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, 2008 -------------------------------------------- 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, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer" "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer __ Accelerated filer __ Non-accelerated filer __ Smaller reporting company |X| Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the 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, 3,543,190 shares outstanding as of May 12, 2008 Harleysville Savings Financial Corporation and Subsidiary Index PAGE(S) ------- Part I FINANCIAL INFORMATION Item 1. Financial Statements Unaudited Consolidated Statements of Financial Condition as of March 31, 2008 Unaudited and September 30, 2007 1 Unaudited Consolidated Statements of Income for the Three and Six Months Ended March 31, 2008 and 2007 2 Unaudited Consolidated Statements of Comprehensive Income for the Three and Six Months Ended March 31, 2008 and 2007 3 Unaudited Consolidated Statements of Stockholders' Equity for the Six Months Ended March 31, 2008 and March 31, 2007 4 Unaudited Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2008 and 2007 5 Notes to Unaudited Consolidated Financial Statements 6 - 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 - 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 -21 Item 4. Controls and Procedures 22 Part II OTHER INFORMATION Item 1. Legal Proceedings 23 Item 1A. Risk Factors 23 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23 Item 3. Defaults upon Senior Securities 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other information 23 Item 6. Exhibits 23 Signatures 24 Harleysville Savings Financial Corporation Unaudited Consolidated Statements of Financial Condition March 31, September 30, (In thousands, except share data) 2008 2007 ------------ ------------- Assets Cash and amounts due from depository institutions $ 1,561 $ 1,647 Interest bearing deposits in other banks 6,183 6,670 ------------ ------------ Total cash and cash equivalents 7,744 8,317 Investment securities held to maturity (fair value - March 31, $99,268; September 30, $109,305) 96,831 108,693 Investment securities available-for-sale at fair value 1,194 1,910 Mortgage-backed securities held to maturity (fair value - March 31, $224,234; September 30, $188,612) 222,782 192,842 Mortgage-backed securities available-for-sale at fair value 797 817 Loans receivable (net of allowance for loan losses - March 31, $1,925; September 30, $1,932) 440,337 419,053 Accrued interest receivable 3,881 4,047 Federal Home Loan Bank stock - at cost 14,096 14,140 Office properties and equipment, net 9,971 9,917 Prepaid expenses and other assets 14,221 13,808 ------------ ------------ TOTAL ASSETS $ 811,854 $ 773,544 ============ ============ Liabilities and Stockholders' Equity Liabilities: Deposits $ 450,516 $ 424,035 Advances 309,285 298,609 Accrued interest payable 1,482 1,556 Advances from borrowers for taxes and insurance 4,414 1,247 Accounts payable and accrued expenses 760 1,056 ------------ ------------ Total liabilities 766,457 726,503 ------------ ------------ 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 39 Additional paid-in capital 7,982 8,044 Treasury stock, at cost (March 31, 2008 377,987 shares; September 30 2007, 203,658) (5,357) (3,316) Retained earnings - partially restricted 42,933 42,363 Accumulated other comprehensive loss (200) (89) ------------ ------------ Total stockholders' equity 45,397 47,041 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 811,854 $ 773,544 ============ ============ See notes to unaudited condensed consolidated financial statements. page -1- Harleysville Savings Financial Corporation Unaudited Consolidated Statements of Income For the Three Months Ended For the Six Months Ended (In thousands,except per share data) March 31, March 31, -------------------------- -------------------------- 2008 2007 2008 2007 ---- ---- ---- ---- INTEREST INCOME: Interest on mortgage loans $ 4,671 $ 4,230 $ 9,256 $ 8,435 Interest on commerical loans 409 112 717 153 Interest on mortgage-backed securities 2,437 2,335 4,718 4,779 Interest on consumer and other loans 1,466 1,495 2,982 3,005 Interest on taxable investments 1,378 1,328 2,829 2,586 Interest on tax-exempt investments 348 383 699 743 Dividends on investment securities 13 16 22 30 ---------- ---------- ---------- ---------- Total interest income 10,722 9,899 21,223 19,731 ---------- ---------- ---------- ---------- Interest Expense: Interest on deposits 4,167 3,806 8,312 7,528 Interest on borrowings 3,352 3,151 6,839 6,457 ---------- ---------- ---------- ---------- Total interest expense 7,519 6,957 15,151 13,985 ---------- ---------- ---------- ---------- Net