SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20429 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission file number 0-29709 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION ------------------------------------------ (Exact name of registrant as specified in its charter Pennsylvania 23-3028464 ------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 271 Main Street, Harleysville, Pennsylvania 19438 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (215) 256-8828 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $.01 Par Value, 2,256,281 as of April 29, 2002 HARLEYSVILLE SAVINGS FINANCIAL CORPORATION AND SUBSIDIARY Index ----- PAGE(S) ------- Part I FINANCIAL INFORMATION Item 1. Financial Statements Unaudited Condensed Consolidated Statements of Financial Condition as of March 31, 2002 and September 30, 2001 1 Unaudited Condensed Consolidated Statements of Income for the Three and Six Months Ended March 31, 2002 and 2001 2 Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended March 31, 2002 and 2001 3 Unaudited Condensed Consolidated Statements of Stockholders' Equity for the Six Months Ended March 31, 2002 3 Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2002 and 2001 4 Notes to Unaudited Condensed Consolidated Financial Statements 5 - 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 10 - 11 Part II OTHER INFORMATION Item 1. - 6. 12 Signatures 13 Harleysville Savings Financial Corporation Unaudited Condensed Consolidated Statements of Financial Condition March 31, September 30, 2002 2001 ------------- ------------- Assets Cash and amounts due from depository institutions $ 1,321,675 $ 1,360,099 Interest bearing deposits in other banks 15,073,224 7,588,033 ------------- ------------- Total cash and cash equivalents 16,394,899 8,948,132 Investment securities held to maturity (fair value - March 31, $60,251,000; September 30, $63,568,000) 60,099,732 62,202,405 Investment securities available-for-sale at fair value 2,159,997 3,293,981 Mortgage-backed securities held to maturity (fair value - March 31, $169,266,000; September 30, $171,236,000) 168,474,453 167,726,725 Mortgage-backed securities available-for-sale at fair value 10,954,668 -- Loans receivable (net of allowance for loan losses - March 31, $2,041,301; September 30, $2,038,383) 299,411,294 290,213,221 Accrued interest receivable 2,953,261 3,402,945 Federal Home Loan Bank stock - at cost 9,549,100 8,950,200 Office properties and equipment 5,090,898 5,224,482 Deferred income taxes 265,746 260,041 Prepaid expenses and other assets 8,090,636 8,165,985 ------------- ------------- TOTAL ASSETS $ 583,444,684 $ 558,388,117 ============= ============= Liabilities and Stockholders' Equity Liabilities: Deposits $ 354,294,120 $ 350,146,555 Advances from Federal Home Loan Bank 188,767,707 171,309,384 Accrued interest payable 887,552 727,501 Advances from borrowers for taxes and insurance 2,908,098 979,964 Accounts payable and accrued expenses 591,196 960,825 ------------- ------------- Total liabilities 547,448,673 524,124,229 ------------- ------------- Commitments Stockholders' equity: Preferred Stock: $.01 par value; 7,500,000 shares authorized; none issued Common stock: $.01 par value; 15,000,000 shares authorized; issued and outstanding, Mar. 2002, 2,316,490; Sept. 2001, 2,306,455 23,165 23,065 Paid-in capital in excess of par 7,492,633 7,358,681 Treasury stock, at cost (2002, 60,209 shares; 2001, 65,659 shares) (899,104) (1,024,733) Retained earnings - partially restricted 29,405,700 27,922,182 Accumulated other comprehensive loss (26,383) (15,307) ------------- ------------- Total stockholders' equity 35,996,011 34,263,888 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 583,444,684 $ 558,388,117 ============= ============= See notes to unaudited condensed consolidated financial statements. -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, -------------------------------- -------------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- INTEREST INCOME: Interest on mortgage loans $ 4,398,502 $ 4,060,612 $ 8,915,368 $ 8,099,004 Interest on mortgage-backed securities 2,389,599 2,530,112 4,774,527 4,883,899 Interest on consumer and other loans 980,560 1,087,845 1,963,248 2,174,863 Interest and dividends on investments 877,377 1,411,942 1,931,043 2,831,524 ------------ ------------ ------------ ------------ Total interest income 8,646,038 9,090,511 17,584,186 17,989,290 ------------ ------------ ------------ ------------ Interest Expense: Interest on deposits 3,390,498 4,166,432 7,280,503 8,278,512 Interest on borrowings 