Harleysville Savings Financial Corp (HARL) SEC Filing 10-K Annual report for the fiscal year ending Sunday, September 30, 2012

Harleysville Savings Financial Corp

CIK: 1107160 Ticker: HARL

Exhibit 99.1




October 17, 2012
   Brendan J. McGill
   Executive Vice President COO/ CFO

Harleysville Savings Financial Corporation Announces Earnings for the Fiscal Year

Ended September 30, 2012 and the Declaration of Regular Cash Dividend.

Harleysville, PA., October 17, 2012 – Harleysville Savings Financial Corporation (NASDAQ:HARL) reported today that the Company’s Board of Directors declared a regular quarterly cash dividend of $.20 per share on the Company’s common stock. The cash dividend will be payable on November 21, 2012 to stockholders of record on November 7, 2012.

Net income for the twelve months ended September 30, 2012 amounted to $5,053,000 or $1.33 per diluted share compared to $5,395,000 or $1.44 per diluted share for the twelve months ended September 30, 2011.

Net income for the fourth quarter of fiscal year 2012 amounted to $1,156,000 or $.30 per diluted share compared to $1,097,000 or $.29 per diluted share for the fourth quarter of fiscal year 2011.

Ron Geib, President and Chief Executive Officer of the Company, stated, “Again this year, we ended our fiscal year with solid financial results in spite of continued economic uncertainty, increased regulatory burden, low demand for loans and pressure on interest margins. Our credit quality continues to be high and the liabilities on our balance sheet continue to experience a shift from certificate of deposits to a significant increase in core transaction accounts. Combining this shift in deposits with reducing the amount of advances as they mature, has allowed our net interest rate spread to increase to 2.26% from 2.07% a year ago. Between the improved strength of the balance sheet and the work ethic of our highly engaged team members, we are looking forward to continuing to create value for our stakeholders this coming year.”

The following information was filed by Harleysville Savings Financial Corp (HARL) on Thursday, October 18, 2012 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-K Annual Report statement of earnings and operation as management may choose to highlight particular information in the press release.
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Washington, D.C. 20549




(Mark One)

x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended: September 30, 2012



¨ 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




(Exact name of Registrant as specified in its charter)


Pennsylvania   23-3028464

(State or Other Jurisdiction of

Incorporation or Organization)


(I.R.S. Employer

Identification Number)

271 Main Street, Harleysville, Pennsylvania   19438
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code: (215) 256-8828

Securities registered pursuant to Section 12(b) of the Act:

Title of each class


Name of each exchange on which registered

Common Stock, $.01 par value per share   The Nasdaq Stock Market, LLC



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ¨    NO  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES  ¨    NO   x

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 and (2) has been subject to such filing requirements for the past 90 days.    YES   x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark 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 Registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES  ¨    NO  x

The aggregate market value of the 3,379,206 shares of the Registrant’s common stock held by non-affiliates (3,768,931 shares outstanding, less 389,725 shares held by affiliates), based upon the closing price of $16.50 for a share of common stock on March 31, 2012, as reported by the Nasdaq Stock Market, was approximately $55.8 million. Shares of common stock held by executive officers, directors and by each person who owns 5% or more of the outstanding common stock have been excluded since such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

Number of shares of common stock outstanding as of December 3, 2012: 3,763,192




Set forth below are the documents incorporated by reference and the part of the Form 10-K into which the document is incorporated:

Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders for the year ended September 30, 2012 are incorporated by reference into Part III, Items 10-14 of this Form 10-K.




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Item 1.




Item 1A.


Risk Factors


Item 1B.


Unresolved Staff Comments


Item 2.




Item 3.


Legal Proceedings


Item 4.


Mine Safety Disclosures


Item 5.


Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


Item 6.


Selected Financial Data


Item 7.


Management’s Discussion and Analysis of Financial Condition and Results of Operations


Item 7A.


Quantitative and Qualitative Disclosures about Market Risk


Item 8.


Financial Statements and Supplementary Data


Item 9.


Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


Item 9A.


Controls and Procedures


Item 9B.


Other Information


Item 10.


Directors, Executive Officers and Corporate Governance


Item 11.


Executive Compensation


Item 12.


Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


Item 13.


Certain Relationships and Related Transactions, and Director Independence


Item 14.


Principal Accounting Fees and Services


Item 15.


Exhibits and Financial Statement Schedules






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Forward-Looking Statements

This Annual Report on Form 10-K contains certain forward looking statements (as defined in the Securities Exchange Act of 1934 and the regulations hereunder). Forward looking statements are not historical facts but instead represent only the beliefs, expectations or opinions of Harleysville Savings Financial Corporation and its management regarding future events, many of which, by their nature, are inherently uncertain. Forward looking statements may be identified by the use of such words as: “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”, or words of similar meaning, or future or conditional terms such as “will”, “would”, “should”, “could”, “may”, “likely”, “probably”, or “possibly.” Forward looking statements include, but are not limited to, financial projections and estimates and their underlying assumptions; statements regarding plans, objectives and expectations with respect to future operations, products and services; and statements regarding future performance. Such statements are subject to certain risks, uncertainties and assumption, many of which are difficult to predict and generally are beyond the control of Harleysville Savings Financial Corporation and its management, that could cause actual results to differ materially from those expressed in, or implied or projected by, forward looking statements. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward looking statements: (1) economic and competitive conditions which could affect the volume of loan originations, deposit flows and real estate values; (2) the levels of non-interest income and expense and the amount of loan losses; (3) competitive pressure among depository institutions increasing significantly; (4) changes in the interest rate environment causing reduced interest margins; (5) general economic conditions, either nationally or in the markets in which Harleysville Savings Financial Corporation is or will be doing business, being less favorable than expected;(6) political and social unrest, including acts of war or terrorism; or (7) legislation or changes in regulatory requirements adversely affecting the business in which Harleysville Savings Financial Corporation will be engaged. Harleysville Savings Financial Corporation undertakes no obligation to update these forward looking statements to reflect events or circumstances that occur after the date on which such statements were made.

As used in this report, unless the context otherwise requires, the terms “we,” “us,” or the “Company” refer to Harleysville Savings Financial Corporation, a Pennsylvania corporation, and the term the “Bank” refers to Harleysville Savings Bank, a Pennsylvania chartered savings bank and wholly owned subsidiary of the Company. In addition, unless the context otherwise requires, references to the operations of the Company include the operations of the Bank.



Item 1. Business.


Harleysville Savings Financial Corporation is a Pennsylvania corporation headquartered in Harleysville, Pennsylvania. The Company became the bank holding company for Harleysville Savings Bank in connection with the holding company reorganization of the Bank in February 2000 (the “Reorganization”). In August 1987, the Bank’s predecessor, Harleysville Savings Association, converted to the stock form of organization. The Bank, whose predecessor was originally, incorporated in 1915, converted from a Pennsylvania chartered, permanent reserve fund savings association to a Pennsylvania chartered stock savings bank in June 1991. The Bank operates from six full-service offices located in Montgomery County and one office located in Bucks County, Pennsylvania. The Bank’s primary market area includes Montgomery County, which has the third largest population and the second highest per capita income in the Commonwealth of Pennsylvania, and, to a lesser extent, Bucks County. As of September 30, 2012, the Company had $802.6 million of total assets, $542.9 million of deposits and $59.7 million of stockholders’ equity. The Company’s stockholders’ equity constituted 7.4% of total assets as of September 30, 2012.



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The Bank’s primary business consists of attracting deposits from the general public and business customers 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 a variety of consumer loans, predominately home equity loans and lines of credit also secured by residential properties in the Bank’s primary lending area. The Bank is also engaged in the general commercial banking business, and provides a full range of commercial loans and commercial real estate loans to customers in the Bank’s primary market area. The Bank serves its customers through its full-service branch network as well as through remote ATM locations, the internet and telephone banking.

Deposits with the Bank are insured to the maximum extent provided by law through the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation (“FDIC”). The Bank 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 Company’s principal executive offices are located at 271 Main Street, Harleysville, Pennsylvania 19438 and its telephone number is (215) 256-8828.


The Company 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 Company faces additional significant competition for investors’ funds from other financial intermediaries. The Company competes for deposits principally by offering depositors a variety of deposit programs, convenient branch locations, hours and other services. The Company does not rely upon any individual group or entity for a material portion of its deposits.

The Company’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.

The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“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.



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Lending Activities

Loan Portfolio Composition. The Company’s loan portfolio is predominantly comprised of loans secured by first mortgages on single-family residential properties. As of September 30, 2012, first mortgage loans on residential properties, including loans on single-family, multi-family residential properties, construction loans and lot loans on such properties, amounted to $315.4 million or 63.0% of the Company’s total loan portfolio. Loans on the Company’s residential properties are primarily long-term and are conventional (i.e., not insured or guaranteed by a federal agency).

As of September 30, 2012, loans secured by commercial real estate and commercial business loans comprised $97.7 million and $6.1 million or 19.5% and 1.2% of the total loan portfolio, respectively. Home equity lines, including installment home equity loans and home equity lines of credit comprised $80.4 million or 16.1% of the total loan portfolio. Consumer loans, including automobile loans, loans on savings accounts and education loans, constituted $1.3 million or 0.2% of the total loan portfolio as of September 30, 2012.

The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.


    As of September 30,  
    2012     2011     2010     2009     2008  
    Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent  
    (Dollars in Thousands)  

Real estate loans:





  $ 308,983        61.7   $ 332,642        63.2   $ 336,081        65.0   $ 343,155        68.2   $ 333,885        68.9


    1,422        0.3        1,612        0.3        1,807        0.3        1,997        0.4        2,392        0.5   


    3,258        0.7        5,818        1.1        4,752        0.9        2,912        0.6        8,346        1.7   

  Lot loans

    1,721        0.3        2,125        0.4        1,986        0.4        1,141        0.2        1,167        0.2   

Home equity

    80,402        16.1        85,521        16.3        90,511        17.5        92,343        18.4        92,254        19.1   

Commercial real estate

    97,659        19.5        91,085        17.3        75,450        14.6        54,341        10.8        37,799        7.8   































  Total real estate loans

    493,445        98.6     518,803        98.6     510,587        98.7     495,889        98.6     475,843        98.2































Non-real estate loans:


Commercial business loans

    6,059        1.2        6,262        1.2        4,327        0.8        4,982        1.0        6,584        1.4   

Consumer non-real estate loans

    1,272        0.2        1,136        0.2        1,980        0.5        2,242        0.4        1,955        0.4   































  Total consumer loans

    7,331        1.4     7,398        1.4     6,307        1.3     7,224        1.4     8,539        1.8































  Total loans receivable

    500,776        100.0     526,201        100.0     516,894        100.0     503,113        100.0     484,382        100.0

































  Loans in process

    (1,362       (3,401       (3,426       (1,873       (5,108  

  Deferred loan fees

    (1,015       (1,003       (871       (755       (428  

  Allowance for loan losses

    (4,032       (3,311       (2,504       (2,094       (1,988  
















  Total loans receivable net

  $ 494,367        $ 518,486        $ 510,093        $ 498,391        $ 476,858     


















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Contractual Maturities. The following table sets forth scheduled contractual maturities of the loan and mortgage-backed securities portfolio of the Company as of September 30, 2012 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.