Interest Income 3,203 2,942 6,072 5,746 Provision for loan losses 5 -- 5 -- ---------- ---------- ---------- ---------- Net Interest Income after Provision for Loan Losses 3,198 2,942 6,067 5,746 ---------- ---------- ---------- ---------- Other Income: Customer service fees 140 127 304 257 Gain on sale of investments 4 160 4 160 Income on bank-owned life insurance 121 116 252 234 Other income 202 143 406 287 ---------- ---------- ---------- ---------- Total other income 467 546 966 938 ---------- ---------- ---------- ---------- Other Expenses: Salaries and employee benefits 1,438 1,302 2,758 2,556 Occupancy and equipment 262 273 527 526 Deposit insurance premiums 12 13 25 26 Data Processing 130 131 248 287 Other 583 596 1,252 1,179 ---------- ---------- ---------- ---------- Total other expenses 2,425 2,315 4,810 4,574 ---------- ---------- ---------- ---------- Income before Income Taxes 1,240 1,173 2,223 2,110 Income tax expense 206 269 388 449 ---------- ---------- ---------- ---------- Net Income $ 1,034 $ 904 $ 1,835 $ 1,661 ========== ========== ========== ========== Basic Earnings Per Share $ 0.28 $ 0.23 $ 0.49 $ 0.43 ========== ========== ========== ========== Diluted Earnings Per Share $ 0.28 $ 0.23 $ 0.49 $ 0.43 ========== ========== ========== ========== Dividends Per Share $ 0.17 $ 0.17 $ 0.34 $ 0.34 ========== ========== ========== ========== See notes to unaudited consolidated financial statements. page -2- Harleysville Savings Financial Corporation Unaudited Consolidated Statements of Comprehensive Income Three Months Ended March 31, (In thousands) 2008 2007 ----------------------------------------------------------------------------------------------------------------------- Net Income $ 1,034 $ 904 Other Comprehensive Income Unrealized gain on securities net of tax 2008, ($7); 2007, $(22) 14(1) 42 ----------- ----------- Total Comprehensive Income $ 1,048 $ 946 =========== =========== (1) Disclosure of reclassification amount, net of tax for the three months ended: 2008 2007 ---- ---- Net unrealized gain arising during the three months ended $ 14 $ 147 Less: Reclassification adjustment for net gains included in net income net of tax expense 2008, $0; 2007, $54 -- 105 ----------- ----------- Net unrealized gain on securities $ 14 $ 42 =========== =========== Six Months Ended March 31, 2008 2007 ----------------------------------------------------------------------------------------------------------------------- Net Income $ 1,835 $ 1,661 Other Comprehensive Income Unrealized loss on securities net of tax benefit 2008, $57; 2007, $1 (111)(1) (2) ----------- ----------- Total Comprehensive Income $ 1,724 $ 1,659 =========== =========== (1) Disclosure of reclassification amount, net of tax for the six months ended: 2008 2007 ---- ---- Net unrealized gain arising during the six months ended $ 3 $ 103 Less: Reclassification adjustment for net gains included in net income net of tax expense 2008, $59; 2007, $54 114 105 ----------- ----------- Net unrealized (loss) on securities $ (111) $ (2) =========== =========== See notes to unaudited consolidated financial statements. page -3- Harleysville Savings Financial Corporation Unaudited Consolidated Statements of Stockholders' Equity Retained Accumulated Common Additional Earnings- Other Total Stock Common Paid-in Treasury Partially Comprehensive Stockholders' (In thousands, except share and per share data) Shares Stock Capital Stock Restricted Loss Equity ------------------------------------------------------------------------------------------------------------------------------------ Balance at October 1, 2007 3,921,177 $ 39 $ 8,044 $(3,316) $ 42,363 $ (89) $ 47,041 Net Income 1,835 1,835 Dividends - $.34 per share (1,265) (1,265) Option Compensation 54 54 Treasury stock purchased (205,358 shares) (2,557) (2,557) Treasury stock issued for stock options exercised (2,250 shares) (19) 38 19 Treasury Stock issued under Dividend Reinvestment Plan (20,779 shares) (71) 345 274 Treasury stock delivered under employee stock plan (8,000 shares) (26) 133 107 Change in unrealized holding loss on available - for- sale securities (111) (111) --------- --------- ------- ------- --------- --------- -------- Balance at March 31, 2008 3,921,177 $ 39 $ 7,982 $(5,357) $ 42,933 $ (200) $ 45,397 ========= ========= ======= ======= ========= ========= ======== 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 $ 7,992 $(1,262) $ 41,715 $ (12) $ 48,472 Net Income 1,661 1,661 Dividends - $.34 per share (1,311) (1,311) Option Compensation 56 56 Treasury stock issued for stock options exercised (3,334 shares) (13) 58 45 Treasury Stock issued under Dividend Reinvestment Plan (16,746 shares) (4) 291 287 Change in unrealized holding loss on