2,595,594 2,491,209 5,151,405 4,919,914 ------------ ------------ ------------ ------------ Total interest expense 5,986,092 6,657,641 12,431,908 13,198,426 ------------ ------------ ------------ ------------ Net Interest Income 2,659,946 2,432,870 5,152,278 4,790,864 Provision for loan losses -- -- -- -- ------------ ------------ ------------ ------------ Net Interest Income after Provision for Loan Losses 2,659,946 2,432,870 5,152,278 4,790,864 ------------ ------------ ------------ ------------ Other Income: (Loss) gain on sales of securities (23,894) 133,737 (23,894) 133,737 Gain on sale of loans 728 728 Other income 259,370 231,173 527,783 455,281 ------------ ------------ ------------ ------------ Total other income 236,204 364,910 504,617 589,018 ------------ ------------ ------------ ------------ Other Expenses: Salaries and employee benefits 860,238 757,958 1,670,302 1,465,244 Occupancy and equipment 311,538 280,644 632,402 543,248 Deposit insurance premiums 15,795 15,028 31,423 30,800 Other 384,557 362,741 764,700 738,956 ------------ ------------ ------------ ------------ Total other expenses 1,572,128 1,416,371 3,098,827 2,778,248 Income before Income Taxes 1,324,022 1,381,409 2,558,068 2,601,634 Income tax expense 264,150 349,100 493,017 668,900 ------------ ------------ ------------ ------------ Net Income $ 1,059,872 $ 1,032,309 $ 2,065,051 $ 1,932,734 ============ ============ ============ ============ Basic Earnings Per Share $ 0.47 $ 0.46 $ 0.92 $ 0.86 ============ ============ ============ ============ Diluted Earnings Per Share $ 0.46 $ 0.46 $ 0.90 $ 0.86 ============ ============ ============ ============ Dividends Per Share $ 0.13 $ 0.12 $ 0.26 $ 0.24 ============ ============ ============ ============ See notes to unaudited condensed consolidated financial statements. -2- Harleysville Savings Financial Corporation Unaudited Condensed Consolidated Statement of Comprehensive Income Three Months Ended 2002 2001 ------------------------------------------------------------------------------------------------------------- Net Income $ 1,059,872 $ 1,032,309 Other Comprehensive Income Unrealized (loss) gain on securities net of tax ( benefit) or expense (9,043) 154,434 ----------- ----------- Total Comprehensive Income $ 1,050,829 $ 1,186,743 =========== =========== Six Months Ended 2002 2001 ------------------------------------------------------------------------------------------------------------- Net Income $ 2,065,051 $ 1,955,734 Other Comprehensive Income Unrealized (loss) gain on securities net of tax ( benefit) or expense (11,076) 88,786 ----------- ----------- Total Comprehensive Income $ 2,053,975 $ 2,044,520 ============ =========== See notes to unaudited condensed consolidated financial statements. Harleysville Savings Financial Corporation Unaudited Condensed Consolidated Statement of Stockholders' Equity Paid-in Retained Accumulated Capital Earnings- Other Total Common in Excess Treasury Partially Comprehensive Stockholders' Stock of Par Stock Restricted Loss Equity -------------------------------------------------------------------------------------------------------------------- ------------- Balance at October 1, 2001 $ 23,065 $ 7,358,681 $ (1,024,733) $ 27,922,182 $ (15,307) $ 34,263,888 ======== =========== ============= ============ ========== ============ Net Income 2,065,051 2,065,051 Issuance of Common Stock: 100 133,952 134,052 Dividends - $.13 per share (581,533) (581,533) Use of treasury stock 276,109 276,109 Purchase of treasury stock (150,480) (150,480) Unrealized holding loss on available-for- sale securities, net of tax (11,076) (11,076) -------- ----------- ------------ ------------ ---------- ------------ Balance at March 31, 2002 $ 23,165 $ 7,492,633 $ (899,104) $ 29,405,700 $ (26,383) $ 35,996,011 ======== =========== ============= ============ ========== ============ See notes to unaudited condensed consolidated financial statements. -3- Harleysville Savings Financial Corporation Unaudited Condensed Consolidated Statements of Cash Flows Six Months Ended March 31, 2002 2001 ---- ---- Operating Activities: Net Income $ 2,065,051 $ 1,932,734 Adjustments to reconcile net income to net cash provided by (used by) operating activities: Depreciation 251,777 232,834 Amortization of deferred loan fees (214,002) (77,776) Gain on sale of loans (728) Loss on sale of securities available for sale 23,894 Proceeds from the sale of loans held for sale 102,918 Gain on sale of mortgage backed securities available for sale -- 133,737 Changes in assets and liabilities which provided (used) cash: Decrease in accounts payable and accrued expenses and income taxes payable (369,629) (6,327) Decrease in deferred income taxes 41,552 52,789 Decrease in prepaid expenses and other assets (75,349) (238,850) Decrease (increase) in accrued interest receivable 449,684 (33,996) Increase in accrued interest payable 160,051 258,537 ------------ ------------ Net cash provided by operating activities 2,435,219 2,253,682 ------------ ------------ Investing Activities: Purchase of investment securities held to maturity (25,549,315) (8,383,745) Proceeds from maturities of investment securities held to maturity 27,651,988 16,000,726 Proceeds from sale of mortgage-backed securities available for sale -- 7,331,055 Purchase of investment securities available for sale (2,808,379) (4,469,715) Proceeds from sale of investment securities available for sale 3,918,469 Purchase of FHLB stock (598,900) (1,585,000) Long-term loans originated or acquired (66,185,670) (35,113,654) Purchase of mortgage-backed securities available for sale (11,008,185) Purchase of mortgage-backed securities held to maturity (29,373,041) (34,195,264) Principal collected on long-term loans & mortgage-backed securities 85,870,604 35,584,477 Purchases of premises and equipment (118,193) (468,622) ------------ ------------ Net cash used in investing activities (18,200,622) (25,299,742) ------------ ------------ Financing Activities: Net increase in demand deposits, NOW accounts and savings accounts 15,375,478 6,788,392 Net (decrease) increase in certificates of deposit (11,227,913) 8,688,224 Cash dividends (581,533) (534,371) Net increase in FHLB advances 17,458,323 15,569,686 Use of treasury stock 276,109 -- Purchase of treasury stock (150,480) (293,937) Net proceeds from issuance of stock 134,052 140,778 Net increase in advances from borrowers for taxes & insurance 1,928,134 2,467,520 ------------ ------------ Net cash provided by financing activities 23,212,170 32,826,292 ------------ ------------ INCREASE IN CASH AND CASH EQUIVALENTS 7,446,767 9,780,232 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,948,132 4,080,202 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,394,899 $ 13,860,434 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Income taxes $ 627,519 $ 523,353 Interest expense 12,591,959 12,939,889 See notes to unaudited condensed consolidated financial statements. -4- Notes to Unaudited Condensed Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - The accompanying unaudited financial statements have been prepared in accordance with the instructions for Form 10-Q and therefore do not include information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with generally accepted accounting principles. However, all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation have been included. The results of operations for the three and six months ended March 31, 2002 are not necessarily indicative of the results which may be expected for the entire fiscal year or any other period. 2. INVESTMENT SECURITIES HELD TO MATURITY A comparison of cost and approximate fair value of investment securities, by maturities, is as follows: March 31, 2002 ----------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Losses Fair Value ----------------------------------------------------------------------------------------------------------------------------- U.S. Government agencies Due after 1 years through 5 years $ 14,060,547 $ (58,547) $ 14,002,000 Due after 5 years through 10 years 2,000,000 $ 99,000 2,099,000 Due after 10 years through 15 years 18,541,015 74,069 (258,084) 18,357,000 Tax Exempt Obligations Due after 10 years through 15 years 3,529,024 61,611 (3,635) 3,587,000 Due after 15 years 21,969,146 463,612 (226,758) 22,206,000 ------------ ----------- ----------- ------------ Total Investment Securities $ 60,099,732 $ 698,292 $ (547,024) $ 60,251,000 ============ =========== ============ ============ September 30, 2001 ----------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Losses Fair Value ----------------------------------------------------------------------------------------------------------------------------- U.S. Government agencies Due after 2 years through 5 years $ 1,000,000 $ -- $ 1,000,000 Due after 5 years through 10 years 12,985,052 $ 214,948 -- 13,200,000 Due after 10 years through 15 years 24,446,500 304,500 -- 24,751,000 Tax Exempt Obligations Due after 15 years 23,770,853 846,147 -- 24,617,000 ------------ ----------- ----------- ------------ Total Investment Securities $ 62,202,405 $ 1,365,595 $ -- $ 63,568,000 ============ =========== ============ ============ The Company has the positive intent and the ability to hold these securities to maturity. At March 31, 2002, neither a disposal, nor conditions that could lead to a decision not to hold these securities to maturity were reasonably foreseen. -5- 3. INVESTMENT SECURITIES AVAILABLE-FOR-SALE A comparison of cost and approximate fair value of investment securities is as follows: March 31, 2002 --------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Losses Fair Value --------------------------------------------------------------------------------------------------------------------------- ARM Mutual Funds $ 2,159,997 $ -- $ -- $ 2,159,997 ----------- ----------- ------------ ----------- Total Investment Securities $ 2,159,997 $ -- $ -- $ 2,159,997 =========== =========== ============ =========== September 30, 2001 --------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Losses Fair Value --------------------------------------------------------------------------------------------------------------------------- ARM Mutual Funds $ 3,317,173 $ -- $ (23,192) $ 3,293,981 ----------- ----------- ------------ ----------- Total Investment Securities $ 3,317,173 $ -- $ (23,192) $ 3,293,981 =========== =========== ============ =========== 4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY A comparison of cost and approximate fair value of mortgage-backed securities is as follows: March 31, 2002 --------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Losses Fair Value --------------------------------------------------------------------------------------------------------------------------- Collateralized mortgage obligations $61,369,897 $ 420,674 $ (109,571) $61,681,000 FHLMC pass-through certificates 26,323,798 180,738 (205,536) 26,299,000 FNMA pass-through certificates 24,808,563 154,046 (82,609) 24,880,000 GNMA pass-through certificates 55,972,195 522,802 (88,997) 56,406,000 ------------ ----------- ------------ ------------ Total Mortgage-backed Securities $168,474,453 $ 1,278,260 $ (486,713) $169,266,000 ============ =========== ============ ============ September 30, 2001 --------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Losses Fair Value --------------------------------------------------------------------------------------------------------------------------- Collateralized mortgage obligations $68,183,560 $ 887,139 $ (181,699) $68,889,000 FHLMC pass-through certificates 14,315,089 544,911 -- 14,860,000 FNMA pass-through certificates 19,714,010 528,990 -- 20,243,000 GNMA pass-through certificates 65,514,066 1,729,934 -- 67,244,000 ------------ ----------- ------------ ------------ Total Mortgage-backed Securities $167,726,725 $ 3,690,974 $ (181,699) $171,236,000 ============ =========== ============ ============ 5. MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE A comparison of cost and approximate fair value of mortgage-backed securities is as follows: March 31, 2002 --------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Losses Fair Value --------------------------------------------------------------------------------------------------------------------------- FNMA pass-through certificates $ 10,994,642 $ 1,209 $ (41,183) $ 10,954,668 ------------ ----------- ------------ ------------ Total Mortgage-backed Securities $ 10,994,642 $ 1,209 $ (41,183) $ 10,954,668 ============ =========== ============ ============ -6- 6. LOANS RECEIVABLE Loans receivable consist of the following: March 31, 2002 September 30, 2001 -------------- ------------------ Residential Mortgages $ 239,459,770 $ 233,290,694 Commercial Mortgages 581,814 785,923 Construction 8,266,440 14,649,063 Education 2,392,400 1,041,197 Savings Account 531,156 617,244 Home Equity 43,578,640 43,401,198 Automobile and other 649,959 628,752 Line of Credit 13,946,085 9,806,918 ------------- ------------- Total 309,406,264 304,220,989 Undisbursed portion of loans in process (5,837,140) (9,919,306) Deferred loan fees (2,116,529) (2,052,274) Allowance for loan losses (2,041,301) (2,036,188) ------------- ------------- Loans receivable - net $ 299,411,294 $ 290,213,221 ============= ============= The total amount of loans being serviced for the benefit of others was approximately $3.9 million and $4.9 million at March 31, 2002 and September 30, 2001, respectively. The following schedule summarizes the changes in the allowance for loan losses: Six Months Ended March 31, -------------------------- 2002 2001 ---- ---- Balance, beginning of period $ 2,036,188 $ 2,038,131 Loan recoveries 5,113 252 ----------- ----------- Balance, end