UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20429 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2007 ------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------------------------------- Commission file number 0-29709 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION ------------------------------------------ (Exact name of registrant as specified in its charter) Pennsylvania 23-3028464 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 271 Main Street, Harleysville, Pennsylvania 19438 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (215) 256-8828 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $.01 Par Value, 3,921,177 shares outstanding as of May 7, 2007 Harleysville Savings Financial Corporation and Subsidiary Index PAGE(S) ------- Part I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition as of March 31, 2007 Unaudited and September 30, 2006 1 Unaudited Consolidated Statements of Income for the Three and Six Months Ended March 31, 2007 and 2006 2 Unaudited Consolidated Statements of Comprehensive Income for the Three and Six Months Ended March 31, 2007 and 2006 3 Unaudited Consolidated Statements of Stockholders' Equity for the Six Months Ended March 31, 2007 and 2006 4 Unaudited Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2007 and 2006 5 Notes to Unaudited Consolidated Financial Statements 6 - 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 - 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 - 16 Item 4. Controls and Procedures 16 Part II OTHER INFORMATION Item 1. Legal Proceedings 17 Item 1A. Risk Factors 17 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17 Item 3. Defaults upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other information 17 Signatures 17 Harleysville Savings Financial Corporation Condensed Consolidated Statements of Financial Condition March 31, September 30, 2007 2006 -------------- -------------- (Unaudited) Assets Cash and amounts due from depository institutions $ 1,604,307 $ 1,596,695 Interest bearing deposits in other banks 6,536,993 8,453,455 -------------- -------------- Total cash and cash equivalents 8,141,300 10,050,150 Investment securities held to maturity (fair value - March 31, $106,931,057; September 30, $111,248,000) 106,821,321 111,098,682 Investment securities available-for-sale at fair value 7,260,149 8,107,759 Mortgage-backed securities held to maturity (fair value - March 31, $194,049,300; September 30, $213,913,000) 198,350,674 219,493,818 Mortgage-backed securities available-for-sale at fair value 825,319 820,255 Loans receivable (net of allowance for loan losses - March 31, $1,946,390; September 30, $1,955,805) 399,799,269 385,450,375 Accrued interest receivable 3,720,325 3,969,610 Federal Home Loan Bank stock - at cost 13,809,300 15,498,600 Office properties and equipment, net 9,917,011 8,013,969 Prepaid expenses and other assets 14,990,471 13,134,625 -------------- -------------- TOTAL ASSETS $ 763,635,139 $ 775,637,843 ============== ============== Liabilities and Stockholders' Equity Liabilities: Deposits $ 434,471,139 $ 429,254,047 Advances 274,153,786 294,611,162 Accrued interest payable 1,250,287 1,406,161 Advances from borrowers for taxes and insurance 3,804,507 1,184,089 Accounts payable and accrued expenses 714,105 711,014 Income taxes payable 33,689 -- -------------- -------------- Total liabilities 714,427,513 727,166,473 ============== ============== Stockholders' equity: Preferred Stock: $.01 par value; 12,500,000 shares authorized; none issued Common stock: $.01 par value; 25,000,000 shares authorized; 3,921,177 shares issued 39,212 39,212 Additional Paid-in capital 8,031,522 7,992,014 Treasury stock, at cost (Mar. 2007, 51,361 shares; Sept. 2006, 71,441) (913,419) (1,262,412) Retained earnings - partially restricted 42,064,656 41,714,616 Accumulated other comprehensive loss (14,345) (12,060) -------------- -------------- Total stockholders' equity 49,207,626 48,471,370 -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 763,635,139 $ 775,637,843 ============== ============== See notes to unaudited condensed consolidated financial statements. page -1- Harleysville Savings Financial Corporation Unaudited Condensed Consolidated Statements of Income For the Three Months Ended For the Six Months Ended March 31, March 31, ------------------------------ ------------------------------ 2007 2006 2007 2006 ------------- ------------- ------------- ------------- INTEREST INCOME: Interest on mortgage loans $ 4,230,013 $ 3,943,558 $ 8,434,885 $ 7,884,807 Interest on mortgage-backed securities 2,335,004 2,754,221 4,779,244 5,602,480 Interest on consumer and other loans 1,606,748 1,385,364 3,158,026 2,729,369 Interest and dividends on tax-exempt investments 277,081 346,478 687,833 692,850 Interest and dividends on taxable investments 1,450,006 1,205,099 2,671,491 2,195,901 ------------- ------------- ------------- ------------- Total interest income 9,898,852 9,634,720 19,731,479 19,105,407 ------------- ------------- ------------- ------------- Interest Expense: Interest on deposits 3,806,729 3,203,365 7,528,320 6,316,741 Interest on borrowings 3,150,755 3,167,082 6,456,526 6,475,737 ------------- ------------- ------------- ------------- Total interest expense 6,957,484 6,370,447 13,984,846 12,792,478 ------------- ------------- ------------- ------------- Net Interest Income 2,941,368 3,264,273 5,746,633 6,312,929 Provision for loan losses -- -- -- -- ------------- ------------- ------------- ------------- Net Interest Income after Provision for Loan Losses 2,941,368 3,264,273 5,746,633 6,312,929 ------------- ------------- ------------- ------------- Other Income: Gain on sales of securities 159,888 8,914 159,888 8,914 Other income 385,737 273,116 778,312 594,971 ------------- ------------- ------------- ------------- Total other income 545,625 282,030 938,200 603,885 ------------- ------------- ------------- ------------- Other Expenses: Salaries and employee benefits 1,301,365 1,129,574 2,556,580 2,167,803 Occupancy and equipment 404,031 385,045 812,854 753,018 Deposit insurance premiums 12,957 13,679 26,377 27,476 Other 596,199 502,710 1,178,620 1,056,030 ------------- ------------- ------------- ------------- Total other expenses 2,314,552 2,031,008 4,574,431 4,004,327 ------------- ------------- ------------- ------------- Income before Income Taxes 1,172,441 1,515,295 2,110,402 2,912,487 Income tax expense 268,500 354,177 449,500 670,177 ------------- ------------- ------------- ------------- Net Income $ 903,941 $ 1,161,118 $ 1,660,902 $ 2,242,310 ============= ============= ============= ============= Basic Earnings Per Share $ 0.23 $ 0.30 $ 0.43 $ 0.58 ============= ============= ============= ============= Diluted Earnings Per Share $ 0.23 $ 0.29 $ 0.43 $ 0.57 ============= ============= ============= ============= Dividends Per Share $ 0.17 $ 0.16 $ 0.34 $ 0.32 ============= ============= ============= ============= See notes to unaudited condensed consolidated financial