     Principal Balance
at September 30,
     Principal Repayments Contractually Due in Year(s) Ended  September 30,  
      2013      2014      2015-2017      2018-2021      2022-2026      2027-and
                   (In Thousands)                

Residential real estate loans:



   $ 308,983       $ 4,635       $ 4,944       $ 16,685       $ 38,005       $ 54,380       $ 190,334   


     1,422         21         23         77         175         250         876   


     3,258         49         52         176         401         573         2,007   

Lot loans

     1,721         93         101         348         780         399         —     

Mortgage-backed securities

     162,710         2,441         2,766         9,112         20,501         28,800         99,090   

Home equity lines of credit

     80,402         7,799         8,281         15,357         36,824         12,141         —     

Commercial real estate

     97,659         3,516         3,809         13,379         30,958         45,997         —     

Commercial business loans

     6,059         218         85         563         52         606         4,535   

Consumer and other loans

     1,272         156         168         582         —           159         207   























   $ 663,486       $ 18,928      $ 20,229       $ 56,279       $ 127,696       $ 143,305       $ 297,049   























(1) With respect to the $644.6 million of loans and mortgage-backed securities with principal maturities contractually due after September 30, 2013, $582.0 million have fixed rates of interest and $62.6 million have adjustable or floating rates of interest.

Contractual principal maturities of loans do not necessarily reflect the actual term of the Company’s loan portfolio. The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and because of enforcement of due-on-sale clauses, which give the Company 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 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 the Company 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 the Company are competitive with those of other local financial institutions.

Origination, Purchase and Sale of Loans. Although the Company has general authority to originate, purchase and sell loans secured by real estate located throughout the United States, the Company’s lending activities are focused in its assessment area of Montgomery County, Pennsylvania and surrounding suburban counties.

The Company 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 Company. The Company generally does not engage in the purchase of whole loans. The Company did engage in the acquisition of participations of commercial loans on a limited basis during fiscal years ended September 30, 2012 and 2011.

On occasion, we have sold participation interests in loans originated by us to other institutions. When we have sold participation interests, we generally have sold them to mitigate our risks in certain situations. During the years ended September 30, 2012 and 2011, we sold no loan participations.



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The Company’s total loan originations decreased by $36.2 million or 27.8% in fiscal 2012 and decreased by $4.8 million or 3.5% in fiscal 2011. Of the $94.2 million and $130.4 million of total loans originated in fiscal 2012 and 2011, respectively, $38.5 million and $50.4 million were originated to fund single-family residential properties, $377,000 and $4.0 million were loans originated to fund construction properties and $48.5 million and $68.9 million were to fund commercial real estate and home equity lines of credits which are secured by real estate. The Company’s total real estate loan originations in fiscal 2012 decreased by $11.9 million or 23.7% from the prior year. The non-real estate loans originated totaled $6.8 million and $7.1 million in 2012 and 2011, respectively. Management intends to continue to emphasize origination of consumer loans which may have adjustable rates, and generally have shorter terms than residential real estate loans.

The Company’s total purchase of mortgage-backed securities increased by $12.7 million and $44.9 million in fiscal 2012 and 2011, respectively. The purchase of these mortgage-backed securities reflects the use of excess funds.

The following table shows total loans originated, sold and repaid during the periods indicated.


     Year Ended September 30,  
     2012     2011  
     (In Thousands)  

Real estate loan originations:





   $ 38,485      $ 50,423   


     377        3,992   

Home equity

     28,413        31,569   

Commercial real estate

     20,095        37,285   

Commercial business loans

     6,059        6,262   

Consumer non-real estate loans (1)

     725        858   







Total loan originations

     94,154        130,389   

Purchases of mortgage-backed securities

     72,576        59,889   







Total loan originations, and purchases

     166,730        190,278   

Principal loan and mortgage-backed securities repayments

     188,426        161,443   

Transfer of loans to foreclosed real estate

     126        284   







Total principal repayments and sales

     188,552        161,727   







Net (decrease) increase in loans and mortgage-backed securities

   $ (21,822   $ 28,551   








(1) Includes installment vehicle loans, secured and unsecured personal loans and lines of credit.

Loan Underwriting Policies. Each loan application received by the Company is underwritten to the standards of the Company’s written underwriting policies as adopted by the Company’s Board of Directors. The Company’s Board of Directors has granted loan approval authority to several officers and employees of the Company, provided that the loan meets the guidelines set out in its written underwriting policies. Individual approval authority of $500,000 has been granted to the Company’s Chief Executive Officer, the Company’s Chief Operating and Financial Officer, and the Company’s Chief Lending Officer. Joint approval authority of $1.0 million has been granted to a combination of at least two of the above named individuals. Individual lending authority of $250,000 has been granted to the Bank’s Vice President/Loan Administration Manager, the Vice President/Loan Customer Service Manager and to the Bank’s Consumer Loan and Residential Mortgage Underwriter, employed by the Company. Additional consumer loan lending authority of $50,000 has been granted to several designated underwriters, employed by the Bank. Loans with policy exceptions require approval by the next highest approval authority. Loans over $1.0 million must be approved by the Company’s Senior Loan Committee or the Board of Directors.



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In the exercise of any loan approval authority, the officers of the Company will take into account the risk associated with the extension of credit to a single borrower, borrowing entity, or affiliation. The Company has aggregate loans to one borrower limit of 15% of the Company’s unimpaired capital and unimpaired surplus in accordance with federal regulations. At September 30, 2012, the largest aggregate amount of loans outstanding to any borrower, including related entities, was $5.2 million, which did not exceed the Company’s loan to one borrower limitation.

Single Family Residential Real Estate Lending. The Company is permitted to lend up to 97% of the appraised value or sales price of the security property for a residential real estate loan, provided that the borrower obtains private mortgage insurance on loans that exceed 80% of the appraised value or sales price, whichever is less, of the security property. The Company 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 conform to the secondary market underwriting standards. Refinancings are limited to 90% or less. Loans over $417,000 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 80% of the appraised value if the borrower’s FICO score is 680 or higher.

All appraisals and other property valuations are performed by independent fee appraisers approved by the Company’s Senior Loan Committee. On all amortizing real estate loans, the Company requires borrowers to obtain title insurance, insuring the Company has 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 advance funds on a monthly basis together with payment of principal and interest into a mortgage escrow account from which the Company makes disbursements for items such as real estate taxes and insurance premiums as they fall due.

The Company presently originates fixed-rate loans on single-family residential properties pursuant to underwriting standards consistent with secondary market guidelines, and 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 $2.0 million, are held in the portfolio. It is the Company’s policy to originate both fixed-rate loans and ARMs for terms up to 30 years. As of September 30, 2012 and 2011, $312.3 million or 62.4% and $338.5 million or 64.3% of the Company’s total loan portfolio consisted of single-family (including construction loans) residential loans, respectively. As of September 30, 2012, approximately $301.1 million or 96.4% of the Company’s total mortgage loans consisted of fixed-rate, single-family residential mortgage loans. As of such date, $11.2 million or 3.6% of the total mortgage loan portfolio consisted of adjustable-rate single-family residential mortgage loans. Most of the Company’s residential mortgage loans include “due on sale” clauses.

During the years ended September 30, 2012 and 2011, the Company originated $6.0 million and $4.0 million of ARM mortgages, respectively. ARMs represented 6.3% and 3.1% of the Company’s total mortgage loan portfolio originations in fiscal 2012 and 2011, respectively. The ARM mortgages offered by the Company 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. The Company 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 Company’s cost of funds.

Multi-family Residential Real Estate Lending. The Company originates mortgage loans secured by multifamily dwelling units. At September 30, 2012, $1.4 million, or 0.3% of our total loan portfolio consisted of loans secured by multifamily residential real estate. The majority of our multifamily residential real estate loans are secured by apartment buildings located in the Bank’s local market area. The interest rates for our multifamily residential real estate loans generally adjust at five- to ten-year intervals, with the rate to be



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negotiated at the end of such term or to automatically convert to a floating interest rate. These loans generally have a five-year term with an amortization period of no more than twenty years. At September 30, 2012, we had no multifamily residential real estate loans that were delinquent in excess of 30 days.

Construction Loans. The Company offers fixed-rate and adjustable-rate construction loans on residential properties. Residential construction loans are originated for individuals who are building their primary residence as well as to selected local builders for construction of single-family dwellings. As of September 30, 2012, $3.3 million or 0.7% of the total loans consisted of construction loans.

Construction loans to homeowners are usually made in connection with the permanent financing on the property. The permanent loans have amortizing terms up to 30 years, following the initial construction phase during which time the borrower pays interest on the funds advanced. These loans are reclassified as permanent mortgage loans when the residences securing the loans are completed. The Company 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 Company will charge on the permanent loan on the completed project. Advances are made on a percentage of completion basis with the Company’s receipt of a satisfactory inspection report of the project.

Historically, the Company 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 Company historically has not experienced any significant problems.

The Company 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 Company’s lending activities. Additionally, the Bank has not been active in residential subdivision lending and has no acquisition/development loans in the portfolio.

Home Equity. Home equity loans and lines of credit continue to be a popular product and represented $80.4 million or 16.1% of the total loan portfolio at September 30, 2012. After taking into account first mortgage balances, the Company will lend up to 80% of the value of owner-occupied property on fixed rate terms up to 15 years. This amount may be raised to 100% when considering other factors, such as excellent credit history and income stability. At September 30, 2012, the Company had outstanding 2,506 home equity loans, of which 630 were installment equity loans and 1,876 were line of credit loans. As of such date, the Company had an outstanding balance on line of credit loans of approximately $61.1 million and there was approximately $55.3 million of unused credit available on such loans.

Commercial Real Estate Loans. The Company originates mortgage loans for the acquisition and refinancing of commercial real estate properties. At September 30, 2012, $97.7 million, or 19.5% of the Bank’s total loan portfolio consisted of loans secured by commercial real estate properties, owner occupied commercial real estate loans and non-owner occupied commercial real estate loans. The majority of our commercial real estate loans are secured by office buildings, manufacturing facilities, distribution/warehouse facilities, and retail centers, which are generally located in our local market area. The interest rates for our commercial real estate loans generally adjust at one- to five-year intervals, and are typically renegotiated at the end of such period or automatically converted to a floating interest rate. The loans generally have a five-year term with an amortization period of no greater than twenty five years. At September 30, 2012, the largest such loan had a balance of $5.2 million.

The Company generally requires appraisals of the properties securing commercial real estate loans. Appraisals are performed by an independent appraiser designated by the Company and all appraisals are reviewed by management. The Company considers the quality and location of the real estate, the credit of the borrower, the cash flow of the project and the quality of management involved with the property when making decisions on commercial real estate loans.



Table of Contents

Loan-to-value ratios on our commercial real estate loans are generally limited to 80% of the appraised value of the secured property. As part of the criteria for underwriting commercial real estate loans, we generally impose a debt service coverage ratio (the ratio of net operating income before payment of debt service compared to debt service) of not less than 1.2-to-1. It is also our general practice to obtain personal guarantees from the principals of our corporate borrowers on commercial real estate loans.

Loans secured by commercial real estate typically have higher balances and are more difficult to evaluate and monitor and, therefore, involve a greater degree of credit risk than other types of loans. If the estimate of value proves to be inaccurate, the property may not provide us with full repayment in the event of default and foreclosure. Because payments on these loans are often dependent on the successful development, operation, and management of the properties, repayment of these loans may be affected by adverse conditions in the real estate market or the economy. The Company seeks to minimize these risks by limiting the maximum loan-to-value ratio and strictly scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan. The Company also generally obtains loan guarantees from financially capable parties based on a review of personal financial statements.

