Corporation), by reason of the fact that he is or was a director
or officer of the Corporation, or is or was serving at the request of the
Corporation as a representative of another domestic or foreign corporation
for profit or not-for-profit, partnership, joint venture, trust or other
enterprise, against expenses (including attorney's fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with the action or proceeding if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests
of the Corporation and, with respect to any criminal proceeding, had no
reasonable cause to believe his conduct was unlawful, provided that the
Corporation shall not be liable for any amounts which may be due to any such
person in connection with a settlement of any action or proceeding effected
without its prior written consent or any action or proceeding initiated by
any such person (other than an action or proceeding to enforce rights to
indemnification hereunder).
9
<PAGE>
6.2 DERIVATIVE AND CORPORATE ACTIONS. The Corporation shall
indemnify any person who was or is a party, or is threatened to be made a
party, to any threatened, pending or completed action by or in the right of
the Corporation to procure a judgment in its favor by reason of the fact that
he is or was a director or officer of the Corporation or is or was serving at
the request of the Corporation as a representative of another domestic or
foreign corporation for profit or not-for-profit, partnership, joint venture,
trust or other enterprise, against expenses (including attorney's fees)
actually and reasonably incurred by him in connection with the defense or
settlement of the action if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, provided that the Corporation shall not be liable for any
amounts which may be due to any such person in connection with a settlement
of any action or proceeding affected without its prior written consent.
Indemnification shall not be made under this Section 6.2 in respect of any
claim, issue or matter as to which the person has been adjudged to be liable
to the Corporation unless and only to the extent that the court of common
pleas of the judicial district embracing the county in which the registered
office of the Corporation is located or the court in which the action was
brought determines upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnity for the expenses that the court
of common pleas or other court deems proper.
6.3 MANDATORY INDEMNIFICATION. To the extent that a representative
of the Corporation has been successful on the merits or otherwise in defense
of any action or proceeding referred to in Section 6.1 or Section 6.2 or in
defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred
by him in connection therewith.
6.4 PROCEDURE FOR EFFECTING INDEMNIFICATION. Unless ordered by a
court, any indemnification under Section 6.1 or Section 6.2 shall be made by
the Corporation only as authorized in the specific case upon a determination
that indemnification of the representative is proper in the circumstances
because he has met the applicable standard of conduct set forth in those
sections. The determination shall be made:
(1) by the Board of Directors by a majority vote of a quorum consisting
of directors who were not parties to the action or proceeding;
(2) if such a quorum is not obtainable, or if obtainable and a majority
vote of a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion; or
(3) by the stockholders.
6.5 ADVANCING EXPENSES. Expenses (including attorneys' fees)
incurred in defending any action or proceeding referred to in this Section VI
shall be paid by the Corporation in advance of the final disposition of the
action or proceeding upon receipt of an undertaking by or on behalf of the
director or officer to repay the amount if it is ultimately determined that
he is not entitled to be indemnified by the Corporation as authorized in this
Section VI or otherwise.
10
<PAGE>
6.6 INSURANCE. The Corporation shall have the power to purchase
and maintain insurance on behalf of any person who is or was a representative
of the Corporation or is or was serving at the request of the Corporation as
a representative of another domestic or foreign corporation for profit or
not-for-profit, partnership, joint venture, trust or other enterprise against
any liability asserted against him and incurred by him in any such capacity,
or arising out of his status as such, whether or not the Corporation would
have the power to indemnify him against that liability under the provisions
of this Section VI.
6.7 MODIFICATION. The duties of the Corporation to indemnify and
to advance expenses to a director or officer provided in this Section VI
shall be in the nature of a contract between the Corporation and each such
person, and no amendment or repeal of any provision of this Section VI shall
alter, to the detriment of such person, the right of such person to the
advance of expenses or indemnification related to a claim based on an act or
failure to act which took place prior to such amendment or repeal.
SECTION VII
CAPITAL STOCK
7.1 CERTIFICATES. Certificates of stock shall be issued in
numerical order, and each stockholder shall be entitled to a certificate
signed by the President or a Vice President, and the Secretary or the
Treasurer, or in such other manner as the Corporation may determine, and may
be sealed with the seal of the Corporation or a facsimile thereof. The
signatures of such officers may be facsimiles if the certificate is manually
signed on behalf of a transfer agent, or registered by a registrar, other
than the Corporation itself or an employee of the Corporation. If an officer
who has signed or whose facsimile signature has been placed upon such
certificate ceases to be an officer before the certificate is issued, it may
be issued by the Corporation with the same effect as if the person were an
officer on the date of issue. Each certificate of stock shall state:
(a) that the Corporation is incorporated under the laws of the
Commonwealth of Pennsylvania;
(b) the name of the person to whom issued;
(c) the number and class of shares and the designation of the
series, if any, which such certificate represents; and
(d) the par value of each share represented by such
certificate, or a statement that such shares are without par value.
7.2 TRANSFERS.
(a) Transfers of stock shall be made only upon the stock transfer books
of the Corporation, kept at the registered office of the Corporation or at its
principal place of business, or
11
<PAGE>
at the office of its transfer agent or registrar, and before a new certificate
is issued the old certificate shall be surrendered for cancellation. The Board
of Directors may, by resolution, open a share register in any state of the
United States, and may employ an agent or agents to keep such register, and to
record transfers of shares therein.
(b) Shares of stock shall be transferred by delivery of the
certificates therefor, accompanied either by an assignment in writing on the
back of the certificate or an assignment separate from the certificate, or by a
written power of attorney to sell, assign and transfer the same, signed by the
holder of said certificate. No shares of stock shall be transferred on the books
of the Corporation until the outstanding certificates therefor have been
surrendered to the Corporation.
7.3 REGISTERED OWNER. Registered stockholders shall be treated by
the Corporation as the holders in fact of the stock standing in their
respective names and the Corporation shall not be bound to recognize any
equitable or other claim to or interest in any share on the part of any other
person, whether or not it shall have express or other notice thereof, except
as expressly provided below or by the laws of the Commonwealth of
Pennsylvania. The Board of Directors may adopt by resolution a procedure
whereby a stockholder of the Corporation may certify in writing to the
Corporation that all or a portion of the shares registered in the name of
such stockholder are held for the account of a specified person or persons.
The resolution shall set forth:
(a) The classification of shareholder who may certify;
(b) The purpose or purposes for which the certification may be made;
(c) The form of certification and information to be contained therein;
(d) If the certification is with respect to a record date, the time
after the record date within which the certification must be received by the
Corporation; and
(e) Such other provisions with respect to the procedure as are deemed
necessary or desirable.
Upon receipt by the Corporation of a certification complying with the
above requirements, the persons specified in the certification shall be deemed,
for the purpose or purposes set forth in the certification, to be the holders of
record of the number of shares specified in place of the stockholder making the
certification.
7.4 MUTILATED, LOST OR DESTROYED CERTIFICATES. In case of any
mutilation, loss or destruction of any certificate of stock, another may be
issued in its place upon receipt of proof of such mutilation, loss or
destruction. The Board of Directors may impose conditions on such issuance
and may require the giving of a satisfactory bond or indemnity to the
Corporation in such sum as they might determine, or establish such other
procedures as they deem necessary.
12
<PAGE>
7.5 FRACTIONAL SHARES OR SCRIP. The Corporation may (a) issue
fractions of a share which shall entitle the holder to exercise voting
rights, to receive dividends thereon, and to participate in any of the assets
of the Corporation in the event of liquidation; (b) arrange for the
disposition of fractional interests by those entitled thereto; (c) pay in
cash the fair value of fractions of a share as of the time when those
entitled to receive such shares are determined; or (d) issue scrip in
registered or bearer form which shall entitle the holder to receive a
certificate for a full share upon the surrender of such scrip aggregating a
full share.
SECTION VIII
FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the Corporation shall end on the 30th day of
September of each year. The Corporation shall be subject to an annual audit as
of the end of its fiscal year by independent public accountants appointed by and
responsible to the Board of Directors or the Audit Committee of the Board of
Directors. The appointment of such accountants shall be subject to annual
ratification by the stockholders.
SECTION IX
DIVIDENDS AND FINANCE
9.1 DIVIDENDS. Dividends may be declared by the Board of Directors
and paid by the Corporation in accordance with the conditions and subject to
the limitations imposed by the laws of the Commonwealth of Pennsylvania. The
Board of Directors may declare dividends payable only to stockholders of
record at the close of business on any business day not more than 90 days
prior to the date on which the dividend is paid.
9.2 DEPOSITORIES. The monies of the Corporation shall be deposited
in the name of the Corporation in such bank or banks or trust company or
trust companies as the Board of Directors shall designate, and shall be drawn
out only by check or other order for payment of money signed by such persons
and in such manner as may be determined by resolution of the Board of
Directors.
SECTION X
NOTICES
10.1 NOTICE. Whenever written notice is required to be given to
any person pursuant to these Bylaws, it may be given to the person either
personally or by sending a copy thereof by first class or express mail,
postage prepaid, or by telegram (with messenger service specified), telex or
TWX (with answerback received) or courier service, charges prepaid, or by
facsimile transmission, to his address (or to his telex, TWX or facsimile
number), in the case of stockholders, appearing on the books of the
Corporation or, in the case of directors, supplied by them to the Corporation
for the purpose of notice or, in the case of the Corporation, at the address
of its principal executive offices. If the notice is sent by mail, telegraph
or courier service, it shall be deemed to have been given to
13
<PAGE>
the person entitled thereto when deposited in the United States mail or with a
telegraph office or courier service for delivery to that person or, in the case
of telex or TWX, when dispatched.
10.2 WRITTEN WAIVER OF NOTICE. Whenever any written notice is
required to be given under these Bylaws, a waiver thereof in writing, signed
by the person or persons entitled to the notice, whether before or after the
time stated therein, shall be deemed equivalent to the giving of the notice.
Neither the business to be transacted at, nor the purpose of, a meeting need
be specified in the waiver of notice of the meeting.
10.3 WAIVER OF NOTICE BY ATTENDANCE. Attendance of a person at any
meeting shall constitute a waiver of notice of the meeting except where a
person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the
meeting was not lawfully called or convened.
SECTION XI
SEAL
The corporate seal of the Corporation shall be in such form and bear
such inscription as may be adopted by resolution of the Board of Directors, or
by usage of the officers on behalf of the Corporation.
SECTION XII
BOOKS AND RECORDS
The Corporation shall keep correct and complete books and records of
account and shall keep minutes and proceedings of meetings of its stockholders
and Board of Directors; and it shall keep at its registered office or principal
place of business, or at the office of its transfer agent or registrar, a record
of its stockholders, giving the names and addresses of all stockholders and the
number and class of the shares held by each. Any books, records and minutes may
be in written form or any other form capable of being converted into written
form within a reasonable time.
SECTION XIII
AMENDMENTS
The Board of Directors, to the extent permitted by law, or stockholders
may adopt, alter, amend or repeal the Bylaws of the Corporation. Such action by
the Board of Directors shall require the affirmative vote of a majority of the
directors then in office at any regular or special meeting of the Board of
Directors. Such action by the stockholders shall require the affirmative vote of
the holders of a majority of the shares of the Corporation entitled to vote
generally in an election of directors, voting together as a single class, as
well as such additional vote of the Preferred Stock as may be required by the
provisions of any series thereof, provided that the affirmative vote of the
holders of at least 75% of the shares of the Corporation entitled to vote
generally in an election of directors, voting together as a single class, as
well as such additional vote of the Preferred Stock as
14
<PAGE>
may be required by the provisions of any series thereof, shall be required to
amend, adopt, alter, change or repeal any provision of these Bylaws which is
inconsistent with Articles VI, VII, VIII, IX and XI of the Articles of
Incorporation of the Corporation and which is not approved by the affirmative
vote of 80% of the members of the Corporation's Board of Directors then in
office.
15
<PAGE>
Exhibit 4.1
(FORM OF STOCK CERTIFICATE - FRONT SIDE)
NUMBER SHARES
COMMON STOCK See reverse for
certain definitions
[LOGO] HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
HARLEYSVILLE, PENNSYLVANIA
$.01 par value common stock -- fully paid and non-assessable
This certifies that ___________________________________ is the
registered holder of _________________ shares of the Common Stock, par value
$.01 per share, of Harleysville Savings Financial Corporation, Harleysville,
Pennsylvania (the "Corporation"), incorporated under the laws of the
Commonwealth of Pennsylvania.
The shares evidenced by this Certificate are transferable only on the
books of the Corporation by the holder hereof, in person or by duly authorized
attorney or legal representative, upon surrender of this Certificate properly
endorsed. This Certificate and the shares represented hereby are subject to all
the provisions of the Articles of Incorporation and Bylaws of the Corporation
and any and all amendments thereto. THE SHARES REPRESENTED BY THIS CERTIFICATE
ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT FEDERALLY INSURED OR GUARANTEED.
This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed by the facsimile signatures of its duly authorized officers and has
caused its facsimile seal to be affixed hereto.
Dated:
(SEAL)
- -------------------- -----------------------------
Diane P. Moyer Edward J. Molnar
Secretary President and Chief Executive
Officer
<PAGE>
(FORM OF STOCK CERTIFICATE - BACK SIDE)
The Corporation is authorized to issue more than one class of stock,
including a class of preferred stock which may be issued in one or more series.
The Corporation will furnish to any stockholder, upon written request and
without charge, a full statement of the designations, preferences, limitations
and relative rights of the shares of each class authorized to be issued and,
with respect to the issuance of any preferred stock to be issued in series, the
relative rights and preferences between the shares of each series so far as the
rights and preferences have been fixed and determined and the authority of the
Board of Directors to fix and determine the relative rights and preferences of
subsequent series.
The following abbreviations, when used in the inscription on the face
of this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not
as tenants in common
UNIF GIFT MIN ACT - Custodian under
----------------------- -------------------
(Cust) (Minor)
Uniform Gifts to Minors Act
-------------------
(State)
Additional abbreviations may also be used though not in the above list.
2
<PAGE>
For value received,________________ hereby sell, assign and transfer
PLEASE INSERT SOCIAL SECURITY OR OTHER
TAXPAYER IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- ---------------------------------------
unto
----------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE
----------------------------------------------
----------------------------------------------
----------------------------------------------
________shares of Common Stock represented by this Certificate, and do hereby
irrevocably constitute and appoint __________as Attorney, to transfer the said
shares on the books of the within named Corporation, with full power of
substitution.
Dated______________,____
-----------------
Signature
-----------------
Signature
NOTICE: The signature(s) to this assignment must correspond with the name(s) as
written upon the face of the Certificate in every particular, without alteration
or enlargement, or any change whatever. The signature(s) should be guaranteed by
an eligible guarantor institution (bank, stockbroker, savings and loan
association or credit union) with membership in an approved signature medallion
program, pursuant to S.E.C. Rule 17Ad-15.
3
<PAGE>
Exhibit 99.1
[Harleysville Savings Bank's letterhead]
FOR IMMEDIATE RELEASE FOR FURTHER INFORMATION
FEBRUARY 24, 2000 EDWARD J. MOLNAR
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(215) 256-8828
HARLEYSVILLE SAVINGS BANK
ESTABLISHES HOLDING COMPANY
Pittsburgh, Pennsylvania -- Harleysville Savings Bank (Nasdaq: HARL) today
announced the consummation of its reorganization into the bank holding company
structure. The Savings Bank's common stock is now wholly owned by Harleysville
Savings Financial Corporation and each share of common stock of Pennwood Savings
Bank now represents one share of common stock of the new holding company. As a
result of the Reorganization, Harleysville Savings Financial Corporation is now
a bank holding company.
The Reorganization was approved by the stockholders of the Savings Bank at the
Savings Bank's Annual Meeting of Stockholders held on January 26, 2000. Edward
J. Molnar, President and Chief Executive Officer of Harleysville Savings
Financial Corporation and the Savings Bank, stated that, "The holding company
form of ownership provides greater flexibility for meeting the future financial
needs of the Savings Bank."
Harleysville Savings Bank is a Pennsylvania-chartered, federally insured savings
bank headquartered in Harleysville, Pennsylvania. Harleysville Savings Bank was
established in 1915 and is distinguished as a premier consumer savings bank
serving the personal banking needs of individuals and families.
Effective February 25, 2000, the common stock of Harleysville Savings Financial
Corporation replaces the Savings Bank's common stock on the Nasdaq National
Market System and will continue to trade under the symbol "HARL."
<PAGE>
Exhibit 99.2
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C.
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- -----
ACT OF 1934
FOR THE FISCAL YEAR ENDED: SEPTEMBER 30, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
- -----
EXCHANGE ACT OF 1934
FDIC Certificate Number: 31461-7
HARLEYSVILLE SAVINGS BANK
------------------------------------------------
(Exact name of bank as specified in its charter)
PENNSYLVANIA 23-0672875
- -------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
271 Main Street
Harleysville, Pennsylvania 19438
- ---------------------------- ---------------------
(Address of principal officer) (Zip Code)
Bank's telephone number, including area code: (215) 256-8828
COMMON STOCK, $1.00 PAR VALUE
-----------------------------
Title of Class
Indicate by check mark whether the Bank (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days. YES X NO
--- ---
Indicate by check made if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Bank's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K [ X ].
As of December 15, 1999, the aggregate market value of the 1,754,493 shares of
Common Stock of the Registrant issued and outstanding on such date, excluding
the 506,257 shares held by all directors and executive officers as a group, was
approximately $22.5 million. This figure is based on the closing sales price of
$12.81 per share of the Bank's Common Stock on December 14, 1999.
Number of shares of Common Stock outstanding as of December 15, 1999: 2,260,750
DOCUMENTS INCORPORATED BY REFERENCE
Set forth below are the documents incorporated by reference and the
part of the Form 10-K into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the year ended
September 30, 1999 are incorporated by reference into Part II, Items
5-9 and Part IV, Item 14 of this Form 10-K.
(2) Portions of the definitive Proxy Statement for the 2000 Annual Meeting
of Stockholders are incorporated by reference into Part III, Items
10-13 of this Form 10-K.
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Harleysville Savings Bank ("Harleysville Savings" or the "Bank") is a
Pennsylvania-chartered stock savings bank headquartered in Harleysville,
Pennsylvania. In August 1987, the Bank's predecessor, Harleysville Savings
Association, converted to the stock form of organization. In June 1991,
Harleysville Savings Association converted from a Pennsylvania chartered,
permanent reserve fund savings association to a Pennsylvania chartered stock
savings bank. The Bank, whose predecessor was originally incorporated in 1915,
operates from four full-service offices located in Montgomery County,
Pennsylvania. Harleysville Savings' primary market area includes Montgomery
County and, to a lesser extent, Bucks County. As of September 30, 1999,
Harleysville Savings had $459.8 million of total assets, $303.7 million of
deposits and $29.0 million of stockholders' equity. The Bank's stockholders'
equity constituted 6.3% of total assets as of September 30, 1999.
The Bank's primary business consists of attracting deposits from the
general public through a variety of deposit programs and investing such deposits
principally in first mortgage loans secured by residential properties in the
Bank's primary market area. The Bank also originates construction loans
primarily on residential properties. In recent years, the Bank has engaged to a
significant extent in the origination of a variety of consumer loans. The Bank
also serves its customers through participation in the MAC System -Registered
Trademark, a shared automated teller machine ("ATM") network located throughout
Pennsylvania and a large portion of the east coast.
Deposits with Harleysville Savings are insured to the maximum extent
provided by law through the Savings Association Insurance Fund ("SAIF")
administered by the Federal Deposit Insurance Corporation ("FDIC"). Harleysville
Savings is subject to examination and comprehensive regulation by the FDIC and
the Pennsylvania Department of Banking ("Department"). It is also a member of
the Federal Home Loan Bank of Pittsburgh ("FHLB of Pittsburgh" or "FHLB"), which
is one of the 12 regional banks comprising the Federal Home Loan Bank System
("FHLB System"). The Bank is also subject to regulations of the Board of
Governors of the Federal Reserve System ("Federal Reserve Board") governing
reserves required to be maintained against deposits and certain other matters.
The Bank's principal executive offices are located at 271 Main Street,
Harleysville, Pennsylvania 19438 and its telephone number is (215) 256-8828.
2
<PAGE>
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. Harleysville Savings' loan portfolio is
predominantly comprised of loans secured by first mortgages on single-family
residential properties. As of September 30, 1999, first mortgage loans on
residential properties, including loans on single-family and multi-family
residential properties and construction loans on such properties, amounted to
$198.0 million or 51.6% of the Bank's total loan and mortgage-backed securities
portfolio. Loans on the Bank's residential properties are primarily long-term
and are conventional (i.e., not insured or guaranteed by a federal agency). The
Bank's portfolio of first mortgage loans on residential properties had remained
relatively stable as a percent of the total loan and mortgage-backed securities
portfolio in recent years until fiscal 1998 when the balance of mortgage-backed
securities increased by $60.2 million and comprised 24.0% of the portfolio at
September 30, 1998 compared to 8.2% of the portfolio at September 30, 1997. At
September 30, 1999, mortgage-backed securities totaled $124.7 million and
comprised 32.4% of the portfolio.
As of September 30, 1999, loans secured by commercial real estate
comprised $767,000 or .2% of the total loan and mortgage-backed securities
portfolio. Consumer loans, including installment home equity loans, home equity
lines of credit, automobile loans, loans on savings accounts and education
loans, constituted $59.0 million or 15.4% of the total loan and mortgage-backed
securities portfolio as of September 30, 1999.