available - for- sale securities (2) (2) --------- --------- ------- ------- --------- --------- -------- Balance at March 31, 2007 3,921,177 $ 39 $ 8,031 $ (913) $ 42,065 $ (14) $ 49,208 ========= ========= ======= ======= ========= ========= ======== See notes to unaudited condensed consolidated financial statements. page -4- Harleysville Savings Financial Corporation Unaudited Consolidated Statements of Cash Flows Six Months Ended March 31, -------------------------- (In thousands) 2008 2007 ---- ---- Operating Activities: Net Income $ 1,835 $ 1,661 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 257 260 Provision for loan losses 5 -- Gain on sale of securities (4) (160) Amortization of deferred loan fees 12 (1) Net amortization of premiums and discounts 17 85 Increase in cash surrender value (252) (234) Compensation charge on stock options 54 56 Changes in assets and liabilities which provided (used) cash: (Decrease) Increase in accounts payable and accrued expenses (296) 37 Increase in prepaid expenses and other assets (104) (14) Decrease in accrued interest receivable 166 249 Decrease in accrued interest payable (74) (156) ----------- ----------- Net cash provided by operating activities 1,616 1,783 Investing Activities: Purchase of investment securities held to maturity (18,086) (17,492) Purchase of mortgage-backed securities held to maturity (48,147) (8,059) Proceeds from maturities of investment securities available-for-sale 568 1,311 Proceeds from sale of investment securities available-for-sale -- (471) Proceeds from sales of mortgage-backed securities -- 10,290 Proceeds from redemption of FHLB stock 44 1,690 Proceeds from maturities of investment securities held to maturity 29,948 21,769 Principal collected on long-term loans & mortgage-backed securities 62,287 59,555 Long-term loans originated or acquired (65,394) (56,523) Purchases of premises and equipment (311) (2,163) ----------- ----------- Net cash (used in) provided by investing activities (39,091) 9,907 Financing Activities: Net (decrease) increase in demand deposits, NOW accounts and savings accounts (620) 7,365 Net increase (decrease) in certificates of deposit 27,101 (2,148) Cash dividends (1,265) (1,311) Proceeds from long-term debt 121,800 25,000 Repayment of long-term debt (111,124) (45,457) Treasury stock delivered under Dividend Reinvestment and employee stock plans 400 332 Acquisition of Treasury stock (2,557) Net increase in advances from borrowers for taxes and insurance 3,167 2,620 ----------- ----------- Net cash provided by (used in) financing activities 36,902 (13,599) ----------- ----------- DECREASE IN CASH AND CASH EQUIVALENTS (573) (1,909) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,317 10,050 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,744 $ 8,141 =========== =========== Supplemental Disclosure of Cash Flow Information Cash paid during the period for: Interest (credited and paid) $ 15,225 $ 14,141 Income taxes 433 2 See notes to consolidated financial statements. page -5- 2. INVESTMENT SECURITIES HELD TO MATURITY A comparison of amortized cost and approximate fair value of investment securities held to maturity with gross unrealized gains and losses is as follows: March 31, 2008 Gross Gross Amortized Unrealized Unrealized Approximate (In thousands) Cost Gains Losses Fair Value ------------------------------------------------------------------------------------------------ U.S. Government Agencies $ 71,741 $ 1,173 $ -- $ 72,914 Tax-Exempt Obligations 25,090 1,377 (113) 26,354 ----------- ----------- ----------- ----------- Total Investment Securities $ 96,831 $ 2,550 $ (113) $ 99,268 =========== =========== =========== =========== September 30, 2007 Gross Gross Amortized Unrealized Unrealized Approximate (In thousands) Cost Gains Losses Fair Value ------------------------------------------------------------------------------------------------ U.S. Government Agencies $ 83,155 $ 211 $ (533) $ 82,833 Tax Exempt Obligations 25,538 1,101 (167) 26,472 ----------- ----------- ----------- ----------- Total Investment Securities $ 108,693 $ 1,312 $ (700) $ 109,305 =========== =========== =========== =========== page -12- 3. INVESTMENT SECURITIES AVAILABLE-FOR-SALE A comparison of amortized cost and approximate fair value of investment securities available-for-sale with unrealized gains and losses is as follows: March 31, 2008 Gross Gross Amortized Unrealized Unrealized (In thousands) Cost Gains Losses Fair Value ------------------------------------------------------------------------------------------------ Equity Securities $ 1,501 $ 24 $ (339) $ 1,186 Money Market Mutual Funds 8 -- -- 8 ----------- ----------- ----------- ----------- Total Investment Securities $ 1,509 $ 