Commercial Business Loans. Our commercial business loans amounted to $6.1 million or 1.2% of the total loan portfolio at September 30, 2012. The Company originates business loans typically for small to mid-sized businesses in our market area and may be for working capital, equipment financing, inventory financing, or accounts receivable financing. Small business loans may have adjustable or fixed rates of interest and generally have terms of three years or less but may go up to 10 years. Our commercial business loans generally are secured by equipment, machinery or other corporate assets. In addition, we generally obtain personal guarantees from the principals of the borrower with respect to all commercial business loans.

Commercial lending generally involves greater credit risk than residential mortgage or consumer lending, and involves risks that are different from those associated with commercial real estate lending. Although commercial loans may be collateralized by equipment or other business assets, the liquidation of collateral in the event of a borrower default may represent an insufficient source of repayment because equipment and other business assets may, among other things, be obsolete or of limited use. Accordingly, the repayment of a commercial loan depends primarily on the creditworthiness and projected cash flow of the borrower (and any guarantors), while liquidation of collateral is considered a secondary source of repayment.

Our commercial lenders actively solicit commercial business loans in our market area. Commercial business loans generally are deemed to involve a greater degree of risk than single-family residential mortgage loans. Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists. As a result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing other loans, such as inventory or equipment, may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.

Consumer Non-Real Estate Loans. The Company 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 0.8% and 0.7% during fiscal 2012 and 2011, respectively. The shorter-term and normally higher interest rates on such loans help the Company to maintain a profitable spread between its average loan yield and its cost of funds. The Company’s consumer loan department offers vehicle loans, personal loans and personal lines of credit. Loans secured by deposit accounts at the Company are also made to depositors in an amount up to 90% of their account balances with terms of up to 15 years.



Table of Contents

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 Company receives fees both for the origination of loans and for making commitments to originate and purchase residential and commercial mortgage loans. The Company 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 commissions. 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 loans under accounting principles generally accepted in the United States of America are deferred along with direct origination costs. Deferred loan fees, net and discounts on mortgage loans purchased are amortized to income as a yield adjustment over the estimated remaining terms of such loans using the interest method.

As of September 30, 2012, the Company was servicing $1.2 million of loans for others, which consisted of loans sold by the Company to the Federal Home Loan Bank (“FHLB”), in the amount of $1.2 million. The Company receives a servicing fee of 0.25% on such loans, which totaled $14,000 as of September 30, 2012, and are included in prepaid expenses and other assets on the statement of financial condition.

Non-performing Loans and Real Estate Owned. When a borrower fails to make a required loan payment, the Company 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 Company’s normal collection procedures, or an acceptable arrangement is not worked out with the borrower, the Company 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.

All interest accrued but not collected for loans that are placed on nonaccrual status or charged off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Interest income is recognized using the interest method when the collection is reasonably assured. The Company had $10.8 million of non-accrual loans at September 30, 2012 and $3.4 million of non-accrual loans at September 30, 2011.

If foreclosure is effected, the property is sold at a public auction in which the Company may participate as a bidder. If the Company is the successful bidder, the acquired real estate property is then included in the Company’s real estate owned (“REO”) account until it is sold. When property is acquired, it is recorded at the market value at the date of acquisition less estimated cost to sell and any write-down resulting 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 expensed. Costs incurred for the improvement or developments of such property are capitalized. The Company 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 Company’s underwriting guidelines.



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Foreclosed Real Estate. Real estate acquired through, or in lieu of, loan foreclosures are carried at the fair value of the property, based on an appraisal, less cost to sell. Costs relating to the development and improvement of the property are capitalized, and those relating to holding the property are charged to expense. The Company had no properties in other real estate owned at September 30, 2012 compared to two properties with balances totaling $196,000 at September 30, 2011.

The following table sets forth information regarding non-accrual loans, loans which are 90 days or more delinquent but on which the Company is accruing interest, troubled debt restructurings, and other real estate owned held by the Company at the dates indicated. The Company continues to accrue interest on loans which are 90 days or more overdue where management believes that such interest is collectible.


     As of September 30,  
     2012     2011     2010     2009     2008  
     (Dollars in Thousands)  

Residential real estate loans:


Non-accrual loans

   $ 5,041      $ 3,059      $ 1,716      $ 335      $ 244   

Accruing loans 90 days overdue

     47        —          147        1,446        192   

Troubled debt restructurings

     —          —          —          —          —     

















     5,088        3,059        1,863        1,781        436   
















Commercial loans:


Non-accrual loans

     5,653        127        312        —          —     

Accruing loans 90 days overdue

     —          —          —          —          815   

Troubled debt restructurings

     2,703        —          —          —          —     

















     8,356        127        312        —          815   
















Consumer loans:


Non-accrual loans

     57        171        110        —          —     

Accruing loans 90 days overdue

     1        15        —          119        7   

Troubled debt restructurings

     —          —          —          —          —     

















     58        186        110        119        7   
















Total non-performing loans:


Non-accrual loans

     10,751        3,357        2,138        335        244   

Accruing loans 90 days overdue

     48        15        147        1,565        1,014   

Troubled debt restructurings

     2,703        —          —          —          —     

















   $ 13,502      $ 3,372      $ 2,285      $ 1,900      $ 1,258   
















Total non-performing loans to total loans

     1.85     .40     .28     .38     .26

Total real estate owned, net of related reserves

     —        $ 196      $ 186      $ 747        —     

Total non-performing loans and other real estate owned to total assets

     1.85     .43     .30     .32     .15


* Not material

Management establishes reserves for losses on delinquent loans when it determines that losses are probable. The Company has recorded a provision for loan losses totaling $930,000 in fiscal 2012 and $1.2 million in fiscal 2011. Although unemployment and property values remain constant the decrease in the provision from fiscal 2011 to fiscal 2012 is primarily due to the decrease in average loan balances. 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 Company’s policy to establish specific reserves for losses on delinquent consumer loans and commercial loans when it determines that losses are probable. In addition, consumer loans are charged against reserves if they are more than 120 days delinquent unless a satisfactory repayment schedule is arranged.




Table of Contents

The following table summarizes activity in the Company’s allowance for loan losses during the periods indicated.


     Year Ended September 30,  
     2012     2011     2010     2009     2008  
     (Dollars In Thousands)  

Total loans outstanding at end of period

   $ 500,776      $ 526,201      $ 516,894      $ 503,113      $ 484,382   

Average loans outstanding

     513,489        521,548        510,004        493,748        454,305   

Allowance for loan losses, beginning of year

   $ 3,311      $ 2,504      $ 2,094      $ 1,988      $ 1,933   

Provision for loan losses

     930        1,150        600        400        85   



Single family

     (190     (224     —          —          —     

Commercial real estate and multi family residential

     —          (105     (147     (288     —     


     —          —          —          —          —     

Commercial business

     —          —          —          —          —     

Home equity

     —          —          —          —          (13

Consumer non-real estate

     (29     (14     (52     (33     (27
















Total charge-offs

     (219     (343     (199     (321     (40

Recoveries of loans previously charged off

     10        —          9        27        10   
















Allowance for loan losses, end of year

   $ 4,032      $ 3,311      $ 2,504      $ 2,094      $ 1,988   
















Allowance for loan losses as a percent non- performing loans

     27.12     98.19     109.58     110.21     158.03

Ratio of net charge-offs during the period to average loans outstanding during the period

     0.04     0.07     0.04     0.06     0.01

The following table shows how our allowance for loan losses is allocated by type of loan at each of the dates indicated.


    As of September 30,  
    2012     2011     2010     2009     2008  
as a %
of total
as a %
of total
as a %
of total
as a %
of total
as a %
of total
    (Dollars in Thousands)  

Single-family residential

  $ 1,644        63.0   $ 855        63.6   $ 803        65.4   $ 811        68.4   $ 425        69.1

Multi-family residential

    —          —          16        0.3        18        0.3        20        0.4        24        0.5   


    —          —          33        1.1        7        0.9        4        0.6        13        1.7   

Home equity

    351        16.1        431        16.3        405        17.5        357        18.4        202        19.1   

Commercial real estate

    1,729        19.5        1,516        17.3        906        14.6        542        9.7        396        7.8   

Commercial business loans

    65        1.2        214        1.2        4        0.8        104        2.1        188        1.4   

Consumer non-real estate loans

    45        0.2        5        0.2        22        0.5        21        0.4        20        0.4   


    198        —          241        —          339        —          235        —          720        —     































Total loans receivable

  $ 4,032        100.0   $ 3,311        100.0   $ 2,504        100.0   $ 2,094        100.0   $ 1,988        100.0

































Table of Contents

Investment Activities

The Company’s investment portfolio consists primarily of United States government agency mortgage-backed securities and debt obligations of United States government agencies. The other investments include tax-exempt municipal obligations, money market mutual funds, and stock of the FHLB of Pittsburgh.

As of September 30, 2012, the Company had $153.0 million of mortgage-backed securities, invested in Federal Home Loan Mortgage Corporation (“FHLMC”), Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”), all Government Sponsored Entities. FHLMC securities are guaranteed by the FHLMC, GNMA securities by the Federal Housing Administration and FNMA securities by the FNMA, which are instrumentalities of the United States government, and, pursuant to federal regulations, are deemed to be part of the Company’s loan portfolio.

At September 30, 2012, the Bank held $9.7 million in Collateralized Mortgage Obligations of which $7.6 million are issued by Government Sponsored Enterprises and $2.1 million are privately-issued. These private label securities are adequately rated.

The following table sets forth certain information relating to our investment and mortgage-backed securities portfolios and our investments in FHLB stock at the dates indicated.


     September 30,  
     2012      2011      2010  
     (In thousands)  

Mortgage-backed securities and collateralized mortgage obligations (CMO’s)

   $ 162,657       $ 170,858       $ 150,526       $ 158,487       $ 131,604       $ 138,539   

U.S. Government Sponsored Enterprises (“GSE”) Agency Notes

     51,876         52,074         65,993         66,085         108,807         109,530   

Municipal securities

     13,270         14,444         16,022         16,815         16,462         17,188   

Equity securities

     331         388         355         289         355         343   

U.S. Government Money Market funds

     10,462         10,462         17,420         17,420         20,261         20,261   

FHLB stock

     10,165         10,165         13,110         13,110         16,096         16,096   



















Total investment and mortgage-backed securities and FHLB stock

   $ 248,761       $ 258,391       $ 263,426       $ 272,206       $ 293,585       $ 301,957   



















The following table sets forth the amount of investment and mortgage-backed securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at September 30, 2012. No tax-exempt yields have been adjusted to a tax-equivalent basis.


     Amounts at September 30, 2012 Which Mature in  
     One year
Or less
    Over One
     (Dollars in Thousands)  

Bonds and other


Debt securities:


Mortgage-backed securities and CMO’s

   $ 811         4.32   $ 1,648         4.26   $ 28,878         3.15   $ 131,320         3.18

U.S. Government Agency Notes

     —           0.00     —           0.00     3,000         2.25     48,876         2.41

Municipal securities

     —           0.00     —           0.00     2,176         5.56     11,094         4.30


























   $ 811         4.32   $ 1,648         4.26   $ 34,054         3.22   $ 191,290         3.05




























Table of Contents

The Company’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 Company’s funds for use in lending and for other general business purposes. In addition to deposits, the Company 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. The Company 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, certificates of deposit ranging in terms from 90 days to 60 months and jumbo certificates of deposit in denominations of $100,000 or more. The interest rates on the Company’s various accounts are determined weekly by the Interest Rate Risk Management Officer based on reports prepared by members of senior management. The Company attempts to control the flow of deposits by pricing its accounts to remain competitive with other financial institutions in its market area.