As of September 30, 1999, the Bank had $124.7 million, or 32.4%, of the
total loan and mortgage-backed securities portfolio invested in Federal Home
Loan Mortgage Corporation ("FHLMC"), Government National Mortgage Association
("GNMA") or Federal National Mortgage Association ("FNMA") backed securities.
FHLMC securities are guaranteed by the FHLMC, GNMA securities by the Federal
Housing Administration and FNMA securities by the FNMA, which are an
instrumentality of the United States government, and, pursuant to federal
regulations, are deemed to be part of the Bank's loan portfolio.
3
<PAGE>
The following table sets forth information concerning the Bank's loan
and mortgage-backed securities portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
As of September 30,
-----------------------------------------------------------------------------------
1999 1998 1997
---------------------- -------------------- ---------------------------
Amount Percent Amount Percent Amount Percent
---------- --------- --------- --------- ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential:
Single-family $193,067 50.4% $191,567 55.9% $188,844 69.4%
Multi-family 1,056 0.3 873 0.3 1,388 0.5
Construction 3,885 1.0 6,785 2.0 3,430 1.2
Lot Loans 1,004 0.3 1,307 0.4 1,282 0.5
Mortgage-backed securities 124,694 32.4 82,488 24.0 22,287 8.2
Commercial 767 0.2 579 0.2 508 0.2
------- ----- ------- ---- ------- -----
Total real estate loans and
mortgage-backed securities 324,473 84.6% 283,599 82.8% 217,739 80.0%
------- ---- ------- ---- ------- ----
Consumer Loans:
Education loans 1,348 0.4% 958 0.3% 3,820 1.4%
Installment equity loans 49,240 12.8 49,827 14.5 43,368 15.9
Line of credit loans 7,176 1.9 7,006 2.0 5,922 2.2
Savings account loans 535 0.1 514 0.2 691 0.3
Automobile and other loans 661 0.2 669 0.2 654 0.2
------- ----- --------- ---- ----- ----
Total consumer loans 58,960 15.4% 58,974 17.2% 54,455 20.0%
Total loans receivable and
mortgage-backed securities 383,433 100.0% 342,573 100.0% 272,194 100.0%
------- ----- ------- ----- ------- -----
Less:
Loans in process (2,533) (4,443) (1,830)
Deferred Loan Fees (1,905) (1,873) (1,649)
Allowance for Loan Losses (2,040) (2,040) (1,925)
------ ---------- ------
Total loans receivable and
mortgage-backed securities,
net $376,955 $334,217 $266,790
======== ======= ========
</TABLE>
4
<PAGE>
CONTRACTUAL MATURITIES. The following table sets forth scheduled
contractual maturities of the loan and mortgage-backed securities portfolio of
the Bank as of September 30, 1999 by categories of loans and securities. The
principal balance of the loan is set forth in the period in which it is
scheduled to mature. This table does not reflect loans in process or unamortized
premiums, discounts and fees.
<TABLE>
<CAPTION>
Principal Repayments Contractually
Due in Years(s) Ended September 30,
-----------------------------------------------------------------------------
Principal Balance
at September 30, 2002- 2005- 2010- 2015 and
1999 2000 2001 2004 2009 2014 Thereafter
------------------- --------- -------- ----------- ------- --------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential
Single-family $193,067 $ 3,712 $ 3,965 $13,503 $30,433 $35,080 $106,374
Multi-family 1,056 16 17 57 130 186 650
Construction 3,885 58 62 210 478 684 2,393
Lot Loans 1,004 54 59 203 455 233 --
Mortgage-backed securities 124,694 1,870 2,120 6,983 15,711 22,071 75,939
Commercial 767 28 30 105 243 361 --
Consumer and other loans 58,960 7,252 7,783 26,989 13,266 3,670 --
-------- ------ ------- ------ ------ ------- -----------
Total(1) $383,433 $12,990 $14,036 $48,050 $60,716 $62,285 $185,356
======= ====== ====== ====== ====== ====== =======
</TABLE>
(1) With respect to the $370.4 million of loans with principal maturities
contractually due after September 30, 2000, $258.0 million have fixed
rates of interest and $112.5 million have adjustable or floating rates
of interest.
5
<PAGE>
Contractual principal maturities of loans do not necessarily reflect
the actual term of the Bank's loan portfolio. The average life of mortgage loans
is substantially less than their contractual terms because of loan payments and
prepayments and because of enforcement of due-on-sale clauses, which give the
Bank the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells the real property subject to the mortgage
and the loan is not repaid. The average life of mortgage loans tends to
increase, however, when current mortgage loan rates substantially exceed rates
on existing mortgage loans and, conversely, decrease when rates on existing
mortgage loans substantially exceed current mortgage loan rates.
Interest rates charged by Harleysville Savings on loans are affected
principally by the demand for such loans and the supply of funds available for
lending purposes. These factors are, in turn, affected by general economic
conditions, monetary policies of the federal government, including the Federal
Reserve Board, legislative tax policies and government budgetary matters. The
interest rates charged by Harleysville Savings are competitive with those of
other local financial institutions.
ORIGINATION, PURCHASE AND SALE OF LOANS. Although Harleysville Savings
has general authority to originate, purchase and sell loans secured by real
estate located throughout the United States, the Bank's lending activities are
focused in its assessment area of Montgomery County, Pennsylvania and
surrounding suburban counties.
The Bank accepts loan applications through its branch network, and also
accepts mortgage applications from mortgage brokers who are approved by the
Board of Directors to do business with the Bank.
The Bank generally does not engage in the purchase of whole loans or
loan participations. Over the past several years, the Bank has sold a portion of
the fixed-rate residential, conforming loans it originated in connection with
its "gap" management policy. Generally, adjustable rate mortgages,
non-conforming and jumbo mortgages, commercial real estate loans, and consumer
loans and lines of credit are originated for its portfolio.
During the years ended September 30, 1997, 1998 and 1999, the Bank did
not sell any residential loans or mortgage-backed securities.
The Bank's total loan originations decreased by $23.1 million or 30.2%
in fiscal 1997, increased by $21.6 million or 40.6% in fiscal 1998 and decreased
by $12.2 million or 16.3% in fiscal 1999. Of the $27.3 million, $31.1 million
and $20.9 million of single-family loans originated in fiscal 1997, 1998 and
1999, $6.5 million, $13.6 million and $7.4 million, respectively, were loans
originated to refinance property, $20.8 million, $17.5 million and $13.5
million, respectively, were loans to acquire residential property. During this
period, the Bank's originations of consumer loans amounted to $19.8 million,
$35.2 million and $31.4 million or 37.2% , 47.0% and 22.6% of total loan
originations during fiscal 1997, 1998 and 1999, respectively. Management intends
to continue
6
<PAGE>
to emphasize origination of consumer loans which may have adjustable rates, and
generally have shorter terms than residential real estate loans.
The following table shows total loans originated, sold and repaid
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
1999 1998 1997
------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Real estate loan originations:
Residential:
Single-family $21,337 $31,120 $27,275
Multi-family -- -- --
Construction 9,580 8,126 6,082
Lot loans 380 402 75
------ ------ ------
Total real estate loan originations 31,297 39,648 33,432
Consumer loan originations(1) 31,349 35,179 19,804
------ ------ ------
Total loan originations 62,646 74,827 53,236
Purchases of mortgage-backed securities 68,220 67,963 3,818
------ ------ ------
Total loan originations, and purchases 130,866 142,790 57,054
Principal loan and mortgage-backed securities
repayments 87,126 66,714 44,225
Sales of loans and mortgage-backed securities 2,880 5,697 --
------ ------ ------
Total principal repayments and sales 90,006 72,411 44,225
------ ------ ------
Net increase in loans $40,860 $70,379 $12,829
====== ====== ======
</TABLE>
(1) Includes installment home equity loans, home equity lines of credit,
vehicle loans, Pennsylvania Higher Education Assistance loans, secured
and unsecured personal loans and lines of credit.
LOAN UNDERWRITING POLICIES. Each loan application received by the Bank
is underwritten in accordance with the Bank's written underwriting policies as
adopted by the Bank's Board of Directors. The Bank's Board of Directors have
granted loan approval authority to several officers and employees of the Bank,
provided the loan meets the guidelines set out in its written loan underwriting
policies. Individual approval authority of $500,000 has been granted to the
Bank's President and Chief Lending Officer, $250,000 to the Assistant Vice
President/Loan origination Manager, and $50,000 to a delegated underwriter who
is an employee of the bank. All approved loans are ratified by the Board of
Directors at the next succeeding board meeting. Any loan which does not meet the
guidelines set forth in the lending policies must be approved by the Bank's
Board of Directors.
7
<PAGE>
In the exercise of any loan approval authority, the officers of the
Bank will take into account the risk associated with the extension of credit to
a single borrower, borrowing entity, or affiliation. The Bank has an aggregate
loans to one borrower limit of 15% of the Bank's unimpaired capital and
unimpaired surplus in accordance with federal regulations. At September 30,
1999, the largest aggregate amount of loans outstanding to any borrower,
including related entities, was $1.4 million which did not exceed the Bank's
loan to one borrower limitation.
REAL ESTATE LENDING. Harleysville Savings is permitted to lend up to
100% of the appraised value of the real property securing a loan. The Bank will
generally lend up to 95% of the lesser of the appraised value or the sale price
for the purchase of single family, owner-occupied dwellings which conforming to
the secondary market underwriting standards. Refinancings are limited to 80% or
less. Loans over $227,150 and other non-conforming loans, secured by 1-4
residential, owner-occupied dwellings, are limited to 90% of the lesser of the
purchase price or appraised value. The purchase of non-owner occupied, 1-4 unit
dwellings may be financed to 80% of the lower of the appraisal or sale price; a
refinance is limited to 70% of the appraised value.
All appraisals and other property valuations are performed by
independent fee appraisers approved by the Bank's Board of Directors. On all
real estate loans, other than certain "streamlined refinances" the Bank requires
borrowers to obtain title insurance, insuring the Bank a valid first lien on the
mortgaged real estate. Borrowers must also obtain and maintain a hazard
insurance policy prior to closing and, when the real estate is located in a
flood hazard area designated by the Federal Emergency Management Agency, a flood
insurance policy is required. Generally, borrowers are required to advance funds
on a monthly basis together with payment of principal and interest into a
mortgage escrow account from which the Bank makes disbursements for items such
as real estate taxes, and insurance premiums when appropriate as they fall due.
Harleysville Savings presently originates fixed-rate loans on
single-family residential properties pursuant to underwriting standards
consistent with FHLMC guidelines, which may or may not be sold into the
secondary mortgage market as conditions warrant. Adjustable rate mortgages
("ARMs"), as well as non-conforming and jumbo fixed-rate loans in amounts up to
$500,000, are held for portfolio. It is the Bank's policy to originate both
fixed-rate loans and ARMs for terms up to 30 years. As of September 30, 1999,
$196.9 million or 60.7% and $1.1 million or 0.3% of Harleysville Savings' total
loan and mortgage-backed securities portfolio consisted of single-family
(including construction loans) and multi-family residential loans, respectively.
As of September 30, 1999, approximately $217.4 million or 67.0% of the Bank's
total mortgage loans and mortgage-backed securities portfolio consisted of
fixed-rate, single-family residential mortgage loans. As of such date, $107.0
million or 33.0% of the total mortgage loan portfolio consisted of
adjustable-rate single-family residential mortgage loans and mortgage-backed
securities. Most of the Bank's residential mortgage loans include "due on sale"
clauses.
8
<PAGE>
During the year ended September 30, 1999, the Bank originated $6.3
million of ARM mortgages. ARMs represented 65.0%, 22.7% and 20.8% of the Bank's
total mortgage loan portfolio originations in fiscal 1997, 1998 and 1999,
respectively. The ARM mortgages offered by Harleysville Savings are originated
with initial adjustment periods varying from one to 10 years, and provide for
initial rates of interest below the rates which would prevail were the index
used for repricing applied initially. Harleysville Savings expects to emphasize
the origination of ARMs as market conditions permit, in order to reduce the
impact of rising interest rates in the market place. Such loans, however, may
not adjust as rapidly as changes in the Bank's cost of funds.
The Bank also originates, to a lesser extent, loans secured by
multi-family rental units or properties with some commercial usage. The primary
method used by the Bank to evaluate a multi-family residential or commercial
mortgage loan is based on both the fair market value of the property and an
income approach pursuant to which Harleysville Savings determines if the income
from the project will be sufficient to support the related debt and other
associated costs. The Bank also considers a review of the costs to develop the
project and the overall financial strength of the borrower. Multi-family
residential loans are made on an adjustable rate basis for a maximum term of 25
years or a fixed rate of 15 years or less. Initial rates are generally fully
indexed to the one or three year treasury yield.
CONSTRUCTION LOANS. The Bank offers fixed-rate and adjustable-rate
construction loans on residential properties. Residential construction loans are
originated for individuals who are building their primary residences as well as
to selected local builders for construction of single-family dwellings. As of
September 30, 1999, $3.9 million or 1.0% of the total loan and mortgage-backed
securities portfolio consisted of construction loans.
Construction loans to homeowners are usually made in connection with
the permanent financing on the property. Permanent loans made in conjunction
with residential construction have maximum terms of 30.5 years. At the end of
the initial six month term of such a loan the Bank requires the borrower to
begin to make principal repayments on the loan. These loans are reclassified as
permanent mortgage loans when the residences securing the loans are completed.
The Bank will make construction/permanent loans up to a maximum of 90% of the
fair market value of the completed project. The rate on the loan during
construction is the same rate as the Bank will charge on the permanent loan on
the completed project. Advances are made on a percentage of completion basis
with the Bank's receipt of a satisfactory inspection report of the project.
Historically, the Bank has been active in on-your-lot home construction
lending and intends to continue to emphasize such lending. Although construction
lending is generally considered to involve a higher degree of risk of loss than
long-term financing on improved, occupied real estate, the Bank historically has
not experienced any significant problems.
9
<PAGE>
The Bank also offers mortgage loans on undeveloped single lots held for
residential construction. These loans are generally fixed-rate loans with terms
not exceeding 15 years; they are not a significant part of the Bank's lending
activities.
CONSUMER AND OTHER LOANS. The Bank actively originates consumer loans
to provide a wider range of financial services to its customers and to improve
the interest rate sensitivity of its interest-earning assets. Originations of
consumer loans as a percent of total loan originations amounted to 37.2%, 47.0%
and 50.0% during fiscal 1997, 1998 and 1999, respectively. The shorter-term and
normally higher interest rates on such loans help the Bank to maintain a
profitable spread between its average loan yield and its cost of funds. The
Bank's consumer loan department offers a variety of loans, including home equity
installment loans and lines of credit, student loans guaranteed by the
Pennsylvania Higher Education Assistance Agency, vehicle loans, personal loans
and lines of credit. Loans secured by deposit accounts at the Bank are also made
to depositors in an amount up to 90% of their account balances with terms of up
to 15 years.
Home equity loans continue to be a popular product and represented
$56.4 million or 14.7% of the loan and mortgage-backed securities portfolio at
September 30, 1999. After taking into account first mortgage balances, the Bank
will lend up to 80% of the value of owner-occupied property on fixed rate terms
up to fifteen years. This amount may be raised to 100% when considering other
factors, such as excellent credit history and income stability. At September 30,
1999, the Bank had outstanding approximately 2,600 home equity loans of which
approximately 2,100 were installment equity loans and 500 were line of credit
loans. As of such date, the Bank had an outstanding balance on line of credit
loans of approximately $7.2 million and there was approximately $9.8 million of
unused credit available on such loans.
Consumer loans generally involve more risk of collectibility than
mortgage loans because of the type and nature of the collateral and, in certain
cases, the absence of collateral. As continued payments are dependent on the
borrower's continuing financial stability, these loans may be more likely to be
adversely affected by job loss, divorce, personal bankruptcy or by adverse
economic conditions.
LOAN FEE AND SERVICING INCOME. The Bank receives fees both for the
origination of loans and for making commitments to originate and purchase
residential and commercial mortgage loans. The Bank also receives servicing fees
with respect to residential mortgage loans it has sold. It also receives loan
fees related to existing loans, including late charges, and credit life
insurance premiums. Loan origination and commitment fees and discounts are a
volatile source of income, varying with the volume and type of loans and
commitments made and purchased and with competitive and economic conditions.
Loans fees generated on origination of real estate mortgage loans under
generally accepted accounting principles ("GAAP") are deferred to the extent
that they exceed the costs of originating such loans. Deferred loan fees and
discounts on mortgage loans purchased are amortized to income
10
<PAGE>
over the estimated remaining terms of such loans using various methods which
approximate the interest method. The Bank generated $314,000, $403,000 and
$321,000 in deferred loan fees in fiscal 1997, 1998 and 1999, respectively.
In its real estate lending, the Bank charges loan fees which are
calculated as a percentage of the amount borrowed. The fees received in
connection with the origination of residential real estate loans and commercial
real estate loans generally do not exceed 3% of the principal amount. All
origination fees in excess of loan origination costs are deferred and amortized
into income over the estimated life of the related loans.
On September 30, 1999, the Bank was servicing $7.6 million of loans for
others, substantially all of which related to loans sold by the Bank to the
FHLMC. The Bank receives a servicing fee of .25% on such loans.
NON-PERFORMING LOANS AND REAL ESTATE OWNED. When a borrower fails to
make a required loan payment, the Bank attempts to cure the default by
contacting the borrower; generally, after a payment is more than 15 days past
due, at which time a late charge is assessed. Defaults are cured promptly in
most cases. If the delinquency on a mortgage loan exceeds 60 days and is not
cured through the Bank's normal collection procedures, or an acceptable
arrangement is not worked out with the borrower, the Bank will institute
measures to remedy the default. This may include commencing a foreclosure action
or, in special circumstances, accepting from the borrower a voluntary deed of
the secured property in lieu of foreclosure with respect to mortgage loans and
equity loans, or title and possession of collateral in the case of other
consumer loans. Substantial delays may occur in instituting and completing
residential foreclosure proceedings due to the extensive procedures and time
periods required to be complied with under Pennsylvania law.
If foreclosure is effected, the property is sold at a public auction in
which the Bank may participate as a bidder. If the Bank is the successful
bidder, the acquired real estate property is then included in the Bank's "real
estate owned" account until it is sold. When property is acquired, it is
recorded at the lower of carrying or market value at the date of acquisition and
any write-down resulting therefrom is charged to the allowance for loan losses.
Interest accrual, if any, ceases on the date of acquisition and all costs
incurred in maintaining the property from that date forward are expended. Costs
incurred for the improvement or development of such property are capitalized.
The Bank is permitted under Department regulations to finance sales of real
estate owned by "loans to facilitate," which may involve more favorable interest
rates and terms than generally would be granted under the Bank's underwriting
guidelines. The Bank had no loans outstanding which would have been recorded as
loans accounted for on a non-accrual basis as of the end of the period.
11
<PAGE>
The following table sets forth information regarding non-accrual loans,
loans which are 90 days or more delinquent but on which the Bank is accruing
interest, troubled debt restructuring, and other real estate owned held by the
Bank at the dates indicated. The Bank continues to accrue interest on loans
which are 90 days or more overdue where management believes that such interest
is collectible due to the value of the collateral securing such loans.
<TABLE>
<CAPTION>
As of September 30,
------------------------
1999 1998 1997
------- ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
Residential real estate loans:
Non-accrual loans $ -- $ -- $ --
Accruing loans 90 days overdue 299 156 68
Troubled debt restructurings -- -- --
---- ---- ----
Total 299 156 68
---- ---- ----
Consumer loans:
Non-accrual loans -- -- --
Accruing loans 90 days overdue -- 12 4
Troubled debt restructurings -- -- --
---- ---- ----
Total -- 12 4
---- ---- ----
Total non-performing loans:
Non-accrual loans -- -- --
Accruing loans 90 days overdue 299 168 72
Troubled debt restructurings -- -- --
---- ---- ----
Total $299 $168 $ 72
==== ==== ====
Total non-performing loans to total loans .12% .07% .03%
Total real estate owned, net of related reserves -- -- --
Total non-performing loans and other real
estate owned to total assets .07% .04% .02%
</TABLE>
12
<PAGE>
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 Bank's provision for general loan
losses of $177,424, $119,817 and $16,579, respectively, in fiscal 1997, 1998 and
1999 were based on the amount and types of loans originated by it and its
historical experience. Although management believes that it uses the best
information available to make determinations with respect to loan loss reserves,
future adjustments to reserves may be necessary if economic conditions differ
substantially from the assumptions used in making the initial determinations.
Residential mortgage lending generally entails a lower risk of default
than other types of lending. Consumer loans and commercial real estate loans
generally involve more risk of collectibility because of the type and nature of
the collateral and, in certain cases, the absence of collateral. It is the
Bank's policy to establish specific reserves for losses on slow consumer loans
and commercial loans when it determines that losses are expected to be incurred
on the property securing the loans. In addition, consumer loans are charged
against reserves if they are more than 120 days delinquent unless a satisfactory
repayment schedule is arranged. Although management has currently established no
specific reserves for losses, no assurance can be given as to whether future
specific reserves may be required. The establishment of any such reserves could
affect net income.
