SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20429 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission file number 0-29709 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Pennsylvania 23-3028464 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 271 Main Street, Harleysville, Pennsylvania 19438 (Address of principal executive offices) (Zip Code) (215) 256-8828 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $.01 Par Value, 2,316,490 as of August 14, 2003 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION AND SUBSIDIARY Index PAGE(S) Part I FINANCIAL INFORMATION Item 1. Financial Statements Unaudited Condensed Consolidated Statements of Financial Condition as of June 30, 2003 and September 30, 2002 1 Unaudited Condensed Consolidated Statements of Income for the Three and Nine Months Ended June 30, 2003 and 2002 2 Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended June 30, 2003 and 2002 3 Unaudited Condensed Consolidated Statements of Stockholders' Equity for the Nine Months Ended June 30, 2003 3 Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2003 and 2002 4 Notes to Unaudited Condensed Consolidated Financial Statements 5 - 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 - 13 Item 4. Controls and Procedures 13 Part II OTHER INFORMATION Item 1. - 6. 14 Signatures 15 - 17 Harleysville Savings Financial Corporation Unaudited Condensed Consolidated Statements of Financial Condition June 30, September 30, 2003 2002 ------------- ------------- Assets Cash and amounts due from depository institutions $ 1,281,411 $ 1,431,186 Interest bearing deposits in other banks 3,464,923 34,871,718 ------------- ------------- Total cash and cash equivalents 4,746,334 36,302,904 Investment securities held to maturity (fair value - June 30, $74,687,000; September 30, $57,555,000) 72,278,537 55,665,399 Investment securities available-for-sale at fair value 3,904,957 11,999,611 Mortgage-backed securities held to maturity (fair value - June 30, $247,156,000; September 30, $168,529,000) 243,243,216 163,814,970 Mortgage-backed securities available-for-sale at fair value 13,816,797 29,514,940 Loans receivable (net of allowance for loan losses - June 30, $1,991,000; September 30, $2,035,000) 289,586,988 295,353,734 Accrued interest receivable 2,927,924 2,836,448 Federal Home Loan Bank stock - at cost 13,089,700 10,496,500 Office properties and equipment 4,972,201 5,013,031 Deferred income taxes 341,123 134,493 Prepaid expenses and other assets 9,356,976 9,132,423 ------------- ------------- TOTAL ASSETS $ 658,264,753 $ 620,264,453 ============= ============= Liabilities and Stockholders' Equity Liabilities: Deposits $ 384,650,490 $ 371,946,978 Advances from Federal Home Loan Bank 227,384,578 207,502,346 Accrued interest payable 1,066,508 1,041,892 Advances from borrowers for taxes and insurance 4,169,154 983,083 Accounts payable and accrued expenses 918,236 922,522 ------------- ------------- Total liabilities 618,188,966 582,396,821 ------------- ------------- Commitments Stockholders' equity: Preferred Stock: $.01 par value; 7,500,000 shares authorized; none issued Common stock: $.01 par value; 15,000,000 shares authorized; issued and outstanding, June 2003, 2,316,490; Sept. 2002, 2,316,490 23,165 23,165 Paid-in capital in excess of par 7,559,340 7,551,849 Treasury stock, at cost (June 2003, 52,217 shares; Sept. 2002, 55,912 shares) (1,056,429) (881,227) Retained earnings - partially restricted 33,478,390 31,124,031 Accumulated other comprehensive income 71,321 49,814 ------------- ------------- Total stockholders' equity 40,075,787 37,867,632 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 658,264,753 $ 620,264,453 ============= ============= See notes to unaudited condensed consolidated financial statements. page -1- Harleysville Savings Financial Corporation Unaudited Condensed Consolidated Statements of Income For the Three Months Ended For the Nine Months Ended June 30, June 30, ---------------------------------------------------------------- 2003 2002 2003 2002 ---------- ---------- ----------- ------------ INTEREST INCOME: Interest on mortgage loans $4,210,229 $4,417,540 $12,857,199 $ 13,332,908 Interest on mortgage-backed securities 2,352,111 2,529,961 7,250,568 7,304,488 Interest on consumer and other loans 851,227 976,226 2,649,237 2,939,474 Interest and dividends on tax-exempt investments 366,488 345,820 1,075,725 1,087,913 Interest and dividends on investments 476,304 562,817 1,510,649 1,751,767 ---------- ---------- ----------- ------------ Total interest income 8,256,359 8,832,364 25,343,378 26,416,550 ---------- ---------- ----------- ------------ Interest Expense: Interest on deposits 2,583,279 3,148,842 8,219,824 10,429,344 Interest on borrowings 2,772,530 2,729,782 8,290,727 