statements. page -2- Harleysville Savings Financial Corporation Unaudited Condensed Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2007 2006 --------------------------------------------------------------------------------------------------------------------------------- Net Income $ 903,941 $ 1,161,118 Other Comprehensive Income Unrealized gain on securities net of tax 2007, ($21,518); 2006, $(9,046) 41,775 (1) 24,855 ------------ --- --------------- Total Comprehensive Income $ 945,716 $ 1,185,973 ============= =============== (1) Disclosure of reclassification amount, net of tax for the three months ended: 2007 2006 ------------- --------------- Net unrealized gain arising during the three months ended $ 41,775 $ 30,738 Less: Reclassification adjustment for net gains included in net income Net of tax expense -2007, 0; 2006, $3,031 0 5,883 ------------- --------------- Net unrealized gain on securities $ 41,775 $ 24,855 ============= =============== Six Months Ended March 31, 2007 2006 --------------------------------------------------------------------------------------------------------------------------------- Net Income $ 1,660,902 $ 2,242,310 Other Comprehensive Income Unrealized loss on securities net of tax benefit 2007, $1,177; 2006, $332 (2,285) (1) (913) ------------- --------------- Total Comprehensive Income $ 1,658,617 $ 2,241,397 ============= =============== (1) Disclosure of reclassification amount, net of tax for the six months ended: 2007 2006 ------------- --------------- Net unrealized gain (loss) arising during the six months ended $ (2,285) $ 4,970 Less: Reclassification adjustment for net gains included in net income Net of tax expense -2007, 0; 2006, $3,031 0 5,883 ------------- --------------- Net unrealized loss on securities $ (2,285) $ (913) ============= =============== See notes to unaudited condensed consolidated financial statements. page -3- Harleysville Savings Financial Corporation Unaudited Condensed Consolidated Statement of Stockholders' Equity Retained Accumulated Common Additional Earnings- Other Total Stock Common Paid-in Treasury Partially Comprehensive Stockholders' Shares Stock Capital Stock Restricted Loss Equity ----------------------------------------------------------------------------------------------------------------------------------- Balance at October 1, 2006 3,921,177 $ 39,212 $7,992,014 $(1,262,412) $ 41,714,616 $ (12,060) $ 48,471,370 Net Income 1,660,902 1,660,902 Dividends - $.34 per share (1,310,862) (1,310,862) Option Compensation 56,250 56,250 Treasury stock issued for stock options exercised (3,334 shares) (13,186) 57,947 44,761 Treasury Stock issued under Dividend Reinvestment Plan (16,746 shares) (3,556) 291,046 287,490 Unrealized holding loss on available - for- sale securities, net of tax (2,285) (2,285) ---------- -------- ----------- ------------ --------------- -------------- --------------- Balance at March 31, 2007 3,921,177 $ 39,212 $8,031,522 $ (913,419) $ 42,064,656 $ (14,345) $ 49,207,626 ========== ======== =========== ============ =============== ============== =============== Retained Accumulated Common Additional Earnings- Other Total Stock Common Paid-in Treasury Partially Comprehensive Stockholders' Shares Stock Capital Stock Restricted Loss Equity ----------------------------------------------------------------------------------------------------------------------------------- Balance at October 1, 2005 3,904,136 $ 39,041 $ 7,610,511 $ (60,107) $ 39,995,584 $ (9,213) $ 47,575,816 Net Income 2,242,310 2,242,310 Issuance of Common Stock 17,041 171 171 Dividends - $.32 per share (1,249,734) (1,249,734) Option Compensation 35,025 35,025 Treasury stock purchased (1,091,072) (1,091,072) Treasury stock issued for stock options exercised (12,339) 155,122 142,783 Stock delivered under Dividend Reinvestment Plan 300,427 300,427 Unrealized holding loss on available - for- sale securities, net of tax (913) (913) --------- ---------- ------------ ------------ ------------ ------------ ------------ Balance at March 31, 2006 3,921,177 $ 39,212 $ 7,933,624 $ (996,057) $ 40,988,160 $ (10,126) $ 47,954,813 ========= ========== ============ ============ ============ ============ ============ See notes to unaudited condensed consolidated financial statements. page -4- Harleysville Savings Financial Corporation Unaudited Condensed Consolidated Statements of Cash Flows Six Months Ended March 31, ----------------------------------- 2007 2006 ---------------- -------------- Operating Activities: Net Income $ 1,660,902 $ 2,242,310 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation 259,642 219,793 Compensation charge on stock options 56,250 35,025 Amortization of deferred loan fees (1,598) (31,295) Gain on sale of securities (159,888) (8,914) Increase in cash surrender value (234,000) (215,000) Net amortization of premiums and discounts 84,924 258,300 Changes in assets and liabilities which provided (used) cash: Increase (decrease) in accounts payable and accrued expenses 36,780 (269,539) (Increase) in prepaid expenses and other assets (1,620,670) (915,636) (Increase) decrease in accrued interest receivable 249,285 (221,449) Decrease in accrued interest payable (155,874) (36,662) ---------------- -------------- Net cash provided by operating activities 175,753 1,056,933 ---------------- -------------- Investing Activities: Purchase of investment securities held to maturity (17,491,691) (20,795,000) Purchase of investment securities available for sale (471,067) (280,181) Purchase of mortgage-backed securities held to maturity (8,058,720) (2,011,250) Proceeds from the sales of mortgage-backed securities 10,290,037 -- Proceeds from maturities of investment securities held to maturity 21,769,052 163,074 Proceeds from maturities of investment securities available for sale 1,310,152 73,106 Principal collected on long-term loans & mortgage-backed securities 61,162,459 67,749,151 Proceeds of FHLB stock 1,689,300 1,453,200 Long-term loans originated (56,522,964) (46,838,255) Purchases of premises and equipment (2,162,684) (1,522,045) ---------------- -------------- Net cash provided by (used in) investing activities 11,513,874 (2,008,200) ---------------- -------------- Financing Activities: Net increase (decrease) in demand deposits, NOW accounts and savings accounts 7,365,164 (1,482,196) Net (decrease) increase in certificates of deposit (2,148,072) 14,368,443 Cash dividends (1,310,862) (1,249,734) Proceeds from advances 25,000,000 -- Repayment of FHLB advances (45,457,376) (12,377,716) Treasury stock delivered under employee stock plan and -- Dividend Reinvestment Plan 332,251 443,210 Purchase of treasury stock -- (1,091,072) Net proceeds from issuance of stock -- 171 Net increase in advances from borrowers for taxes & insurance 2,620,418 2,352,614 ---------------- -------------- Net cash (used in) provided by financing activities (13,598,477) 963,720 ---------------- -------------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,908,850) 12,453 