The Company’s deposits are obtained primarily from residents of Montgomery and Bucks Counties; the Company does not utilize brokered deposits. The principal methods used by the Company to attract deposit accounts include local advertising, offering a wide variety of services and accounts, competitive interest rates and convenient office locations. The Company also is a member of the “STAR” ATM network.

The following table shows the distribution of, and certain other information relating to, the Company’s deposits by type as of the dates indicated.


     As of September 30,  
   2012     2011  
   Amount      Percent of
    Amount      Percent of
     (Dollars in Thousands)  

Passbook and club accounts

   $ 4,739         0.9   $ 4,194         0.8

NOW and interest-bearing checking accounts

     74,867         13.8        69,310         12.5   

Non-interest-bearing checking accounts

     26,166         4.8        20,836         4.7   

Money market demand accounts

     155,744         28.7        131,919         25.2   

Certificates of deposit:


3 month

     1,065         0.2        948         0.2   

6 month

     2,907         0.5        3,783         0.7   

7 month

     13,882         2.6        17,989         3.4   

9 month

     5,305         1.0        7,023         1.3   

12 month

     18,815         3.5        22,813         4.4   

15 month

     3,767         0.7        4,849         0.9   

17 month

     3,057         0.6        3,487         0.7   

18 month

     3,514         0.6        3,607         0.7   

20 month

     16,315         3.0        24,776         4.7   

24 month

     15,292         2.8        12,783         2.4   

36 month

     22,151         4.0        27,968         5.3   

48 month

     54,496         10.0        52,711         10.1   

60 month

     49,760         9.2        43,483         8.3   


     100         0.0        100         0.0   

Retirement accounts:


Money market deposit accounts

     2,236         0.4        2,692         0.5   

Certificates of deposit

     68,745         12.7        69,130         13.2   













Total deposits

   $ 542,923         100.0   $ 524,401         100.0
















Table of Contents

The large variety of deposit accounts offered by the Company has increased the Company’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 Company 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 Company to attract and retain deposits and the Company’s cost of funds have been, and will continue to be, significantly affected by money market conditions.

The following table presents certain information concerning the Company’s deposit accounts as of September 30, 2012 and the scheduled quarterly maturities of its certificates of deposit.


     Amount      Percentage of
Total  Deposits

Nominal  Rate
     (Dollars in Thousands)  

Passbook and club accounts

   $ 4,739        0.9     0.69

NOW and interest-bearing checking accounts

     74,867         13.8        0.07   

Non-interest-bearing checking accounts

     26,166         4.8        0.00   

Money market deposits accounts(1)

     157,980         29.1        0.24  











   $ 263,752         48.6      0.18










Certificate accounts maturing by quarter:


December 31, 2012

   $ 35,004        6.4     1.04

March 31, 2013

     36,229         6.7        1.29   

June 30, 2013

     27,042         5.0        1.39   

September 30, 2013

     21,940         4.0        1.45   

December 31, 2013

     22,666         4.2        2.55   

March 31, 2014

     22,350         4.1        2.31   

June 30, 2014

     16,121         3.0        2.19   

September 30, 2014

     16,900         3.1        2.00   

December 31, 2014

     11,199         2.0        2.13   

March 31, 2015

     7,972         1.5        2.27   

June 30, 2015

     5,447         1.0        2.19   

September 30, 2015

     8,742         1.6        1.93   


     47,559         8.8        1.90   










Total certificate accounts(1)

     279,171         51.4        1.76   










Total deposits

   $ 542,923        100.0     1.00











(1) Includes retirement accounts.

Management of the Company expects, based on historical experience and its pricing policies, to retain a significant portion of the $120.2 million of certificates of deposit which mature during the 12 months ending September 30, 2013.



Table of Contents

The following table sets forth the net deposit flows of the Company during the periods indicated.


     Year Ended September 30,  
     2012      2011  
     (In Thousands)  

Increase (decrease) before interest credited

   $ 13,782       $ (9,828

Interest credited

     4,740         6,129   







Net deposit (decrease) increase

   $ 18,522      $ (3,699







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, 2012 which mature during the periods indicated.


     As of
September 30,
     Amounts at September 30, 2012 Maturing  
      One Year
or Less
     Two Years      Three Years      Thereafter  
     (In Thousands)  

Certificate accounts:


0.01% to 2.00%

   $ 162,270       $ 86,141       $ 28,914       $ 18,760       $ 28,455   

2.01% to 4.00%

     113,110         32,635         46,790         14,600         19,085   

4.01% to 6.00%

     3,791         1,439         2,333         —           19   
















Total certificate accounts(1)

   $ 279,171       $ 120,215       $ 78,037       $ 33,360       $ 47,559   

















(1) Includes retirement accounts.

The following table sets forth the maturity of our certificates of deposit of $100,000 or more at September 30, 2012, by time remaining to maturity.


At September 30, 2012


Quarter Ending:

   Amount      Weighted
     (Dollars in Thousands)  

December 31, 2012

   $ 6,325         1.38

March 31, 2013

     5,229         1.57   

June 30, 2013

     3,904         1.32   

September 30, 2013

     5,326         1.85   

After September 30, 2013

     35,386         2.26   







Total certificates of deposit with balances of $100,000 or more

   $ 56,170         1.99







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 - Regulation of the Bank - Federal Home Loan Bank System.” At September 30, 2012, the Bank had advances with maturities of one year or less totaling $15.5 million at an interest rate of 3.7% and FHLB advances with maturities of 13 months to 10 years totaling $127.0 million at interest-rates ranging from 3.3% to 4.7%. Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. In addition, there are four long-term advances from other financial institutions that are secured by investment and mortgage-backed securities totaling $50 million at interest-rates ranging from 3.3% to 4.8%.

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, investment securities and to expand lending.



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The following table sets forth certain information regarding the borrowings of the Company as of the dates indicated.


     September 30,  
     2012     2011  
     Balance      Weighted
    Balance      Weighted
     (Dollars In Thousands)  


   $  192,483         4.17   $ 250,194         4.34

The following table sets forth certain information concerning the short-term borrowings of the Company for the periods indicated.


     Year Ended September 30,  
     2012     2011  
     (In Thousands)  



Average balance outstanding

   $ 34      $ 918   

Maximum amount outstanding at any month-end during the period

   $ 2,000      $ 7,500   

Weighted average interest rate during the period

     0.32     0.72


The Company had 81 full-time employees and 47 part-time employees as of September 30, 2012. None of these employees is represented by a collective bargaining agent, and the Company believes that it enjoys good relations with its personnel.


The references to laws and regulations which are applicable to the Company and the Bank set forth below and elsewhere herein are brief summaries thereof which do not purport to be complete and are qualified in their entirety by reference to such laws and regulations.

Regulation of the Company

General. The Company is a registered bank holding company pursuant to the Bank Holding Company Act (“BHCA”) and, as such, is subject to regulation and supervision by the Federal Reserve Board and the Department. The Company is required to file annually a report of its operations with, and is subject to examination by, the Federal Reserve Board and the Department.

BHCA Activities and Other Limitations. The BHCA prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, or increasing such ownership or control of any bank, without prior approval of the Federal Reserve Board. The BHCA also generally prohibits a bank holding company from acquiring any bank located outside of the state in which the existing bank subsidiaries of the bank holding company are located unless specifically authorized by applicable state law. No approval under the BHCA is required, however, for a bank holding company already lawfully owning or controlling more than 50% of the voting shares of a bank to acquire additional shares of such bank.



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The BHCA also prohibits a bank holding company, with certain exceptions, from acquiring more than 5% of the voting shares of any company that is not a bank (or engaged in related activities as described below) and from engaging in any business other than banking or managing or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to approve the ownership of shares by a bank holding company in any company, the activities of which the Federal Reserve Board has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto. In making such determinations, the Federal Reserve Board is required to weigh the expected benefit to the public, such as greater convenience, increased competition or gains in efficiency, against the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The BHCA permits a bank holding company to elect to be considered a financial holding company (“FHC”). A bank holding company that makes an FHC election is permitted to engage in activities that are financial in nature or incidental to such financial activities. The BHCA lists certain activities that are considered financial in nature and permits the Federal Reserve Board to expand that list to include other activities that are complementary to the activities on the preapproved list. The preapproved activities include (1) securities underwriting, dealing and market making; (2) insurance underwriting; (3) merchant banking; and (4) insurance company portfolio investments. The Company has not made the FHC election.

The Federal Reserve Board has by regulation determined that certain activities are closely related to banking within the meaning of the BHCA. These activities include operating a mortgage company, finance company, credit card company, factoring company, trust company or savings association; performing certain data processing operations; providing limited securities brokerage services; acting as an investment or financial advisor; acting as an insurance agent for certain types of credit-related insurance; leasing personal property on a full-payout, non-operating basis; providing tax planning and preparation services; operating a collection agency; and providing certain courier services. The Federal Reserve Board also has determined that certain other activities, including real estate brokerage and syndication, land development, property management and underwriting of life insurance not related to credit transactions, are not closely related to banking and a proper incident thereto. However, under the BHCA certain of these activities are permissible for a bank holding company that becomes an FHC.

Limitations on Transactions with Affiliates. Transactions between savings banks and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings bank includes any company or entity which controls the savings bank or that is controlled by a company that controls the savings bank. In a holding company context, the parent holding company of a savings bank (such as the Company) and any companies which are controlled by such parent holding company are affiliates of the savings bank. Generally, Section 23A (i) limits the extent to which the savings bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such bank’s capital stock and surplus, and (ii) contains an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus. Section 23B applies to “covered transactions” as well as certain other transactions and requires that all transactions be on terms substantially the same, or at least favorable, to the bank or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans to, purchase of assets from, issuance of a guarantee to an affiliate and similar transactions. Section 23B transactions also include the provision of services and the sale of assets by a savings bank to an affiliate.

In addition, Sections 22(h) and (g) of the Federal Reserve Act place restrictions on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, an executive officer and a greater than 10% stockholder of a savings bank, and certain affiliated interests of either, may not exceed, together with all other outstanding loans to such person and affiliated interests, the savings bank’s loans to one borrower limit (generally equal to 15% of the bank’s unimpaired capital and surplus). Section 22(h) also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons and also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a savings bank to all insiders cannot exceed the bank’s unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers.