7,881,188 ---------- ---------- ----------- ------------ Total interest expense 5,355,809 5,878,624 16,510,551 18,310,532 ---------- ---------- ----------- ------------ Net Interest Income 2,900,550 2,953,740 8,832,827 8,106,018 Provision for loan losses -- -- -- -- ---------- ---------- ----------- ------------ Net Interest Income after Provision for Loan Losses 2,900,550 2,953,740 8,832,827 8,106,018 ---------- ---------- ----------- ------------ Other Income: Gain on sales of loans 5,611 500 6,313 1,227 Loss on sales of securities -- -- -- (23,894) Other income 324,209 276,149 935,905 803,932 ---------- ---------- ----------- ------------ Total other income 329,820 276,649 942,218 781,265 ---------- ---------- ----------- ------------ Other Expenses: Salaries and employee benefits 938,777 845,313 2,705,118 2,515,616 Occupancy and equipment 365,813 334,244 1,130,643 966,646 Deposit insurance premiums 15,007 15,423 45,550 46,845 Other 412,640 486,607 1,279,720 1,251,306 ---------- ---------- ----------- ------------ Total other expenses 1,732,237 1,681,587 5,161,031 4,780,413 ---------- ---------- ----------- ------------ Income before Income Taxes 1,498,133 1,548,802 4,614,014 4,106,870 Income tax expense 378,100 376,000 1,169,685 869,017 ---------- ---------- ----------- ------------ Net Income $1,120,033 $1,172,802 $ 3,444,329 $ 3,237,853 ========== ========== =========== ============ Basic Earnings Per Share $ 0.49 $ 0.52 $ 1.52 $ 1.44 ========== ========== =========== ============ Diluted Earnings Per Share $ 0.48 $ 0.51 $ 1.48 $ 1.41 ========== ========== =========== ============ Dividends Per Share $ 0.16 $ 0.14 $ 0.48 $ 0.40 ========== ========== =========== ============ See notes to unaudited condensed consolidated financial statements. page -2- Harleysville Savings Financial Corporation Unaudited Condensed Consolidated Statement of Comprehensive Income Three Months Ended 2003 2002 -------------------------------------------------------------------------------- Net Income $1,120,033 $ 1,172,802 Other Comprehensive Income Unrealized gain (loss) on securities net of taxes 130,505 (50,378) ---------- ----------- Total Comprehensive Income $1,250,538 $ 1,122,424 ========== =========== Nine Months Ended 2003 2002 -------------------------------------------------------------------------------- Net Income $3,444,329 $ 3,237,853 Other Comprehensive Income Unrealized gain (loss) on securities net of taxes 21,507 (61,454) ---------- ----------- Total Comprehensive Income $3,465,836 $ 3,176,399 ========== =========== See notes to unaudited condensed consolidated financial statements. Harleysville Savings Financial Corporation & Subsidiary UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Paid-in Retained Accumulated Capital Earnings- Other Total Common in Excess Treasury Partially Comprehensive Stockholders' Stock of Par Stock Restricted Income Equity ----------------------------------------------------------------------------------------------------------------------------------- Balance at October 1, 2002 $ 23,165 $ 7,551,849 $ (881,227) $ 31,124,031 $ 49,814 $ 37,867,632 Net Income 3,444,329 3,444,329 Dividends - $.16 per share (1,089,970) (1,089,970) Treasury stock purchased (681,592) (681,592) Treasury stock delivered under Dividend Reinvestment Plan 116,770 227,571 344,341 Treasury stock delivered under employee stock plan (109,279) 278,819 169,540 Unrealized holding gain on available for: sale securities, net of tax 21,507 21,507 -------- ----------- ------------ ------------ -------- ------------ Balance at June 30, 2003 $ 23,165 $ 7,559,340 $ (1,056,429) $ 33,478,390 $ 71,321 $ 40,075,787 ======== =========== ============ ============ ======== ============ See notes to unaudited condensed consolidated financial statements. page -3- Harleysville Savings Financial Corporation Unaudited Consolidated Statements of Cash Flows Nine Months Ended June 30, ------------------------------------ 2003 2002 ------------- ------------- Operating Activities: Net Income $ 3,444,329 $ 3,237,853 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 227,254 310,287 Amortization of deferred loan fees (1,339,426) (362,214) Gain on sale of loans 6,313 1,227 Loss on sale of securities available for sale -- 23,894 Proceeds from the sale of loans held for sale 394,000 102,918 Changes in assets and liabilities which provided (used) cash: Decrease in accounts payable and accrued expenses and income taxes payable (4,286) (150,405) (Increase) decrease in deferred income taxes (70,254) 31,657 Increase in prepaid expenses and other assets (224,553) (523,871) (Increase) decrease in accrued interest receivable (91,476) 188,336 Increase in accrued interest payable 24,616 279,560 ------------- ------------- Net cash provided by operating activities 