The following table summarizes activity in the Bank's allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------
1999 1998 1997
------------------- --------------- -------------------
<S> <C> <C> <C>
Allowances at beginning of year $2,040,000 $1,925,000 $1,760,000
Provision for loan losses charged to
operating expenses 16,579 119,817 177,424
Amounts charged off (16,579) (4,817) (12,424)
--------- ----------- ---------
Allowances at end of year $2,040,000 $ 2,040,000 $1,925,000
========= ========== =========
Ratio of net charge-offs to average
loans outstanding -- -- .01%
Ratio of allowances to period-end loans .81% .81% .79%
</TABLE>
INVESTMENT ACTIVITIES
The Bank is required to maintain certain liquidity ratios and does so
by investing in securities that qualify as liquid assets under FDIC regulations.
Such securities include obligations issued or fully guaranteed by the United
States government, certain federal agency obligations, certain time deposits and
certificates of deposit as well as other specified investments. See "Regulation
- - Federal Home Loan Bank System."
13
<PAGE>
The Bank's investment portfolio consists primarily of United States
Treasury securities and obligations of United States government agencies. The
other investments include interest-bearing deposits in other banks, tax exempt
obligations, ARM mutual funds, and stock of the FHLB of Pittsburgh. The Bank has
primarily invested in instruments that reprice within five years; the amount of
such investments as of September 30, 1999 was $17.5 million.
The following table sets forth the Bank's investment portfolio at
carrying value as of the dates indicated.
<TABLE>
<CAPTION>
As of September 30,
-----------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
(In Thousands)
<S> <C> <C> <C>
Interest-bearing deposits at
other depository institutions $2,681 $17,742 $16,367
Tax exempt obligations 8,121 8,121 6,397
ARM mutual funds 3,202 1,586 1,508
U.S. Government Securities
available-for-sale -- -- 2,007
U.S. Government and agency
obligations held to maturity 52,892 42,501 42,064
FHLB of Pittsburgh stock 6,473 4,998 2,510
------ ------ ------
Total $73,369 $74,948 $70,853
====== ====== ======
</TABLE>
The Bank's investment strategy is set and reviewed periodically by the
entire Board of Directors.
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Bank's funds for use in
lending and for other general business purposes. In addition to deposits, the
Bank obtains funds from loan payments and prepayments, FHLB advances and other
borrowings, and, to a lesser extent, sales of loans. Loan repayments are a
relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general market interest rates and economic
conditions.
DEPOSITS. Due to changes in regulatory and economic conditions in
recent years, the Bank has increasingly emphasized deregulated fixed-rate
certificate accounts and other authorized types of deposits. The Bank has a
number of different programs designed to attract both short-term and long-term
deposits from the general public by providing an assortment of accounts and
rates consistent with FDIC regulations. These programs include passbook and club
savings accounts, NOW and regular checking accounts, money market deposit
accounts, retirement accounts,
14
<PAGE>
certificates of deposit ranging in terms from 90 days to 60 months and jumbo
certificates of deposit in denominations of $98,000 or more. The interest rates
on the Bank's various accounts are determined weekly by the Interest Rate Risk
Management Officer based on reports prepared by members of senior management.
The Bank attempts to control the flow of deposits by pricing its accounts to
remain competitive with other financial institutions in its market area.
The Bank's deposits are obtained primarily from residents of Montgomery
and Bucks Counties; the Bank does not utilize brokered deposits. The principal
methods used by the Bank to attract deposit accounts include local advertising,
offering a wide variety of services and accounts, competitive interest rates and
convenient office locations. The Bank also is a member of the "MAC" ATM network.
The following table shows the distribution of, and certain other
information relating to, the Bank's deposits by type as of the dates indicated.
<TABLE>
<CAPTION>
As of September 30,
--------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- ---------------------------- ----------------------------
Percent Percent Percent
of of of
Amount Deposits Amount Deposits Amount Deposits
------------ ---------- ------------ ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook and club
accounts $ 2,707 0.9% $ 3,256 1.1% $ 3,616 1.3%
NOW accounts 11,812 3.9 9,862 3.4 8,672 3.2
Checking accounts 5,372 1.8 5,128 1.8 4,556 1.7
Money market demand
accounts 54,055 1.78 34,872 1.20 31,442 11.5
Certificates of deposit:
6 month 7,159 2.4 4,449 1.5 4,991 1.8
9 month 8,762 2.9 11,603 4.0 12,881 4.7
12 month 16,867 5.6 19,615 6.8 22,213 8.1
15 month 7,047 2.3 9,231 3.2 11,851 4.3
17 month 14,946 4.9
18 month 52,442 1.72 53,337 1.84 62,722 22.9
24 month 47,099 1.55 62,879 2.17 40,814 14.9
27 month 2,970 1.0
36 month 24,511 8.1 25,332 8.7 19,432 7.1
60 month 13,195 4.3 15,357 5.3 17,825 6.5
Other 3,052 1.0 3,162 1.1 2,668 1.0
Retirement accounts:
Money market deposit
accounts 435 0.1 489 0.2 505 0.2
Certificates of deposit 31,229 10.3 31,255 10.8 29,585 10.8
------- ----- ------- ----- ------- -----
Total deposits $303,660 100.0% $289,827 100.0% $273,773 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
15
<PAGE>
The large variety of deposit accounts offered by the Bank has increased
the Bank's ability to retain deposits and has allowed it to be competitive in
obtaining new funds, although the threat of disintermediation (the flow of funds
away from savings institutions into direct investment vehicles such as
government and corporate securities and non-deposit products) still exists. The
new types of accounts, however, have been more costly than traditional accounts
during periods of high interest rates. In addition, the Bank has become more
vulnerable to short-term fluctuations in deposit flows as customers have become
more rate-conscious and willing to move funds into higher yielding accounts. The
ability of the Bank to attract and retain deposits and the Bank's cost of funds
have been, and will continue to be, significantly affected by money market
conditions.
16
<PAGE>
The following table presents certain information concerning the Bank's
deposit accounts as of September 30, 1999 and the scheduled quarterly maturities
of its certificates of deposit.
<TABLE>
<CAPTION>
Percentage of Weighted
Total Average
Amount Deposits Nominal Rate
--------------- ----------------- ------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Passbook and club accounts $ 2,707 0.9% 2.59%
NOW accounts 11,812 3.9 1.23
Checking accounts 5,372 1.8 0.00
Money market deposits accounts(1) 54,490 17.9 3.60
------ ---- ----
Total $ 74,381 24.5% 2.93%
------ ---- ----
Certificate accounts maturing by quarter:
December 31, 1998 27,834 9.2% 5.52%
March 31, 1999 44,464 14.6 5.52
June 30, 1999 33,573 11.1 5.62
September 30, 1999 23,221 7.6 5.64
December 31, 1999 43,323 14.3 5.67
March 31, 2000 23,796 7.8 5.81
June 30, 2000 4,120 1.4 5.91
September 30, 2000 3,858 1.3 5.77
December 31, 2000 6,432 2.1 5.91
March 31, 2001 1,654 0.5 5.75
June 30, 2001 1,471 0.5 5.71
September 30, 2001 2,547 0.8 5.55
Thereafter 12,986 4.3 5.94
------- ----- ----
Total certificate accounts(1) 229,279 75.5 5.65
------- ----- ----
Total deposits $303,660 100.0% 4.99%
======= ===== ====
</TABLE>
- --------------------
(1) Includes retirement accounts.
17
<PAGE>
Management of the Bank expects, based on historical experience and its
pricing policies, to retain a significant portion of the $129.1 million of
certificates of deposit which mature during the 12 months ended September 30,
2000.
The following table sets forth the net deposit flows of the Bank during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------
1999 1998 1997
--------------------- -------------------- ------------------
(In Thousands)
<S> <C> <C> <C>
Increase before interest credited $ 1,747 $ 4,046 $13,550
Interest credited 12,086 12,008 10,963
------ ------ ------
Net deposit increase $13,833 $16,054 $24,513
====== ====== ======
</TABLE>
The following table presents by various interest rate categories the
amounts of certificate accounts as of the dates indicated and the amounts of
certificate accounts as of September 30, 1999 which mature during the periods
indicated.
<TABLE>
<CAPTION>
Amounts at September 30, 1999 Maturing
-----------------------------------------------------------
As of
September 30, One Year or
1999 Less Two Years Three Years Thereafter
---------------- ------------- ------------ ------------- --------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificate accounts:
4.01% to 6.00% $211,528 $117,384 $75,223 $ 9,288 $ 9,633
6.01% to 8.00% 17,751 11,554 2 2,839 3,356
------- ------- ------ ------ ------
Total certificate
accounts(1) $229,279 $128,938 $75,225 $12,127 $12,989
======= ======= ====== ====== ======
</TABLE>
- -----------------
(1) Includes retirement accounts.
BORROWINGS. The Bank obtains advances from the FHLB of Pittsburgh upon
the security of its capital stock in the FHLB of Pittsburgh and a portion of its
first mortgages. See "Regulation Federal Home Loan Bank System." At September
30, 1999, the Bank had FHLB advances with maturities of one year or less
totaling $10.3 million at an interest rate of 5.4% and FHLB advances with
maturities of 13 months to 10 years totaling $114.9 million at interest-rates
ranging from 5.0% to 6.7%. Such advances are made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
based on either a fixed percentage of assets or the FHLB of Pittsburgh's
assessment of the Bank's creditworthiness. FHLB advances are generally available
to meet seasonal and other withdrawals of deposit accounts to purchase
mortgage-backed securities and to expand lending.
18
<PAGE>
The following table sets forth certain information regarding the
borrowings of the Bank as of the dates indicated.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Balance Rate Balance Rate Balance Rate
------------ ---------- ---------- ------------ ------------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Advances from FHLB of Pittsburgh $125,180 5.76% $99,953 5.86% $46,354 6.24%
The following table sets forth certain information concerning the
short-term borrowings of the Bank for the periods indicated.
<CAPTION>
Year Ended September 30,
-------------------------------------------------
1999 1998 1997
--------------- --------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C>
Advances from FHLB of Pittsburgh:
Average balance outstanding $6,575 $4,584 $ 8,526
Maximum amount outstanding at any
month-end during the period 11,700 5,001 12,001
Weighted average interest rate
during the period 5.44% 5.99% 5.70%
</TABLE>
19
<PAGE>
COMPETITION
The Bank faces significant competition in attracting deposits. Its most
direct competition for deposits has historically come from commercial banks and
other savings institutions located in its market area. The Bank faces additional
significant competition for investors' funds from other financial
intermediaries. The Bank competes for deposits principally by offering
depositors a variety of deposit programs, convenient branch locations, hours and
other services. The Bank does not rely upon any individual group or entity for a
material portion of its deposits.
The Bank's competition for real estate loans comes principally from
mortgage banking companies, other savings institutions, commercial banks and
credit unions. The Bank competes for loan originations primarily through the
interest rates and loan fees it charges, the efficiency and quality of services
it provides borrowers, referrals from real estate brokers and builders, and the
variety of its products. Factors which affect competition include the general
and local economic conditions, current interest rate levels and volatility in
the mortgage markets.
FIRREA eliminated many of the distinctions between commercial banks and
savings institutions and holding companies and allowed bank holding companies to
acquire savings institutions. FIRREA has generally resulted in an increase in
the competition encountered by savings institutions and has resulted in a
decrease in both the number of savings institutions and the aggregate size of
the savings industry.
EMPLOYEES
The Bank had 46 full-time employees and 32 part-time employees as of
September 30, 1999. None of these employees is represented by a collective
bargaining agent, and the Bank believes that it enjoys good relations with its
personnel.
REGULATION
GENERAL. The Bank is subject to extensive regulation and examination by
the Department and by the FDIC, which insures its deposits to the maximum extent
permitted by law. The federal and state laws and regulations which are
applicable to banks regulate, among other things, the scope of their business,
their investments, their reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral for
certain loans. There are periodic examinations by the Department and the FDIC to
test the Bank's compliance with various regulatory requirements. This regulation
and supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulation, whether by
the Department, the FDIC or the Congress could have a material adverse impact on
the Bank and their operations.
20
<PAGE>
PENNSYLVANIA SAVINGS BANK LAW. The Pennsylvania Banking Code of 1965,
as amended (the "Banking Code") contains detailed provisions governing the
organization, location of offices, rights and responsibilities of directors,
officers, employees and members, as well as corporate powers, savings and
investment operations and other aspects of the Bank and its affairs. The Banking
Code delegates extensive rulemaking power and administrative discretion to the
Department so that the supervision and regulation of state-chartered savings
banks may be flexible and readily responsive to changes in economic conditions
and in savings and lending practices.
One of the purposes of the Banking Code is to provide savings banks
with the opportunity to be competitive with each other and with other financial
institutions existing under other Pennsylvania laws and other state, federal and
foreign laws. A Pennsylvania savings bank may locate or change the location of
its principal place of business and establish an office anywhere in
Pennsylvania, with the prior approval of the Department.
The Department generally examines each savings bank not less frequently
than once every two years. Although the Department may accept the examinations
and reports of the FDIC in lieu of the Department's examination, the present
practice is for the Department to conduct individual examinations. The
Department may order any savings bank to discontinue any violation of law or
unsafe or unsound business practice and may direct any trustee, officer,
attorney or employee of a savings bank engaged in an objectionable activity,
after the Department has ordered the activity to be terminated, to show cause at
a hearing before the Department why such person should not be removed.
INTERSTATE ACQUISITIONS. The Interstate Banking Act allows federal
regulators to approve mergers between adequately capitalized banks from
different states regardless of whether the transaction is prohibited under any
state law, unless one of the banks' home states has enacted a law expressly
prohibiting out-of-state mergers before June 1997. This act also allows a state
to permit out-of-state banks to establish and operate new branches in this
state. The Commonwealth of Pennsylvania has "opted in" to this interstate merger
provision. Therefore, the prior requirement that interstate acquisitions would
only be permitted when another state had "reciprocal" legislation that allowed
acquisitions by Pennsylvania-based bank holding companies has been eliminated.
The new Pennsylvania legislation, however, retained the requirement that an
acquisition of a Pennsylvania institution by a Pennsylvania or a
non-Pennsylvania-based holding company must be approved by the Banking
Department.
FDIC INSURANCE PREMIUMS. The deposits of the Bank are insured by the
SAIF, which is administered by the FDIC. The FDIC also administers the Bank
Insurance Fund ("BIF") which generally provides insurance for commercial bank
deposits. Each of the SAIF and the BIF are required by law to attain and
maintain a reserve ratio of 1.25% of insured deposits. As the result of the BIF
achieving a fully funded status, the FDIC promulgated a regulation in November
1995, which reduced deposit premiums paid by BIF-insured banks in the lowest
risk category from 27 basis points to zero (subject to an annual minimum of
$2,000).
21
<PAGE>
On September 30, 1996, legislation was enacted into law to recapitalize
the SAIF through a one-time special assessment on SAIF-insured deposits as of
March 31, 1995. The special assessment amounted to approximately $4.5 billion or
approximately $.65 for every $100 of assessable deposits. The Bank's assessment
amounted to $1.4 million ($831,000, net of income tax benefit). As a result of
the special assessment, the Bank's deposit insurance premiums decreased from the
rate of $0.23 per $100 of deposits to approximately $0.06 per $100 of deposits.
Under the Federal Deposit Insurance Act ("FDIA"), insurance of deposits
may be terminated by the FDIC upon a finding that the institution has engaged or
is engaging in unsafe and unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law, regulation,
rule, order or condition imposed by the FDIC or written agreement entered into
with the FDIC. The management of the Bank does not know of any practice,
condition or violation that might lead to termination of deposit insurance. At
September 30, 1999, the Bank's regulatory capital exceeded all of its capital
requirements.
CAPITAL REQUIREMENTS. The FDIC has promulgated regulations and adopted
a statement of policy regarding the capital adequacy of state-chartered banks
which, like the Bank, are not members of the Federal Reserve System. The FDIC's
capital regulations establish a minimum 3.0% Tier I leverage capital requirement
for the most highly-rated state-chartered, non-member banks, with an additional
cushion of at least 100 to 200 basis points for all other state-chartered,
non-member banks, which effectively will increase the minimum Tier I leverage
ratio for such other banks to 4.0% to 5.0% or more. Under the FDIC's regulation,
highest-rated banks are those that the FDIC determines are not anticipating or
experiencing significant growth and have well diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high liquidity, good
earnings and, in general, which are considered a strong banking organization,
rated composite 1 under the Uniform Financial Institutions Rating System.
Leverage or core capital is defined as the sum of common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
related surplus, and minority interests in consolidated subsidiaries, minus all
intangible assets other than certain qualifying supervisory goodwill, and
certain purchased mortgage servicing rights and purchased credit and
relationships.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital which is defined as Tier I capital and
supplementary (Tier 2 capital) to risk weighted assets of 8%. In determining the
amount of risk-weighted assets, all assets, plus certain off balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item.
The components of Tier I capital are equivalent to those discussed
above under the 3% leverage standard. The components of supplementary (Tier 2)
capital include certain perpetual preferred stock, certain mandatory convertible
securities, certain subordinated debt and intermediate preferred stock and
general allowances for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets.
22
<PAGE>
Overall, the amount of capital counted toward supplementary capital cannot
exceed 100% of core capital. At September 30, 1999, the Bank met each of its
capital requirements.
A bank which has less than the minimum leverage capital requirement
shall, within 60 days of the date as of which it fails to comply with such
requirement, submit to its FDIC regional director for review and approval a
reasonable plan describing the means and timing by which the bank shall achieve
its minimum leverage capital requirement. A bank which fails to file such plan
with the FDIC is deemed to be operating in an unsafe and unsound manner, and
could subject the bank to a cease- and-desist order from the FDIC. The FDIC's
regulation also provides that any insured depository institution with a ratio of
Tier I capital to total assets that is less than 2.0% is deemed to be operating
in an unsafe or unsound condition pursuant to Section 8(a) of the FDIA and is
subject to potential termination of deposit insurance. However, such an
institution will not be subject to an enforcement proceeding thereunder solely
on account of its capital ratios if it has entered into and is in compliance
with a written agreement with the FDIC to increase its Tier I leverage capital
ratio to such level as the FDIC deems appropriate and to take such other action
as may be necessary for the institution to be operated in a safe and sound
manner. The FDIC capital regulation also provides, among other things, for the
issuance by the FDIC or its designee(s) of a capital directive, which is a final
order issued to a bank that fails to maintain minimum capital to restore its
capital to the minimum leverage capital requirement within a specified time
period. Such directive is enforceable in the same manner as a final
cease-and-desist order.
The Bank is also subject to more stringent Department capital
guidelines. Although not adopted in regulation form, the Department utilizes
capital standards requiring a minimum of 6% leverage capital and 10% risk-based
capital. The components of leverage and risk-based capital are substantially the
same as those defined by the FDIC.
LOANS-TO-ONE BORROWER LIMITATION. Under federal regulations, with
certain limited exceptions, a Pennsylvania chartered savings bank may lend to a
single or related group of borrowers on an "unsecured" basis an amount equal to
15% of its unimpaired capital and surplus. An additional amount may be lent,
equal to 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain securities
and bullion, but generally does not include real estate.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. Section 24
of the FDIA, as amended by the FDICIA, generally limits the activities and
equity investments of FDIC-insured, state-chartered banks to those that are
permissible for national banks. Under regulations dealing with equity
investments, an insured state bank generally may not directly or indirectly
acquire or retain any equity investment of a type, or in an amount, that is not
permissible for a national bank. An insured state bank is not prohibited from,
among other things, (i) acquiring or retaining a majority interest in a
subsidiary, (ii) investing as a limited partner in a partnership the sole
purpose of which is direct or indirect investment in the acquisition,
rehabilitation or new construction of a qualified housing project, provided that
such limited partnership investments may not exceed 2% of the bank's
23
<PAGE>
total assets, (iii) acquiring up to 10% of the voting stock of a company that
solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met.
The FDIC has adopted final regulations pertaining to the other activity
restrictions imposed upon insured savings banks and their subsidiaries by
Section 24. Pursuant to such regulations, insured savings banks engaging in
impermissible activities may seek approval from the FDIC to continue such
activities. Savings banks not engaging in such activities but that desire to
engage in otherwise impermissible activities may apply for approval from the
FDIC to do so, however, if such bank fails to meet the minimum capital
requirements or the activities present a significant risk to the FDIC insurance
funds, such application will not be approved by the FDIC.
FEDERAL SECURITIES LAWS. Shares of the Bank's common stock are
registered under Section 12(g) of the Exchange Act with the FDIC. The proxy
rules, tender offer rules, insider trading restrictions, annual and periodic
reporting and other requirements of the Securities Exchange Act of 1934, as
amended ("Exchange Act") apply to the Bank but under the jurisdiction of the
FDIC. Such reports are available from the FDIC's Registration, Disclosure and
Securities Operations Unit, 1776 F Street, N.W., Room F-6043, Washington, D.C.
20429.
REGULATORY ENFORCEMENT AUTHORITY. FIRREA included substantial
enhancement to the enforcement powers available to federal banking regulators.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities. FIRREA significantly increased the amount of and grounds
for civil money penalties and requires, except under certain circumstances,
public disclosure of final enforcement actions by the federal banking agencies.
The foregoing references to laws and regulations are brief summaries
thereof which do not purport to be complete and which are qualified in their
entirety by reference to such laws and regulations.
FEDERAL AND STATE TAXATION
GENERAL. The Bank is subject to federal income taxation in the same
general manner as other corporations with some exceptions, including
particularly the reserve for bad debts discussed below. The following discussion
of federal taxation is intended only to summarize certain pertinent federal
income tax matters and is not a comprehensive description of the tax rules
applicable to the Bank.
24
<PAGE>
METHOD OF ACCOUNTING. For federal income tax purposes, the Bank
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending September 30 for filing its federal income tax
returns.