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Capital Requirements. The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the BHCA. The Federal Reserve Board capital adequacy guidelines generally require bank holding companies to maintain total capital equal to 8% of total risk-adjusted assets, with at least one-half of that amount consisting of Tier I or core capital and up to one-half of that amount consisting of Tier II or supplementary capital. Tier I capital for bank holding companies generally consists of the sum of common stockholders’ equity and perpetual preferred stock (subject in the case of the latter to limitations on the kind and amount of such stocks which may be included as Tier I capital), less goodwill and, with certain exceptions, intangibles. Tier II capital generally consists of hybrid capital instruments; perpetual preferred stock which is not eligible to be included as Tier I capital; term subordinated debt and intermediate-term preferred stock; and, subject to limitations, general allowances for loan losses. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics, with the categories ranging from 0% (requiring no additional capital) for assets such as cash to 100% for the bulk of assets which are typically held by a bank holding company, including multi-family residential and commercial real estate loans, commercial business loans and consumer loans. Single-family residential first mortgage loans which are not past-due (90 days or more) or non-performing and which have been made in accordance with prudent underwriting standards are assigned a 50% level in the risk-weighing system, while certain privately-issued mortgage-backed securities representing indirect ownership of such loans are assigned a level ranging from 20% to 100% in the risk-weighting system. Off-balance sheet items also are adjusted to take into account certain risk characteristics.

In addition to the risk-based capital requirements, the Federal Reserve Board requires bank holding companies to maintain a minimum leverage capital ratio of Tier I capital to total assets of 3.0%. Total assets for this purpose does not include goodwill and any other intangible assets and investments that the Federal Reserve Board determines should be deducted from Tier I capital. The Federal Reserve Board has announced that the 3.0% Tier I leverage capital ratio requirement is the minimum for the top-rated bank holding companies without any supervisory, financial or operational weaknesses or deficiencies or those which are not experiencing or anticipating significant growth. Other bank holding companies will be expected to maintain Tier I leverage capital ratios of at least 4.0% to 5.0% or more, depending on their overall condition. At September 30, 2012, the Company was in compliance with the above-discussed Federal Reserve Board regulatory capital requirements.

Financial Support of Affiliated Institutions. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances when it might not do so absent such policy. Recently enacted legislation amended the Federal Deposit Insurance Act (“FDIA”) to incorporate this policy into law. No regulations implementing that provision have been promulgated. Section 18 of the FDIA describes the circumstances under which a Federal banking agency would be protected from a claim by an affiliate or a controlling shareholder of an insured depository institution seeking the return of assets of such an affiliate or controlling shareholder. Under that provision, a claim would not be permitted if (1) the insured depository institution was under a written Federal directive to raise capital, (2) the institution was undercapitalized, and (3) the subject Federal banking agency followed the procedures set forth in Section 5(g) of the BHCA

Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 generally established a comprehensive framework to modernize and reform the oversight of public company auditing, improve the quality and transparency of financial reporting by those companies and strengthen the independence of auditors. Among other things, the legislation (i) created a public company accounting oversight board which is empowered to set auditing, quality control and ethics standards, to inspect registered public accounting firms, to conduct investigations and to take disciplinary actions, subject to SEC oversight and review; (ii) strengthened auditor independence from corporate management by, among other things, limiting the scope of consulting services that auditors can offer their public company audit clients; (iii) heightened the responsibility of public company directors and senior managers for the quality of the financial reporting and disclosure made



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by their companies; (iv) adopted a number of provisions to deter wrongdoing by corporate management; (v) imposed a number of new corporate disclosure requirements; (vi) adopted provisions which generally seek to limit and expose to public view possible conflicts of interest affecting securities analysts; and (vii) imposed a range of new criminal penalties for fraud and other wrongful acts, as well as extended the period during which certain types of lawsuits can be brought against a company or its insiders.

Regulation of the Bank

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 and is subject to certain requirements by the Federal Reserve Board. 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, the Federal Reserve Board or the Congress could have a material adverse impact on the Bank and its operations.

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 and employees, 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, director, 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 not “opted out” of this interstate merger provision. Therefore, the federal provision permitting interstate acquisitions applies to banks chartered in Pennsylvania. Pennsylvania law, 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. The Interstate Act also allows a state to permit out-of-state banks to establish and operate new



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branches in this state. Pennsylvania law permits an out of state banking institution to establish a branch office in Pennsylvania only if the laws of the state where that institution is located would permit an institution chartered under the laws of Pennsylvania to establish and maintain a branch in such other state on substantially the same terms and conditions.

FDIC Insurance Premiums. The deposits of the Bank are insured by the Deposit Insurance Fund, which is administered by the FDIC. The recently enacted financial institution reform legislation permanently increased deposit insurance on most accounts to $250,000. In addition, pursuant to Section 13(c)(4)(G) of the Federal Deposit Insurance Act, the FDIC has implemented two temporary programs to provide deposit insurance for the full amount of most noninterest bearing transaction deposit accounts and to guarantee certain unsecured debt of financial institutions and their holding companies. Under the unsecured debt program, the FDIC’s guarantee expires on the earlier of the maturity date of the debt or December 31, 2012. The unlimited deposit insurance for non-interest-bearing transaction accounts was extended by the recently enacted legislation through the end of 2012 for all insured institutions without a separate insurance assessment (but the cost of the additional insurance coverage will be considered under the risk-based assessment system). The Bank participates in the FDIC Transaction Account Guarantee (TAG) Program, but does not participate in the guarantee of certain unsecured debt of financial institutions and their holding companies.

The FDIC’s risk-based premium system provides for quarterly assessments. Each insured institution is placed in one of four risk categories depending on supervisory and capital considerations. Within its risk category, an institution is assigned to an initial base assessment rate which is then adjusted to determine its final assessment rate based on its brokered deposits, secured liabilities and unsecured debt. The FDIC recently amended its deposit insurance regulations (1) to change the assessment base for insurance from domestic deposits to average assets minus average tangible equity and (2) to lower overall assessment rates. The revised assessments rates are between 2.5 to 9 basis points for banks in the lowest risk category and between 30 to 45 basis points for banks in the highest risk category. The amendments became effective for the quarter beginning April 1, 2011 with the new assessment methodology being reflected in the premium invoices that were due September 30, 2011.

In 2009, the FDIC collected a five basis point special assessment on each insured depository institution’s assets minus its Tier 1 capital as of June 30, 2009. The amount of our special assessment, which was paid on September 30, 2009, was $382,000. The special assessment was fully expensed by the Company in the second quarter of 2009. In 2009, the FDIC also required insured deposit institutions on December 30, 2009 to prepay 13 quarters of estimated insurance assessments. At the time, our initial prepayment totaled $3.1 million. As of September 30, 2012 our prepayment balance is $1.2 million. Unlike a special assessment, this prepayment did not immediately affect bank earnings. Banks will book the prepaid assessment as a non-earning asset and record the actual risk-based premium payments at the end of each quarter. In addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership government corporation established to recapitalize a predecessor to the Deposit Insurance Fund. The assessment rate for the third quarter of fiscal 2012 was .00165% of insured deposits and is adjusted quarterly. These assessments will continue until the Financing Corporation bonds mature in 2019.

The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances which would result in termination of the Bank’s deposit insurance.



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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 losses. Allowance for loan losses includable in supplementary capital is limited to a maximum of 1.3% of risk-weighted assets. Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of core capital. At September 30, 2012, the Bank met each of its capital requirements.

Prompt Corrective Action. Under Section 38 of the FDIA, each federal banking agency is required to implement a system of prompt corrective action for institutions which it regulates. The federal banking agencies (including the FDIC) have adopted substantially similar regulations to implement Section 38 of the FDIA. Under the regulations, a savings bank shall be deemed to be (i) “well capitalized” if it has total risk-based capital of 10.0% or more, has a Tier 1 risk-based ratio of 6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or more and is not subject to any order or final capital directive to meet and maintain a specific capital level for any capital measure, (ii) “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of “well capitalized”, (iii) “undercapitalized” if it has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% (3.0% under certain circumstances), (iv) “significantly undercapitalized” if it has a total risk-based ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is less than 3.0%, and (v) “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. Section 38 of the FDIA and the regulations promulgated thereunder also specify circumstances under which the FDIC may reclassify a well capitalized savings bank as adequately capitalized and may require an adequately capitalized savings bank or an undercapitalized savings bank to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized savings bank as critically undercapitalized). At September 30, 2012, the Bank was in the “well capitalized” category.

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.



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Loans-to-One Borrower Limitation. 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 no greater than 15% of its capital account.

Activities and Investments of Insured State-Chartered Banks. Section 24 of the FDIA 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 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.

Pursuant to FDIC regulations promulgated under Section 24 of the FDIA, 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. The FDIC has authorized the Bank’s subsidiary HARL, LLC, to invest up to 15% of its capital in the equity securities of bank holding companies, banks or thrifts. As of September 30, 2012, $331,000 was invested by HARL, LLC in such equity securities.

Regulatory Enforcement Authority. Federal banking regulators have substantial enforcement authority over the financial institutions that they regulate including, 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. Except under certain circumstances, federal law requires public disclosure of final enforcement actions by the federal banking agencies.

Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank of Pittsburgh, which is one of 12 regional Federal Home Loan Banks that administers a home financing credit function primarily for its members. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. The Federal Home Loan Bank of Pittsburgh is funded primarily from proceeds derived from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the Federal Home Loan Bank. At September 30, 2012, the Bank had $142.5 million of Federal Home Loan Bank advances and $75.0 million available on its credit line with the Federal Home Loan Bank.

As a member, the Bank is required to purchase and maintain stock in the Federal Home Loan Bank of Pittsburgh in an amount equal to 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of its outstanding advances from the Federal Home Loan Bank. At September 30, 2012, the Bank was in compliance with the applicable requirement.



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The Federal Home Loan Banks are required to provide funds for the resolution of troubled savings institutions and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of Federal Home Loan Bank dividends paid in the past and could do so in the future. These contributions also could have an adverse effect on the value of Federal Home Loan Bank stock in the future.

Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain reserves against their transaction accounts (primarily NOW and Super NOW checking accounts) and non-personal time deposits. The required reserves must be maintained in the form of vault cash or an account at a Federal Reserve Bank. At September 30, 2012, the Bank was in compliance with its reserve requirements.

Community Reinvestment Act. All insured depository institutions have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. An institution’s failure to comply with the provisions of the Community Reinvestment Act could result in restrictions on its activities. The Bank received a “satisfactory” Community Reinvestment Act rating in its most recently completed examination.

Recent Legislation

On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). This law significantly changes the bank regulatory structure and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies.

The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare various studies and reports for Congress. The federal agencies are given significant discretion in drafting such rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for months or years.

Certain provisions of the Dodd-Frank Act are expected to have a near term impact on the Company. For example, effective July 21, 2011, a provision of the Dodd-Frank Act eliminated the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change could have an adverse impact on the Company’s interest expense.

The Dodd-Frank Act also broadens the base for Federal Deposit Insurance Corporation insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012.

Bank and thrift holding companies with assets of less than $15 billion as of December 31, 2009, such as the Company, are permitted to include trust preferred securities that were issued before May 19, 2010, as Tier 1 capital; however, trust preferred securities issued by a bank or thrift holding company (other than those with assets of less than $500 million) on or after May 19, 2010, will no longer count as Tier 1 capital. Trust preferred securities still will be entitled to be treated as Tier 2 capital.

The Dodd-Frank Act also require publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and allow greater access by shareholders to the company’s proxy material by authorizing the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded.



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The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets such as the Bank will continue to be examined for compliance with the consumer laws by their primary bank regulators. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.

Many of the regulations implementing the Dodd-Frank Act have not yet been promulgated, so we cannot determine the full impact on our business and operations at this time. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense.