2,366,517 3,139,242 ------------- ------------- Investing Activities: Purchase of investment securities held to maturity (43,392,095) (30,897,815) Proceeds from maturities of investment securities held to maturity 26,778,957 39,662,422 Purchase of investment securities available for sale -- (7,096,559) Proceeds from sale of investment securities available for sale -- 3,918,469 Purchase of FHLB stock (2,593,200) (1,283,800) Long-term loans originated or acquired (114,470,965) (91,339,771) Purchase of mortgage-backed securities available for sale (20,686,030) (19,028,203) Purchase of mortgage-backed securities held to maturity (207,676,165) (49,524,955) Principal collected on long-term loans & mortgage-backed securities 293,788,701 118,623,485 Purchases of premises and equipment (186,424) (120,502) ------------- ------------- Net cash used in investing activities (68,437,221) (37,087,229) ------------- ------------- Financing Activities: Net increase in demand deposits, NOW accounts and savings accounts 16,513,251 18,530,375 Net (decrease) increase in certificates of deposit (3,809,739) (13,471,507) Cash dividends (1,089,970) (897,397) Net increase in FHLB advances 19,882,232 32,894,379 Delivery of treasury stock for employee benefit plans 513,881 351,804 Purchase of treasury stock (681,592) (234,885) Net proceeds from issuance of stock -- 159,245 Net increase in advances from borrowers for taxes & insurance 3,186,071 3,119,484 ------------- ------------- Net cash provided by financing activities 34,514,134 40,451,498 ------------- ------------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (31,556,570) 6,503,511 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 36,302,904 8,948,132 ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,746,334 $ 15,451,643 ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Income taxes $ 1,191,201 $ 917,519 Interest expense 17,577,059 19,317,593 See notes to unaudited condensed consolidated financial statements. page -4- Notes to Unaudited Condensed Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - The accompanying unaudited financial statements have been prepared in accordance with the instructions for Form 10-Q and therefore do not include information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. However, all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation have been included. The results of operations for the three and nine months ended June 30, 2003 are not necessarily indicative of the results which may be expected for the entire fiscal year or any other period. New Accounting Pronouncements In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, Accounting for Stock-Based Compensation --Transition and Disclosure, an amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This Statement is effective for financial statements for fiscal years ending after December 15, 2002. The Company has elected to continue application of APB Opinion No. 25 and related interpretations for stock options and, accordingly no compensation expense has been recorded in the consolidated financial statements. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation. For the Three Months Ended For the Nine Months Ended June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002 ------------- ------------- ------------- ------------- Net income $ 1,120,033 $ 1,172,802 $ 3,444,329 $ 3,237,853 Less: Stock based compensation expense -- -- 30,531 17,644 ------------- ------------- ------------- ------------- Proforma net income $ 1,120,033 $ 1,172,802 $ 3,413,798 $ 3,220,209 Earnings per share: Basic - as reported $ 0.49 $ 0.52 $ 1.52 $ 1.44 Basic - pro forma 0.49 0.52 1.50 1.43 Diluted - as reported $ 0.48 $ 0.51 $ 1.48 $ 1.41 Diluted - pro forma 0.48 0.51 1.47 1.41 In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. This Statement is effective for contracts entered into or modified after June 30, 2003, except for the provision of this statement that relate to SFAS 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003 and for hedging relationships designated after June 30, 2003. All provisions are to be applied prospectively except for the provision of this Statement that relate to SFAS 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003. These provisions are to be applied in accordance with their respective effective dates. Management of the Company does not expect that the adoption of this Statement will have a material impact on the Company's results of operations or financial condition for contracts entered into or modified after June 30, 2003. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. Currently, the Company has no financial instruments entered into or modified after May 31, 2003 that require application of this Statement. Management does not expect that the adoption of this Statement will have a material impact on the Company's results of operations or financial condition. financial condition. In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. This Interpretation also incorporates, without change, the guidance in FASB Interpretation No. 34, Disclosure of Indirect Guarantees of Indebtedness of Others, which is being superseded. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company currently has no guarantees that would be required to be recognized, measured or disclosed under this Interpretation. In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities. The Interpretation clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Company is not a party to any variable interest entities covered by the Interpretation. page -5- 2. INVESTMENT SECURITIES HELD TO MATURITY A comparison of amortized cost and approximate fair value of investment securities, by maturities, is as follows: June 30, 2003 --------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gains Losses Fair Value --------------------------------------------------------------------------------------------------------------- U.S. Government agencies Due after 1 year through 5 years $ 3,000,000 $ 13,000 $ 3,013,000 Due after 5 years through 10 years 12,998,761 152,239 13,151,000 Due after 10 years through 15 years 30,360,256 243,744 $ (40,617) 30,604,000 Tax-Exempt Obligations Due after 10 years through 15 years 2,864,704 238,296 3,103,000 Due after 15 years 23,054,816 1,761,184 24,816,000 ------------ ------------ ---------- ------------ Total Investment Securities $ 72,278,537 $ 2,408,463 $ (40,617) $ 74,687,000 ============= =========== ========== ============ September 30, 2002 --------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gains Losses Fair Value --------------------------------------------------------------------------------------------------------------- U.S. Government agencies Due after 1 year through 5 years $ 7,026,952 $ 26,048 $ 7,053,000 Due after 5 years through 10 years 2,000,000 75,000 2,075,000 Due after 10 years through 15 years 21,757,858 415,571 $ (117,429) 22,056,000 Tax-Exempt Obligations Due after 10 years through 15 years 3,235,924 124,076 3,360,000 Due after 15 years 21,644,665 1,406,010 (39,675) 23,011,000 ------------ ------------ ---------- ------------ Total Investment Securities $ 55,665,399 $ 2,046,705 $ (157,104) $ 57,555,000 ============ ============ ========== ============ The Company has the positive intent and the ability to hold these securities to maturity. At June 30, 2003, neither a disposal, nor conditions that could lead to a decision not to hold these securities to maturity were reasonably foreseen. page -6- 3. INVESTMENT SECURITIES AVAILABLE-FOR-SALE A comparison of amortized cost and approximate fair value of investment securities is as follows: June 30, 2003 ---------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gains Losses Fair Value ---------------------------------------------------------------------------------------------------------------------------- Equites $ 785,054 $ 93,531 $ (733) $ 877,852 ARM Mutual Funds 3,027,105 -- -- 3,027,105 ------------ ------------ ---------- ------------ Total Investment Securities $ 3,812,159 $ 93,531 $ (733) $ 3,904,957 ============ ============ ========== ============ September 30, 2002 ---------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gains Losses Fair Value ---------------------------------------------------------------------------------------------------------------------------- ARM Mutual Funds $ 11,999,611 $ -- $ -- $ 11,999,611 ------------ ------------ ---------- ------------ Total Investment Securities $ 11,999,611 $ -- $ -- $ 11,999,611 ============ ============ ========== ============ 4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY A comparison of amortized cost and approximate fair value of mortgage-backed securities is as follows: June 30, 2003 ---------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gains Losses Fair Value ---------------------------------------------------------------------------------------------------------------------------- Collateralized mortgage obligations $ 52,102,145 $ 119,115 $ (63,260) $ 52,158,000 FHLMC pass-through certificates 53,667,645 987,355 -- 54,655,000 FNMA pass-through certificates 107,882,276 1,580,945 (47,221) 109,416,000 GNMA pass-through certificates 29,591,150 1,335,850 $ -- 30,927,000 ------------- ------------ ------------ ------------- Total Mortgage-backed Securities $ 243,243,216 $ 4,023,265 $ (110,481) $ 247,156,000 ============= ============ ============ ============= September 30, 2002 ---------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gains Losses Fair Value ---------------------------------------------------------------------------------------------------------------------------- Collateralized mortgage obligations $ 45,143,747 $ 255,218 $ (5,965) $ 45,393,000 FHLMC pass-through certificates 33,697,029 1,166,921 (4,950) 34,859,000 FNMA pass-through certificates 29,674,733 1,062,267 -- 30,737,000 GNMA pass-through certificates 55,299,461 2,240,539 -- 57,540,000 ------------- ------------ ------------ ------------- Total Mortgage-backed Securities $ 163,814,970 $ 4,724,945 $ (10,915) $ 168,529,000 ============= ============ ============ ============= 5. MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE A comparison of amortized cost and approximate fair value of mortgage-backed securities is as follows: June 30, 2003 ---------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gains Losses Fair Value ---------------------------------------------------------------------------------------------------------------------------- FNMA pass-through certificates $ 13,801,533 $ 15,264 $ -- $ 13,816,797 ------------- ------------ ------------ ------------- Total Mortgage-backed Securities $ 13,801,533 $ 15,264 $ -- $ 13,816,797 ============= ============ ============ ============= September 30, 2002 ---------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gains Losses Fair Value ---------------------------------------------------------------------------------------------------------------------------- FNMA pass-through certificates $ 22,322,686 $ 69,129 $ -- $ 22,391,815 GNMA pass-through certificates 7,116,778 6,347 7,123,125 ------------- ------------ ------------ ------------- Total Mortgage-backed Securities $ 29,439,464 $ 75,476 $ -- $ 29,514,940 ============= ============ ============ ============= page -7- 6. LOANS RECEIVABLE Loans receivable consist of the following: June 30, 2003 September 30, 2002 ------------- ------------------ Residential Mortgages $ 228,811,206 $ 235,359,382 Commercial Mortgages 941,976 495,647 Construction 7,852,701 8,607,450 Education 357,291 334,271 Savings Account 732,983 478,969 Home Equity 33,365,996 41,451,058 Automobile and other 594,252 725,883 Line of Credit 27,049,458 18,529,734 ------------- ------------------ Total 299,705,863 305,982,394 Undisbursed portion of loans in process (6,435,723) (6,502,564) Deferred loan fees (1,691,978) (2,091,264) Allowance for loan losses (1,991,174) (2,034,832) ------------- ------------------ Loans receivable - net $ 289,586,988 $ 295,353,734 ============= ================== The total amount of loans being serviced for the benefit of others was approximately $2.5 million and $3.5 million at June 30, 2002 and September 30, 2002, respectively. The following schedule summarizes the changes in the allowance for loan losses: Nine Months Ended June 30, 2003 2002 ----------- ----------- Balance, beginning of period $ 2,034,832 $ 2,036,188 Amounts charged-off (43,658) (3,086) Loan recoveries -- 5,113 ----------- ----------- Balance, end of period $ 1,991,174 $ 2,038,215 =========== =========== 7. OFFICE PROPERTIES AND EQUIPMENT Office properties and equipment are summarized by major classification as follows: June 30, 2003 September 30, 2002 ------------- ------------------ Land and buildings $ 5,343,042 $ 5,190,758 Construction in progress 25,071 -- Furniture, fixtures and equipment 3,607,407 3,406,672 Automobiles 24,896 81,059 ------------- ------------------ Total 9,000,416 8,678,489 Less accumulated depreciation (4,028,215) (3,665,458) ------------- ------------------ Net $ 4,972,201 $ 5,013,031 ============= ================== 8. DEPOSITS Deposits are summarized as follows: June 30, 2003 September 30, 2002 ------------- ------------------ NOW accounts $ 17,318,217 $ 14,051,771 Checking accounts 10,868,562 8,572,256 Money Market Demand accounts 93,955,892 83,464,010 Passbook and Club accounts 3,785,955 3,327,338 Certificate accounts 258,721,864 262,531,603 ------------- ------------------ Total deposits $ 384,650,490 $ 371,946,978 ============= ================== The aggregate amount of certificate accounts in denominations of more than $100,000 at June 30, 2003 amounted to approximately $22.8 million. page -8- 9. COMMITMENTS At June 30, 2003, the following commitments were outstanding: Origination of fixed-rate mortgage loans $ 11,129,605 Unused line of credit loans 29,335,014 Loans in process 6,435,723 ------------ Total $ 46,900,342 ============ 10. DIVIDEND On July 16, 2003, the Board of Directors declared a cash dividend of $.18 per share payable on August 20, 2003 to the stockholders of record at the close of business on August 6, 2003. 11. 