BAD DEBT RESERVES. Savings institutions such as the Bank are permitted
to establish a reserve for bad debts and to make annual additions to the
reserve. As an institution with less than $500 million in assets, the Bank has
elected to use the experience method for computing additions to its bad debt
reserve.
Under the experience method, the deductible annual addition to the
Bank's bad debt reserves is the amount necessary to increase the balance of the
reserve at the close of the taxable year to the greater of (a) the amount which
bears the same ratio to loans outstanding at the close of the taxable year as
the total net bad debts sustained during the current and five preceding taxable
years bear to the sum of the loans outstanding at the close of those six years
or (b) the lower of (i) the balance in the reserve account at the close of the
last taxable year prior to the most recent adoption of the experience method
(the "base year"), except that for taxable years beginning after 1987, the base
year is the last taxable year beginning before 1988, or (ii) if the amount of
loans outstanding at the close of the taxable year is less than the amount of
loans outstanding at the close of the base year, the amount which bears the same
ratio to loans outstanding at the close of the taxable year as the balance of
the reserve at the close of the base year bears to the amount of loans
outstanding at the close of the base year.
Legislation adopted in August 1996 (i) repealed the provision of the
Code which authorized the use of the percentage of taxable income method by
qualifying savings institutions to determine deductions for bad debts, effective
for taxable years beginning after 1995, and (ii) requires that a savings
institution recapture for tax purposes (i.e. take into income) over a six-year
period its applicable excess reserves, which for a savings institution such as
the Bank which is a "small bank," as defined in the Code, generally is the
excess of the balance of its bad debt reserves as of the close of its last
taxable year beginning before January 1, 1996 over the balance of such reserves
as of the close of its last taxable year beginning before January 1, 1988, which
recapture would be suspended for any tax year that begins after December 31,
1995 and before January 1, 1998 (thus a maximum of two years) in which a savings
institution originates an amount of residential loans which is not less than the
average of the principal amount of such loans made by a savings institution
during its six most recent taxable years beginning before January 1, 1996. The
Bank does not believe that these provisions will have a material adverse effect
on the Bank's financial condition or operations.
The above-referenced legislation also repealed certain provisions of
the Code that only apply to thrift institutions to which Section 593 applies:
(i) the denial of a portion of certain tax credits to a thrift institution; (ii)
the special rules with respect to the foreclosure of property securing loans of
a thrift institution; (iii) the reduction in the dividends received deduction of
a thrift institution ; and (iv) the ability of a thrift institution to use a net
operating loss to offset its income from a
25
<PAGE>
residual interest in a real estate mortgage investment conduit. It is not
anticipated that the repeal of these provisions will have a material adverse
effect on the Bank's financial condition or operations.
DISTRIBUTIONS. If the Bank distributes cash or property to its
stockholders, and the distribution is treated as being from its accumulated
pre-1988 tax bad debt reserves, the distribution will cause the Bank to have
additional taxable income. A distribution to stockholders is deemed to have been
made from accumulated bad debt reserves to the extent that (a) the reserves
exceed the amount that would have been accumulated on the basis of actual loss
experience, and (b) the distribution is a "non-dividend distribution." A
distribution in respect of stock is a non-dividend distribution to the extent
that, for federal income tax purposes, (i) it is in redemption of shares, (ii)
it is pursuant to a liquidation of the institution, or (iii) in the case of a
current distribution, together with all other such distributions during the
taxable year, it exceeds the Bank's current and post-1951 accumulated earnings
and profits. The amount of additional taxable income created by a non-dividend
distribution is an amount that when reduced by the tax attributable to it is
equal to the amount of the distribution.
MINIMUM TAX. The Code imposes an alternative minimum tax at a rate of
20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The alternative minimum tax is
payable to the extent such AMTI is in excess of an exemption amount. The Code
provides that an item of tax preference is the excess of the bad debt deduction
allowable for a taxable year pursuant to the percentage of taxable income method
over the amount allowable under the experience method. The other items of tax
preference that constitute AMTI include (a) tax exempt interest on newly-issued
(generally, issued on or after August 8, 1986) private activity bonds other than
certain qualified bonds and (b) for taxable years beginning after 1989, 75% of
the excess (if any) of (i) adjusted current earnings as defined in the Code,
over (ii) AMTI (determined without regard to this preference and prior to
reduction by net operating losses). Net operating losses can offset no more than
90% of AMTI. Certain payments of alternative minimum tax may be used as credits
against regular tax liabilities in future years.
NET OPERATING LOSS CARRYOVERS. A financial institution may carry back
net operating losses to the preceding three taxable years and forward to the
succeeding 15 taxable years. Effective for net operating losses arising in tax
years beginning after October 1, 1997, the carryback period is reduced from
three years to two years and the carryforward period is extended from 15 years
to 20 years. At September 30, 1999, the Bank had no net operating loss
carryforwards for federal income tax purposes.
CORPORATE DIVIDENDS-RECEIVED DEDUCTION. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated tax
return, and corporations which own less than 20% of the stock of a corporation
distributing a dividend may deduct only 70% of dividends received or accrued on
their behalf. However, a corporation may deduct 100% of dividends from a member
of the same affiliated group of corporations.
26
<PAGE>
OTHER MATTERS. Harleysville Savings' federal income tax returns for its
tax years 1993 and beyond are open under the statute of limitations and are
subject to review by the Internal Revenue Service ("IRS").
PENNSYLVANIA TAXATION. The Bank is subject to tax under the
Pennsylvania Mutual Thrift Institutions Tax Act, which imposes a tax at the rate
of 11.5% on the Bank's net earnings, determined in accordance with generally
accepted accounting principles, as shown on its books. For fiscal years
beginning in 1983, and thereafter, NOLs may be carried forward and allowed as a
deduction for three succeeding years. This Act exempts the Bank from all other
corporate taxes imposed by Pennsylvania for state tax purposes, and from all
local taxes imposed by political subdivisions thereof, except taxes on real
estate and real estate transfers.
SUBSIDIARY
The Bank formed HSB, Inc., a Delaware company, as a wholly owned
subsidiary of the Bank during fiscal 1997. HSB, Inc. was formed in order to
accommodate the transfer of certain assets that are legal investments for the
Bank and to provide for a greater degree of protection to claims of creditors.
The laws of the State of Delaware and the court system create a more favorable
environment for the proposed business affairs of the subsidiary. HSB, Inc.
currently manages the investment securities for the Bank, which as of September
30, 1999 amounted to approximately $88.0 million.
YEAR 2000 COMPLIANCE
The following discussion of the implications of the year 2000 problem
for the Bank contains numerous forwarding-looking statements based on inherently
uncertain information. The cost of the project and the date on which the Bank
plans to complete the internal Year 2000 modifications are based on management's
best estimates, which are derived utilizing a number of assumptions of future
events including the continued availability of internal and external resources,
third party modifications and other factors. However, there can be no guarantee
that these statements will be achieved and actual results could differ.
Moreover, although management believes it will be able to make the necessary
modifications in advance, there can be no guarantee that failure to modify the
systems would not have a material adverse effect on the Bank.
The Bank currently has a Year 2000 Project Plan and Review Team in
place. As recommended by the Federal Financial Institutions Examination's
Council, the Plan encompasses the following phases: Exposure, Assessment,
Remediation, Testing and Implementation. These phases will enable the Bank to
identify risks, develop an action plan, and perform adequate testing and
complete certification that its processing systems will be Year 2000 ready.
Execution of the plan is currently on target.
27
<PAGE>
The Bank has completed the Remediation Phase, which included among
other things, changing the information processing system, the most essential
system to the Bank. The system was purchased from Open Solutions Incorporated
("OSI"), Glastonbury, Connecticut. The system has been certified by its vendor
as Year 2000 compliant and is supported by a contractual agreement that states
the system, including the software, will be Year 2000 compliant prior to January
1, 2000. During the Remediation Phase, the Bank contacted all other material
vendors and suppliers regarding their Year 2000 state of readiness. No
contracts, written assurance, or oral assurances with the Bank's material
vendors, system providers, and suppliers include any type of remedy or penalty
for breach of contract in the event that any of these parties are not Year 2000
compliant.
As a practical matter, individual mortgage loan and consumer loan
customers were not contacted regarding their Year 2000 readiness. It was deemed
to be beyond the scope of our testing parameters to contact these borrowers.
Further, most of these are individuals with adequate collateral for their loans.
If the Plan fails to significantly address the Year 2000 issues of the
Bank, the following, among other things, could negatively affect the Bank:
(a) Utility service companies may be unable to provide the
necessary service to the Bank's offices. However, in
anticipation of the system conversion, a generator was
installed at the Harleysville Office which will adequately
meet the electric needs of the entire facility.
(b) The Bank may have to transact its business manually.
The Bank will attempt to monitor these uncertainties by continuing to
request an update on all critical and important vendors throughout the remainder
of 1999. If the Bank identifies any concern related to any critical or important
vendor, the contingency plans will be implemented immediately to assure
continued service to the Bank's customers.
The Bank has completed the Testing Phase, which involved testing of all
internal systems as well as testing with vendors. The Implementation Phase is to
certify that systems are Year 2000 ready, along with assurances that any new
systems are compliant on a going-forward basis. No assurances can be given that
the Year 2000 Project Plan will be completed successfully by the year 2000, in
which event the Bank could incur significant costs.
If the provider of the information processing system is unable to
resolve potential problem in time, the Bank would likely experience significant
data processing delays, mistakes or failures. These delays, mistakes, or
failures could have a significant adverse impact on the operations of the Bank.
28
<PAGE>
Monitoring and managing the Year 2000 project will result in additional
direct and indirect costs to the Bank. Direct costs include potential charges by
third party software vendors for product enhancements, costs involved in testing
software products for Year 2000 compliance, and any resulting costs for
developing and implementing contingency plans for critical software products
which are not enhanced. Indirect costs will principally consist of the time
devoted by existing employees in managing software vendor progress, testing
enhanced software products, and implementing any necessary contingency plans.
The Bank does not expect direct costs to be material over the next quarter.
The Bank developed its own Year 2000 contingency plans concerning
specific software and hardware issues and a business resumption plan addressing
operational plans for continuing operation for a substantial majority of the
mission critical hardware and software functions and programs. These plans were
completed in March of 1999. The Year 2000 Project Plan and Review Team will
review substantially all mission critical test plans and contingency and
business resumption plans to ensure the reasonableness of the plans.
Despite the best efforts of management to address this issue, the vast
number of external entities that have direct and indirect business relationships
with the Bank, such as customers, vendors, payment system providers and other
financial institutions, makes it impossible to assure that a failure to achieve
compliance by one or more of these entities would not have material adverse
impact on the operations of the Bank.
<TABLE>
<CAPTION>
RESOLUTIONS PHASES OF YEAR 2000 COMPLIANCE AT SEPTEMBER 30, 1999
EXPOSURE ASSESSMENT REMEDIATION TESTING IMPLEMENTATION
-------- ---------- ----------- ------- --------------
<S> <C> <C> <C> <C>
Information 100% Complete 100% Complete 100% Complete 100% Complete
Technology
Equipment 100% Complete 100% Complete 100% Complete 100% Complete
with software
3rd Party 100% Complete 100% Complete 100% Complete 100% Complete
interface
</TABLE>
29
<PAGE>
ITEM 2. PROPERTIES
As of September 30, 1999, Harleysville Savings conducted its business
from its main office in Harleysville, Pennsylvania and three other full service
branch offices. The Bank is also part of the MAC ATM System, which provides
customers with access to their deposits at locations throughout Pennsylvania,
Delaware, New York and New Jersey.
<TABLE>
<CAPTION>
Net Book Value
of Property and
Leasehold
Owned Lease Improvements at
or Expiration September 30,
County Address Leased Date 1999 Deposits
- -------------- ------------------------------ --------- ------------------ ------------------ -------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Montgomery 271 Main Street
Harleysville, Pennsylvania Owned -- $1,347 $130,740
Montgomery Sumneytown Pike and
Perkiomenville Road
Sumneytown, Pennsylvania Owned -- 85 34,190
Montgomery 1550 Hatfield Valley Road
Hatfield, Pennsylvania Leased January 2064(1) 1,025 69,044
Montgomery 2301 West Main Street
Norristown, Pennsylvania Owned -- 601 69,686
----- -------
Total $3,058 $303,660
===== =======
</TABLE>
- -----------------
(1) The land at this office is leased, however, the Bank owns the building.
30
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
Harleysville Savings is not involved in any legal proceedings except
nonmaterial litigation incidental to the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II.
ITEM 5. MARKET FOR THE BANK'S COMMON EQUITY RELATED STOCKHOLDER MATTERS.
The information required herein is incorporated by reference from page
28 of the Bank's 1999 Annual Report to Stockholders ("Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from page
1 of the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required herein is incorporated by reference from pages
6 to 11 of the Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required herein is incorporated by reference from pages
8 to 10 of the Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages
13 to 27 of the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable
31
<PAGE>
PART III.
ITEM 10. DIRECTORS AND PRINCIPAL OFFICERS OF THE BANK.
The information required herein is incorporated by reference from pages
14 to 18 of the Bank's Proxy Statement - Offering Memorandum for the 2000 Annual
Meeting of Stockholders ("Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from pages
19 to 26 of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from pages
12 to 13 and pages 14 to 17 of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from page
26 of the Proxy Statement.
32
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) CONTENTS
(1) The following financial statements are incorporated by reference
from Item 8 hereof (see Exhibit 13):
Independent Auditors' Report
Consolidated Statements of Financial Condition as of
September 30, 1999 and 1998
Consolidated Statements of Income for the Years Ended
September 30, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the
Years Ended September 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the
Years Ended September 30, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
33
<PAGE>
(C) EXHIBITS
(2) The following exhibits are filed as part of this Form 10-K and this
list includes the Exhibit Index.
<TABLE>
<CAPTION>
No. Exhibits Page
<S> <C> <C>
3.1 Restated Articles of Incorporation, as amended (1)
3.2 Bylaws (1)
4 Common Stock Certificate (1)
10.1 Stock Compensation Program (2)
10.2 Employee Stock Ownership Plan (2)
10.3 1995 Employee Stock Purchase Plan (3)
10.4 1995 Stock Option Plan (3)
10.5 Profit Sharing Incentive Plan (4)
10.6 Employment Agreements with Edward J. Molnar, Ronald B.
Geib, Marian Bickerstaff and Diane P. Moyer (2)
13 Annual Report to Stockholders E-1
22 Subsidiaries of the Registrant - Reference is made to "Item 1.
Business - Subsidiaries" of this Form 10-K for the required
information --
</TABLE>
- -----------------
(1) Incorporated herein by reference to Harleysville Savings' Form F-2 for
the fiscal year ended September 30, 1991 filed with the FDIC.
(2) Incorporated herein by reference to Harleysville Savings' Form 10
Registration Statement filed with the Federal Home Loan Bank Board, the
predecessor to the OTS, on July 1, 1987.
(3) Incorporated herein by reference to Harleysville Savings' definitive
proxy statement dated December 19, 1995 filed with the FDIC.
(4) Incorporated herein by reference to Harleysville Savings' Form 10-K for
the fiscal year ended September 30, 1989 filed with the OTS.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HARLEYSVILLE SAVINGS BANK
December 15, 1999 By:/s/ Edward J. Molnar
------------------------
Edward J. Molnar
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/ Edward J. Molnar December 15, 1999
- ----------------------------------
Edward J. Molnar
President, Chief Executive
Officer and Director
/s/ Brendan J. McGill December 15, 1999
- ----------------------------------
Brendan J. McGill
Senior Vice President, Treasurer
and Chief Financial Officer
/s/ Sandford A. Alderfer December 15, 1999
- ----------------------------------
Sanford A. Alderfer
Director
/s/ Paul W. Barndt December 15, 1999
- ----------------------------------
Paul W. Barndt
Director
<PAGE>
/s/ Philip A. Clemens December 15, 1999
- ----------------------------------
Philip A. Clemens
Director
/s/ Mark R. Cummins December 15, 1999
- ----------------------------------
Mark R. Cummins
Director
/s/ David J. Friesen December 15, 1999
- ----------------------------------
David J. Friesen
Director
/s/ George W. Meschter December 15, 1999
- ----------------------------------
George W. Meschter
Director
<PAGE>
Exhibit 99.3
HARLEYSVILLE
SAVINGS BANK
ANNUAL
1999 REPORT
[PHOTO]
<PAGE>
MISSION
STATEMENT
HARLEYSVILLE SAVINGS BANK'S PURPOSE IS TO FULFILL OUR PUBLIC
RESPONSIBILITY TO PROVIDE AN IMPORTANT LINK BETWEEN PEOPLE WHO HAVE
MONEY TO SAVE AND THOSE WHO NEED TO BORROW; TO BE A RESPONSIBLE
CORPORATE CITIZEN OF THE COMMUNITY; TO PROVIDE A REWARDING PLACE
FOR OUR EMPLOYEES TO WORK; AND TO ACHIEVE A FAIR AND APPROPRIATE
RETURN FOR OUR SHAREHOLDERS.
HARLEYSVILLE
SAVINGS BANK
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
SELECTED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
(In thousands except per share data) AS OF SEPTEMBER 30,
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Assets $459,848 $417,533 $345,239 $315,495 $274,316
Mortgage-backed securities held to maturity 116,778 78,793 18,303 16,262 12,332
Mortgage-backed securities available-for-sale 7,916 3,695 3,983 4,120
Loans receivable - net 252,260 251,729 244,503 233,216 201,186
Investment securities held to maturity 61,015 50,622 48,461 45,265 36,488
Investment securities available-for-sale 3,202 1,586 3,515 6,376 1,327
Other investments (1) 9,155 22,740 18,876 2,760 16,258
Deposits 303,660 289,827 273,773 249,260 227,066
FHLB advances and other borrowings 125,180 99,953 46,414 43,820 26,861
Total stockholders' equity 28,963 26,100 22,872 19,617 18,498
Book value per share $ 12.83 11.68 10.32 9.11 8.69
</TABLE>
SELECTED OPERATIONS DATA:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income 29,716 $27,129 $ 24,485 $20,969 $18,180
Interest expense 20,199 17,949 15,362 12,964 10,721
------- ------- -------- ------- -------
Net interest income 9,517 9,180 9,123 8,005 7,459
Provision for loan losses 17 120 177 200 243
------- ------- -------- ------- -------
Net interest income after provision
for loan losses 9,500 9,060 8,946 7,805 7,216
Gain (loss) on sales of loans and securities 35 101 (10) 11 106
Other income 451 453 423 341 345
FDIC special assessment 1,355
Other expense 4,858 4,528 4,161 4,404 3,903
------- ------- -------- ------- -------
Income before taxes 5,128 5,086 5,198 2,398 3,764
Income tax expense 1,622 1,605 1,784 840 1,424
------- ------- -------- ------- -------
Net income $ 3,506 $ 3,481 $ 3,414 $ 1,558 $ 2,340
======= ======= ======== ======= =======
Earnings per share - basic $ 1.56 $ 1.57 $ 1.56 $ 0.73 $ 1.11
Earnings per share - diluted 1.53 1.52 1.52 0.71 1.08
Dividends per share 0.36 0.32 0.29 0.24 0.20
</TABLE>
SELECTED OTHER DATA:
<TABLE>
<CAPTION>
(based on monthly balances)
- ---------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets 0.81% 0.93% 1.04% 0.55%(2) 0.92%
Return on average equity 12.83% 14.24% 16.14% 8.07%(2) 13.51%
Average equity to average assets 6.32% 6.52% 6.42% 6.77% 6.80%
Interest rate spread 1.91% 2.15% 2.48% 2.52% 2.65%
Net yield on interest-earning assets 2.25% 2.50% 2.83% 2.87% 2.99%
Ratio of non-performing assets to
total assets at end of period 0.07% 0.04% 0.02% 0.09% 0.09%
Ratio of interest-earning assets to
interest-bearing liabilities 107% 107% 107% 108% 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%.
<PAGE>
PRESIDENT'S REPORT TO THE STOCKHOLDERS
TO OUR STOCKHOLDERS:
I am pleased to report to you that Harleysville Savings Bank's net income
amounted to $3,506,000 for the fiscal year ended September 30, 1999,
exceeding the previous record earned in fiscal 1998 and is the most the Bank
has earned in any year in its 84 year history. We were especially pleased
with the fiscal year results inasmuch as the year started slowly because of
the impact of larger than normal loan refinancing activity prompted by low
mortgage interest rates and a flat yield curve.
Net income amounted to $1.53 per (diluted) share. Return on average equity
was 12.83% and return on average assets was .81% for the year. Stockholders'
equity increased to $12.83 per share compared to $11.68 per share a year ago.
During 1999, the Bank's assets increased 10.1% to $460 million. Over the past
five years the Bank's asset growth rate has exceeded the asset growth rate of
our banking peers, averaging 14.2% annually during that period.
One of the most important goals in our mission statement is to provide a fair
return to our stockholders. This past year, the stock market has not rewarded
us as stockholders with results that parallel those reported above.
Nevertheless, while these things are largely out of our control, the payment
of a higher cash dividend is a tangible way to reward our stockholders. The
Bank's board of directors increased the regular quarterly cash dividend by
22.2% from $.09 per share to $.11 per share, payable on November 24, 1999 to
stockholders' of record on November 10, 1999. Also, the stock was split 4 for
3 in February of 1999.