Recent Regulatory Capital Proposals

The Federal Reserve Board and the FDIC were part of a joint proposal in June 2012 seeking comment on three notices of proposed rulemaking (“NPR”) that would revise and replace the agencies’ current capital rules in connection with the Basel accords. The two NPRs discussed below concern capital issues of significant importance to the Bank and, under certain circumstances, the Company. The third NPR, relates to advanced approaches and market risk capital rules, is not applicable to the organization’s current operations.

The first NPR relates to Basel III and proposes to revise risk-based and leverage capital requirements, including the implementation of new common equity Tier 1 capital requirements and a higher minimum Tier 1 capital requirement. Also included in the NPR are proposed limitations on capital distributions and certain discretionary bonus payments for any banking organization not holding a specified buffer of common equity Tier 1 capital in excess of its minimum risk-based capital requirement. Revisions to the prompt correction action framework and the tangible common equity definition are also included in the NPR. The other NPR applicable to the organization’s operations proposes a standardized approach for risk-weighted assets to enhance risk sensitivity and to address certain weaknesses identified over recent years, including methods for determining risk-weighted assets for residential mortgages, securitization exposures and counterparty credit risk. The proposed changes in the two NPRs would be applicable to the Bank and the Company (as long as the Company’s assets continue to exceed $500 million).

The comment period for these NPRs ended on October 22, 2012. Since Basel III is intended to be implemented beginning January 1, 2013 the regulators intended to finalize the rules by that date. However, on November 9, 2012, the federal agencies, including the Federal Reserve Board and FDIC, that proposed the NPRs announced that they do not expect that any of the proposed rules would become effective on January 1, 2013. Moreover, the announcement did not indicate the likely new effective date.

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.



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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. The Company computes its reserve for bad debts under the specific charge-off method. The bad debt deduction allowable under this method is available to large banks with assets greater than $500 million. Generally, this method allows the Company to deduct an annual addition to the reserve for bad debts equal to its net charge-offs. Retained earnings at September 30, 2012 and 2011 includes approximately $1.3 million representing bad debt deductions for which no deferred income taxes have been provided.

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, 2012, 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.

Other Matters. The Company’s federal income tax returns for its tax years 2008 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 accounting principles generally accepted in the United States of America, as shown on its books. For fiscal



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years beginning in 1983, and thereafter, net operating losses 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.


The Bank is the only direct wholly owned subsidiary of the Company. 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 business affairs of the subsidiary. HSB, Inc. currently manages the investment securities for the Bank, which as of September 30, 2012 amounted to approximately $175.7 million. The Bank has two limited liability company subsidiaries, Freedom Financial Solutions LLC (“FFS”) and HARL, LLC. FFS was established to engage in the sale of insurance products through a third party. HARL, LLC was established for the purpose of investing in FDIC insured financial institutions/holding company equity securities.



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Item 1A. Risk Factors.

Not applicable.

Item 1B. Unresolved Staff Comments.

Not applicable.

Item 2. Properties.

As of September 30, 2012, the Company conducted its business from its main office in Harleysville, Pennsylvania and six other full service branch offices. The Company is also part of the STAR ATM System, which provides customers with access to their deposits at locations worldwide.





   Owned or




   Net Book Value of
Property and
Improvements at
September 30, 2012
                    (In Thousands)  



1889 Ridge Pike

Royersford, Pennsylvania

   Owned    —      $ 1,599       $ 25,560   



271 Main Street

Harleysville, Pennsylvania

   Owned    —        902         200,900   



640 East Main Street

Lansdale, Pennsylvania

   Leased    May 2043(1)      749         57,274   



1550 Hatfield Valley Road

Hatfield, Pennsylvania

   Leased    January 2064(1)      727         90,848   



2301 West Main Street

Norristown, Pennsylvania

   Owned    —        335         89,924   



3090 Main Street

Sumneytown, Pennsylvania

   Owned    —        165         60,385   



741 North County Line Road

Souderton, Pennsylvania

   Owned    —        2,725        18,032   








         $ 7,202      $ 542,923   








(1) The land at this office is leased; however, the Bank owns the building.


Item 3. Legal Proceedings.

The Company is not involved in any legal proceedings except nonmaterial litigation incidental to the ordinary course of business.


Item 4. Mine Safety Disclosures.

Not applicable.



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Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

(a) The information for all equity based and individual compensation arrangements is incorporated by reference from Part III, Item 12 hereof.

Harleysville Savings Financial Corporation’s common stock is listed on the Nasdaq Global Market under the symbol “HARL”. The common stock was issued at an adjusted price of $1.45 per share in connection with the Company’s conversion from mutual to stock form and the common stock commenced trading on the NASDAQ Stock Market on September 3, 1987. Prices shown below reflect the prices reported by the NASDAQ Stock Market during the indicated periods. The closing price of the common stock on September 30, 2012 was $16.40 per share. There were 3,768,931 shares of common stock outstanding as of September 30, 2012, held by approximately 1,000 stockholders of record, not including the number of persons or entities whose stock is held in nominee or “street” name through various brokerage firms and banks.


For The Quarter Ended

   High      Low      Close      Cash  Dividends

September 30, 2012

   $ 18.03       $ 16.40       $ 16.40       $ 0.20   

June 30, 2012

     19.48         16.00         17.72         0.20   

March 31, 2012

     18.08         13.87         16.50         0.19   

December 31, 2011

     15.14         13.28         14.34         0.19   

September 30, 2011

   $ 15.52       $ 11.57       $ 14.01       $ 0.19   

June 30, 2011

     15.74         14.75         15.25         0.19   

March 31, 2011

     15.56         14.60         15.24         0.19   

December 31, 2010

     15.72         14.01         15.03         0.19   

(b) Not applicable.

(c) The following table sets forth information with respect to purchases made by or on behalf of the Company of shares of common stock of the Company during the fourth quarter of fiscal 2012.



   Total Number
of Shares
Price Paid
per Share
     Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
     Maximum Number of
Shares that May Yet Be
Purchased Under  the Plans
or Programs(1)

July 1-31, 2012

     —           —           —           50,492   

August 1-31, 2012

     —           —           —           50,492   

September 1-30, 2012

     —           —           —           50,492   














     —         $ —           —           50,492   














(1) On June 30, 2008, the Company announced its current program to repurchase up to 5.0% of the outstanding shares of common stock of the Company, or 196,000 shares. The program does not have an expiration date and all shares are purchased in the open market.



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Item 6. Selected Financial Data.


Selected Balance Sheet Data:    As of September 30,  

(Dollars in thousands, except per share data)

   2012     2011     2010     2009     2008  

Total Assets

   $ 802,626      $ 835,713      $ 857,140      $ 830,007      $ 825,675   

Cash and investment securities

     99,582        122,306        166,063        121,364        89,483   

Mortgage-backed securities

     162,710        150,547        131,628        163,215        214,690   

Total Investments

     262,292        272,853        297,691        284,579        304,173   

Consumer loans receivable

     394,634        424,424        431,966        440,367        433,743   

Commercial loans receivable

     103,765        97,373        80,631        60,118        45,103   

Allowance for loan losses

     (4,032     (3,311     (2,504     (2,094     (1,988

Total Loans Receivable Net

     494,367        518,486        510,093        498,391        476,858   

Total Loans held for sale

     3,515        —          —          —          —     

FHLB stock

     10,165        13,110        16,096        16,096        16,574   

Checking accounts

     101,033        90,146        70,912        58,463        53,166   

Savings accounts

     162,719        138,805        139,818        80,373        54,647   

Certificate of deposit accounts

     279,171        295,450        317,370        327,765        317,700   

Total Deposits
































Total stockholders’ equity

     59,736        57,082        53,351        50,139        47,209   

Book value per share

     15.85        15.19        14.47        13.82        13.23   
Selected Operations Data:    Year Ended September 30,  
     2012     2011     2010     2009     2008  

Interest income

   $ 34,533      $ 37,573      $ 40,018      $ 41,343      $ 43,076   

Interest expense

     15,095        19,034        21,747        24,886        29,016   
















Net interest income

     19,438        18,539        18,271        16,457        14,060   

Provision for loan losses

     930        1,150        600        400        85   
















Net interest income after provision for loan losses

     18,508        17,389        17,671        16,057        13,975   

Realized gain (loss) on securities, including impairment

     34        —          —          (454     (179

Gain on sales of loans

     34        —          —          —          —     

Other income

     2,102        2,986        1,987        1,925        1,909   

Other expense

     13,488        13,125        12,702        11,527        10,094   
















Income before taxes

     7,190        7,250        6,956        6,001        5,611   

Income tax expense

     2,137        1,855        1,948        1,285        1,232   
















Net income

   $ 5,053      $ 5,395      $ 5,008      $ 4,716      $ 4,379   
















Earnings per share - basic

   $ 1.35      $ 1.45      $ 1.37      $ 1.31      $ 1.20   

Earnings per share - diluted

     1.33        1.44        1.36        1.31        1.20   

Dividends per share

     0.78        0.76        0.76        0.73        0.69   
Selected Other Data:    Year Ended September 30,  
     2012     2011     2010     2009     2008  

Return on average assets (1)

     0.61     0.63     0.59     0.57     0.54

Return on average equity (1)

     8.69     9.79     9.73     9.70     9.42

Dividend payout ratio

     58.65     52.38     55.41     55.60     57.26

Average equity to average assets (1)

     7.06     6.46     6.07     5.90     5.76

Interest rate spread (1)

     2.26     2.07     2.04     1.84     1.57

Net yield on interest-earning assets (1)

     2.42     2.23     2.21     2.04     1.79

Ratio of non-performing assets to total assets at end of period

     1.85     0.40     0.30     0.32     0.15

Ratio of interest-earning assets to interest-bearing liabilities at end of period

     109.08        107.30     106.47     106.45     105.93

Full service banking offices at end of period

     7        7        7        6        6   


(1) All ratios are based on average monthly balances during the indicated periods.



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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion is intended to assist in understanding our financial condition, and the results of operations for Harleysville Savings Financial Corporation, and its subsidiary Harleysville Savings Bank, for the fiscal years ended September 30, 2012 and 2011. The information in this section should be read in conjunction with the Company’s financial statements and the accompanying notes included elsewhere herein.

Critical Accounting Policies and Judgments

The Company’s consolidated financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in Note 2, Summary of Significant Accounting Policies. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect the Company’s reported results and financial position for the period or in future periods. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on the Company’s future financial condition and results of operations.

Analysis and Determination of the Allowance for Loan Losses - The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. The Company evaluates the need to establish allowances against losses on loans on a monthly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.

Our methodology for assessing the appropriateness of the allowance for loan losses consists of three key elements: (1) specific allowances for certain impaired or collateral-dependent loans; (2) a general valuation allowance on certain identified problem loans; and (3) a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.

Specific Allowance Required for Certain Impaired or Collateral-Dependent Loans: We establish an allowance for certain impaired loans for the amounts by which the discounted cash flows (or collateral value or observable market price) are lower than the carrying value of the loan. Under current accounting guidelines, a loan is defined as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due under the contractual terms of the loan agreement.

General Valuation Allowance on Certain Identified Problem Loans - We also establish a general allowance for classified loans that do not have an individual allowance. We segregate these loans by loan category and assign allowance percentages to each category based on inherent losses associated with each type of lending and consideration that these loans, in the aggregate, represent an above-average credit risk and that more of these loans will prove to be uncollectible compared to loans in the general portfolio.