of period $ 2,041,301 $ 2,038,383 =========== =========== 7. OFFICE PROPERTIES AND EQUIPMENT Office properties and equipment are summarized by major classification as follows: March 31, 2002 September 30, 2001 -------------- ------------------ Land and buildings $ 5,088,965 $ 5,081,110 Construction in progress 4,725 -- Furniture, fixtures and equipment 3,350,654 3,243,153 Automobiles 56,164 56,164 ----------- ----------- Total 8,500,508 8,380,427 Less accumulated depreciation (3,409,610) (3,155,945) ----------- ----------- Net $ 5,090,898 $ 5,224,482 8. DEPOSITS Deposits are summarized as follows: March 31, 2002 September 30, 2001 -------------- ------------------ NOW accounts $ 14,180,759 $ 12,280,113 Checking accounts 8,034,034 6,859,090 Money Market Demand accounts 79,960,823 67,941,336 Passbook and Club accounts 2,815,484 2,535,083 Certificate accounts 249,303,020 260,530,933 ------------ ------------ Total deposits $354,294,120 $350,146,555 The aggregate amount of certificate accounts in denominations of more than $100,000 at March 31, 2002 amounted to approximately $17.0 million. -7- 9. COMMITMENTS At March 31, 2002, the following commitments were outstanding: Origination of fixed-rate mortgage loans $ 4,697,600 Unused line of credit loans 17,852,270 Loans in process 5,837,140 ----------- Total $28,387,010 =========== 10. DIVIDEND On April 17, 2002, the Board of Directors declared a cash dividend of $.13 per share payable on May 22, 2002 to the stockholders' of record at the close of business on May 8, 2002. 11. EARNINGS PER SHARE The calculations of earnings per share were based on the number of common stock and common stock equivalents outstanding for the six months ended March 31, 2002 and 2001. The following average shares were used for the computation of earnings per share: For the Three Months Ended For the Six Months Ended March 31, March 31, --------------------------------- ------------------------------- 2002 2001 2002 2001 --------- --------- --------- --------- Basic 2,249,887 2,222,695 2,241,456 2,226,339 Diluted 2,292,752 2,251,235 2,281,545 2,252,742 -8- 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. Changes in Financial Position for the Six Month Period Ended March 31, 2002 --------------------------------------------------------------------------- Total assets at March 31, 2002 were $583.4 million, an increase of $25.1 million or 4.49% for the six month period. This increase was primarily the result of an increase in mortgage-backed securities, loans receivable and cash and cash equivalents of approximately $11.7 million, $9.2 million and $7.5 million, respectively. The remainder was due to an increase in Federal Home Loan Bank stock of approximately $599 thousand. These increases were partially offset by decreases in investment securities, accrued interest receivable, office property and equipment and prepaid expenses and other assets of $3.2 million, $450 thousand, $133 thousand and $75 thousand, respectively. During the six month period ended March 31, 2002, total deposits increased by $4.2 million to $354.3 million. Advances from borrowers for taxes and insurance also increased by $1.9 million. This is a seasonal increase as the majority of taxes the Company escrows for are disbursed in the month of August. There was also an increase in advances from Federal Home Loan Bank of $17.5 million, which was used to fund the purchase of investment securities and fund loans. Comparisons of Results of Operations for the Three and Six Month Period Ended ----------------------------------------------------------------------------- March 31, 2002 with the Three and Six Month Period Ended March 31, 2001. ------------------------------------------------------------------------ Net Interest Income ------------------- The increase in the net interest income for the three and six month periods ended March 31, 2002 when compared to the same periods in 2001 can be attributed to the increase in the average balance of interest-earning assets to $561.2 and $554.6 million from $504.8 and $495.2 million, respectively. These increases were partially offset by a smaller increase in the average balance of interest-bearing liabilities to $533.4 and $527.9 million for the three and six month periods ended March 31, 2002, respectably, when compared to $479.5 and $471.1 million the same periods in 2001. Total interest income was $8.7 million for the three-month period ended March 31, 2002 compared to $9.1 million for the comparable period in 2001. For the six month period ended March 31, 2002, total interest