Long term investors in the Bank's stock have been rewarded during the twelve
years that the Bank has been a public company. Market appreciation plus cash
dividends have provided our stockholders with an average yearly return in
excess of 17%. The cash dividend represents the 49th consecutive quarterly
cash dividend paid since the Bank became a public company 1987. It is also
the twelfth consecutive year that the cash dividend has been increased.
At the top of our list of financial goals in the Bank's Five Year Strategic
Plan is "Return on Equity". We believe that reaching return on equity goals
creates a foundation for long term value for our stockholders. Return on
equity goals that are commensurate with the risk profile of the Bank have
been achieved in every year of the Bank's life as a public company and have
exceeded the levels reached by our savings institution peer banks as reported
by America's Community Bankers.
- ---------------------------------------------------------
RETURN ON EQUITY -- HSB vs PEERS
- ---------------------------------------------------------
YEAR HSB PEER-BANK HSB ADVANTAGE
- ---------------------------------------------------------
93 14.64% 12.66% 1.98%
- ---------------------------------------------------------
94 14.18% 9.32% 4.86%
- ---------------------------------------------------------
95 12.85% 7.90% 4.95%
- ---------------------------------------------------------
*96 13.59% 9.08% 4.51%
- ---------------------------------------------------------
97 15.80% 9.97% 5.83%
- ---------------------------------------------------------
98 13.95% 10.78% 3.17%
- ---------------------------------------------------------
Mar-99 12.25% 9.94% 2.31%
Jun-99 13.33% 9.70% 3.63%
Sep-99 13.91% -- --
- ---------------------------------------------------------
* Percentages do not reflect the FDIC special assessment.
Source: America's Community Bankers Peer Group Report
- ---------------------------------------------------------
The fundamental bedrock keys to our success are the same today as they have
been for the past twelve years:
* High asset quality
The Bank's ratio of non-performing assets, which is among the best in the
industry was only 0.07% as of September 30, 1999 and our loan loss reserve
exceeds $2 million.
* Exceptional operating efficiency
The Bank's ratio of operating expenses to assets, which is among the best in
the industry, was a lean 1.12% and its efficiency ratio was a very favorable
48.74% compared to an industry average of over 60.00%
* Effective utilization of capital
The Bank has utilized its capital through carefully planned asset growth that
corresponds to internal capital accumulation. As of September 30, 1999, the
strong capital position of the Bank exceeds all regulatory requirements and
qualifies for the highest "well capitalized" category as measured by the FDIC.
* Providing genuine quality customer service
All banks talk about quality customer service, but few deliver. Community
banks like Harleysville Savings Bank have been best at truly delivering
genuine quality customer service.
At the very top of the reasons why we have been able to deliver quality
customer service is our staff of motivated
2
<PAGE>
employees. A high percentage of our employees have long service records with
the Bank. Twelve of our employees were recognized during 1999 for service to
the Bank. Receiving awards for 5 years were Adrian Gordon and Kelly Sweet.
Receiving awards for 10 years were Jean Alderfer, Valerie Arner, Marie Myers,
Donna Wardle and Susan Wolfe. Receiving awards for 15 years were Michelle
Beck and Diane Carlson. Receiving an award for 20 years was Lori Steeley.
Receiving awards for 25 years were Marian Bickerstaff and Fran Kline.
Harleysville Savings Bank is unique in that it has steadfastly maintained its
mission of serving the personal banking needs of the families in our
communities. While others have ventured into more risky lending, Harleysville
Savings has maintained a high quality loan portfolio enabling it to more
effectively utilize its capital and retain more of its earnings in
stockholder equity rather than write-offs for loan losses. While primarily
focusing on lending supported by home mortgages and home equity loans we have
been able to operate more efficiently and be successful with tighter net
interest margins than our bank peers.
Our goal for the future is to distinguish Harleysville Savings Bank as the
premier consumer savings bank serving the personal banking needs of the
families of our communities. Technology has provided us with the opportunity
to deliver quality financial products to our customers. As we move into the
21st century, we have a five pronged plan that will provide our customers
with convenient access to their accounts with Harleysville Savings Bank.
1. The successful installation of our new data processing system
this past year will enable us to introduce "live time 24 hour"
internet banking to our customers in the year 2000.
2. Our Access 24 telephone banking system installed in 1998 gives
our customers access to their account information and the ability
to move money between accounts via the telephone 24 hours per day,
seven days a week from the convenience of their homes.
3. Expansion of the Bank's ATM network will give our customers
access to their accounts at convenient retail locations ringed
around our branch offices in "hub and spoke" fashion. This will
give our customers greater access to their cash and lessening the
need to use another institution's ATM.
4. The addition of a new branch location every few years to expand
the Bank's market presence.
5. Leveraging the Bank's present branch locations by 10% through
expansion of business hours. Expanded Saturday hours at our
Hatfield Office will be introduced early in 2000.
New electronic technology has made it possible for community banks like
Harleysville Savings Bank to not only compete with much larger banks, but to
excel. We will be able to excel because we can combine our personal service
with these modern electronic delivery systems in a more cost effective way
than our competition which is already burdened with the overhead costs of
large brick and mortar branch systems.
A very important element of the Bank's Five Year Plan is the creation of a
bank holding company. Stockholders will be asked to approve the formation of
Harleysville Savings Financial Corporation, a bank holding company, at our
annual meeting in January. The holding company form of organization will
provide flexibility for meeting the future financial needs of Harleysville
Savings or other subsidiaries of the holding company. For example, the
holding company form of organization would permit the holding company to
repurchase shares of common stock without the adverse tax consequences which
would be experienced by Harleysville Savings in its present form.
The Y2K issue has been a very important project of Harleysville Savings Bank
since it created its Year 2000 Plan in 1997. The Plan is closely monitored
by the Bank's senior officers and the results are reported to the board of
directors monthly. The Bank's computer system, which is Y2K ready, is a
modern client server system that uses "four-digit technology" to recognize
"year dates". Furthermore, the Bank has developed a Business Resumption
Contingency Plan that deals with contingencies that may develop because of
situations beyond our control, such as power outages.
On a more personal note, I want to acknowledge the service of board member
Pete Reigner, who retired from our board of directors in October because of a
career change. All of us wish Pete success in his new career and thank him
for his service on our board of directors during the past seven years.
Our desire is to strive to maintain a business philosophy that is consistent
with the God given Proverb, "A good name is to be more desired than great
riches". By doing so, we hope to remain focused on the solid operating
principles that have enabled this Bank to be successful.
As we look ahead to 2000 and beyond, we are optimistic about the
opportunities that exist for Harleysville Savings Bank. I want to express our
appreciation to you for the confidence that you have expressed in the
management of this institution. I hope to see you at our Annual Stockholders'
meeting in January.
Sincerely,
/s/ Edward J. Molnar
- ---------------------------
Edward J. Molnar
President and Chief Executive Officer
<PAGE>
BOARD OF DIRECTORS
[PHOTO]
PHILIP A. CLEMENS, DAVID J. FRIESEN, GEORGE W. MESCHTER, PAUL W. BARNDT,
MARK R. CUMMINS, EDWARD J. MOLNAR, SANFORD A. ALDERFER.
SENIOR OFFICERS
[PHOTO]
<TABLE>
<S> <C> <C>
EDWARD J. MOLNAR RONALD B. GEIB MARIAN BICKERSTAFF
President and Executive Vice President and Senior Vice President and
Chief Execuitve Officer Chief Operating Officer Chief Lending Officer
</TABLE>
[PHOTO]
DIANE P. MOYER BRENDAN J. MCGILL
Corporate Secretary and Senior Vice President and
Senior Vice President of Chief Financial Officer
Branch Administration
4 ANNUAL REPORT/1999
<PAGE>
MANAGERS
[PHOTO]
NATHANAEL J. CLEMMER
Assistant Vice President,
Controller, and
Accounting Department
Manager
[PHOTO] [PHOTO]
LORI N. MCCAUSLAND ADRIAN D. GORDON
Assistant Vice President and Assistant Vice President and
Loan Servicing Manager Information Systems Manager
[PHOTO]
MICHELLE A. BECK
Assistant Vice President
and Security Officer
[PHOTO] [PHOTO]
DIANE M. CARLSON H. FRANCES KLINE
Assistant Vice President Assistant Vice President
and West Norriton Office and Sumneytown Office
Branch Manager Branch Manager
[PHOTO] [PHOTO]
SHERI L. STROUSE DENISE L. MONAGHAN
Assistant Vice President Assistant Vice President
and Harleysville Office and Hatfield Office
Branch Manager Branch Manager
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Harleysville Savings Bank'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 Bank's interest rate
spread is affected by regulatory, economic and competitive factors that
influence interest rates, loan demand and deposit flows. The Bank, 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 Bank has adopted certain asset and liability
management strategies, described below. The Bank's earnings are also affected
by, among other factors, other non-interest income, other expenses and income
taxes.
The Bank's total assets at September 30, 1999, amounted to $459.8 million,
compared to $417.5 million and $345.2 million as of September 30, 1998 and 1997,
respectively. Deposits as of September 30, 1999, totaled $303.7 million,
compared to $289.8 million and $273.8 million at September 30, 1998 and 1997,
respectively. Stockholders' equity totaled $29.0 million as of September 30,
1999, compared to $26.1 million and $22.9 million at September 30, 1998 and
1997, respectively.
During fiscal 1999, net interest income increased $337,000 or 3.7% from the
prior fiscal year. This increase was the result of a 15.4% growth in the
interest-earning assets and interest-bearing liabilities which was offset by a
decrease in the interest rate spread from 2.15% in fiscal 1998 to 1.91% in
fiscal 1999. Earnings for fiscal 1999 were $3.51 million compared to $3.48
million and $3.41 million for the years ended September 30, 1998 and 1997,
respectively. The Bank's return on average assets (net income divided by average
total assets) was 0.81% during fiscal 1999 compared to .93% and 1.04% during
fiscal 1998 and 1997, respectively. Return on equity (net income divided by
average equity) was 12.83% during fiscal 1999 compared to 14.24% during fiscal
1998 and 16.14% during fiscal 1997.
In recent years, as described below, Harleysville Savings has instituted
programs designed to decrease the sensitivity of its earnings to material and
prolonged increases in interest rates. This has included the origination of
adjustable-rate mortgages and shorter term consumer loans. In order to promote
these areas of lending, the Bank offers competitive rates of interest and places
advertisements in local newspapers.
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 $1.4 million or 10.7% in fiscal 1997,
by $271,000 or 1.8% in fiscal 1998 and decreased by $260,000 or 1.7% in fiscal
1999 from the respective prior years. During fiscal 1997, the Bank experienced
an increase in the average balance of mortgage loans of $15.7 million or 9.2%
and an increase of 0.1% in the yield earned. Likewise, during fiscal 1998, the
Bank experienced an increase in the average balance of mortgage loans of $4.5
million or 2.4% and the yield did not change. During fiscal 1999, the average
balance of mortgage loans increased $1.9 million or 1.0% and the yield decreased
by .2%. The increase in the balance of mortgage loans reflects the Bank's
ability to originate mortgage loans despite an increase in refinancing of
existing loans. The majority of loans originated during the year were long term
fixed rate mortgages. The interest income on mortgage-backed securities
reflected an increase of $51.8 million or 111.7% in the average balance which
was slightly offset by a 0.3% decrease in yield earned during fiscal 1999. The
increase in the balance of mortgage-backed securities reflects the need the Bank
had for mortgage-related products that the Bank was not able to originate in the
local market area. The Bank needed a higher volume of loans during fiscal 1998
and 1999 to offset the lower interest rate spread. In addition, the Bank needed
to purchase adjustable rate mortgage-backed securities to position their asset
and liability management since the consumer desired fixed rate mortgages during
this period. The decrease in interest income on consumer and other loans
reflected a small increase in the average balance of $351,000 or .6%, which was
offset by a decrease in the yield to 7.46%.
Interest and dividends on investments increased by $1.1 million or 36.8% in
fiscal 1997 and by $295,000 or 7.2% in fiscal 1998 over the respective prior
years. During fiscal 1997, the increase resulted from a $15.2 million or 31.5%
growth in the average balance in addition to a 0.3% increase in the yield
earned. During fiscal 1998, the increase resulted from a $7.3 million or 11.6%
growth in the average balance and the yield decreased 0.3%. During fiscal 1999,
the average balance increased $2.5 million or 3.6% and the yield decreased 0.2%
to produce the $3,000 or 1.0% decrease 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 $1.4 million or 12.1% in fiscal
1997, by $1.2 million or 9.5% in fiscal 1998 and decreased by $13,000 or .09% in
fiscal 1999 as compared to the respective prior years. In fiscal 1997, the
increase resulted from a combination of the average balance increasing $26.7
million or 11.5% in addition to a slight increase in the average rate paid. 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. Likewise, in fiscal 1999, the average
balance increased $12.4 million or 4.5% with a 0.2% decrease in the average rate
paid. The increase in the average balance reflects normal savings activity for
the Bank. The average rate paid on deposits was 4.9% for the year ended
September 30, 1999, compared to 5.1% and 5.0% for the years ended September 30,
1998 and 1997, respectively. During fiscal 1999, the treasury rates continued to
decline. However, the average rate paid on deposits lagged behind the drop in
the treasury rates 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,
- ---------------------------------------------------------------------------------------------------------------------
1997 1998
---------------------------------------- ------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------- ---------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $ 185,997 $ 14,821 7.97% $190,535 $ 15,092 7.92%
Mortgage-backed securities 19,721 1,430 7.25% 46,360 2,985 6.44%
Consumer and other loans 53,032 4,114 7.76% 59,559 4,635 7.78%
Investments 63,367 4,121 6.50% 70,708 4,416 6.25%
----------- ---------- ------------- ------------ ------------ ------------
Total interest-earning
assets 322,117 24,486 7.60% 367,162 27,128 7.39%
----------- ---------- ------------- ------------ ------------ ------------
Interest-bearing liabilities:
Deposits 260,220 12,951 4.98% 277,901 14,182 5.10%
Borrowings 39,899 2,412 6.04% 64,435 3,767 5.85%
----------- ---------- ------------- ------------ ------------ ------------
Total interest-bearing
liabilities 300,119 15,363 5.12% 342,336 17,949 5.24%
----------- ---------- ------------- ------------ ------------ ------------
Net interest income/interest
rate spread $ 9,123 2.48% $ 9,179 2.15%
========== ============= ============ ============
Net interest-earning assets/
net yield on interest-
earning assets (1) $ 21,998 2.83% $ 24,826 2.50%
=========== ============= ============ ============
Ratio of interest-earning
assets to interest-
bearing liabilities 107.3% 107.3%
============= ============
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, AS OF
SEPT 30,
- --------------------------------------------------------------------------------------------
1999 1999
------------------------------------------- ------------
AVERAGE YIELD/
BALANCE INTEREST RATE RATE
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $192,388 $ 14,832 7.71% 7.37%
Mortgage-backed securities 98,155 6,003 6.12% 6.51%
Consumer and other loans 59,910 4,468 7.46% 7.56%
Investments 73,255 4,413 6.02% 6.57%
------------- ------------- ------------ ------------
Total interest-earning
assets 423,708 29,716 7.01% 7.02%
------------- ------------- ------------ ------------
Interest-bearing liabilities:
Deposits 290,285 14,169 4.88% 4.78%
Borrowings 105,462 6,031 5.72% 5.76%
------------- ------------- ------------ ------------
Total interest-bearing
liabilities 395,747 20,200 5.10% 5.07%
------------- ------------- ------------ ------------
Net interest income/interest
rate spread $ 9,516 1.91% 1.95%
============= ============ ============
Net interest-earning assets/
net yield on interest-
earning assets (1) $ 27,961 2.25%
============= ============
Ratio of interest-earning
assets to interest-
bearing liabilities 107.1%
============
</TABLE>
(1) Net interest income divided by average interest-earning assets
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 1998 Compared FISCAL 1999 COMPARED
to Fiscal 1997 TO FISCAL 1998
Increase (Decrease) INCREASE (DECREASE)
- ------------------------------------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
------------ -------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest income on interest-earning assets:
Mortgage loans $ 360 $ (89) $ 271 $ 146 $ (406) $ (260)
Mortgage-backed securities 1,731 (176) 1,555 3,175 (157) 3,018
Consumer and other loans 507 14 521 27 (195) (168)
Investments 463 (168) 295 156 (159) (3)
------------ --------- ------------ ------------- ---------- -----------
Total 3,061 (419) 2,642 3,504 (917) 2,587
------------ --------- ------------ ------------- ---------- -----------
Interest expense on interest-bearing liabilities:
Deposits 896 335 1,231 618 (631) (13)
Borrowings 1,435 (80) 1,355 2,348 (85) 2,263
------------ --------- ------------ ------------- ---------- -----------
Total 2,331 255 2,586 2,966 (716) 2,250
------------ --------- ------------ ------------- ---------- -----------
Net change in net interest income $ 730 $ (674) $ 56 $ 538 $ (201) $ 337
============ ========= ============ ============= ========== ===========
</TABLE>
7
<PAGE>
Interest expense on borrowings increased by $1 million or 70.9% in fiscal
1997, increased by $1.4 million or 56.2% in fiscal 1998 and increased by $2.3
million or 60.1% in fiscal 1999 as compared to the respective prior years. The
increase in interest expense during fiscal 1999 was the result of a $41.0
million or 63.7% increase in the average balance of borrowings, which was
slightly offset by a decrease of 0.1% in the average rate paid. Borrowings were
primarily obtained during fiscal 1999 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 $1.1 million or 14.0% in fiscal 1997, by
$56,000 or .6% in fiscal 1998, and by $337,000 or 3.7% in fiscal 1999 over the
respective prior periods. The improvements in the net interest income in each
year was 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 $177,000, $120,000, and $17,000
for the years ended September 30, 1997, 1998 and 1999, respectively. 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, 1998 and 1999.
OTHER INCOME
The Bank's total other operating income increased from $413,000 in fiscal
1997 to $554,000 in fiscal 1998 and decreased to $486,000 in fiscal 1999. The
increase from 1997 to 1998 reflected an increase in other income and the gain on
sale of loans. The decrease from 1998 to 1999 reflected a slight decrease in
other income and a decrease to gain on the sales of loans which was based on
fewer loans being sold in fiscal 1999.
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 $82,000 or 24.1% and $29,000 or
6.9% during fiscal years 1997 and 1998 respectively. During fiscal 1999, other
income decreased by $2,000 or .40% over the prior comparable fiscal years. The
fees which comprise other income are set by the Bank 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 $121,000 or 6.1% in fiscal
1997, by $145,000 or 6.9% in fiscal 1998 and by $152,000 or 6.8% in fiscal 1999
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 $44,000 or 5.4% in fiscal
1997, by $112,000 or 12.8% in fiscal 1998 and by $171,000 or 17.4% in fiscal
1999 as compared to the prior respective fiscal years. The increase during
fiscal 1999 was attributable to normal activity which included implementing a
new data processing system.
Deposit insurance premiums decreased by $406,000 or 76.5% in fiscal 1997,
increased by $48,000 or 38.5% in fiscal 1998, and decreased by $1,000 or .54% in
fiscal 1999 over the prior respective fiscal years. The decrease during fiscal
1997 is the result of the FDIC SAIF fund being fully capitalized with the FDIC
special assessment paid in fiscal 1996 and the annual deposit premium being
reduced to 6.3 basis points from 23.0 basis points. The increase during fiscal
1998 is due to the increase in the amount of the bank'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. Furthermore, as the result of the sharing of FICO bond interest
payments by all FDIC insured institutions, the premium is scheduled to be
further reduced to 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, and insurance
premiums, decreased by $2,000 or .2% in fiscal 1997, increased by $63,000 or
5.8% in fiscal 1998, and increased by $8,000 or .7% in fiscal 1999 over the
prior respective fiscal years. Management considers these normal increases after
the effects of inflation and the growth in the size of the Bank.
INCOME TAXES
The Bank recorded income tax provisions of $1.8 million for fiscal year
1997, and $1.6 million for fiscal years 1998 and 1999. Note 11 of the "Notes to
Financial Statements" provides an analysis of the provision for income taxes.
ASSET AND LIABILITY MANAGEMENT
The Bank 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 Bank'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 Bank's interest-earning
assets. Although management of the Bank believes that the steps taken have
reduced the Bank's overall vulnerability to increases in interest rates, the
Bank remains vulnerable to material and prolonged increases in interest rates
during periods in which its interest rate sensitive liabilities exceed its
interest rate sensitive assets.
The authority and responsibility for interest rate management is vested in
the Bank's Board of Directors. The Chief Executive Officer implements the Board
of Directors' policies during the day-to-day operations of the Bank. Each month,
the Chief Executive Officer presents the Board of Directors with a report which
outlines the Bank'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
8
<PAGE>
time period. He also meets weekly with the Bank's other senior officers to
review and establish policies and strategies designed to regulate the Bank's
flow of funds and coordinate the sources, uses and pricing of such funds. The
first priority in structuring and pricing the Bank'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 Bank'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 65.0%, 22.7% and 20.8% of the total mortgage loan portfolio
originations during fiscal years 1997, 1998 and 1999, respectively. As of
September 30, 1999, approximately $70.5 million or 35.3% of the Bank's portfolio
of real estate loans were ARMs, compared to being $87.1 million or 43.3% of the
portfolio on September 30, 1998. The decrease in the percentage of ARMs was a
result of the flat yield curve that persisted throughout fiscal 1999 which
resulted in the consumer favoring fixed rate mortgages.