24 $ (339) $ 1,194 =========== =========== =========== =========== At March 31, 2008 the Company had 3 equity securities with unrealized losses of $199,000 in this position for a time period greater than twelve months. The Company also had 2 equity securities with unrealized losses of $140,000 in this position for a time period less than twelve months. All these securities are equity holdings of other financial institutions. The severity and duration of the impairment is consistent with market developments in the financial industry. Management believes these equity securities in an unrealized loss position will recover in the foreseeable future. The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation the Company's ability and intent to hold those securities for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider these equity securities to be other-than-temporarily impaired. September 30, 2007 Gross Gross Amortized Unrealized Unrealized (In thousands) Cost Gains Losses Fair Value ------------------------------------------------------------------------------------------------ Equity Securities $ 1,501 $ 6 $ (173) $ 1,334 Money Market Mutual Funds 576 -- -- 576 ----------- ----------- ----------- ----------- Total Investment Securities $ 2,077 $ 6 $ (173) $ 1,910 =========== =========== =========== =========== page -13- 4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY A comparison of amortized cost and approximate fair value of mortgage-backed securities held to maturity with gross unrealized gains and losses is as follows: March 31,2008 Gross Gross Amortized Unrealized Unrealized Approximate (In thousands) Cost Gains Losses Fair Value -------------------------------------------------------------------------------------------------------- Collateralized mortgage obligations $ 15,703 $ 39 $ (220) $ 15,522 FHLMC pass-through certificates 94,831 866 (63) 95,634 FNMA pass-through certificates 112,027 868 (42) 112,853 GNMA pass-through certificates 221 4 -- 225 ----------- ----------- ----------- ----------- Total Mortgage-Backed Securities $ 222,782 $ 1,777 $ (325) $ 224,234 =========== =========== =========== =========== September 30,2007 Gross Gross Amortized Unrealized Unrealized Approximate (In thousands) Cost Gains Losses Fair Value -------------------------------------------------------------------------------------------------------- Collateralized mortgage obligations $ 16,471 $ 97 $ (299) $ 16,269 FHLMC pass-through certificates 89,533 164 (2,198) 87,499 FNMA pass-through certificates 86,586 12 (2,008) 84,590 GNMA pass-through certificates 252 2 -- 254 ----------- ----------- ----------- ----------- Total Mortgage-Backed Securities $ 192,842 $ 275 $ (4,505) $ 188,612 =========== =========== =========== =========== page -14- 5. MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE A comparison of amortized cost and approximate fair value of mortgage-backed securities available-for-sales with gross unrealized gains and losses is as follows: March 31,2008 Gross Gross Amortized Unrealized Unrealized (In thousands) Cost Gains Losses Fair Value ---------------------------------------------------------------------------------------------------- FNMA pass-through certificates $ 785 $ 12 $ -- $ 797 ----------- ----------- ----------- ----------- Total Mortgage-Backed Securities $ 785 $ 12 $ -- $ 797 =========== =========== =========== =========== September 30,2007 Gross Gross Amortized Unrealized Unrealized (In thousands) Cost Gains Losses Fair Value ---------------------------------------------------------------------------------------------------- FNMA pass-through certificates $ 785 $ 32 $ -- $ 817 ----------- ----------- ----------- ----------- Total Mortgage-Backed Securities $ 785 $ 32 $ -- $ 817 =========== =========== =========== =========== 6. LOANS RECEIVABLE Loans receivable consist of the following: (In thousands) March 31, 2008 September 30, 2007 -------------- ------------------ Residential Mortgages $ 322,237 $ 305,341 Commercial Mortgages 25,318 15,314 Construction 4,339 6,093 Savings Account 992 977 Home Equity 71,321 74,218 Automobile and other 933 904 Home Equity Line of Credit 22,161 21,386 --------- --------- Total 447,301 424,233 Undisbursed portion of loans in process (4,622) (2,795) Deferred loan fees (417) (453) Allowance for loan losses (1,925) (1,932) --------- --------- Loans Receivable - net $ 440,337 $ 419,053 ========= ========= The total amount of loans being serviced for the benefit of others was approximately $3.3 million and $3.6 million at March 31, 2008 and September 30, 2007, respectively. The following schedule summarizes the changes in the allowance for loan losses: Six Months Ended Year Ended March 31, 2008 September 30, 