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,050,150 7,934,980 ---------------- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,141,300 $ 7,947,433 ================ ============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Income taxes $ 2,000 $ 670,000 Interest expense 14,140,720 12,829,140 See notes to unaudited condensed consolidated financial statements. page -5- Harleysville Savings Financial Corporation Notes to Unaudited Condensed Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - The unaudited condensed consolidated financial statements include the accounts of Harleysville Savings Financial Corporation (the "Company") and its subsidiary. Harleysville Savings Bank (the "Bank") is the wholly owned subsidiary of the Company. The accompanying consolidated financial statements include the accounts of the Company, the Bank, and the Bank's wholly owned subsidiaries, HSB Inc, a Delaware corporation which was formed in order to hold certain assets, Freedom Financial LLC that allows the Company to offer non deposit products and HARL LLC that allows the Bank to invest in equity investments. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and therefore do not include information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. However, all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the six months ended March 31, 2007 are not necessarily indicative of the results which may be expected for the entire fiscal year ending September 30, 2007 or any other period. The financial information should be read in conjunction with the Annual Report on Form 10-K for the period ended September 30, 2006. Use of Estimates in Preparation of Consolidated Financial Statements - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of income and expenses during the reporting period. The most significant of these estimates is the allowance for loan losses. Actual results could differ from those estimates. Recent Accounting Pronouncements - In October 2006, the FASB issued FASB Staff Position No. 123R-5, "Amendment of FASB Staff Position FAS 123(R)-1" ("FSP 123(R)-5"). FSP 123(R)-5 amends FSP 123(R)-1 for equity instruments that were originally issued as employee compensation and then modified, with such modification made solely to reflect an equity restructuring that occurs when the holders are no longer employees. The Company does not expect the adoption of FSP 123(R)-5 to have a material impact on its financial condition, results of operations or cash flows. In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. The Company must presume the tax position will be examined by the relevant tax authority and determine whether it is more likely than not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years begining after December 15, 2006. The cumulative effect of applying the provisions of FIN 48 represents a change in accounting principle and shall be reported as an adjustment to the opening balance of retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on its Consolidated Financial Statements. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The changes to current practice resulting from the application of SFAS No. 157 relate to the definition of fair value, the methods used to measure fair value and the expanded disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. The provisions of SFAS No. 157 should be applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for certain financial instruments which require retrospective application as of the beginning of the fiscal year of initial application (a limited form of retrospective application). The transition adjustment, measured as the difference between the carrying amounts and the fair values of those financial instruments at the date SFAS No. 157 is initially applied, should be recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The Company is currently evaluating the impact of adopting SFAS No. 157 on its Consolidated Financial Statements and whether to adopt its provisions prior to the required effective date. In September 2006, the Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin ("SAB") No. 108. This release expresses the staff's views regarding the process of quantifying financial statement misstatements and addresses diversity in practice in quantifying financial statement misstatements and the potential under current practice for the build up of improper amounts on the balance sheet. SAB No. 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. The Company has reviewed the SAB in connection with our condensed consolidated financial statements for the current and prior periods, and has determined that its adoption will not have an impact on any of these financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115." SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for our Company January 1, 2008. The Company is evaluating the impact that the adoption of SFAS No. 159 will have on our consolidated financial statements. In March 2007, the FASB ratified EITF Issue No. 06-11, "Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards." EITF 06-11 requires companies to recognize the income tax benefit realized from dividends or dividend equivalents that are charged to retained earnings and paid to employees for nonvested equity-classified employee share-based payment awards as an increase to additional paid-in capital. EITF 06-11 is effective for fiscal years beginning after September 15, 2007. The Company does not expect EITF 06-11 will have a material impact on its financial position, results of operations or cash flows. On September 7, 2006, the Task Force reached a conclusion on EITF Issue No. 06-5, "Accounting for Purchases of Life Insurance-Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance" ("EITF 06-5"). The scope of EITF 06-5 consists of six separate issues relating to accounting for life insurance policies purchased by entities protecting against the loss of "key persons". The six issues are clarifications of previously issued guidance on FASB Technical Bulletin No. 85-4. EITF 06-5 is effective for fiscal years beginning after December 15, 2006. The Company does not expect it to have a material impact on the Company's consolidated financial statements. page -6- 2. INVESTMENT SECURITIES HELD TO MATURITY A comparison of amortized cost and approximate fair value of investment securities with gross unrealized gains and losses, by maturities, is as follows: March 31, 2007 Gross Gross Amortized Unrealized Unrealized Approximate Cost Gains Losses Fair Value ---------------------------------------------------------------------------------------------------------------- U.S. Government Agencies Due after 1 years through 5 years $ 5,000,000 $ (82,820) $ 4,917,180 Due after 5 years through 10 years 20,899,629 $ 26,133 (270,486) 20,655,276 Due after 10 years through 15 years 48,416,180 24,865 (720,552) 47,720,493 Due after 15 years 6,387,323 -- (65,764) 6,321,559 Tax-Exempt Obligations Due after 10 years through 