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 and nine months ended June 30, 2003 and 2002. The following average shares were used for the computation of earnings per share: For the Three Months Ended For the Nine Months Ended June 30, June 30, ----------------------------------- ----------------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Basic 2,275,936 2,257,574 2,271,791 2,246,829 Diluted 2,328,722 2,303,573 2,321,813 2,288,888 page -9- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by and information currently available to management. In addition, in those and other portions of this document, the words "anticipate," "believe," "estimate," "intend," "should" and similar expressions, or the negative thereof, as they relate to the Company or the Company's management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future-looking events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements. Critical Accounting Policies and Judgments The Company's condensed consolidated financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in Note 1, Summary of Significant Accounting Policies. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect the Company's reported results and financial position for the period or in future periods. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on the Company's future financial condition and results of operations. Allowance for Loan Losses - The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). The Bank's periodic evaluation of the allowance is based on known and inherent risks in the portfolio, past loan loss experience, current economic conditions, trends within the Company's market area and other relevant factors. The first step in determining the allowance for loan losses is recognizing a specific allowance on individual impaired loans. Special mention, nonaccrual, substandard and doubtful residential and other consumer loans are considered for impairment. An allowance is recognized for loan losses in the remainder of the loan portfolio based on known and inherent risk characteristics in the portfolio, past loss experience and prevailing market conditions. Because evaluating losses involves a high degree of management judgment, a margin is included for the imprecision inherent in making these estimates. While management believes that the allowance is adequate to absorb estimated credit losses in its existing loan portfolio, future adjustments may be necessary in circumstances that differ substantially form the assumptions used in evaluating the adequacy of the allowance for loan losses. Changes in Financial Position for the Nine-Month Period Ended June 30, 2003 Total assets at June 30, 2003 were $658.3 million, an increase of $38.0 million or 6.1% for the nine-month period. The increase was primarily the result of an increase in mortgage-backed securities held to maturity of $79.4 million, an increase in investment securities held to maturity of $16.6 million and an increase in FHLB stock of $2.6 million. These increases were offset by a decrease of $8.1 million in investment securities available for sale, a decrease in loans receivable of $5.8 million, a decrease in cash equivalents of $31.6 million and a decrease in mortgage-backed securities available for sale of $15.7 million. Retail deposits and long-term Federal Home Loan Bank advances funded the overall increase in assets. During the nine-month period ended June 30, 2003, total deposits increased by $12.7 million to $384.7 million. The increase was partially attributed to an increase of $3.3 million in NOW, $2.3 million in checking accounts, $10.5 million in money market demand accounts, which was partially offset by a decrease of certificates of $3.8 million. Advances from borrowers for taxes and insurance also increased by $3.2 million. This is a seasonal increase as the majority of taxes the Company escrows for are disbursed in the month of August. There was also an increase in advances from Federal Home Loan Bank of $19.9 million, which was used to fund the purchase of mortgage-backed securities and investment securities. page -10- Comparisons of Results of Operations for the Three-Month and Nine-Month Periods Ended June 30, 2003 with the Three and Nine-Month Periods Ended June 30, 2002. Net Interest Income The decrease in the net interest income for the three month period ended June 30, 2003 when compared to the same period in 2002 can be attributed to the decrease in the interest rate spread of 20 basis points. The increase in the net interest income for the nine month period ended June 30, 2003 when compared to the same period in 2002 can be attributed to the increase in the interest rate spread of 19 basis points. Total interest income was $8.3 million for the three-month period ended June 30, 2003 compared to $8.8 million for the comparable period in 2002. For the nine month period ended June 30, 2003, total interest income was $25.3 million compared to $26.4 million for the comparable