income was $17.6 million compared to $18.0 million for the comparable period in 2001. The decrease is the result of the decreased average yield for the interest-earning assets to 6.16% and 6.34% for the three and six-month period ended March 31, 2002, respectively, from 7.20% and 7.27% for the comparable periods in 2001. Total interest expense decreased to $6.0 million for the three-month period ended March 31, 2002 from $6.7 million for the comparable period in 2001. For the six-month period ended March 31, 2002, total interest expense decreased to $12.4 million from $13.2 million for the comparable period in 2001. These decreases occurred as a result of a decrease in the average rate paid on interest-bearing liabilities from 5.55% and 5.60% for the three and six month periods ended March 31, 2001, respectively, to 4.49% and 4.71% for the comparable period ended March 31, 2002. -9- Other Income ------------ Other income decreased to $236,000 for the three-month period ended March 31, 2002 from $365,000 for the comparable period in 2001. For the six-month period ended March 31, 2002, other income decreased to $505,000 from $589,000 for the comparable period in 2001. The three and six-month decrease is due to a non-recurring gain on the sale of securities in 2001 which was partially offset by an increase in the fee generating services offered by the Company and additional income from Bank Owned Life Insurance. Other Expenses -------------- During the quarter ended March 31, 2002, other expenses increased by $156,000 or 11.0% to $1.6 million when compared to the same period in 2001. For the six month period ended March 31, 2002, other expenses increased by $321,000 or 11.5% compared to the comparable period in 2001. Management believes these are normal increases in the cost of operations after considering the effects of inflation and the impact of the growth in the assets of the Company when compared to the same periods in 2001. The annualized ratio of expenses to average assets for the three and six month periods ended March 31, 2002 was 1.09%. Income Taxes ------------ The Company made provisions for income taxes of $264,000 and $493,000 for the three and six-month periods ended March 31, 2002, respectively, compared to $349,000 and $669,000 for the comparable periods in 2001. These provisions are based on the levels of taxable income. Critical Accounting Policies ---------------------------- In management's opinion, the most critical accounting policy impacting the Company's consolidated financial statements is the evaluation of the allowance for loan losses. Management carefully monitors the credit quality of the loan portfolio and makes estimates about the amount of credit losses that have been incurred at each financial statement date. Management evaluates the fair value of collateral supporting the impaired loans using independent appraisals and other measures of fair value. This process involved subjective judgments and assumptions and is subject to change based on factors that may be outside the control of the Company. Liquidity and Capital Resources ------------------------------- The Company's net income for the quarter ended March 31, 2002 of $1,060,000 increased stockholder's equity to $36.0 million or 6.2% of total assets. This amount is well in excess of the Company's minimum regulatory capital requirements as illustrated below: (in thousands) Leveraged Risk-based -------------------- ----------------- Actual regulatory capital $35,970 6.2% $38,101 15.0% Minimum required regulatory capital 23,338 4.0% 20,299 8.0% ------- --- ------- ---- Excess capital $12,632 2.2% $17,802 7.0% The liquidity of the Company's operations, measured by the ratio of the cash and securities balances to total assets, equaled 44.2% at March 31, 2002 compared to 43.4% at September 30, 2001. As of March 31, 2002, the Company had $28.4 million in commitments to fund loan originations, disburse loans in process and meet other obligations. Management anticipates that the majority of these commitments will be funded within the next six months by means of normal cash flows and net new deposits. In addition, the amount of certificate accounts which are scheduled to mature during the 12 months ending March 31, 2003 is $169 million. Management expects that a substantial portion of these maturing deposits will remain as accounts in the Company. 