15 years 17,913,446 1,046,056 18,959,502 Due after 15 years 8,204,743 265,543 (113,239) 8,357,047 -------------- --------------- --------------- --------------- Total Investment Securities $ 106,821,321 $ 1,362,597 $ (1,252,861) $ 106,931,057 ============== =============== =============== =============== A summary of investment with unrealized losses, aggregated by category, at March 31, 2007 is as follows: Less than 12 Months 12 Months or Longer Fair Value Unrealized Losses Fair Value Unrealized Losses -------------- ----------------- -------------- ----------------- US Government agencies $ 14,329,023 $ (143,477) $ 60,349,765 $ (996,145) Tax-Exempt Obligations 2,903,433 (113,239) -- -- -------------- --------------------------------------------------------- Total $ 17,232,456 $ (256,716) $ 60,349,765 $ (996,145) ============== ========================================================= Total Total Fair Value Unrealized Losses ------------- ------------------ US Government agencies $ 74,678,788 $ (1,139,622) Tax-Exempt Obligations 2,903,433 (113,239) ----------------------------------- Total $ 77,582,221 $ (1,252,861) =================================== At March 31, 2007, investment securities in a gross unrealized loss position for twelve months or longer consisted of 23 US Government Agency Securities that at such date had an aggregate depreciation of 1.6% from the Company's amortized cost basis. Management believes that the estimated fair value of the securities disclosed above is primarily dependent upon the movement in market interest rates. Management evaluated the length of time and the extent to which the market value has been less than cost and the financial condition and near term prospects of the issuer. The Company has the ability and intent to hold these securities until the anticipated recovery of fair value occurs. Management does not believe any individual unrealized loss as of March 31, 2007 represents an other-than-temporary impairment. September 30, 2006 Gross Gross Amortized Unrealized Unrealized Approximate Cost Gains Losses Fair Value ---------------------------------------------------------------------------------------------------------------- U.S. Government Agencies Due after 1 year through 5 years $ 12,000,000 $ (146,000) $ 11,854,000 Due after 5 years through 10 years 21,878,790 $ 24,290 (386,080) 21,517,000 Due after 10 years through 15 years 46,237,147 45,273 (769,420) 45,513,000 Due after 15 years 6,386,754 (97,754) 6,289,000 Tax Exempt Obligations Due after 10 years through 15 years 17,981,750 997,250 -- 18,979,000 Due after 15 years 6,614,241 481,759 -- 7,096,000 -------------- --------------- --------------- --------------- Total Investment Securities $ 111,098,682 $ 1,548,572 $ (1,399,254) $ 111,248,000 ============== =============== =============== =============== A summary of investment with unrealized losses, aggregated by category, at September 30, 2006 is as follows: Less than 12 Months 12 Months or Longer Fair Value Unrealized Losses Fair Value Unrealized Losses -------------- ------------------ -------------- ------------------ US Government agencies $ 26,578,627 $ (216,285) $ 50,655,619 $ (1,182,969) -------------- ------------------ -------------- ------------------ Total $ 26,578,627 $ (216,285) $ 50,655,619 $ (1,182,969) ============== ================== ============== ================== Total Total Fair Value Unrealized Losses ------------- ------------------ US Government agencies $ 77,234,246 $ (1,399,254) ----------------------------------- Total $ 77,234,246 $ (1,399,254) =================================== At September 30, 2006, investment securities in a gross unrealized loss position for twelve months or longer consisted of 19 US Government Agency Securities that at such date had an aggregate depreciation of 2.3% from the Company's amortized cost basis. Management believes that the estimated fair value of the securities disclosed above is primarily dependent upon the movement in market interest rates. Management evaluated the length of time and the extent to which the market value has been less than cost and the financial condition and near term prospects of the issuer. The Company has the ability and intent to hold these securities until the anticipated recovery of fair value occurs. Management does not believe any individual unrealized loss as of September 30, 2006 represents an other-than-temporary impairment. page -7- 3. INVESTMENT SECURITIES AVAILABLE-FOR-SALE A comparison of amortized cost and approximate fair value of investment securities with gross unrealized gains and losses, is as follows: March 31, 2007 Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ---------------------------------------------------------------------------------------------------------------- Equity Securities $ 1,516,667 $ 30,902 $ (92,768) $ 1,454,801 Money Market Mutual Funds 5,805,348 5,805,348 -------------- --------------- -------------- --------------- Total Investment Securities $ 7,322,015 $ 30,902 $ (92,768) $ 7,260,149 ============== =============== ============== =============== A summary of investment securities available for sale with unrealized losses, aggregated by category, at March 31, 2007 is as follows: Less than 12 Months 12 Months or Longer Fair Value Unrealized Losses Fair Value Unrealized Losses -------------- ------------------ -------------- ----------------- Equity Securities $ 1,023,251 $ (92,768) $ -- $ -- -------------- ------------------ -------------- ----------------- Total $ 1,023,251 $ (92,768) $ -- $ -- ============== ================== ============== ================= Total Total Fair Value Unrealized Losses ------------- ------------------ Equity Securities $ 1,023,251 $ (92,768) ------------- ------------------ Total $ 1,023,251 $ (92,768) ============= ================== There were no securities in a loss position greater then twelve months. Management evaluated the length of time and the extent to which the market value has been less than cost and the financial condition and near term prospects of the issuer. The Company has the ability and intent to hold these securities until the anticipated recovery of fair value occurs. Management does not believe any individual unrealized loss as of March 31, 2007 represents an other-than-temporary impairment. September 30, 2006 Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ---------------------------------------------------------------------------------------------------------------- Equity Securities $ 1,050,664 $ 13,802 $ (67,143) $ 997,323 Money Market Mutual Funds 7,110,436 7,110,436 -------------- --------------- -------------- --------------- Total Investment Securities $ 8,161,100 $ 13,802 $ (67,143) $ 8,107,759 ============== =============== ============== =============== A summary of investment securities available for sale with unrealized losses, aggregated by category, at September 30,2006 is as follows: Less than 12 Months 12 Months or Longer Fair Value Unrealized Losses Fair