2007 -------------- ------------------ (In thousands) -------------- Balance, beginning of period $ 1,932 $ 1,956 Provision for loan losses 5 -- Amounts charged-off (19) (37) Loan recoveries 7 13 ---------- ---------- Balance, end of period $ 1,925 $ 1,932 ========== ========== page -15- 7. DEPOSITS Deposits are summarized as follows: (In thousands) March 31,2008 September 30,2007 ------------- ----------------- Non-interest bearing checking $ 11,775 $ 11,740 NOW accounts 14,958 13,711 Interest checking accounts 27,872 25,750 Money Market Demand accounts 48,208 51,827 Passbook and Club accounts 2,459 2,864 Certificate accounts 345,244 318,143 ----------- ----------- Total deposits $ 450,516 $ 424,035 =========== =========== The aggregate amount of certificate accounts in denominations of more than $100,000 at March 31, 2008 and September 30, 2007 amounted to approximately $58.4 million and $53.6 million, respectively. Amounts in excess of $100,000 may not be federally insured. 8. COMMITMENTS At March 31, 2008, the following commitments were outstanding: (In thousands) Commitments to originate mortgage loans $ 9,267 Unused line of credit loans 46,308 Loans in process 4,622 ---------- Total $ 60,197 ========== page -16- 9. 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, ---------------------------------------------------------------------------- 2008 2007 2008 2007 ---- ---- ---- ---- Basic 3,730,759 3,864,189 3,726,061 3,859,201 Diluted 3,746,480 3,891,445 3,743,211 3,892,782 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. 10. ADVANCES Advances consists of the following: March 31, September 30, 2008 2007 Weighted Weighted (In thousands) Interest Interest Maturing Period Amount Rate Amount Rate ------------------------------------------------------------------------------------- 1 to 12 months $ 37,623 4.36% $ 69,227 5.07% 13 to 24 months 22,995 4.43% 20,043 4.37% 25 to 36 months 15,000 4.71% 17,410 4.50% 37 to 48 months 29,313 4.46% 23,595 4.99% 49 to 60 months 52,379 4.23% 58,334 4.48% 61 to 72 months 41,975 4.22% 20,000 4.63% 73 to 84 months 5,000 3.58% 20,000 4.26% 85 to 120 months 105,000 4.03% 70,000 4.50% -------------------------------------------------- Total $309,285 4.23% $298,609 4.65% ================================================== 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 $8 million out of $75.0 million was used at March 31, 2008 and $31.5 million was used as of September 30, 2007, for general purposes. Included in the table above at March 31, 2008 and September 30, 2007 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 $545.6 million of which $259.2 million was used as of March 31, 2008. In addition, there are four long-term advances from other financial institutions that are secured by investment and mortgage-backed securities totalin 11. 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, 2008, that the Bank meets all capital adequacy requirements to which it is subject. As of March 31, 2008, 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, 2008 Tier 1 Capital (to assets) $ 44,834 5.62% $ 31,905 4.00% $ 39,881 5.00% Tier 1 Capital (to risk weighted assets) 44,834 11.10% 16,155 4.00% 24,232 6.00% Total Capital (to risk weighted assets) 46,759 11.58% 32,309 8.00% 40,386 10.00% As of September 30, 2007 Tier 1 Capital (to assets) $ 46,797 6.02% $ 31,021 4.00% $ 38,776 5.00% Tier 1 Capital (to risk weighted assets) 46,797 12.12% 15,443 4.00% 23,164 6.00% Total Capital (to risk weighted assets) 48,729 12.62% 30,886 8.00% 38,607 10.00% page -17- 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 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, commercial loans and commercial lines of credit 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 loans that are collateral dependent; (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 Loans that are Collateral Dependent: 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 31,2008 and December 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 -18- 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, 2008 --------------------------------------------------------------------------- Total assets at March 31, 2008 were $811.9 million, an increase of $38.3 million for the six-month period then ended. The increase was primarily due to the retail growth in mortgage and commercial loans, resulting in an overall increase in loans receivable of approximately $21.3 million. There was also an increase in investments due to purchases less maturities of approximately $18.1 million. Asset growth was primarily funded by deposit growth during the six -month period ended March 31, 2008, total deposits increased by $26.5 million to $450.5 million. Advances from borrowers for taxes and