General Valuation Allowance on the Remainder of the Loan Portfolio - We establish another general allowance for loans that are not classified to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience, delinquency trends and management’s evaluation of the collectibility of the loan portfolio. The allowance is adjusted for significant factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, loss experience in particular segments of the portfolio, duration of the current business cycle, and bank regulatory examination results. The applied loss factors are reevaluated monthly to ensure their relevance in the current economic environment.




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Investment Securities Impairment Valuation. Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent or requirement of the Company to sell its investment in debt securities and its intent and ability to retain its investment in equity securities for a period of time sufficient to allow for any anticipated recovery in fair value.


Harleysville Savings Financial Corporation, a bank holding company, of which Harleysville Savings Bank (the “Bank”), is a wholly owned subsidiary, was formed in February 2000. For purposes of this discussion, the Company, including its wholly owned subsidiary, will be referred to as the “Company.” The Company’s earnings are primarily dependent upon its net interest income, which is determined by (i) the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities (“interest rate spread”) and (ii) the relative amounts of interest-earning assets and interest-bearing liabilities outstanding. The Company’s interest rate spread is affected by regulatory, economic, and competitive factors that influence interest rates, loan demand and deposit flows. The Company, like other thrift institutions, is vulnerable to an increase in interest rates to the extent that interest-bearing liabilities mature or reprice more rapidly than interest-earning assets. To reduce the effect of adverse changes in interest rates on its operations, the Company has adopted certain asset and liability management strategies, described below. The Company’s earnings are also affected by, among other factors, other non-interest income, other expenses, and income taxes.

The Company’s total assets at September 30, 2012 amounted to $802.6 million compared to $835.7 million as of September 30, 2011. The decrease in assets was primarily due to a decrease in total investments of $11.6 million, repurchase of FHLB stock of $2.9 million, and a decrease in loans receivable of $24.1 million. The decrease in investments, FHLB stock, and loans receivable was partially offset by increases in cash, loans held for sale, and prepaid expenses and other assets of $6.4 million. Total liabilities at September 30, 2012 were $742.9 million compared to $778.6 million at September 30, 2011. The decrease in liabilities was due to a decrease in borrowings of $57.7 million which was offset by an increase in total deposits of $18.5 million. Stockholder’s equity totaled $59.7 million at September 30, 2012 compared to $57.1 million at September 30, 2011.

During fiscal 2012, net interest income increased $899,000 or 4.9% from the prior fiscal year. This increase was the result of a 3.5% decrease in the average interest-earning assets which was offset by a 5.0% decrease in average interest-bearing liabilities, and an increase in the interest rate spread to 2.3% in fiscal year 2012 from 2.1% in fiscal year 2011. Net income for fiscal 2012 was $5.1 million compared to $5.4 million for the fiscal year ended 2011. The Company’s return on average assets (net income divided by average total assets) was 0.6% during fiscal 2012 compared to 0.6% during fiscal 2011. Return on average equity (net income divided by average equity) was 8.7% during fiscal 2012 compared to 9.8% during fiscal 2011.



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Results of Operations

The following table sets forth 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. Yields on tax-exempt assets have not been calculated on a fully tax-exempt basis.


    As of
September  30,
    For The Year Ended September 30,  
      2012     2011     2010  
    Rate     Average
    Interest     Yield/Rate     Average
    Interest     Yield/Rate     Average
    Interest     Yield/Rate  
    (Dollars in Thousands)  

Interest-earning assets:


Mortgage loans (2)(3)

    5.34   $ 322,429      $ 17,843        5.53   $ 332,145      $ 18,952        5.71   $ 345,041      $ 20,127        5.83

Mortgage-backed securities

    3.20     155,510        5,199        3.34     139,801        5,675        4.06     148,137        6,879        4.64

Commercial loans

    5.50     101,445        5,634        5.55     87,798        5,146        5.86     70,404        4,218        5.99

Consumer and other loans(3)

    4.39     97,147        3,686        3.79     102,346        4,046        3.95     106,758        4,380        4.10


    1.70     124,258        2,171        1.75     167,414        3,754        2.24     155,757        4,414        2.83































Total interest-earning assets

    4.29     800,789        34,533        4.31     829,504        37,573        4.53     826,097        40,018        4.84































Interest-bearing liabilities:


Savings and money market

    0.25     150,762        575        0.38     139,811        602        0.43     110,095        932        0.85


    0.14     72,089        56        0.08     61,604        49        0.08     49,998        85        0.17

Certificates of deposit

    1.76     289,788        5,186        1.79     308,611        6,837        2.22     324,853        8,017        2.47































Total deposits

    1.05     512,639        5,817        1.13     510,026        7,488        1.47     484,946        9,034        1.86


    4.17     221,483        9,278        4.19     263,084        11,546        4.39     290,956        12,713        4.37































Total interest-bearing liabilities

    1.90     734,122        15,095        2.06     773,110        19,034        2.46     775,902        21,747        2.80































Net interest income/interest rate spread

    2.39     $ 19,438        2.25     $ 18,539        2.07     $ 18,271        2.04






















Net interest-earning assets/net yield on interest-earning assets(1)

    $ 66,667          2.43   $ 56,394          2.23   $ 50,195          2.21



















Ratio of interest-earning assets to interest-bearing liabilities

          109.1         107.3         106.5











(1) Net interest income divided by average interest-earning assets.
(2) Loan fee income is immaterial to this analysis.
(3) There were 43 non-accruing loans totaling $10.8 million at September 30, 2012, 29 non-accruing loans totaling $3.4 million at September 30, 2011 and 17 non-accruing loans totaling $2.1 million at September 30, 2010.



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The following table shows, for the periods indicated, the changes in interest income and interest expense attributable to changes in volume (changes in volume multiplied by prior year rate) and changes in rate (changes in rate multiplied by prior year volume). Changes in rate/volume (determined by multiplying the change in rate by the change in volume) have been allocated to the change in rate or the change in volume based upon the respective percentages of their combined totals.


     Fiscal 2012 Compared
to Fiscal 2011
Increase (Decrease)
    Fiscal 2011 Compared
to Fiscal 2010
Increase (Decrease)
(In Thousands)    Volume     Rate     Total     Volume     Rate     Total  

Interest income on interest-earning assets:


Mortgage loans (1)

   $ (546   $ (563   $ (1,109   $ (742   $ (433   $ (1,175

Mortgage-backed securities

     835        (1,311     (476     (372     (831     (1,203


     736        (248     488        1,017        (89     928   

Consumer and other loans (1)

     (201     (159     (360     (178     (157     (335

Interest and dividends on Investments

     (852     (731     (1,583     369        (1,029     (660




















     (28     (3,012     (3,040     94        (2,539     (2,445



















Interest expense on interest-bearing liabilities:



     (331     (1,340     (1,671     43        (1,589     (1,546


     (1,761     (507     (2,268     (1,223     56        (1,167




















     (2,092     (1,847     (3,939     (1,180     (1,533     (2,713



















Net change in net interest income

   $ 2,064      $ (1,165   $ 899      $ 1,274      $ (1,006   $ 268   




















(1) There were 43 non-accruing loans totaling $10.8 million at September 30, 2012, 29 non-accruing loans totaling $3.4 million at September 30, 2011 and 17 non-accruing loans totaling $2.1 million at September 30, 2010.



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Net Interest Income

Net interest income increased by $899,000 or 4.9% in fiscal 2012, over the prior year. The increase in the net interest income in fiscal 2012 was due to an increase in the interest rate spread between interest bearing assets and interest earning liabilities in spite of a decrease in the balance sheet. The driving factors are further explained below under “- Interest Income” and “- Interest Expense.”

Interest Income

Interest income on mortgage loans decreased by $1.1 million or 5.9% in fiscal 2012 from the prior year. During fiscal 2012, the average balance of mortgage loans decreased $9.7 million or 2.9% and the yield decreased by 18 basis points. The majority of loans during the year were fixed rate mortgages. The decrease in interest on mortgage-backed securities reflects a decrease in the yield of 72 basis points, despite an increase in the average balance of $15.7 million in fiscal 2012. During fiscal 2012, the average consumer and other loan average balance decreased $5.2 million or 5.1% and the yield decreased by 16 basis points. The increase on interest income on commercial loans during fiscal 2012 reflected an increase in average balance of $13.6 million, which was partially offset by a decrease in yield of 31 basis points.

Interest and dividends on investments decreased by $1.6 million or 42.2% in fiscal 2012 from fiscal 2011. During fiscal 2012, the decrease in income resulted from a decrease in yield of 49 basis points and a decrease in average balance of $43.2 million or 25.8%. The decrease in the average balance in fiscal 2012, is a result of investments maturing and being called due to a low interest rate environment.

Interest Expense

Interest expense on deposits decreased $1.7 million or 22.3% in fiscal 2012 as compared to the prior year. In fiscal 2012, the average balance of deposits increased by $2.6 million. The average rate paid on deposits was 1.1% for the year ended September 30, 2012, compared to 1.5% for the year ended September 30, 2011. The average rate paid on deposits is a direct reflection of the falling interest rate environment.

Interest expense on borrowings decreased by $2.3 million or 19.6% in fiscal 2012 compared to the prior year. The decrease in 2012 was primarily the result of a decrease in the average balance in borrowings of $41.6 million or 15.8%. Borrowings were primarily paid down by the increase of deposits and also the maturity of investments during fiscal 2012.

Provision for Loan Losses

Management establishes reserves for losses on loans when it determines that losses are probable. The adequacy of loan loss reserves is based upon a regular monthly review of loan delinquencies and “classified assets”, as well as local and national economic trends. The allowance for loan losses totaled $4.0 million and $3.3 million at September 30, 2012 and 2011 or 0.9% and 0.6% of total loans at September 30, 2012 and 2011, respectively. The Company recorded a provision for loan losses of $930,000 in fiscal 2012 compared to $1.2 million in fiscal 2011, although the unemployment trends and property values remained constant from 2011 to 2012, our average loan value decreased from fiscal year end 2011 to fiscal year end 2012.

Other Income

The Company’s total other operating income decreased to $2.2 million in fiscal 2012 compared to $3.0 million in fiscal 2011. The decrease in fiscal 2012 was primarily due to a one-time bank-owned life insurance (“BOLI”) benefit claim of $1.0 million due to the death of an officer in fiscal 2011. Bank –owned life insurance income was $486,000 in fiscal 2012 compared to $1.5 million in fiscal 2011.

Customer service fees were $578,000 and $549,000 in fiscal 2012 and 2011, respectively. The increase was due to more NSF fees during 2012.



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Other income, which consists primarily of loan servicing fees, the sale of non-deposit products and insurance commissions, increased by $149,000 or 16.8% during fiscal 2012. The fees, which comprise other income, are set by the Company at a level, which is intended to cover the cost of providing the related services and expenses to customers and employees.

Other Expenses

Salaries and employee benefits increased by $330,000 or 4.5% in fiscal 2012 as compared to fiscal 2011. The increased expenses of salaries and employee benefits during the periods are attributable to increased staffing, due to a new branch and bank growth, normal salary increases and increased employee benefit expenses as well as stock compensation expense.

Occupancy and equipment expense increased by $6,000 or 0.4% in fiscal 2012 compared to fiscal 2011. Data processing costs increased by $10,000 in fiscal 2012. The increase in occupancy and equipment and data processing expenses in fiscal 2012 was attributable to a new satellite branch, normal growth, normal technology needs and inflationary effects.