period in 2002. The decrease is the result of the reduction in the average yield for the interest-earning assets to 5.19% and 6.06% for the three and nine-month periods ended June 30, 2003, respectively from 6.15% and 6.27% for the comparable periods in 2002. Total interest expense decreased to $5.4 million for the three-month period ended June 30, 2003 from $5.9 million for the comparable period in 2002. For the nine-month period ended June 30, 2003, total interest expense decreased to $16.5 million from $18.3 million for the comparable period in 2002. These decreases occurred as a result of a decrease in the average rate on liabilities to 3.56% and 4.17% for the three and nine-month periods ended June 30, 2003, respectively, from 4.32% and 4.57% for the comparable period ended June 30, 2002. Other Income Other income increased to $330,000 for the three-month period ended June 30, 2003 from $277,000 for the comparable period in 2002. For the nine-month period ended June 30, 2003, other income increased to $942,000 from $781,000 for the comparable period in 2002. The three-month increase is due to additional fees collected from fee generating services in connection with refinancing offered by the Company. The nine month increase is due to the lack of a loss on the sale of investment securities, which was recognized in the first quarter 2002 of $24,000 and additional fees collected from fee generating services offered by the Company. Other Expenses During the quarter ended June 30, 2003, other expenses increased by $51,000 or 3.0% to $1.7 million when compared to the same period in 2002. For the nine month period ended June 30, 2003, other expenses increased by $381,000 or 8.0% compared to the comparable period in 2002. Management believes these are normal increases in the cost of operations after considering the effects of the growth in the assets of the Company when compared to the same periods in 2002. The annualized ratio of expenses to average assets for the three and nine month periods ended June 30, 2003 was 1.06% and 1.08%, respectively when compared to the three and nine month periods ended June 30, 2002 of 1.13% and 1.10%, respectively. Income Taxes The Company made provisions for income taxes of $378,000 and $1.2 million for the three and nine-month periods ended June 30, 2002, respectively, compared to $376,000 and $869,000 for the comparable periods in 2002. These provisions are based on the levels of taxable income. Liquidity and Capital Resources The Company's net income for the quarter ended June 30, 2003 of $1.1 million increased stockholder's equity to $40.1 million or 6.09% of total assets. This amount is well in excess of the Company's minimum regulatory capital requirements as illustrated below: (in thousands) Leveraged Risk-based ----------------- ----------------- Actual regulatory capital $ 40,072 6.1% $ 42,105 14.3% Minimum required regulatory capital 26,123 4.0% 22,467 8.0% -------- ---- -------- ----- Excess capital $ 13,949 2.1% $ 19,638 6.3% page -11- The liquidity of the Company's operations, measured by the ratio of the cash and securities balances to total assets, equaled 51.4% at June 30, 2003 compared to 47.9% at September 30, 2002. As of June 30, 2003, the Company had $46.9 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 June 30, 2004, is $121.6 million. Management expects that a substantial portion of these maturing deposits will remain as accounts in the Company. The Company invests excess funds in overnight deposits and other short-term interest-earning assets, which provide liquidity to meet lending requirements. The Company also has available borrowings with the Federal Home Loan Bank of Pittsburgh ("FHLB") up to the Company's maximum borrowing capacity which was $488.9 million at June 30, 2003, of which $227.4 million was outstanding at June 30, 2003. Item 3.Quantitative and Qualitative Disclosures About Market Risk The Company has instituted programs designed to decrease the sensitivity of its earnings to material and prolonged increases in interest rates. The principal determinant of the exposure of the Company's earnings to interest rate risk is the timing difference between the repricing or maturity of the Company's interest-earning assets and the repricing or maturity of its interest-bearing liabilities. If the maturities of such assets and liabilities were perfectly matched, and if the interest rates borne by its assets and liabilities were equally flexible and moved concurrently, neither of which is the case, the impact on net interest income of rapid increases or decreases in interest rates would be minimized. The Company's asset and liability management policies seek to increase the interest rate sensitivity by shortening the repricing intervals and the maturities of the