Value Unrealized Losses -------------- ----------------- -------------- ----------------- Equity Securities $ 582,873 $ (67,143) $ -- $ -- -------------- ----------------- -------------- ----------------- Total $ 582,873 $ (67,143) $ -- $ -- ============== ================= ============== ================= Total Total Fair Value Unrealized Losses ------------- ------------------ Equity Securities $ 582,873 $ (67,143) ------------- ------------------ Total $ 582,873 $ (67,143) ============= ================== There were no securities in a loss position greater then twelve months. Management evaluated the length of time and the extent to which the market value has been less than cost; the financial condition and near term prospects of the issuer. The Company has the ability and intent to hold these securities until the anticipated recovery of fair value occurs. Management does not believe any individual unrealized loss as of September 30, 2006 represents an other-than-temporary impairment. page -8- 4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY A comparison of amortized cost and approximate fair value of mortgage-backed securities with gross unrealized gains and losses, is as follows: March 31,2007 Gross Gross Amortized Unrealized Unrealized Approximate Cost Gains Losses Fair Value ---------------------------------------------------------------------------------------------------------------- Collateralized mortgage obligations $ 17,287,899 $ 119,699 $ (256,663) $ 17,150,935 FHLMC pass-through certificates 87,466,909 21,687 (2,127,171) 85,361,425 FNMA pass-through certificates 92,862,336 15,284 (2,077,724) 90,799,896 GNMA pass-through certificates 733,530 3,514 -- 737,044 -------------- --------------- -------------- --------------- Total Mortgage-Backed Securities $ 198,350,674 $ 160,184 $ (4,461,558) $ 194,049,300 ============== =============== ============== =============== A summary of motgage-backed securities held to maturity with unrealized losses, aggregated by category, at March 31, 2007 is as follows: Less than 12 Months 12 Months or Longer Fair Value Unrealized Losses Fair Value Unrealized Losses -------------- ----------------- -------------- ----------------- Mortgage-backed securities held to maturity $ 9,457,405 $ (30,339) $ 179,028,533 $ (4,431,219) -------------- ----------------- -------------- ----------------- Total $ 9,457,405 $ (30,339) $ 179,028,533 $ (4,431,219) ============== ================= ============== ================= Total Total Fair Value Unrealized Losses ------------- ------------------ Mortgage-backed securities held to maturity $ 188,485,938 $ (4,461,558) ------------- ------------------ Total $ 188,485,938 $ (4,461,558) ============= ================== At March 31, 2007, mortgage-related securities in a gross unrealized loss position for twelve months or longer consisted of 88 securities that at such date had an aggregate depreciation of 2.4% from the Company's amortized cost basis. Management believes that the estimated fair value of the securities disclosed above is primarily dependent upon the movement in market interest rates. Management evaluated the length of time and the extent to which the market value has been less than cost and the financial condition and near term prospects of the issuer. The Company has the ability and intent to hold these securities until the anticipated recovery of fair value occurs. Management does not believe any individual unrealized loss as of March 31, 2007 represents an other-than-temporary impairment. September 30,2006 Gross Gross Amortized Unrealized Unrealized Approximate Cost Gains Losses Fair Value ---------------------------------------------------------------------------------------------------------------- Collateralized mortgage obligations $ 15,088,964 $ 88,867 $ (319,831) $ 14,858,000 FHLMC pass-through certificates 98,855,830 70,407 (2,793,237) 96,133,000 FNMA pass-through certificates 100,287,098 83,203 (2,825,301) 97,545,000 GNMA pass-through certificates 5,261,926 115,074 5,377,000 -------------- --------------- -------------- --------------- Total Mortgage-Backed Securities $ 219,493,818 $ 357,551 $ (5,938,369) $ 213,913,000 ============== =============== ============== =============== A summary of motgage-backed securities held to maturity with unrealized losses, aggregated by category, at September 30, 2006 is as follows: Less than 12 Months 12 Months or Longer Fair Value Unrealized Losses Fair Value Unrealized Losses -------------- ----------------- -------------- ----------------- Mortgage-backed securities held to maturity $ 6,898,645 $ (68,773) $ 191,950,265 $ (5,869,596) -------------- ----------------- -------------- ----------------- Total $ 6,898,645 $ (68,773) $ 191,950,265 $ (5,869,596) ============== ================= ============== ================= Total Total Fair Value Unrealized Losses ------------- ------------------ Mortgage-backed securities held to maturity $ 198,848,910 $ (5,938,369) ------------- ------------------ Total $ 198,848,910 $ (5,938,369) ============= ================== At September 30, 2006, mortgage-related securities in a gross unrealized loss position for twelve months or longer consisted of 76 securities that at such date had an aggregate depreciation of 3.1% from the Company's amortized cost basis. Management believes that the estimated fair value of the securities disclosed above is primarily dependent upon the movement in market interest rates. Management evaluated the length of time and the extent to which the market value has been less than cost and the financial condition and near term prospects of the issuer. The Company has the ability and intent to hold these securities until the anticipated recovery of fair value occurs. Management does not believe any individual unrealized loss as of September 30, 2006 represents an other-than-temporary impairment. page -9- 5. MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE A comparison of amortized cost and approximate fair value of mortgage-backed securities with gross unrealized gains and losses, is as follows: March 31,2007 Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value --------------------------------------------------------------------------------------------- FNMA pass-through certificates $ 785,187 $ 40,132 $ -- $ 825,319 ----------- ----------- ----------- ---------- Total Mortgage-Backed Securities $ 785,187 $ 40,132 $ -- $ 825,319 =========== =========== =========== ========== September 30,2006 Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value --------------------------------------------------------------------------------------------- FNMA pass-through certificates $ 785,187 $ 35,068 $ -- $ 820,255 ----------- ----------- ----------- ---------- Total Mortgage-Backed Securities $ 785,187 $ 35,068 $ -- $ 820,255 =========== =========== =========== ========== 6. LOANS RECEIVABLE Loans receivable consist of the following: March 31, 2007 September 30, 2006 --------------- ------------------ Residential