Harleysville Savings has also been placing increased emphasis on the
origination of consumer loans. In general, these loans also have shorter terms
and/or rates that vary with the prime rate or other short-term interest rate
indices. Total consumer loan originations were $19.8 million, $35.1 million and
$31.4 million for the fiscal year ended September 30, 1997, 1998 and 1999,
respectively. Originations of consumer loans as a percent of total loan
originations amounted to 37.2%, 47.0% and 50.0% in 1997, 1998 and 1999 fiscal
years, respectively. The 3% increase in the consumer loan originations as a
percentage of total loans originated during fiscal 1999 compares to the growth
during fiscal years 1997 and 1998. This increase reflects the emphasis on the
origination of consumer loans.
The following table summarizes the amount of interest-earning assets and
interest-bearing liabilities outstanding as of September 30, 1999, 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 money market deposit accounts, which are also generally subject to
immediate withdrawal, are included in the "1 Year or Less", category. The
passbook accounts and the negotiable order of withdrawal ("NOW") accounts are
included in the "1 Year or Less", "More than 1 Year through 3 Years" and "More
than 3 Years through 5 Years" categories.
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>
LIQUIDITY AND CAPITAL RESOURCES
- ------------------------------------------------------------------------------------------------------------------------------------
1 YEAR 1 TO 3 3 TO 5 5 TO 10 OVER 10
OR LESS YEARS YEARS YEARS YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Mortgage loans
Adjustable-rate $ 35,134 $ 10,160 $ 7,354 $ 17,819 $ 70,467
Fixed rate 12,355 21,281 17,409 30,895 $ 47,373 129,313
Mortgage-backed securities
Adjustable-rate 36,595 36,595
Fixed rate 7,748 14,620 11,960 21,226 69,140 124,694
Consumer and other loans
Adjustable-rate 8,523 8,523
Fixed rate 20,401 19,411 6,811 3,833 50,456
Investment securities and other investments 6,071 1,000 10,500 46,125 6,473 70,169
------------ -------------- -------------- -------------- ------------ ----------
Total interest-earning assets 126,827 66,472 54,034 119,898 122,986 490,217
------------ -------------- -------------- -------------- ------------ ----------
INTEREST-BEARING LIABILITIES
Passbook and Club accounts 541 1,082 1,082 2,705
NOW accounts 2,362 4,724 4,724 11,810
Money Market Deposit accounts 54,490 54,490
Certificate accounts 129,091 87,201 12,986 229,278
Borrowed money 28,648 49,285 33,628 13,619 125,180
------------ -------------- -------------- -------------- ------------ ----------
Total interest-bearing liabilities 215,132 142,292 52,420 13,619 423,463
------------ -------------- -------------- -------------- ------------ ----------
Repricing GAP during the period $(88,305) $(75,820) $ 1,614 $ 106,279 $ 122,986 $ 66,754
============ ============== ============== ============== ============ ==========
Cumulative GAP $(88,305) $(164,125) $(162,511) $(56,232) $ 66,754
============ ============== ============== ============== ============
Ratio of GAP during the period to total assets -19.20% -16.49% 0.35% 23.11% 26.74%
============ ============== ============== ============== ============
Ratio of cumulative GAP to total assets -19.20% -35.69% -35.34% -12.23% 14.52%
============ ============== ============== ============== ============
</TABLE>
9
<PAGE>
The Bank's assets increased from $345.2 million as of September 30, 1997,
to $417.5 million as of September 30, 1998, and to $459.8 million as of
September 30, 1999. Stockholders' equity increased from $22.9 million as of
September 30, 1997, to $26.1 million as of September 30, 1998, and to $29.0
million as of September 30, 1999. As of September 30, 1999, stockholders' equity
amounted to 6.3% 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 Bank's core deposit
base. In addition to cash, the Bank 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 Bank 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 institutions
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.
YEAR 2000 COMPLIANCE
The following discussion of the implications of the year 2000 problem for
the Bank contains numerous forward-looking statements based on inherently
uncertain information. The cost of the project and the date on which the Bank
plans to complete the internal Year 2000 modifications are based on management's
best estimates, which are derived utilizing a number of assumptions of future
events including the continued availability of internal and external resources,
third party modifications and other factors. However, there can be no guarantee
that these statements will be achieved and actual results could differ.
Moreover, although management believes it will be able to make the necessary
modifications in advance, there can be no guarantee that failure to modify the
systems would not have a material adverse effect on the Bank.
The Bank currently has a Year 2000 Project Plan and Review Team in place.
As recommended by the Federal Financial Institutions Examination's Council, the
Plan encompasses the following phases: Exposure, Assessment, Remediation,
Testing and Implementation. These phases will enable the Bank to identify risks,
develop an action plan, and perform adequate testing and complete certification
that its processing systems will be Year 2000 ready. Execution of the Plan is
currently on target.
The Bank has completed the Remediation Phase, which included among other
things, changing the information processing system, the most essential system to
the Bank. The system was purchased from Open Solutions Incorporated ("OSI"),
Glastonbury, Connecticut. The system has been certified by its vendor as Year
2000 compliant and is supported by a contracted agreement that states the
system, including the software will be Year 2000 compliant prior to January 1,
2000. During the Remediation Phase, the Bank contacted all other material
vendors and suppliers regarding their Year 2000 state of readiness. No
contracts, written assurance, or oral assurances with the Bank's material
vendors, system providers, and suppliers include any type of remedy or penalty
for breach of contract in the event that any of these parties are not Year 2000
compliant.
As a practical matter, individual mortgage loan and consumer loan customers
were not contacted regarding their Year 2000 readiness. It was deemed to be
beyond the scope of our testing parameters to contact these borrowers. Further,
most of these are individuals with adequate collateral for their loans.
If the Plan fails to significantly address the Year 2000 issues of the
Bank, the following, among other things, could negatively affect the Bank:
(a) Utility service companies may be unable to provide the necessary service to
the Bank's offices. However, in anticipation of the system conversion, a
generator was installed at the Harleysville Office, which will adequately
meet the electric needs of the entire facility.
(b) The Bank may have to transact its business manually.
The Bank will attempt to monitor these uncertainties by continuing to
request an update on all critical and important vendors throughout the remainder
of 1999. If the Bank identifies any concern related to any critical or important
vendor, the contingency plans will be implemented immediately to assure
continued service to the Bank's customers.
The Bank has completed the Testing Phase, which involved testing of all
internal systems as well as testing with vendors. The Implementation Phase is to
certify that systems are Year 2000 ready, along with assurances that any new
systems are compliant on a going-forward basis. No assurance can be given that
the Year 2000 Project Plan will be completed successfully by the year 2000, in
which event the Bank could incur significant costs.
If the provider of the information processing system is unable to resolve
potential problem in time, the Bank would likely experience significant data
processing delays, mistakes, or failures. These delays, mistakes, or failures
could have a significant adverse impact on the financial statement of the Bank.
Monitoring and managing the Year 2000 project will result in additional
direct and indirect costs to the Bank. Direct costs include potential charges by
third party software vendors for product enhancements, costs involved in testing
software products for Year 2000 compliance, and any resulting costs for
developing and implementing contingency plans for critical software products
which are not enhanced. Indirect costs will principally consist of the time
devoted by existing employees in managing software vendor progress, testing
enhanced software products, and implementing any necessary contingency plans.
The Bank does not expect direct costs to be material over the next quarter.
10
<PAGE>
The Bank developed its own Year 2000 contingency plans concerning specific
software and hardware issues and a business resumption plan addressing
operational plans for continuing operation for a substantial majority of the
mission critical hardware and software functions and programs. These plans were
completed in March of 1999. The Year 2000 Project Plan and Review Team will
review substantially all mission critical test plans and contingency and
business resumption plans to ensure the reasonableness of the plans.
Despite the best efforts of management to address this issue, the vast
number of external entities that have direct and indirect business relationships
with the Bank, such as customers, vendors, payment system providers and other
financial institutions, makes it impossible to assure that a failure to achieve
compliance by one or more of these entities would not have material adverse
impact on the operation of the Bank.
<TABLE>
<CAPTION>
RESOLUTION PHASES OF YEAR 2000 COMPLIANCE AT SEPTEMBER 30, 1999
EXPOSURE ASSESSMENT REMEDIATION TESTING IMPLEMENTATION
<S> <C> <C> <C> <C>
Information 100% Complete 100% Complete 100% Complete 100% Complete
Technology
Equipment 100% Complete 100% Complete 100% Complete 100% Complete
with software
3rd Party 100% Complete 100% Complete 100% Complete 100% Complete
interface
</TABLE>
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements and information relating
to the Bank 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 Bank or the Bank's management, are
intended to identify forward-looking statements. Such statements reflect the
current views of the Bank 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 Bank does not intend
to update these forward-looking statements.
11
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE PRESIDENT, BOARD OF DIRECTORS AND STOCKHOLDERS OF
HARLEYSVILLE SAVINGS BANK, HARLEYSVILLE, PENNSYLVANIA:
We have audited the accompanying consolidated statements of financial
condition of Harleysville Savings Bank ("the Bank") as of September 30, 1999
and 1998, and the related statements of income, comprehensive income,
stockholders' equity, and cash flows for each of the three years in the
period ended September 30, 1999. These consolidated financial statements are
the responsibility of the Bank'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 generally accepted auditing
standards. 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 Bank as of
September 30, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1999 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
October 22, 1999
12
<PAGE>
<TABLE>
<CAPTION>
Consoldiated Statements of Financial Condition
- ----------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30,
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 1,273,990 $ 1,131,824
Interest bearing deposits in other banks 2,681,828 17,742,102
-------------------- -------------------
Total cash and cash equivalents 3,955,818 18,873,926
Investment securities held to maturity
(fair value - 1999, $59,201,000; 1998, $51,248,000) 61,014,582 50,622,163
Investment securities available-for-sale at fair value 3,201,932 1,586,449
Mortgage-backed securities held to maturity
(fair value - 1999, $114,497,000; 1998, $79,590,000) 116,778,337 78,792,620
Mortgage-backed securities available-for-sale at fair value 7,915,919 3,695,069
Loans receivable (net of allowance for loan losses -
1999, $2,040,000; 1998, $2,040,000) 252,259,611 251,729,308
Accrued interest receivable 2,895,109 2,675,011
Federal Home Loan Bank stock - at cost 6,472,900 4,997,700
Office properties and equipment,net 4,677,886 4,039,728
Deferred income taxes 304,060 242,576
Prepaid expenses and other assets 371,568 278,319
-------------------- -------------------
TOTAL ASSETS $ 459,847,722 $417,532,869
==================== ===================
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 303,660,099 $289,827,372
Advances from Federal Home Loan Bank 125,179,928 99,953,108
Accrued interest payable 601,813 524,741
Advances from borrowers for taxes and insurance 874,167 689,894
Accounts payable and accrued expenses 569,068 437,957
-------------------- -------------------
TOTAL LIABILITIES 430,885,075 391,433,072
-------------------- -------------------
-------------------- -------------------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred Stock: $1.00 par value;
2,500,000 shares authorized; none issued
Common stock: $1.00 par value; 5,000,000
shares authorized; issued and outstanding,
1999, 2,256,750 shares; 1998, 1,676,703 shares 2,256,750 1,676,703
Paid-in capital in excess of par 4,595,612 4,888,367
Retained earnings - partially restricted 22,211,041 19,516,132
Accumulated other comprehensive (loss) income (100,756) 18,595
-------------------- -------------------
TOTAL STOCKHOLDERS' EQUITY 28,962,647 26,099,797
-------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 459,847,722 $417,532,869
==================== ===================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest on mortgage loans $14,832,086 $15,091,871 $14,821,093
Interest on mortgage-backed securities 6,002,879 2,985,183 1,429,509
Interest on consumer and other loans 4,468,156 4,635,388 4,113,529
Interest and dividends on investments 4,412,768 4,415,987 4,121,132
---------------- ----------------- -----------------
TOTAL INTEREST INCOME 29,715,889 27,128,429 24,485,263
---------------- ----------------- -----------------
INTEREST EXPENSE:
Interest on deposits 14,169,061 14,181,937 12,950,529
Interest on borrowings 6,030,367 3,766,997 2,411,578
---------------- ----------------- -----------------
TOTAL INTEREST EXPENSE 20,199,428 17,948,934 15,362,107
---------------- ----------------- -----------------
NET INTEREST INCOME 9,516,461 9,179,495 9,123,156
PROVISION FOR LOAN LOSSES 16,579 119,817 177,424
---------------- ----------------- -----------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,499,882 9,059,678 8,945,732
---------------- ----------------- -----------------
OTHER INCOME:
Gain on sales of loans 35,120 101,052
Loss on sales of securities (10,239)
Other income 450,842 452,644 423,433
---------------- ----------------- -----------------
TOTAL OTHER INCOME 485,962 553,696 413,194
---------------- ----------------- -----------------
OTHER EXPENSES:
Salaries and employee benefits 2,388,307 2,236,046 2,091,357
Occupancy and equipment 1,152,407 981,434 870,212
Deposit insurance premiums 171,999 172,929 124,818
Other 1,145,036 1,137,201 1,074,571
---------------- ----------------- -----------------
TOTAL OTHER EXPENSES 4,857,749 4,527,610 4,160,958
---------------- ----------------- -----------------
INCOME BEFORE INCOME TAXES: 5,128,095 5,085,764 5,197,968
INCOME TAX EXPENSE 1,622,000 1,605,000 1,784,000
---------------- ----------------- -----------------
NET INCOME $3,506,095 $3,480,764 $3,413,968
================ ================= =================
EARNINGS PER SHARE:
Basic $ 1.56 $ 1.57 $ 1.56
================ ================= =================
Diluted $ 1.53 $ 1.52 $ 1.52
================ ================= =================
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 2,244,055 2,225,802 2,189,780
================ ================= =================
Diluted 2,294,532 2,300,501 2,249,768
================ ================= =================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14
<PAGE>
COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $ 3,506,095 $ 3,480,764 $ 3,413,968
Other Comprehensive Income
Unrealized (loss) gain on securities net of tax ( benefit) or
expense -- 1999, ($51,905); 1998, $9,579; 1997, $32,867 (119,351) 72,220 124,020
Plus reclassification adjustment for loss (net) included
in net income (6,758)
----------- ----------- -----------
Total Comprehensive Income $ 3,386,744 $ 3,552,984 $ 3,531,230
=========== =========== ===========
</TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Paid-in Retained Accumulated Employee
Capital Earnings- Other Stock Total
Common in Excess Partially Comprehensive Ownership Stockholders'
Stock of Par Restricted (Loss) Income Plan Equity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1996 $1,291,895 $4,617,658 $13,998,161 $ (170,887) $(120,086) $ 19,616,741
Net Income 3,413,968 3,413,968
Issuance of Common Stock 41,308 265,127 306,435
Stock Split 328,423 (328,423) (5,459) (5,459)
Dividends - $.39 per share (637,059) (637,059)
Repayment of ESOP debt 60,060 60,060
Change in unrealizable holding loss
on available-for-sale securities, net
of tax 117,262 117,262
-------------- ----------- ------------- ---------------- ----------- --------------
Balance at September 30, 1997 1,661,626 4,554,362 16,769,611 (53,625) (60,026) 22,871,948
Net Income 3,480,764 3,480,764
Issuance of Common Stock 15,077 334,005 349,082
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 1,676,703 4,888,367 19,516,132 18,595 26,099,797
Net Income 3,506,095 3,506,095
Issuance of Common Stock 20,701 266,591 287,292
Stock Split 559,346 (559,346) -
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 $2,256,750 $4,595,612 $22,211,041 $ (100,756) $ $ 28,962,647
========== ========== =========== ========== ======== ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flow
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended September 30,
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 3,506,095 $ 3,480,764 $ 3,413,968
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 16,579 119,817 177,424
Depreciation 309,410 277,904 252,291
Deferred income taxes 90,000 7,641 21,260
Realized gain on sales of loans (35,120) (101,052)
Realized gain on sale of real estate owned (19,110)
Proceeds from the sale of loans held for sale 2,879,561 5,696,900
Amortization of deferred loan fees (320,711) (402,699) (314,283)
Changes in assets and liabilities which provided (used) cash:
Increase (decrease) in accounts payable and accrued expenses
and income taxes payable 131,111 (773,331) (542,493)
Decrease (increase) in prepaid expenses and other assets 93,249 285,724 (285,829)
Decrease (increase) in accrued interest receivable 220,098 (293,512) 11,271
Increase (decrease) in accrued interest payable 77,072 260,871 (29,447)
----------------- ------------- -------------
Net cash provided by operating activities 6,967,344 8,559,027 2,685,052
----------------- ------------- -------------
INVESTING ACTIVITIES:
Purchase of mortgage-backed securities held to maturity (63,346,162) (68,025,542) (3,817,722)
Purchase of mortgage-backed securities available-for-sale (4,902,126)
Purchase of investment securities held to maturity (47,859,407) (41,562,507) (27,803,101)
Purchase of investment securities available-for-sale (1,549,213)
Proceeds from maturities of investment securities available-for-sale 2,000,000
Proceeds from sale of investment securities available-for-sale 2,892,104
Purchase of FHLB stock (1,475,200) (2,488,200) (324,500)
Proceeds from maturities of investment securities 37,466,988 39,401,215 24,993,642
Principal collected on long-term loans & mortgage-backed securities 84,653,788 70,048,479 43,726,833
Long-term loans originated or acquired (62,646,388) (74,827,218) (53,236,006)
Purchases of premises and equipment (947,658) (662,251) (270,762)
Proceeds from sale of real estate owned 377,190
----------------- ------------- -------------
Net cash used by investing activities (60,605,378) (76,116,024) (13,462,322)
----------------- ------------- -------------
FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts
and savings accounts 20,773,715 4,815,751 398,134
Net (decrease) increase in certificates of deposit (6,940,988) 11,238,374 24,115,316
Cash dividends (811,186) (734,243) (642,518)
Net increase in FHLB advances 25,226,820 53,599,175 2,654,009
Net proceeds from issuance of stock 287,292 349,082 306,435
Net increase (decrease) in advances from borrowers for taxes and insurance 184,273 (14,438) (47,490)
----------------- ------------- -------------
Net cash provided by financing activities 38,719,926 69,253,701 26,783,886
----------------- ------------- -------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (14,918,108) 1,696,704 16,006,616
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 18,873,926 17,177,222 1,170,606
----------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,955,818 $ 18,873,926 $17,177,222
================= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION-
Cash paid during the period for:
Interest (credited and paid) $14,091,989 $ 13,921,066 $12,979,976
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND NATURE OF OPERATIONS - Harleysville Savings Bank (the
"Bank") is a Pennsylvania chartered stock savings bank 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.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES - The Bank 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
Bank 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 Bank, industry standards, status of nonperforming loans, general economic
conditions as they relate to the Bank's market area, and other factors related
to the collectibility of the Bank'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 Bank 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 Bank 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 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 Bank 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 Bank has not recognized any compensation expense under this method.
The Bank adopted the reporting disclosure requirements of SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, which requires the Bank 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 Bank continues to account for stock-based
compensation under APB Opinion No. 25.
ACCOUNTING FOR COMPREHENSIVE INCOME - During 1999, the Bank 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.
17
<PAGE>
ACCOUNTING PRINCIPLES ISSUED AND NOT YET ADOPTED - 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 accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. The effective date was addressed in SFAS No. 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF
EFFECTIVE DATE OF FASB NO. 133, and will not be applied retroactively to
financial statements of prior periods. The impact of this statement will depend
on the extent of derivatives and embedded derivatives at the date this statement
is adopted.
ACCOUNTING FOR EARNINGS PER SHARE - SFAS No. 128, EARNINGS PER SHARE,
establishes standards for computing and presenting 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
Bank'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 years ended September 30, 1998 and 1997,
have been restated to reflect the increased number of shares outstanding. The
weighted average shares outstanding used to calculate earnings per share were as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Years Ended September 30,
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average shares outstanding - basic 2,244,055 2,225,802 2,189,780
Increase in shares due to options - diluted 50,477 74,699 59,988
--------- --------- ---------
Adjusted shares outstanding - diluted 2,294,532 2,300,501 2,249,768
========= ========= =========
</TABLE>
INTEREST RATE RISK - The Bank is engaged principally in providing first mortgage
loans to individuals and commercial enterprises. At September 30, 1999, the
Bank'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, 1999, the Bank had interest-earning assets of
approximately $450,325,000 having a weighted average effective yield of 7.02%
and a weighted average term to maturity, or rate adjustment for adjustable rate
loans of 5.96 years, and interest-bearing liabilities of approximately
$423,468,000 having a weighted average effective interest rate of 5.07% and a
weighted average term to maturity of 1.47 years. The shorter duration of the
interest-sensitive liabilities indicates that the Bank 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 1998 and 1997 financial statements have
been reclassified to conform with the presentation in the 1999 consolidated
financial statements.
18
<PAGE>
2. 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, 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>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1998
- -------------------------------------------------------------------------------------------------------------------------
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 $19,997,565 $ 136,435 $20,134,000
Due after 5 years through 10 years 16,000,000 152,220 $ (220) 16,152,000
Due after 10 years through 15 years 5,000,000 34,000 5,034,000
Due after 15 years 1,503,654 3,346 1,507,000
Tax Exempt Obligations
Due after 15 years 8,120,944 300,056 8,421,000
----------------- --------------- ---------------- ----------------
Total Investment Securities $50,622,163 $ 626,057 $ (220) $51,248,000
================= =============== ================ ================
</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 and $8 million at September 30, 1999, and September 30, 1998,
respectively.