Company's interest-earning assets. Although management of the Company believes that the steps taken have reduced the Company's overall vulnerability to increases in interest rates, the Company remains vulnerable to material and prolonged increases in interest rates during periods in which its interest rate sensitive liabilities exceed its interest rate sensitive assets. The authority and responsibility for interest rate management is vested in the Company's Board of Directors. The Chief Executive Officer implements the Board of Directors' policies during the day-to-day operations of the Company. Each month, the Chief Executive Officer presents the Board of Directors with a report, which outlines the Company's asset and liability "gap" position in various time periods. The "gap" is the difference between interest-earning assets and interest-bearing liabilities which mature or reprice over a given time period. He also meets weekly with the Company's other senior officers to review and establish policies and strategies designed to regulate the Company's flow of funds and coordinate the sources, uses and pricing of such funds. The first priority in structuring and pricing the Company's assets and liabilities is to maintain an acceptable interest rate spread while reducing the effects of changes in interest rates and maintaining the quality of the Company's assets. The following table summarizes the amount of interest-earning assets and interest-bearing liabilities outstanding as of June 30, 2003, which are expected to mature, prepay or reprice in each of the future time periods shown. Except as stated below, the amounts of assets or liabilities shown which mature or reprice during a particular period were determined in accordance with the contractual terms of the asset or liability. Adjustable and floating-rate assets are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due, and fixed-rate loans and mortgage-backed securities are included in the periods in which they are anticipated to be repaid. The passbook accounts, negotiable order of withdrawal ("NOW") accounts, interest bearing accounts, and money market deposit accounts, are included in the "Over 5 Years" categories based on management's beliefs that these funds are core deposits having significantly longer effective maturities based on the Company's retention of such deposits in changing interest rate environments. Generally, during a period of rising interest rates, a positive gap would result in an increase in net interest income while a negative gap would adversely affect net interest income. Conversely, during a period of falling interest rates, a positive gap would result in a decrease in net interest income while a negative gap would positively affect net interest income. However, the following table does not necessarily indicate the impact of general interest rate movements on Harleysville Savings' net interest income because the repricing of certain categories of assets and page -12- 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. 1 Year 1 to 3 3 to 5 Over 5 or less Years Years Years Total -------- --------- --------- -------- -------- Interest-earning assets Mortgage loans $ 29,481 $ 35,757 $ 28,949 $131,974 $226,161 Mortgage-backed securities 75,883 34,424 29,351 117,402 257,060 Consumer and other loans 39,498 12,373 6,966 4,589 63,426 Investment securities and other investments 63,111 8,648 4,461 25,900 102,120 -------- --------- --------- -------- -------- Total interest-earning assets 207,973 91,202 69,727 279,865 648,767 -------- --------- --------- -------- -------- Interest-bearing liabilities Passbook and Club accounts -- -- -- 3,786 3,786 NOW and Checking accounts -- -- -- 19,656 19,656 Money Market Deposit accounts 30,824 -- -- 63,132 93,956 Certificate accounts 121,588 69,728 67,406 -- 258,722 Borrowed money 44,129 36,772 39,102 107,382 227,385 -------- --------- --------- -------- -------- Total interest-bearing liabilities 196,541 106,500 106,508 193,956 603,505 -------- --------- --------- -------- -------- Repricing GAP during the period $ 11,432 $ (15,298) $ (36,781) $ 85,909 $ 45,262 ======== ========= ========= ======== ======== Cumulative GAP $ 11,432 $ (3,866) $ (40,647) $ 45,262 ======== ========= ========= ======== Ratio of GAP during the period to total assets 1.76% -2.36% -5.67% 13.24% ======== ========= ========= ======== Ratio of cumulative GAP to total assets 1.76% -0.60% -6.27% 6.98% ======== ========= ========= ======== Item 4. Controls and Procedures Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and regulations and are operating in an effective manner. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. page -13- Part II OTHER INFORMATION Item 1-5. Not applicable. Item 6. Exhibits and Reports on Form 8-K None page -14-