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 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 -10- interest rates would be minimized. The Company's asset and liability management policies seek to increase the interest rate sensitivity by shortening the repricing intervals and the maturities of the Company's interest-earning assets. Although management of the Company believes that the steps taken have reduced the Company's overall vulnerability to increases in interest rates, the Company remains vulnerable to material and prolonged increases in interest rates during periods in which its interest rate sensitive liabilities exceed its interest rate sensitive assets. The authority and responsibility for interest rate management is vested in the Company's Board of Directors. The Chief Executive Officer implements the Board of Directors' policies during the day-to-day operations of the Company. Each month, the Chief Executive Officer presents the Board of Directors with a report which outlines the Company's asset and liability "gap" position in various time periods. The "gap" is the difference between interest-earning assets and interest-bearing liabilities which mature or reprice over a given time period. He also meets weekly with the Company's other senior officers to review and establish policies and strategies designed to regulate the Company's flow of funds and coordinate the sources, uses and pricing of such funds. The first priority in structuring and pricing the Company's assets and liabilities is to maintain an acceptable interest rate spread while reducing the effects of changes in interest rates and maintaining the quality of the Company's assets. The following table summarizes the amount of interest-earning assets and interest-bearing liabilities outstanding as of March 31, 2002, which are expected to mature, prepay or reprice in each of the future time periods shown. Except as stated below, the amounts of assets or liabilities shown which mature or reprice during a particular period were determined in accordance with the contractual terms of the asset or liability. Adjustable and floating-rate assets are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due, and fixed-rate loans and mortgage-backed securities are included in the periods in which they are anticipated to be repaid. The following table does not necessarily indicate the impact of general interest rate movements on Harleysville Savings' net interest income because the repricing of certain categories of assets and liabilities is discretionary and is subject to competitive and other pressures. As a result, certain assets and liabilities indicated as repricing within a stated period may in fact reprice at different rate levels. 1 Year 1 to 3 3 to 5 Over 5 or less Years Years Years Total --------- --------- --------- --------- --------- Interest-earning assets Mortgage loans $ 37,018 $ 36,203 $ 27,594 $ 136,892 $ 237,707 Mortgage-backed securities 80,183 18,857 15,274 65,115 179,429 Consumer and other loans 31,798 15,980 9,075 5,996 62,849 Investment securities and other investments 53,908 7,075 -- 34,849 95,832 --------- --------- --------- --------- --------- Total interest-earning assets 202,907 78,115 51,943 242,852 575,817 --------- --------- --------- --------- --------- Interest-bearing liabilities Passbook and Club accounts -- -- -- 2,815 2,815 NOW accounts -- -- -- 22,215 22,215 Money Market Deposit accounts 28,587 -- -- 51,376 79,963 Certificate accounts 168,675 64,609 16,019 -- 249,303 Borrowed money 23,661 39,867 29,752 95,488 188,768 --------- --------- --------- --------- --------- Total interest-bearing liabilities 220,923 104,476 45,771 171,894 543,064 --------- --------- --------- --------- --------- Repricing GAP during the period $ (18,016) $ (26,361) $ 6,172 $ 70,958 $ 32,753 ========= ========= ========= ========= ========= Cumulative GAP $ (18,016) $ (44,377) $ (38,205) $ 32,753 ========= ========= ========= ========= Ratio of GAP during the period to total assets (3.13%) (4.58%) 1.07% 12.32% ========= ========= ========= ========= Ratio of cumulative GAP to total assets (3.13%) (7.71%) (6.63%) 5.69% ========= ========= ========= ========= -11- Part II OTHER INFORMATION Item 1-5. Not applicable. Item 6. Exhibits and Reports on Form 8-K None -12- Pursuant to the requirements of the Securities Exchange Act of 1934, the Bank has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HARLEYSVILLE SAVINGS FINANCIAL CORPORATION Date: May 8, 2002 By: /s/ Edward J. Molnar ------------------------------------------ Edward J. Molnar President and Chief Executive Officer Date: May 8, 2002 By: /s/ Brendan J. McGill ------------------------------------------ Brendan J. McGill Senior Vice President Treasurer and Chief Financial Officer -13-