The Bank has the positive intent and the ability to hold these securities to
maturity. At September 30, 1999, neither a disposal, nor conditions that could
lead to a decision not to hold these securities to maturity were reasonably
foreseen.
3. 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, 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>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAIN LOSSES FAIR VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ARM Mutual Funds $1,606,721 $ - $ (20,272) $ 1,586,449
--------------- -------------- -------------- -----------------
Total Investment Securities $1,606,721 $ - $ (20,272) $ 1,586,449
=============== ============== ============== =================
</TABLE>
19
<PAGE>
4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
A comparison of cost and approximate fair value of mortgage-backed securities is
as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30,1999
- ----------------------------------------------------------------------------------------------------------------------
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>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30,1998
- ----------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Collateralized mortgage obligations $10,007,470 $ 35,519 $ (59,989) $ 9,983,000
FHLMC pass-through certificates 8,153,649 145,382 (3,031) 8,296,000
FNMA pass-through certificates 17,529,774 296,872 (1,646) 17,825,000
GNMA pass-through certificates 43,101,727 411,491 (27,218) 43,486,000
------------------ -------------- ---------------- -----------------
Total Mortgage-Backed Securities $78,792,620 $889,264 $ (91,884) $ 79,590,000
================== ============== ================ =================
</TABLE>
The Bank has the positive intent and ability to hold these securities to
maturity. At September 30, 1999, neither a disposal nor conditions that could
lead to a decision not to hold these securities to maturity, were reasonably
foreseen.
5. MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE
A comparison of cost and approximate fair value of mortgage-backed securities is
as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
September 30,1999
- --------------------------------------------------------------------------------------------------------------------------
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>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
SEPTEMBER 30,1998
- -----------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC pass-through certificates $3,646,623 $ 48,446 $ - $ 3,695,069
----------------- --------------- -------------- ------------------
Total Mortgage-Backed Securities $3,646,623 $ 48,446 $ - $ 3,695,069
================= =============== ============== ==================
</TABLE>
20
<PAGE>
6. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30,
1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Residential Mortgages $195,126,790 $193,746,691
Commercial Mortgages 766,627 579,217
Construction 3,885,232 6,785,270
Education 1,347,591 957,904
Savings Account 535,036 513,808
Home Equity 49,240,261 49,826,671
Automobile and other 660,504 668,659
Line of Credit 7,175,891 7,006,615
------------------ ------------------
Total 258,737,932 260,084,835
Undisbursed portion of loans in process (2,533,342) (4,442,832)
Deferred loan fees (1,904,979) (1,872,695)
Allowance for loan losses (2,040,000) (2,040,000)
------------------ ------------------
Loans Receivable - net $252,259,611 $251,729,308
================== ==================
</TABLE>
The Bank originates and purchases both adjustable and fixed interest rate loans
and mortgage-backed securities. At September 30, 1999, 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 $ 1,387 1 year or less $ 79,540
1-3 years 5,701 1-3 years 10,160
3-5 years 21,967 3-5 years 7,354
5-15 years 44,559 5-15 years 18,593
over 15 years 191,638
------------ ------------------
$ 265,252 $ 115,647
============ ==================
</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 Bank pays on the short-term deposits that have been primarily utilized
to fund these loans.
At September 30, 1999, 1998 and 1997, the Bank was servicing loans for others
amounting to approximately $7,550,000, $9,500,000 and $12,600,000, 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 Bank
held borrowers' escrow balances of approximately $48,000, $32,000, and $30,000
at September 30, 1999, 1998, and 1997, respectively.
Loans to officers and directors at September 30, 1999 and 1998, were
approximately $256,100 and $268,100, respectively. Additional loans and
repayments for the year ended September 30, 1999, were approximately $6,300 and
$18,300, respectively, and for the year ended September 30, 1998, were
approximately $600 and $34,800, respectively.
The Bank provides loans primarily in its local market area to borrowers that
share similar attributes. This concentration of credit exposes the Bank to a
higher degree of risk in this regard.
The following schedule summarizes the changes in the allowance for loan losses:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 2,040,000 $ 1,925,000 $ 1,760,000
Provision for loan losses 16,579 119,817 177,424
Amounts charged off net (16,579) (4,817) (12,424)
------------------ ---------------------- ------------------
Balance, end of year $ 2,040,000 $ 2,040,000 $ 1,925,000
================== ====================== ==================
</TABLE>
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 Bank 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
21
<PAGE>
identified as impaired. For this purpose, delays less than 90 days are
considered to be insignificant. As of September 30, 1999, 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 do not apply to large groups of smaller balance homogeneous loans
that are collectively evaluated for impairment, except for those loans
restructured under a troubled debt restructuring. Loans collectively evaluated
for impairment include consumer loans and residential real estate loans. At
September 30, 1999 and 1998, the Bank's impaired loans consisted of smaller
balance residential mortgage loans collectively evaluated for impairment.
Non-performing loans (which include loans of in excess of 90 days delinquent) at
September 30, 1999 and 1998, amounted approximately $313,000 and $168,000,
respectively.
7. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
SEPTEMBER 30,
1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments and interest-bearing deposits $ 863,305 $ 873,330
Mortgage-backed securities 685,581 446,145
Loans receivable 1,346,223 1,355,536
-------------- ----------------
Total $2,895,109 $ 2,675,011
============== ================
</TABLE>
8. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classifications as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
SEPTEMBER 30,
1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Land and buildings $4,139,005 $ 4,059,640
Furniture, fixtures and equipment 2,740,822 1,816,228
Automobiles 52,263 52,263
--------------- ----------------
Total 6,932,090 5,928,131
Less accumulated depreciation (2,254,204) (1,888,403)
--------------- ----------------
Net $4,677,886 $ 4,039,728
=============== ================
</TABLE>
9. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30,
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
INTEREST INTEREST
AMOUNT RATE AMOUNT RATE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NOW accounts $ 11,811,986 1.23% $ 9,862,578 1.25%
Checking accounts 5,372,003 0.00% 5,127,783 0.00%
Money Market Deposit accounts 54,490,438 3.60% 35,360,664 3.11%
Passbook and Club accounts 2,706,688 2.59% 3,256,375 2.13%
Certificate accounts 229,278,984 5.28% 236,219,972 5.66%
------------------ ---------- ------------------- ---------
Total Deposits $303,660,099 4.70% $289,827,372 5.06%
================== ========== =================== =========
</TABLE>
At September 30, 1999, the amounts of scheduled maturities of certificate
accounts were as follows:
<TABLE>
<S> <C> <C>
For the year ended September 30: 2000 $129,091,456
2001 75,097,939
2002 12,103,432
2003 8,876,751
2004 and thereafter 4,109,406
-------------------
$229,278,984
===================
</TABLE>
22
<PAGE>
The aggregate amount of certificate accounts in denominations of $100,000 or
more at September 30, 1999 amounted to approximately $13 million. Deposits in
excess of $100,000 are not federally insured.
Interest expense on savings deposits is composed of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30,
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW accounts and MMDA accounts $ 1,706,721 $ 1,045,554 $ 1,081,366
Passbook and Club accounts 58,320 72,328 75,328
Certificate accounts 12,404,020 13,064,055 11,793,835
------------------ ------------------ -------------------
Total $14,169,061 $14,181,937 $ 12,950,529
================== ================== ===================
</TABLE>
10. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consist of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30,
1999 1998
- -------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
INTEREST INTEREST
MATURING PERIOD AMOUNT RATE AMOUNT RATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 to 12 months $10,300,000 5.44% $20,410,540 5.92%
13 to 24 months 6,493,431 6.40% 11,107,652 6.20%
25 to 36 months 19,694,729 6.34% 21,746,805 5.85%
37 to 48 months 5,074,137 6.51% 9,460,444 6.15%
49 to 60 months 10,436,527 5.48% 25,708,047 5.57%
61 to 72 months 22,549,949 5.98% 4,845,940 5.92%
73 to 84 months 4,900,846 5.13% 4,466,892 5.90%
85 to 120 months 45,730,309 5.42% 2,206,788 5.50%
------------------ ------------- ---------------- ------------
Total $125,179,928 5.76% $99,953,108 5.86%
================== ============= ================ ============
</TABLE>
The advances are collateralized by Federal Home Loan Bank stock and
substantially all first mortgage loans. The Bank has a line of credit of which
$1.8 million of the available $12 million was used at September 30, 1999, which
has been included in the above table. At September 30, 1998, no amount of the
available $9.0 million was used. The line of credit carries a variable market
interest rate which was 5.63% and 5.58% at September 30, 1999, and 1998,
respectively.
11. INCOME TAXES
In August 1996, The Small Business Job Protection Act (the "Act") was signed
into law. The Act repealed the percentage of taxable income method of accounting
for bad debts for thrift institutions effective for years beginning after
December 31, 1995. The Act required the Bank as of October 1, 1996, to change
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. The timing of this recapture may be delayed for a two-year
period provided certain residential loan requirements are met. At September 30,
1999 and 1998, under SFAS No. 109, deferred taxes were provided on the
difference between the book reserve at September 30, 1999 and 1998,
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, 1999, and 1998 includes approximately
$1,325,000 representing bad debt deductions for which no deferred income taxes
have been provided.
23
<PAGE>
The expense (benefit) for income taxes differs from that computed at the
statutory federal corporate tax rate as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
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 $1,743,552 34.0% $1,720,660 34.0% $1,767,309 34.0%
Adjustments resulting from:
State tax-net of federal
tax benefit 3,960 16,500 0.3 213,180 4.1
Other (125,512) (2.4) (132,160) (2.6) (196,489) (3.8)
-------- ---- -------- ---- -------- ----
Expense per consolidated
statements of income $1,622,000 31.6% $1,605,000 31.7% $1,784,000 34.3%
========== ==== ========== ==== ========== ====
</TABLE>
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
--------------------------------------------------
Year Ended September 30,
1999 1998 1997
--------------------------------------------------
<S> <C> <C> <C>
Current $ 1,622,000 $1,695,000 $ 1,384,281
Deferred (90,000) 399,719
----------- ---------- -----------
Total Income Tax Expense $ 1,622,000 $1,605,000 $ 1,784,000
=========== ========== ===========
</TABLE>
Items that gave rise to significant portions of the deferred tax accounts are as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
SEPTEMBER 30,
1999 1998
---------------- ----------------
<S> <C> <C>
Deferred Tax Assets:
Deferred Loan Fees $ 80,803 $ 106,689
Unrealized Loss on Investment Securities 51,905
Allowance for Loan Losses 383,952 280,736
--------- ---------
Sub-Total 516,660 387,425
--------- ---------
Deferred Tax Liabilities:
Unrealized Gain on Investment Securities (9,579)
Property (119,011) (130,697)
Other (93,589) (4,573)
--------- ---------
Sub-Total (212,600) (144,849)
--------- ---------
Total $ 304,060 $ 242,576
========= =========
</TABLE>
Income taxes paid were approximately $1,704,000,$1,908,000, and $1,145,500 for
the years ended September 30, 1999, 1998, and 1997, respectively.
12. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative 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, 1999,
that the Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 1999, 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.
24
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
TO BE CONSIDERED WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
- ------------------------------------------------------------------------------------------------------------------------------
AS OF SEPTEMBER 30, 1999 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
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%
As of September 30, 1998
Tier 1 Capital (to assets) $ 26,067,823 6.24% $ 16,701,315 4.00% $ 20,876,643 5.00%
Tier 1 Capital (to risk weighted assets) 26,067,823 13.65% 7,639,400 4.00% 11,459,100 6.00%
Total Capital (to risk weighted assets) 28,107,823 14.72% 15,278,800 8.00% 19,098,500 10.00%
</TABLE>
13. PROFIT SHARING PLAN
The Bank has a defined contribution plan covering all full-time employees
meeting certain eligibility requirements. Contributions are at the discretion of
the Bank's Board of Directors. Profit sharing expense was $219,088, $202,767 and
$185,571 for the years ended September 30, 1999, 1998, and 1997, respectively.
14. STOCK OPTIONS
In 1987, the Bank established a stock compensation program for executive
officers and other selected full-time employees and directors of the Bank. 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, 1998, an aggregate of 125,266 shares were authorized and
outstanding of which 98,434 had been issued and 26,832 were unissued. 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.
A SUMMARY OF TRANSACTIONS UNDER THIS PLAN FOLLOWS:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 98,434 $ 13.92 102,651 $ 12.72 113,562 $ 12.65
Exercised (7,341) 8.72 (7,780) 11.91 (34,762) 4.95
Canceled (5,500) 12.62 (3,750) 13.34 (4,087) 11.7
Stock Split 32,813 23,588
Granted 20,900 16.42 7,313 28.35 4,350 20.56
--------- ------------- --------- --------- ------------- ------------
Outstanding, end of year 139,306 $ 11.34 98,434 $ 13.92 102,651 12.72
========= ============= ========= ========= ============= ============
Options exercisable, end of year 57,551 $ 9.66 32,199 $ 12.05 23,088 $ 11.26
========= ============= ========= ========= ============= ============
</TABLE>
Had compensation cost for the Bank'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 Bank's net income and income per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income: As reported $3,506,095 $3,480,764 $ 3,413,968
Pro forma 3,466,417 3,454,544 3,401,623
Net income per common and common equivalent share:
Diluted As reported $ 1.53 $ 1.52 $ 1.52
Pro forma 1.51 1.50 1.50
Significant assumptions used to calculate the above
are as follows:
Risk free interest rate of return 5.00% 5.50% 6.40%
Expected option life 84 months 84 months 84 months
Expected volatility 11.00% 11.00% 10.00%
Expected dividends 2.00% 2.00% 2.00%
</TABLE>
25
<PAGE>
The Bank 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 Bank'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, 1998, 45,413 shares were
available for future purchase under the Purchase Plan. During 1999, 2,890 shares
were issued to employees. At September 30, 1999, there were 42,523 shares
available for future purchase.
15. COMMITMENTS
At September 30, 1999, the Bank had approximately $1.3 million in outstanding
commitments to originate mortgage loans, $424,000 of which were at fixed rates
ranging from 7.25% to 8.25%. The unfunded line of credit commitments at
September 30, 1999 were $9.8 million. The amounts of undisbursed portions of
loans in process at September 30, 1999 were $2.5 million. Also, at September 30,
1999, the Bank had no outstanding futures or options positions.
The Bank leases land for one of its branch offices. Minimum rental commitments
at September 30, 1999, are summarized below:
<TABLE>
<CAPTION>
Fiscal
Year
-------
<S> <C> <C>
2000 20,000
2001 23,000
2002 23,000
2003 23,000
2004 23,000
---------------
Total $ 112,000
===============
</TABLE>
16. 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, 1999. 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.
26
<PAGE>
17. 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 Bank 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 Bank 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,
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
CARRYING ESTIMATED FAIR Carrying Estimated Fair
AMOUNT VALUE Amount Value
--------------- ------------------- ----------------- -------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $3,955,818 $ 3,955,818 $18,873,926 $ 18,873,926
Investment securities held to maturity 61,014,582 59,201,000 50,622,163 51,248,000
Investment securities available-for-sale at fair value 3,201,932 3,201,932 1,586,449 1,586,449
Mortgage-backed securities held to maturity 116,778,337 114,497,000 78,792,620 79,590,000
Mortgage-backed securities available-for-sale at fair value 7,915,919 7,915,919 3,695,069 3,695,069
Loans receivable - net 252,259,611 254,824,930 251,729,308 259,573,000
Federal Home Loan Bank Stock 6,472,900 6,472,900 4,997,700 4,997,700
Liabilities:
Passbook, Club and NOW accounts 19,890,677 19,890,677 18,246,736 18,246,736
Money Market Demand accounts 54,490,438 54,490,438 35,360,664 35,360,664
Certificate accounts 229,278,984 229,435,398 236,219,972 236,083,160
Off Balance Sheet Items:
Commitments 13,600,000 13,600,000 14,950,000 14,950,000
</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, 1999. 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.
27
<PAGE>
MARKET AND CORPORATE INFORMATION
MARKET INFORMATION
Harleysville Savings Bank'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 $3.23 per share in
connection with the Bank'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, 1999, was $14.00 per share. There were 2,256,750
shares outstanding as of September 30, 1999, held by approximately 1,000
shareholders.
<TABLE>
<CAPTION>
CASH DIVIDENDS
FOR THE QUARTER ENDED HIGH LOW CLOSE DECLARED
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1997 $ 20.81 $ 16.31 $ 19.88 $ 0.08
December 31, 1997 22.69 19.13 20.63 0.08
March 31, 1998 23.35 20.63 23.25 0.08
June 30, 1998 26.25 22.69 24.19 0.08
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
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
CORPORATE INFORMATION
<TABLE>
<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
(215) 825-8400
ANNUAL MEETING
Family Heritage Restaurant
Franconia, PA INVESTOR INFORMATION
Wednesday, January 26, 2000 Investors, Analysts and others seeking
9:30 A.M. financial information may contact:
Corporate Secretary
MARKET MAKERS Harleysville Savings Bank
F.J. Morrissey & Co., Inc. 271 Main Street
Herzog, Heine, Geduld, Inc. Harleysville, PA 19438
Ryan Beck & Co., Inc. (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
DIVIDEND REINVESTMENT PLAN Cranford, NJ 07016
The Bank has a Dividend Reinvestment and Stock web site: www.rtco.com
Purchase Plan. Interested stockholders can email: [email protected]
obtain more information regarding the Plan by
contacting: Upon request, the Bank's Annual Report or
Registrar and Transfer Company form 10-K for the year ended September 30, 1999,
10 Commerce Drive and the exhibits thereto required to be filed with
Cranford, NJ 07016 the Federal Deposit Insurance Corporation under
(800)525-7686, extension 2542 the Securities Act of 1934 will be furnished
without charge to any stockholder.