insurance also increased by $3.2 million due to the timing of property tax payments. There was also an increase in advances of $10.7 million. Comparisons of Results of Operations for the Three and Six Month Period Ended ----------------------------------------------------------------------------- March 31, 2008 with the Three Month and Six Month Period Ended March 31, 2007 ----------------------------------------------------------------------------- Net Interest Income ------------------- Net interest income was $3.2 million for the three-month period ended March 31, 2008 compared to $2.94 million for the comparable period in 2007. The increase in the net interest income for the three -month period ended March 31, 2008 when compared to the same period in 2007 can be attributed to the increase in the difference between the average interest earning assets in relation to the average interest earning liabilities in comparable periods. This increase was partially offset by the decrease in interest rate spread from 1.4% in 2007 to 1.39% in 2008. The increase in the net interest income for the six-month period ended March 31, 2008 when compared to the same period in 2007 can be attributed to the increase in interest rate spread from 1.42% in 2007 to 1.63% in 2008. Net interest income was $6.1 million for the six-month period ended March 31, 2008 compared to $5.7 million for the comparable period in 2007. Non-Interest Income ------------------- Non-interest income decreased to $467,000 for the three-month period ended March 31, 2008 from $546,000 for the comparable period in 2007. The decrease is primarily due to the fact that the prior period includes a gain on sale of investments of $160,000. Non-interest income increased to $966,000 for the six-month period ended March 31, 2008 from $938,000 for the comparable period in 2007. The increase is primarily due to the fact that the Company had additional income related to commercial loan fees and customers transaction accounts. Non-Interest Expenses --------------------- For the three-month period ended March 31, 2008, non-interest expenses increased by $111,000 or 4.8% to $2.4 million compared to $2.3 million for the same period in 2007. For the six month period ended March 31, 2008, non-interest expenses increased by $236,000 or 5.2% to $4.8 million compared to $4.6 million for the same period in 2007. Management believes that these are reasonable increases in the cost of operations after considering the impact of additional expenses related to the Company's new commercial loan department and business banking. The annualized ratio of non-interest expenses to average assets for the three and six month periods ended March 31, 2008 and 2007 were 1.21%,1.22% and 1.23%, 1.21%, respectively. Income Taxes ------------ The Company made provisions for income taxes of $205,503 and $387,503 for the three-month and six-month period ended March 31, 2008, respectively, compared to $268,500 and $449,500 for the comparable period in 2007. These provisions are based on the levels of pre-tax income, adjusted primarily for tax-exempt interest income on investments. page -19- Liquidity and Capital Recourses ------------------------------- For a financial institution, liquidity is a measure of the ability to fund customers' needs for loans and deposit withdrawals. Harleysville Savings Bank regularly evaluates economic conditions in order to maintain a strong liquidity position. One of the most significant factors considered by management when evaluating liquidity requirements is the stability of the Bank's core deposit base. In addition to cash, the Bank maintains a portfolio of short-term investments to meet its liquidity requirements. Harleysville Savings also relies upon cash flow from operations and other financing activities, generally short-term and long-term debt. Liquidity is also provided by investing activities including the repayment and maturity of loans and investment securities as well as the management of asset sales when considered necessary. The Bank also has access to and sufficient assets to secure lines of credit and other borrowings in amounts adequate to fund any unexpected cash requirements. As of March 31, 2008, the Company had $60.2 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 new deposits. 