Mortgages $ 290,962,031 $ 282,181,674 Commercial Mortgages 9,500,497 5,893,737 Construction 8,027,620 6,986,632 Savings Account 855,073 1,002,672 Home Equity 73,316,689 70,515,174 Automobile and other 898,056 811,963 Home Equity Line of Credit 22,395,897 25,499,895 --------------- ------------------ Total 405,955,863 392,891,747 Undisbursed portion of loans in process (3,679,265) (4,941,266) Deferred loan fees (530,939) (544,301) Allowance for loan losses (1,946,390) (1,955,805) --------------- ------------------ Loans Receivable - net $ 399,799,269 $ 385,450,375 =============== ================== The total amount of loans being serviced for the benefit of others was approximately $3.8 million and $3.9 million at March 31, 2007 and September 30, 2006, respectively. The following schedule summarizes the changes in the allowance for loan losses: Six Months Ended Year Ended March 31, 2007 September 30, 2006 ---------------- ------------------ Balance, beginning of period $ 1,955,805 $ 1,967,607 Amounts charged-off (12,826) (20,326) Loan recoveries 3,411 8,524 ---------------- ------------------ Balance, end of period $ 1,946,390 $ 1,955,805 ================ ================== Page -10- 7. OFFICE PROPERTIES AND EQUIPMENT Office properties and equipment are summarized by major classification as follows: March 31, 2007 September 30, 2006 -------------- ------------------ Land $ 1,159,031 $ 1,159,031 Buildings 9,657,111 7,543,587 Furniture, fixtures and equipment 3,737,488 3,694,898 Automobiles 24,896 24,896 -------------- ----------------- Total 14,578,526 12,422,412 Less accumulated depreciation (4,661,515) (4,408,443) -------------- ----------------- Net $ 9,917,011 $ 8,013,969 ============== ================= 8. DEPOSITS Deposits are summarized as follows: March 31, 2007 September 30, 2006 -------------- ------------------ Non-interest bearing checking $ 11,018,271 $ 10,338,951 NOW accounts 17,670,873 15,719,531 Checking accounts 26,779,067 20,410,198 Money Market Demand accounts 57,805,632 58,989,416 Passbook and Club accounts 2,874,568 3,325,151 Certificate accounts 318,322,728 320,470,800 -------------- ------------------ Total deposits $ 434,471,139 $ 429,254,047 ============== ================== The aggregate amount of certificate accounts in denominations of more than $100,000 at March 31, 2007 and September 30, 2006 amounted to approximately $43.9 million and $47.6 million, respectively. Amounts in excess of $100,000 may not be federally insured. 9. COMMITMENTS At March 31, 2007, the following commitments were outstanding: Origination of mortgage loans $ 17,540,782 Unused line of credit loans 41,804,345 Loans in process 3,679,265 -------------- Total $ 63,024,392 ============== page -11- 10. EARNINGS PER SHARE The following shares were used for the computation of earnings per share: For the Three Months Ended For the Six Months Ended March 31, March 31, -------------------------------------------------------- 2007 2006 2007 2006 --------- --------- --------- --------- Basic 3,864,189 3,893,428 3,859,201 3,898,099 Diluted 3,891,445 3,953,751 3,892,782 3,949,506 The difference between the number of shares used for computation of basic earnings per share and diluted earnings per share represents the dilutive effect of stock options. 11. ADVANCES Advances consists of the following: March 31, September 30, 2007 2006 Weighted Weighted Interest Interest Maturing Period Amount Rate Amount Rate ------------------------------------------------------------------------------- 1 to 12 months $ 56,458,175 5.12% $ 79,492,234 4.92% 13 to 24 months 45,055,964 4.58% 46,949,489 4.79% 25 to 36 months 14,693,156 4.48% 25,850,822 4.07% 37 to 48 months 15,000,000 5.26% 8,375,148 3.96% 49 to 60 months 30,428,267 4.44% 39,417,941 5.38% 61 to 72 months 42,518,224 3.84% 59,525,528 4.47% 73 to 84 months 20,000,000 4.26% 5,000,000 3.80% 85 to 120 months 50,000,000 4.61% 30,000,000 4.10% ------------------------------------------------ Total $ 274,153,786 4.67% $ 294,611,162 4.67% ================================================ The majority of the advances are collateralized by Federal Home Loan Bank ("FHLB") stock and substantially all first mortgage loans. The Company has a line of credit with the FHLB of which $42.3 million out of $75.0 million was used at March 31, 2007 and $58.2 million was used as of September 30, 2006, for general purposes. Included in the table above at March 31, 2007 and September 30, 2006 are convertible advances whereby the FHLB has the option at a predetermined strike rate to convert the fixed interest rate to an adjustable rate tied to London Interbank Offered Rate ("LIBOR"). The Company then has the option to repay these advances if the FHLB converts the interest rate. These advances are included in the periods in which they mature. The Company has a total FHLB borrowing capacity of $535.6 million of which $249.2 million was used as of March 31, 2007. The Company has two advances that are secured by investment and mortgage-backed securities totaling $25.0 million. 12. REGULATORY CAPITAL REQUIREMENTS Harleysville Savings Bank (the "Bank") is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital (as defined) to assets (as defined). Management believes, as of March 31, 2007, that the Bank meets all capital adequacy requirements to which it is subject. As of March 31, 2007, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. The Bank's actual capital amounts and ratios are also presented in the table. To Be Considered Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio -------------------------------------------------------------------------------------------------------------------------------- As of March 31, 2007 Tier 1 Capital (to assets) $49,019,555 6.55% $29,957,960 4.00% $37,447,450 5.00% Tier 1 Capital (to risk weighted assets) 49,019,555 12.92% 29,957,960 4.00% 44,936,940 6.00% Total Capital (to risk weighted assets) 50,965,899 13.43% 30,354,640 8.00% 37,943,300 10.00% As of September 30, 2006 Tier 1 Capital (to assets) $48,182,567 6.24% $30,868,800 4.00% $38,586,000 5.00% Tier 1 Capital (to risk weighted assets) 48,182,567 13.02% 14,800,960 4.00% 22,201,440 6.00% Total Capital (to risk weighted assets) 50,138,888 13.55% 29,601,920 8.00% 37,002,400 10.00% page -12- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This report contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by and information currently available to management. In addition, in those and other portions of this document, the words "anticipate," "believe," "estimate," "intend," "should" and similar expressions, or the negative thereof, as they relate to the Company or the Company's management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future-looking events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements. The Company's primary business consists of attracting deposits from the general public through a variety of deposit programs and investing such deposits principally in first mortgage loans secured by residential properties in the Company's primary market area. The Company also originates a variety of consumer loans, predominately home equity loans and lines of credit also secured by residential properties in the Company's primary lending area. The Company serves its customers through its full-service branch network as well as through remote ATM locations, the internet and telephone banking. Critical Accounting Policies and Judgments ------------------------------------------ The Company's consolidated financial statements are prepared based on the application of certain 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 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. At March 31, 2007, no loans were considered impaired. 