</TABLE>
28
<PAGE>
<TABLE>
HARLEYSVILLE
------------
SAVINGS BANK
------------
<S> <C> <C> <C>
BOARD OF DIRECTORS
SANFORD A. ALDERFER PAUL W. BARNDT PHILIP A. CLEMENS
Founder Founder President/CEO
Sanford A. Alderfer, Inc. The Barndt Agency, Inc. Hatfield Quality Meats
Harleysville, PA Sumneytown, PA Hatfield, PA
MARK R. CUMMINS, CPA, CFA DAVID J. FRIESEN, CPA GEORGE W. MESCHTER EDWARD J. MOLNAR
Executive Vice President, Director of Development President President/CEO
CIO and Treasurer Penn View Christian School Meschter Insurance Group Harleysville Savings Bank
Harleysville Insurance Companies Souderton, PA Collegeville, PA Harleysville, PA
Harleysville, PA
OFFICERS
EDWARD J. MOLNAR RONALD B. GEIB
President and Executive Vice President and
Chief Executive Officer Chief Operating Officer
MARIAN BICKERSTAFF DIANE P. MOYER BRENDAN J. MCGILL
Senior Vice President and Corporate Secretary and Senior Vice President and
Chief Lending Officer Senior Vice President of Chief Financial Officer
Branch Administration
MANAGERS
DIANE M. CARLSON NATHANAEL J. CLEMMER ADRIAN D. GORDON
Assistant Vice President, Assistant Vice President, Assistant Vice President
and West Norriton Officer Controller, and and
Branch Manager Accounting Department Information Systems Manager
Manager
H. FRANCES KLINE LORI N. MCCAUSLAND SHERI L. STROUSE
Assistant Vice President Assistant Vice President and Assistant Vice President
and Sumneytown Loan Servicing Manager Harleysville
Branch Manager Branch Manager
DENISE L. MONAGHAN MICHELLE A. BECK
Assistant Vice Assistant Vice
President and Hatfield President and Security
Branch Manager Officer
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HARLEYSVILLE
------------------------
SAVINGS BANK
------------------------
<S> <C> <C> <C>
HARLEYSVILLE OFFICE SUMNEYTOWN OFFICE WEST NORRITON OFFICE HATFIELD OFFICE
271 Main Street 3090 Main Street 2301 West Main Street 1550 Cowpath Road
Harleysville, PA 19438 Sumneytown, PA 18084 Norristown, PA 19403 Hatfield, PA 19440
(215) 256-8828 (215) 234-8053 (610) 631-0887 (215) 362-0750
</TABLE>
<PAGE>
EXHIBIT 99.4
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20429
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------------------
FDIC Insurance Certificate No. 31461
HARLEYSVILLE SAVINGS BANK
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-0672875
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
271 Main Street, Harleysville, Pennsylvania 19438
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(215) 256-8828
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---------- ----------
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date:
Common Stock, $1.00 Par Value, 2,268,884 as of January 27, 2000
<PAGE>
HARLEYSVILLE SAVINGS BANK
INDEX
-----
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C> <C>
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
December 31, 1999 (unaudited) and September 30, 1999 1
Consolidated Statements of Income for the Three Months Ended
December 31, 1999 and 1998 (unaudited) 2
Consolidated Statements of Stockholders' Equity for the Three
Months Ended December 31, 1999 (unaudited) 3
Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 1999 and 1998 (unaudited) 4
Notes to Consolidated Financial Statements 5 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk N/A
Part II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K N/A
Signatures 12
</TABLE>
<PAGE>
HARLEYSVILLE SAVINGS BANK
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, September 30,
1999 1999
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 2,886,214 $ 1,273,990
Interest bearing deposits in other banks 7,184,243 2,681,828
------------------ ------------------
Total cash and cash equivalents 10,070,457 3,955,818
Investment securities held to maturity (fair value -
December 31, $60,362,000; September 30, $59,201,000) 63,432,884 61,014,582
Investment securities available-for-sale at fair value 5,102,243 3,201,932
Mortgage-backed securities held to maturity (fair value -
December 31, $113,197,000; September 30, $114,497,000) 116,885,366 116,778,337
Mortgage-backed securities available-for-sale at fair value 7,690,941 7,915,919
Loans receivable (net of allowance for loan losses -
December 31, $2,040,000; September 30, $2,040,000) 252,364,746 252,259,611
Accrued interest receivable:
Investments and interest-bearing deposits 949,553 863,305
Mortgage-backed securities 700,486 685,581
Loans receivable 1,237,731 1,346,223
Federal Home Loan Bank stock - at cost 6,880,400 6,472,900
Office properties and equipment 4,590,947 4,677,886
Deferred income taxes 345,871 304,060
Prepaid expenses and other assets 237,425 371,568
------------------ ------------------
TOTAL ASSETS $470,489,050 $ 459,847,722
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $303,991,704 $ 303,660,099
Advances from Federal Home Loan Bank 133,135,469 125,179,928
Accrued interest payable 750,922 601,813
Advances from borrowers for taxes and insurance 2,115,748 874,167
Accounts payable and accrued expenses 516,884 569,068
Income taxes payable 343,546
------------------ ------------------
Total liabilities 440,854,273 430,885,075
------------------ ------------------
Commitments
Stockholders' equity:
Preferred Stock: $1.00 par value;
2,500,000 shares authorized; none issued
Common stock: $1.00 par value; 5,000,000
shares authorized; issued and outstanding,
December 31, 1999, 2,262,052; September 30, 1999, 2,256,750 2,262,052 2,256,750
Paid-in capital in excess of par 4,644,245 4,595,612
Retained earnings - partially restricted 22,910,398 22,211,041
Accumulated other comprehensive loss (181,918) (100,756)
------------------ ------------------
Total stockholders' equity 29,634,777 28,962,647
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $470,489,050 $ 459,847,722
================== ==================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
page -1-
<PAGE>
HARLEYSVILLE SAVINGS BANK
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
----------------------------
1999 1998
----------- ------------
INTEREST INCOME: (unaudited)
<S> <C> <C>
Interest on mortgage loans $3,645,346 $3,771,362
Interest on mortgage-backed securities 2,062,594 1,222,228
Interest on consumer and other loans 1,104,063 1,120,828
Interest and dividends on investments 1,256,799 1,184,098
---------- ----------
Total interest income 8,068,802 7,298,516
---------- ----------
INTEREST EXPENSE:
Interest on deposits 3,610,825 3,655,130
Interest on borrowings 1,885,437 1,442,178
---------- ----------
Total interest expense 5,496,262 5,097,308
---------- ----------
NET INTEREST INCOME 2,572,540 2,201,208
PROVISION FOR LOAN LOSSES -- 4,907
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,572,540 2,196,301
---------- ----------
OTHER INCOME:
Other income 102,470 124,593
---------- ----------
Total other income 102,470 124,593
---------- ----------
OTHER EXPENSES:
Salaries and employee benefits 648,245 569,242
Occupancy and equipment 250,231 300,620
Deposit insurance premiums 44,705 42,499
Other 352,789 281,045
---------- ----------
Total other expenses 1,295,970 1,193,406
---------- ----------
INCOME BEFORE INCOME TAXES 1,379,040 1,127,488
Income tax expense 431,000 347,000
---------- ----------
NET INCOME $ 948,040 $ 780,488
========== ==========
BASIC EARNINGS PER SHARE $ 0.42 $ 0.35
========== ==========
DILUTED EARNINGS PER SHARE $ 0.42 $ 0.34
========== ==========
DIVIDENDS PER SHARE $ 0.11 $ 0.09
========== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
page -2-
<PAGE>
HARLEYSVILLE SAVINGS BANK
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PAID-IN RETAINED
CAPITAL EARNINGS-
COMMON IN EXCESS PARTIALLY
STOCK OF PAR RESTRICTED
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at September 30, 1999 $ 2,256,750 $ 4,595,612 $ 22,211,041
=========== =========== =============
Net Income 948,040
Issuance of Common Stock:
Exercise of stock options 5,302 48,633
Dividends - $.11 per share (248,683)
Unrealized holding loss on available-for- sale
securities net of tax - - - -
--------------------- ---------------- ----------------
Balance at December 31, 1999 $ 2,262,052 $ 4,644,245 $ 22,910,398
===================== ================ ================
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
LOSS EQUITY
- ------------------------------------------------------------------------------ -----------------------
<S> <C> <C>
Balance at September 30, 1999 $ (100,756) $ 28,962,647
=========== ============
Net Income 948,040
Issuance of Common Stock:
Exercise of stock options 53,935
Dividends - $.11 per share (248,683)
Unrealized holding loss on available-for- sale
securities net of tax - (81,162) (81,162)
-------------------- -----------------------
Balance at December 31, 1999 $ (181,918) $ 29,634,777
==================== =======================
</TABLE>
See notes to consolidated financial statements.
page -3-
<PAGE>
HARLEYSVILLE SAVINGS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1999 1998
---- ----
OPERATING ACTIVITIES: (unaudited)
<S> <C> <C>
Net Income $ 948,040 $ 780,488
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses -- 4,907
Depreciation 107,089 80,538
Amortization of deferred loan fees (37,990) (107,799)
Changes in assets and liabilities which provided (used) cash:
Increase in deferred income taxes (83,038) (17,628)
Increase in accounts payable and accrued
expenses and income taxes payable 291,362 181,056
Decrease (Increase) in prepaid expenses and other assets 134,143 (68,321)
Decrease in accrued interest receivable 7,339 105,794
Increase in accrued interest payable 149,109 10,942
------------ ------------
Net cash provided by operating activities 1,516,054 969,977
------------ ------------
INVESTING ACTIVITIES:
Purchase of investment securities held to maturity (3,435,032) (24,837,813)
Proceeds from maturities of investment securities held to maturity 995,829 17,493,794
Purchase of investment securities available for sale (1,879,410) --
Purchase of FHLB stock (407,500) --
Long-term loans originated or acquired (9,475,757) (20,772,421)
Purchase of mortgage-backed securities held to maturity (3,589,499) --
Principal collected on long-term loans & mortgage-backed securities 13,076,125 26,360,383
Purchases of premises and equipment (20,150) (64,262)
------------ ------------
Net cash used by investing activities (4,735,394) (1,820,319)
------------ ------------
FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits, NOW accounts and
savings accounts (4,417,877) 7,035,552
Net increase (decrease) in certificates of deposit 4,749,482 (3,989,632)
Cash dividends (248,683) (201,205)
Net increase (decrease) in FHLB advances 7,955,541 (2,518,992)
Net proceeds from issuance of stock 53,935 11,456
Net increase in advances from borrowers for taxes & insurance 1,241,581 1,586,070
------------ ------------
Net cash provided by financing activities 9,333,979 1,923,249
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 6,114,639 1,072,907
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,955,818 18,873,926
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,070,457 $ 19,946,833
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 6,500 $ 122,176
Interest expense 5,347,153 5,086,366
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
page -4-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying unaudited financial statements have
been prepared in accordance with the instructions for Form 10-Q and therefore do
not include information or footnotes necessary for a complete presentation of
financial condition, results of operations and cash flows in conformity with
generally accepted accounting principles. However, all adjustments (consisting
only of normal recurring adjustments) which, in the opinion of management, are
necessary for a fair presentation have been included. The results of operations
for the three months ended December 31, 1999 are not necessarily indicative of
the results which may be expected for the entire fiscal year.
COMPREHENSIVE INCOME - The Bank adopted Statement of Financial Accounting
Standards No. 130, REPORTING COMPREHENSIVE INCOME, effective October 1, 1998.
The statement requires disclosure of amounts from transactions and other events
which are currently excluded from the statement of income and are recorded
directly to stockholders' equity. Comprehensive income for the three month
periods ended December 31, 1999 and 1998, was approximately $867,000 and
$746,000, respectively.
2. INVESTMENT SECURITIES HELD TO MATURITY
A comparison of cost and approximate fair value of investment securities, by
maturities, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAIN LOSSES FAIR VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. Government agencies
<S> <C> <C>> <C> <C>
Due after 2 years through 5 years $ 11,500,000 $ (352,000) $11,148,000
Due after 5 years through 10 years 22,979,981 (1,528,981) 21,451,000
Due after 10 years through 15 years 17,394,913 $ 68,066 (957,979) 16,505,000
Tax Exempt Obligations
Due after 10 years through 15 years 1,329,632 5,368 1,335,000
Due after 15 years 10,228,358 3,585 (308,943) 9,923,000
--------------------- ------------------- ------------------ ------------------
Total Investment Securities $ 63,432,884 $ 77,019 $(3,147,903) $60,362,000
===================== =================== ================== ==================
<CAPTION>
September 30, 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain 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 called periodically by the issuing agency.
These structured notes were comprised of step-up bonds with par values of
$998,000 at December 31, 1999 and September 30, 1999.
The Bank has the positive intent and the ability to hold these securities to
maturity. At December 31, 1999, neither a disposal, nor conditions that could
lead to a decision not to hold these securities to maturity were reasonably
foreseen.
page -5-
<PAGE>
3. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
A comparison of cost and approximate fair value of investment securities is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAIN LOSSES FAIR VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ARM Mutual Funds $ 5,144,117 $ - $ (41,874) $ 5,102,243
------------------ ------------------ ---------------- ------------------
Total Investment Securities $ 5,144,117 $ - $ (41,874) $ 5,102,243
================== ================== ================ ==================
<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
================== ================== ================ ==================
4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
A comparison of cost and approximate fair value of mortgage-backed securities is
as follows:
<CAPTION>
DECEMBER 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAIN LOSSES FAIR VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Collateralized mortgage obligations $ 46,057,177 $ 1,037 $ (1,350,214) $ 44,708,000
FHLMC pass-through certificates 9,209,547 13,579 (142,126) 9,081,000
FNMA pass-through certificates 25,153,096 17,828 (1,026,924) 24,144,000
GNMA pass-through certificates 36,465,546 734 (1,202,280) 35,264,000
------------------ ------------------ ---------------- ------------------
Total Mortgage-backed Securities $ 116,885,366 $ 33,178 $ (3,721,544) $ 113,197,000
================== ================== ================ ==================
<CAPTION>
September 30, 1999
- ---------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain 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
================== ================== ================ ==================
5. MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE
A comparison of cost and approximate fair value of mortgage-backed securities is
as follows:
<CAPTION>
DECEMBER 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAIN LOSSES FAIR VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC pass-through certificates $ 3,045,988 $ - $ (143,715) $ 2,902,273
GNMA pass-through certificates 4,878,713 - (90,045) 4,788,668
------------------ ------------------ ---------------- ------------------
Total Mortgage-backed Securities $ 7,924,701 $ - $ (233,760) $ 7,690,941
================== ================== ================ ==================
<CAPTION>
September 30, 1999
- ---------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain 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>
page -6-
<PAGE>
<TABLE>
<CAPTION>
6. LOANS RECEIVABLE
Loans receivable consist of the following:
DECEMBER 31, 1999 September 30, 1999
----------------- ------------------
<S> <C> <C>
Residential Mortgages $ 196,274,789 $ 195,126,790
Commercial Mortgages 762,086 766,627
Construction 3,819,755 3,885,232
Education 1,809,913 1,347,591
Savings Account 587,290 535,036
Home Equity 47,529,725 49,240,261
Automobile and other 644,202 660,504
Line of Credit 7,308,183 7,175,891
------------- -------------
Total 258,735,943 258,737,932
Undisbursed portion of loans in process (2,421,761) (2,533,342)
Deferred loan fees (1,909,436) (1,904,979)
Allowance for loan losses (2,040,000) (2,040,000)
------------- -------------
Loans receivable - net $ 252,364,746 $ 252,259,611
============= =============
The total amount of loans being serviced for the benefit of others was
approximately $7.3 million and $7.6 million at December 31, 1999 and September
30, 1999, respectively.
The following schedule summarizes the changes in the allowance for loan losses:
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Balance, beginning of period $ 2,040,000 $ 2,040,000
Provision for loan losses - 4,907
Amounts charged off - (13,407)
----------- -----------
Balance, end of period $ 2,040,000 $ 2,031,500
=========== ===========
7. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classification as
follows:
<CAPTION>
DECEMBER 31, 1999 September 30, 1999
----------------- ------------------
<S> <C> <C>
Land and buildings $ 4,140,036 $ 4,139,005
Furniture, fixtures and equipment 2,759,941 2,740,822
Automobiles 52,263 52,263
----------- -----------
Total 6,952,240 6,932,090
Less accumulated depreciation (2,361,293) (2,254,204)
----------- -----------
Net $ 4,590,947 $ 4,677,886
=========== ===========
8. DEPOSITS
Deposits are summarized as follows:
<CAPTION>
DECEMBER 31, 1999 September 30, 1999
----------------- ------------------
<S> <C> <C>
NOW accounts $ 8,539,892 $ 11,811,986
Checking accounts 8,883,132 5,372,003
Money Market Demand accounts 49,954,886 54,490,438
Passbook and Club accounts 2,585,328 2,706,688
Certificate accounts 234,028,466 229,278,984
------------- -------------
Total deposits $ 303,991,704 $ 303,660,099
============= =============
</TABLE>
The aggregate amount of certificate accounts in denominations of more than
$100,000 at December 31, 1999 amounted to approximately $10.6 million.
page -7-
<PAGE>
9. COMMITMENTS
At December 31, 1999, the following commitments were outstanding:
<TABLE>
<S> <C>
Origination of fixed-rate mortgage loans $ 594,325
Origination of adjustable-rate mortgage loans 1,095,000
Unused line of credit loans 9,396,114
Loans in process 2,421,761
-----------
Total $13,507,200
===========
10. DIVIDEND
Jauary 27, 1999, the Board of Directors declared a cash dividend of $.11 per
share payable on February 23, 2000 to the stockholders' of record at the close
of business on February 9, 2000.
11. STOCK OPTIONS
A summary of options exercised follows:
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
--------------------------------------------
TYPE OF OPTION 1999 1998
-------------- ---- ----
WEIGHTED Weighted
# OPTIONS PRICE # Options Price
--------- ----- --------- -----
<S> <C> <C> <C> <C>
INCENTIVE 5,302 $9.68 1,040 $ 11.02
12. EARNINGS PER SHARE
The calculations of earnings per share were based on the number of common stock
and common stock equivalents outstanding for the three months ended December 31,
1999 and 1998.
The following average shares were used for the computation of earnings per
share:
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
---------------------------------------
1999 1998
---- ----
Basic 2,260,080 2,235,744
Diluted 2,284,072 2,310,000
</TABLE>
page -8-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This report contains certain forward-looking statements and information relating
to the Bank that are based on the beliefs of management as well as assumptions
made by and information currently available to management. In addition, in those
and other portions of this document, the words "anticipate," "believe,"
"estimate," "intend," "should" and similar expressions, or the negative thereof,
as they relate to the Bank or the Bank's management, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Bank 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 Bank does not intend to update
these forward-looking statements.
CHANGES IN FINANCIAL POSITION FOR THE THREE MONTH PERIOD ENDED DECEMBER 31, 1999
Total assets at December 31, 1999 were $470.5 million, an increase of $10.6
million or 2.3% for the three month period. The increase was primarily the
result of an increase in interest bearing deposits in other banks of $6.1
million. This increase was due to the Bank's Year 2K-liquidity plan, enabling
the Bank to have funds available for customers. The remainder of the increase
was due to the purchase of investment securities held to maturity and available
for sale of approximately $4.3 million.
During the three month period ended December 31, 1999, total deposits increased
by $332,000 to $304.0 million. Advances from borrowers for taxes and insurance
also increased by $1.2 million. This is a seasonal increase as the majority of
taxes the Bank escrows for are disbursed in the month of August. There was also
an increase in advances from Federal Home Loan Bank of $8.0 million, which was
used to fund the purchase of investment securities and maintain adequate cash
for the Bank's Year 2K liquidity plan. The increase in the accrued interest
payable was a direct result of the increased balance in the advances from
Federal Home Loan Bank.
COMPARISONS OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED DECEMBER
31, 1999 WITH THE THREE MONTH PERIOD ENDED DECEMBER 31, 1998.
NET INTEREST INCOME
The increase in the net interest income for the three month period ended
December 31, 1999 when compared to the same period in 1998 can be attributed to
the increase in the interest rate spread. The interest rate spread increased
from 1.84% for the three month period ended December 31, 1998 to 1.95% for the
comparable period ended December 31, 1999. This increase can also be attributed
to the average balance of interest-earning assets increasing from $411.2 million
for the three month period ended December 31, 1998 to $456.3 million for the
comparable period ended December 31, 1999.
Total interest income was $8.1 million for the three month period ended December
31, 1999 compared to $7.3 million for the comparable period in 1998. The
increase in the average balance of interest-earning assets was partially offset
by a decrease in the average yield for the interest-earning assets to 7.07% for
the three month period ended December 31, 1999 from 7.10% for the comparable
period in 1998.
Total interest expense increased to $5.5 million for the three month period
ended December 31, 1999 from $5.1 million for the comparable period in 1998.
This increase occurred as a result of an increase in the average
interest-bearing liabilities from $385.1 million for the three month period
ended December 31, 1998 to $428.5 million for the comparable period ended
December 31, 1999 while the average cost for the respective periods decreased
from 5.29% for the three month period ended December 31, 1998 to 5.13% for the
comparable period ended December 31, 1999. This decrease is the result of a
lower level of interest paid on deposits for the three month period ended
December 31, 1999 when compared to the same period ended December 31, 1998.
page -9-
<PAGE>
PROVISION FOR LOAN LOSSES
The Bank had no provisions added to the Bank's general loan loss reserve.
OTHER INCOME
Other income decreased to $102,000 for the three month period ended December 31,
1999 from $125,000 for the comparable period in 1998. The decrease is due to a
reduction in the number of mortgage late charges and fewer disability and life
insurance fees.
OTHER EXPENSES
During the quarter ended December 31, 1999, other expenses increased by $103,000
or 8.6% to $1.3 million. Management believes these are normal increases in the
cost of operations after considering the effects of inflation and the impact of
the 12.0% growth in the assets of the Bank when compared to the same period in
1998. The annualized ratio of expenses to average assets for the three month
period ended December 31, 1999 was 1.11%.
INCOME TAXES
The Bank made provisions for income taxes of $431,000 for the three month period
ended December 31, 1999 compared to $347,000 for the comparable period in 1998.
These provisions are based on the levels of taxable income.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's net income for the quarter ended December 31, 1999 of $948,000
increased stockholder's equity to $29.6 million or 6.3% of total assets. This
amount is well in excess of the Bank's minimum regulatory capital requirements
as illustrated below:
<TABLE>
<CAPTION>
(in thousands)
Leveraged Risk-based
------------------ ------------------
<S> <C> <C> <C> <C>
Actual regulatory capital $29,790 6.3% $31,830 15.5%
Minimum required regulatory capital 18,820 4.0% 16,448 8.0%
------- ---- -------- -----
Excess capital $10,970 2.3% $ 15,382 7.5%
</TABLE>
The liquidity of the Bank's operations, measured by the ratio of the cash and
securities balances to total assets, equaled 43.2% at December 31, 1999 compared
to 42.0% at September 30, 1999.
As of December 31, 1999, the Bank had $13.5 million in commitments to fund loan
originations, disburse loans in process and meet other obligations. Management
anticipates that the majority of these commitments will be funded within the
next six months by means of normal cash flows and net new deposits. In addition,
the amount of certificate accounts which are scheduled to mature during the 12
months ending December 31, 2000 is $155 million. Management expects that a
substantial portion of these maturing deposits will remain as accounts in the
Bank.
page -10-
<PAGE>
Part II OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of Stockholders was held on January
26, 2000.
(c) There were 2,260,468 shares of Common Stock of the Bank
eligible to be voted at the Annual Meeting and
2,078,795 shares were represented at the meeting by the
holders thereof, which constituted a quorum. The items
voted upon at the Annual Meeting and the vote for each
proposal were as follows:
1. Election of directors for a three-year term:
<TABLE>
<CAPTION>
FOR WITHHELD
--- --------
<S> <C> <C>
David J. Friesen 2,061,632 17,163
George W. Meschter 2,061,759 17,036
Name of each director whose term of office continued:
Sanford A. Alderfer
Mark R. Cummins
Paul W. Barndt
Phillip A. Clemens
Edward J. Molnar
2. Proposal to ratify the appointment by the board of Deloitte & Touche, LLP
as the Bank's independent auditors for the year ending September 30, 2000
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
2,071,629 1,000 6,166
3. Proposal to approve the formation of a new bank holding company for
Harleysville Savings by approving an Agreement and Plan of Reorganization.
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
<S> <C> <C> <C> <C>
1,746,648 25,688 10,254 296,205
</TABLE>
Each of the proposals were adopted by the stockholders
of the Bank.
Item 1-5.NOT APPLICABLE.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
None
page -11-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Bank
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
HARLEYSVILLE SAVINGS BANK
Date: February 2, 2000 By: /s/ Edward J. Molnar
-------------------------------------
Edward J. Molnar
President and Chief Executive Officer
Date: February 2, 2000 By: /s/ Brendan J. McGill
-------------------------------------
Brendan J. McGill
Senior Vice President
Treasurer and Chief Financial Officer
page -12-