Other expenses, which consist primarily of advertising expenses, directors’ fees, ATM network fees, professional fees, checking account costs, REO expenses, and stockholders expense increased by $191,000 or 6.7% in fiscal 2012 compared to fiscal 2011. The increase in other expenses in 2012 was attributable to increases in commercial loans, audit expense and REO expenses. Included in other expenses is a reserve on unfunded loan commitments of $85,000. Many of these expenses were attributable to natural growth of our customer base and overall growth of our retail and business banking.

FDIC insurance expense for the fiscal year 2012 decreased $174,000 or 23.9% from fiscal 2011 due to a change in the FDIC method of calculating the basis of the premium and as well as reducing the rate charge which took effect on April 1, 2011.

Income Taxes

The Company recorded income tax provisions of $2.1 million and $1.9 million for fiscal year 2012 and 2011, respectively. The effective tax rate was 29.7% in fiscal 2012 compared to 25.6% in fiscal 2011. See Note 8 of the “Notes to Consolidated Financial Statements” which provides an analysis of the provision for income taxes.

Commitments and Off-Balance Sheet Arrangements

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and the unused portions of lines of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. Commitments to extend credit and lines of credit are not recorded as an asset or liability by us until the instrument is exercised. At September 30, 2012 and 2011, we had $4.8 million in commitments to originate mortgage loans for sale.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. The amount and type of collateral required varies, but may include accounts receivable, inventory, equipment, real estate and income-producing commercial properties. At September 30, 2012 and 2011, in commitments to originate loans and commitments under unused lines of credit, including undisbursed portions of construction loans in process, for which the Company is obligated, amounted to approximately $78.0 million and $84.0 million, respectively.



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Letters of credit are conditional commitments issued by the Company guaranteeing payments of drafts in accordance with the terms of the letter of credit agreements. Commercial letters of credit are used primarily to facilitate trade or commerce and are also issued to support public and private borrowing arrangements, bond financings and similar transactions. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Collateral may be required to support letters of credit based upon management’s evaluation of the creditworthiness of each customer. The credit risk involved in issuing letters of credit is substantially the same as that involved in extending loan facilities to customers. Most letters of credit expire within one year. At September 30, 2012 and 2011, the Company had letters of credit outstanding of approximately $206,000 and $405,000, respectively, of which all are standby letters of credit. At September 30, 2012 and 2011, the uncollateralized portion of the letters of credit extended by the Company was approximately $74,000 and $191,000, respectively.

The Company is also subject to various pending claims and contingent liabilities arising in the normal course of business, which are not reflected in the consolidated financial statements. Management considers that the aggregate liability, if any, resulting from such matters will not be material.

We anticipate that we will continue to have sufficient funds and alternative funding sources to meet our current commitments.

The following table summarizes our outstanding commitments to originate loans and to advance additional amounts pursuant to outstanding letters of credit, lines of credit and under our construction loans at September 30, 2012.


     Total  Amounts
     (In Thousands)  

Letters of credit

   $ 206   

Commitments to originate loans


Loans held for sale


Unused portion of home equity lines of credit


Unused portion of commercial lines of credit


Undisbursed portion of construction loans in process





Total commitments

   $ 78,440   




Contractual Obligations

The Company’s contractual cash obligations at September 30, 2012 were as follows:


     Total      Less Than
1 Year
     1 to 3
     3 to 5
     After 5
     (In Thousands)  

Lease agreements

   $ 709       $ 133       $ 282       $ 294       $ —     


     192,493         30,455         43,288         55,000         63,740   

Certificates of deposit

     279,171         120,215         111,397         47,559         —     















   $ 472,363       $ 150,803       $ 154,967       $ 102,853       $ 63,740   


















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Liquidity and Capital Resources

The Company’s assets decreased to $802.6 million at September 30, 2012 from $835.7 million as of September 30, 2011. Stockholders’ equity increased to $59.7 million as of September 30, 2012 from $57.1 million as of September 30, 2011. As of September 30, 2012, stockholders’ equity amounted to 7.4% of the Bank’s total assets under accounting principles generally accepted in the United States of America (“GAAP”). For a financial institution, liquidity is a measure of the ability to fund customers’ needs for loans, deposit withdrawals and repayment of borrowings. Harleysville Savings regularly evaluates economic conditions in order to maintain a strong liquidity position. One of the most significant factors considered by management when evaluating liquidity requirements is the stability of the Company’s core deposit base. In addition to cash, the Company maintains a portfolio of cash flows generating investments to meet its liquidity requirements. The Company also relies upon cash flow from operations and other financing activities, generally short-term and long-term debt. Liquidity is also provided by investing activities including the repayment and maturity of loans and investment securities as well as the management of asset sales when considered necessary. The Company also has access to and sufficient assets to secure lines of credit and other borrowings in amounts adequate to fund any unexpected cash requirements.

As of September 30, 2012, the Company had a remaining borrowing capacity with the FHLB of Pittsburgh of approximately $184.6 million. To the extent that the Company cannot meet its liquidity needs with normal cash flows and deposit growth, the Company will be able to utilize the available borrowing capacity provided by the FHLB of Pittsburgh to fund asset growth and loan commitments.



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Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Asset and Liability Management

The Company has instituted programs designed to decrease the sensitivity of its earnings to material and prolonged increases or decreases in interest rates. The principal determinant of the exposure of the Company’s earnings to interest rate risk is the timing difference between the repricing or maturity of the Company’s interest-earning assets and the repricing or maturity of its interest-bearing liabilities. If the maturities of such assets and liabilities were perfectly matched, and if the interest rates borne by its assets and liabilities were equally flexible and moved concurrently, neither of which is the case, the impact on net interest income of rapid increases or decreases in interest rates would be minimized. The Company’s asset and liability management policies seek to decrease the interest rate sensitivity by shortening the repricing intervals and the maturities of the Company’s interest-earning assets. Although management of the Company believes that the steps taken have reduced the Company’s overall vulnerability to increases and decreases in interest rates, the Company remains vulnerable to material and prolonged increases and decreases in interest rates during periods in which its interest rate sensitive liabilities exceed its interest rate sensitive assets and interest rate sensitive assets exceed interest rate sensitive liabilities, respectively.

The authority and responsibility for interest rate management is vested in the Company’s Board of Directors. The Chief Financial Officer implements the Board of Directors’ policies during the day-to-day operations of the Company. Each month, the Chief Financial Officer presents the Board of Directors with a report, which outlines the Company’s asset and liability “gap” position in various time periods. The “gap” is the difference between interest-earning assets and interest-bearing liabilities which mature or reprice over a given time period. The Chief Financial Officer also meets weekly with the Company’s other senior officers to review and establish policies and strategies 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 September 30, 2012, which are expected to mature, prepay or reprice in each of the future time periods shown. Except as stated below, the amounts of assets or liabilities shown which mature or reprice during a particular period were determined in accordance with the contractual terms of the asset or liability. Adjustable and floating-rate assets are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due and fixed-rate loans and mortgage-backed securities are included in the periods in which they are anticipated to be repaid. However, many of our assets can prepay at any time without a penalty unlike many of our liabilities that have a contractual maturity.

The passbook accounts, negotiable order of withdrawal (“NOW”) accounts and a portion of the money market deposit accounts, are included in the “Over 5 Years” categories based on management’s beliefs that these funds are core deposits having significantly longer effective maturities based on the Company’s retention of such deposits in changing interest rate environments.

Generally, during a period of rising interest rates, a positive gap would result in an increase in net interest income while a negative gap would adversely affect net interest income. Conversely, during a period of falling interest rates, a positive gap would result in a decrease in net interest income while a negative gap would positively affect net interest income. However, the table below does not necessarily indicate the impact of general interest rate movements on the Company’s net interest income because the repricing of certain categories of assets and liabilities is discretionary and is subject to competitive and other pressures. As a result, certain assets and liabilities indicated as repricing within a stated period may in fact reprice at different rate levels in a different period.



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     1 Year
or less
    1 to 3
    3 to 5
    Over 5
     (In Thousands)  

Interest-earning assets:


Mortgage loans

   $ 91,514      $ 95,086      $ 55,203      $ 73,581      $ 315,384   

Commercial loans

     51,332        18,859        16,260        17,267        103,718   

Mortgage-backed securities

     47,621        50,351        28,323        36,415        162,710   

Consumer and other loans

     69,460        8,015        2,670        1,529        81,674   

Investment securities and other investments

     65,291        6,428        10,695        22,178        104,592   
















Total interest-earning assets

     325,218        178,739        113,151        150,970       768,078   
















Interest-bearing liabilities:


Passbook and Club accounts

     456        —          —          4,283        4,739   

NOW and interest-bearing checking accounts

     7,487        —          —          67,380        74,867   

Consumer Money Market Deposit accounts

     61,609        —          —          68,396        130,005   

Business Money Market Deposit accounts

     21,114        —          —          6,861        27,975   

Certificate accounts

     120,417        111,239        47,515        —          279,171   

Borrowed money

     32,900        42,237        56,029        61,317        192,483   
















Total interest-bearing liabilities

     243,983        153,476        103,544        208,237        709,240   
















Repricing GAP during the period

   $ 81,235      $ 25,263      $ 9,607      $ (57,267   $ 58,838   
















Cumulative GAP

   $ 81,235      $ 106,498      $ 116,105      $ 58,838     













Ratio of GAP during the period to total assets

     10.12     3.15     1.20     -7.13  













Ratio of cumulative GAP to total assets

     10.12     13.27     14.47     7.33  













Impact of Inflation and Changing Prices

The consolidated financial statements and related data presented herein have been prepared in accordance with GAAP which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.

Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, since prices are affected by inflation to a larger extent than interest rates.



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Item 8. Financial Statements and Supplementary Data.


To the Board of Directors and Stockholders

Harleysville Savings Financial Corporation

Harleysville, Pennsylvania

We have audited the accompanying consolidated statements of financial condition of Harleysville Savings Financial Corporation and subsidiary (“the Company”) as of September 30, 2012 and 2011, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Harleysville Savings Financial Corporation and subsidiary as of September 30, 2012 and 2011, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ ParenteBeard LLC

ParenteBeard LLC

Wilmington, Delaware

December 17, 2012



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Consolidated Statements of Financial Condition


     September 30,  

(In thousands, except share data)

   2012     2011  



Cash and amounts due from depository institutions

   $ 5,154     $ 3,857  

Interest bearing demand deposits

     18,432       18,725  







Total cash and cash equivalents

     23,586        22,582   

Investments and mortgage-backed securities:


Available for sale (amortized cost – 2012, $11,578; 2011, $18,560)

     11,688        18,515   

Held to maturity (fair value – 2012, $236,538; 2011, $240,581)

     227,018        231,756   

Loans receivable (net of allowance for loan losses - 2012, $4,032; 2011, $3,311)

     494,367        518,486   

Loans held for sale

     3,515        —     

Accrued interest receivable

     2,638        2,847   

Federal Home Loan Bank stock - at cost

     10,165        13,110   

Foreclosed real estate

     —          196   

Office properties and equipment, net

     11,550        12,005   

Prepaid expenses and other assets

     18,099        16,216   








   $ 802,626      $ 835,713   







Liabilities and Stockholders’ Equity





   $ 542,923      $ 524,401   

Long-term debt