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 $545.6 million at March 31, 2008 of which $259.2 million was outstanding at March 31, 2008. The Bank's net income for the six months ended March 31, 2008 is $1.8 million compared to $1.7 million for the comparable period in 2007. In spite of a profitable six month period, the decrease in our stockholder's equity is due to a repurchase of common stock in an unsolicited private transaction. The Company repurchased the shares at a price of $12.45 per share or $2,556,707.10 in the aggregate. The Bank's stockholders' equity of $45.4 million or 5.6% of total assets is 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. page -20- 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, 2008, which are expected to mature, prepay or reprice in each of the future time periods shown. Except as stated below, the amounts of assets or liabilities shown which mature or reprice during a particular period were determined in accordance with the contractual terms of the asset or liability. Adjustable and floating-rate assets are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due, and fixed-rate loans and mortgage-backed securities are included in the periods in which they are anticipated to be repaid. The passbook accounts, negotiable order of withdrawal ("NOW") accounts, interest bearing accounts, and money market deposit accounts, are included in the "Over 5 Years" categories based on management's beliefs that these funds are core deposits having significantly longer effective maturities based on the Company's retention of such deposits in changing interest rate environments. Generally, during a period of rising interest rates, a positive gap would result in an increase in net interest income while a negative gap would adversely affect net interest income. Conversely, during a period of falling interest rates, a positive gap would result in a decrease in net interest income while a negative gap would positively affect net interest income. However, the following table does not necessarily indicate the impact of general interest rate movements on 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 $ 65,056 $ 52,194 $ 21,858 $ 183,129 $ 322,237 Commercial loans 9,867 2,935 1,252 11,264 25,318 Mortgage-backed securities 74,483 76,037 21,918 51,141 223,579 Consumer and other loans 44,625 26,318 7,339 21,464 99,746 Investment securities and other investments 69,713 42,573 8,509 10,168 130,963 ------------------------- --------- --------- --------- Total interest-earning assets 263,744 200,057 60,876 277,166 801,843 --------------------------------------------------------- --------- Interest-bearing liabilities: Passbook and Club accounts -- -- -- 2,459 2,459 NOW and checking accounts -- -- -- 42,830 42,830 Consumer Money Market Deposit accounts 12,311 -- -- 29,812 42,123 Business Money Market Deposit accounts 4,565 -- -- 1,520 6,085 Certificate accounts 303,990 29,730 11,524 -- 345,244 Borrowed money 45,299 48,729 72,460 142,797 309,285 --------- --------- --------- --------- --------- Total interest-bearing liabilities 366,165 78,459 83,984 219,418 748,026 --------- --------- --------- --------- --------- Repricing GAP during the period $(102,421) $ 121,598 $ (23,108) $ 57,748 $ 53,817 ========= ========= ========= ========= ========= Cumulative GAP $(102,421) $ 19,177 $ (3,931) $ 53,817 ========= ========= ========= ========= Ratio of GAP during the period to total assets -12.62% 14.98% -2.85% 7.11% ========= ========= ========= ========= Ratio of cumulative GAP to total assets -12.62% 2.36% -0.48% 6.63% ========= ========= ========= ========= page -21- 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 -22- 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, 2007. 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 Total Number of Shares Purchased as Part of Average Publicly Maximum Number of Price Announced Shares that May Yet Be Total Number of Paid per Plans or Purchased Under the Plans Period Shares Purchased Share Programs or Programs (1) January 1 - 31, 2008 66,351 February 1 - 29, 2008 66,351 March 1 - 31, 2008 205,358(2) 12.45 -- 66,351 ------- ---------- --------- ---------- Total 205,358 $ 12.45 -- 66,351 ========== (1) On June 20, 2007, the Company announced its current program to repurchase up to 5.0% of the outstanding shares of Common Stock of the Company, or 196,000 shares. The program commenced immediately following the completion of the 2003 program. The program does not have an expiration date and all shares are purchased in the open market. (2) Shares were purchased in a private transaction outside of the Company's current repurchase program. 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 and Reports on Form 8-K -------------------------------- No. 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 -23- 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 12, 2008 By: /s/ Ronald B. Geib -------------------------------------- Ronald B. Geib Chief Executive Officer Date: May 12, 2008 By: /s/ Brendan J. McGill -------------------------------------- Brendan J. McGill Senior Vice President Treasurer and Chief Financial Officer page -24-