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 may be 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, page -13- 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, recent 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. Changes in Financial Position for the Six-Month Period Ended March 31, 2007 --------------------------------------------------------------------------- Total assets at March 31, 2007 were $763.6 million, a decrease of $12.0 million for the six-month period then ended. The decrease was primarily the result of a decrease in mortgage-backed securities held to maturity of $21.1 million and investment securities held to maturity of $4.3 million. These decreases were partially offset by an increase in loans receivable of $14.3 million. As of March 31, 2007, total deposits increased by $5.2 million to $434.5 million. Advances from borrowers for taxes and insurance also increased by $2.6 million. There was also a decrease in advances of $20.5 million due to the growth of deposits and normal cash flows. Comparisons of Results of Operations for the Three and Six Month Period Ended ----------------------------------------------------------------------------- March 31, 2007 with the Three and Six Month Period Ended March 31, 2006. ------------------------------------------------------------------------ Net Interest Income ------------------- Net interest income was $2.94 million for the three-month period ended March 31, 2007 compared to $3.3 million for the comparable period in 2006. The decrease in the net interest income for the three-month period ended March 31, 2007 when compared to the same period in 2006 is attributed to the decrease in interest rate spread to 1.40% in 2007 from 1.57% in 2006. The decrease in the net interest income for the six-month period ended March 31, 2007 when compared to the same period in 2006 can be attributed to the decrease in interest rate spread to 1.36% in 2007 from 1.51% in 2006. Net interest income was $5.7 million for the six-month periods ended March 31, 2007 compared to $6.3 million for the same period in 2006. Total interest income was $9.9 million for the three-month period ended March 31, 2007 compared to $9.6 million for the comparable period in 2006. For the six month period ended March 31, 2007, total interest income was $19.7 million compared to $19.1 million for the comparable period in 2006. The increase is the result of the increased average yield for the interest-earning assets to 5.53% and 5.44% for the three and six-month periods ended March 31, 2007, respectively, from 5.18% and 5.14% for the comparable periods in 2006. Total interest expense increased to $7.0 million for the three-month period ended March 31, 2007 from $6.4 million for the comparable period in 2006. For the six-month period ended March 31, 2007, total interest expense increased to $14.0 million from $12.8 million for the comparable period in 2006. These increases occurred as a result of a increase in the average rate paid on interest-bearing liabilities to 4.13% and 4.10% for the three and six month periods ended March 31, 2007, respectively, from 3.62% and 3.63% for the comparable period ended March 31, 2006. Other Income ------------ Non-interest income increased to $546,000 for the three-month period ended March 31, 2007 from $282,000 for the comparable period in 2006. The increase is due to the fact that the Company sold investments classified as held to maturity for a gain of approximately $160,000 and had approximately $48,000, $22,000 and $10,000 of additional income from fees associated with transaction accounts, fees associated with loans and additional Bank Owned Life Insurance ("BOLI") income. The Company sold securities held to maturity in accordance with provisions of SFAS No. 115 allowing such securities to be sold if principal reductions on such securities were at least 85%. Non-interest income increased to $938,000 for the six-month period ended March 31, 2007 from $604,000 for the comparable period in 2006. The increase is due to the fact that the Company sold investments for a gain of approximately $160,000 and had approximately $101,000, $35,000 and $15,000 of additional income from fees associated with transaction accounts, fees associated with loans and additional BOLI income. Other Expenses -------------- For the three-month period ended March 31, 2007, non-interest expenses increased by $284,000 or 14.0% to $2.3 million compared to $2.0 million for the same period in 2006. For the six month period ended March 31, 2007, non-interest expenses increased by $570,000 or 14.24% to $4.6 million compared to $4.0 million for the same period in 2006. Management believes that these are reasonable increases in the cost of operations after considering the impact of opening a new branch location in June of 2006 and additional expenses related to the Company's new commercial loan department. The annualized ratio of non-interest expenses to average assets for the three and six page -14- month periods ended March 31, 2007 and 2006 were 1.23%, 1.21% and 1.06%, 1.04%, respectively. Income Taxes ------------ The Company made provisions for income taxes of $268,500 and $449,500 for the three and six-month periods ended March 31, 2007, respectively, compared to $354,000 and $670,000 for the comparable periods in 2006. These provisions are based on the levels of taxable income, adjusted for tax-exempt income on investments. The Company's effective tax rate was 22.9% and 21.3% for the three and six-month periods ended March 21, 2007 compared to 23.4% and 23.0% for the three and six-month periods ended March 31, 2006. Liquidity and Capital Resources ------------------------------- As of March 31, 2007, the Company had $63.0 million in commitments to fund loan originations, disburse loans in process and meet other obligations. Management anticipates that the majority of these commitments will be funded within the next six months by means of normal cash flows, FHLB borrowings and new deposits. The amount of certificate accounts, which are scheduled to mature during the 12 months ending March 31, 2008, is $276.4 million. Management expects that a substantial portion of these maturing deposits will remain as accounts in the Company. The Company invests excess funds in overnight deposits and other short-term interest-earning assets, which provide liquidity to meet lending requirements. The Company also has available borrowings with the Federal Home Loan Bank of Pittsburgh up to the Company's maximum borrowing capacity, which was $535.6 million at March 31, 2007 of which $249.2 million was outstanding at March 31, 2007. The Bank's net income for the six months ended March 31, 2007 of $1.7 million increased the Bank's stockholders' equity to $49.2 million or 6.6% of total assets. This amount is well in excess of the Bank's minimum regulatory capital requirement. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company has instituted programs designed to decrease the sensitivity of its earnings to material and prolonged increases in interest rates. The principal determinant of the exposure of the Company's earnings to interest rate risk is the timing difference between the repricing or maturity of the Company's interest-earning assets and the repricing or maturity of its interest-bearing liabilities. If the maturities of such assets and liabilities were perfectly matched, and if the interest rates borne by its assets and liabilities were equally flexible and moved concurrently, neither of which is the case, the impact on net interest income of rapid increases or decreases in interest rates would be minimized. The Company's asset and liability management policies seek to increase the interest rate sensitivity by shortening the repricing intervals and the maturities of the Company's interest-earning assets. Although management of the Company believes that the steps taken have reduced the Company's overall vulnerability to increases in interest rates, the Company remains vulnerable to material and prolonged increases in interest rates during periods in which its interest rate sensitive liabilities exceed its interest rate sensitive assets. The authority and responsibility for interest rate management is vested in the Company's Board of Directors. The Chief Executive Officer implements the Board of Directors' policies during the day-to-day operations of the Company. Each month, the Chief Financial Officer ("CFO") 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 CFO 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 March 31, 2007, 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 page -15- anticipated to be repaid. The passbook accounts, negotiable order of withdrawal ("NOW") accounts, interest bearing accounts, and money market deposit accounts, are included in the "Over 5 Years" categories based on management's beliefs that these funds are core deposits having significantly longer effective maturities based on the Company's retention of such deposits in changing interest rate environments. Generally, during a period of rising interest rates, a positive gap would result in an increase in net interest income while a negative gap would adversely affect net interest income. Conversely, during a period of falling interest rates, a positive gap would result in a decrease in net interest income while a negative gap would positively affect net interest income. However, the following table does not necessarily indicate the impact of general interest rate movements on 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. 1 Year 1 to 3 3 to 5 Over 5 or less Years Years Years Total --------- --------- --------- --------- --------- Interest-earning assets: Mortgage loans $ 34,159 $ 54,663 $ 42,658 $ 161,482 $ 292,962 Commercial loans 5,873 766 328 2,533 9,500 Mortgage-backed securities 68,086 66,855 32,760 31,475 199,176 Consumer and other loans 48,445 27,056 12,825 9,140 97,466 Investment securities and other investments 42,549 22,265 15,470 67,914 148,198 ---------------------- --------- --------- --------- Total interest-earning assets 199,112 171,605 104,041 272,544 747,302 -------------------------------------------------- --------- Interest-bearing liabilities: Passbook and Club accounts -- -- -- 2,875 2,875 NOW accounts -- -- -- 44,450 44,450 Money Market Deposit accounts 16,663 -- -- 35,144 51,807 Choice Savings 1,499 -- -- 4,499 5,998 Certificate accounts 199,758 112,099 6,466 -- 318,323 Borrowed money 75,146 47,494 44,131 107,383 274,154 --------- --------- --------- --------- --------- Total interest-bearing liabilities 293,066 159,593 50,597 194,351 697,607 --------- --------- --------- --------- --------- Repricing GAP during the period $ (93,954) $ 12,012 $ 53,444 $ 78,193 $ 49,695 ========== ========= ========= ========= ========= Cumulative GAP $ (93,954) $ (81,942) $ (28,498) $ 49,695 ========== ========== ========== ========= Ratio of GAP during the period to total assets -12.30% 1.57% 7.00% 10.24% ========== ========== ========== ========== Ratio of cumulative GAP to total assets -12.30% -10.73% -3.73% 6.51% ========== ========== ========== ========== Item 4. Controls and Procedures Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and regulations and are operating in an effective manner. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. page -16- Part II OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 1A. Risk Factors There are no material changes to the risk factors set forth in Part 1, Item 1A, "Risk Factors" of the Company's Form 10-K for the year ended September 30, 2006. Please refer to that section for disclosures regarding the risk and uncertainties related to the Company's business. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The following table presents the repurchasing activity of the stock repurchase program during the quarter ended March 31, 2007: Total Number of Shares Purchased as Part of Maximum Number of Total Publicly Shares that May Number of Average Announced Yet Be Purchased Shares Price Paid Plans or Under the Plans Period Purchased per Share Programs or Programs (a) January 1 - 31, 2007 39,787 Febuary1 - 28, 2007 39,787 March 1 - 31, 2007 39,787 --------- ---------- ------------ ----------------- Total 39,787 ================= Notes to this table: (a) On June 18, 2003, the Company announced its current program to repurchase up to 5.0% of the outstanding shares of Common Stock of the Company, or 191,667 shares. The program does not have an expiration date and all shares have been purchased in the open market. Item 3. Defaults upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other information. Not applicable. Item 6. Exhibits -------- 31.1 Certification of Chief Executive Officer 31.2 Certification of Chief Financial Officer 32.0 Section 1350 Certification of Chief Executive Officer and Chief Financial Officer page -17- Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HARLEYSVILLE SAVINGS FINANCIAL CORPORATION Date: May 14, 2007 By: /s/ Ronald B. Geib ------------------------------------- Ronald B. Geib Chief Executive Officer Date: May 14, 2007 By: /s/ Brendan J. McGill ------------------------------------- Brendan J. McGill Senior Vice President Treasurer and Chief Financial Officer