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Table of Contents

 

 

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, 2012

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)

N/A

(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark 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 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, 3,728,760 shares outstanding as of May 11, 2012.

 

 

 


Table of Contents

HARLEYSVILLE SAVINGS FINANCIAL CORPORATION

Index

 

     PAGE(S)  

Part I FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Unaudited Consolidated Statements of Financial Condition as of March 31, 2012, and September 30, 2011

     1   

Unaudited Consolidated Statements of Income for the Three and Six Months Ended March 31, 2012 and 2011

     2   

Unaudited Consolidated Statements of Comprehensive Income for the Three and Six Months Ended March 31, 2012 and 2011

     3   

Unaudited Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended March 31, 2012 and 2011

     4   

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2012 and 2011

     5   

Notes to Unaudited Consolidated Financial Statements

     6 - 29   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     29 - 32   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     33 - 34   

Item 4. Controls and Procedures

     35   

Part II OTHER INFORMATION

  

Item 1. Legal Proceedings

     35   

Item 1A. Risk Factors

     35   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     35   

Item 3. Defaults upon Senior Securities

     36   

Item 4. Mine Safety Disclosures

     36   

Item 5. Other Information

     36   

Item 6. Exhibits

     36   

Signatures

     37   


Table of Contents

Harleysville Savings Financial Corporation

Unaudited Consolidated Statements of Financial Condition

 

     March 31,     September 30,  
(In thousands, except share and per share data)    2012     2011  

Assets

  

Cash and amounts due from depository institutions

   $ 4,192      $ 3,857   

Interest bearing deposits

     45,353        18,725   
  

 

 

   

 

 

 

Total cash and cash equivalents

     49,545        22,582   

Investments and mortgage-backed securities:

    

Available for sale (amortized cost—March 31, $15,158; September 30, $18,560)

     15,281        18,515   

Held to maturity (fair value—March 31, $234,346; September 30, $240,581)

     226,148        231,756   

Loans receivable (net of allowance for loan losses— March 31, $3,809; September 30, $3,311)

     508,090        518,486   

Accrued interest receivable

     2,637        2,847   

Federal Home Loan Bank stock—at cost

     11,832        13,110   

Foreclosed real estate

     313        196   

Office properties and equipment, net

     11,806        12,005   

Prepaid expenses and other assets

     16,614        16,216   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 842,266      $ 835,713   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits

   $ 550,421      $ 524,401   

Long-term debt

     227,227        250,194   

Accrued interest payable

     1,100        1,315   

Advances from borrowers for taxes and insurance

     4,483        1,368   

Accounts payable and accrued expenses

     1,009        1,353   
  

 

 

   

 

 

 

Total liabilities

     784,240        778,631   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Preferred Stock: $.01 par value; 7,500,000 shares authorized; none issued

     —          —     

Common stock: $.01 par value; 15,000,000 shares authorized; 3,921,177 shares issued; outstanding March 31, 2012 3,728,089 shares September 30, 2011 3,758,751 shares

     39        39   

Additional paid-in capital

     8,539        8,346   

Treasury stock, at cost (March 31, 2012, 193,088 shares; September 30, 2011, 162,426 shares)

     (2,918     (2,405

Retained earnings—partially restricted

     52,285        51,131   

Accumulated other comprehensive income (loss)

     81        (29
  

 

 

   

 

 

 

Total stockholders’ equity

     58,026        57,082   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 842,266      $ 835,713   
  

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

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Table of Contents

Harleysville Savings Financial Corporation

Unaudited Consolidated Statements of Income

 

     For the Three Months Ended      For the Six Months Ended  
     March 31,      March 31,  
(In thousands, except per share data)    2012      2011      2012      2011  

Interest Income:

     

Interest on mortgage loans

   $ 4,496       $ 4,688       $ 9,158       $ 9,491   

Interest on commercial loans

     1,384         1,246         2,774         2,482   

Interest on mortgage-backed securities

     1,343         1,329         2,757         2,734   

Interest on consumer and other loans

     934         1,008         1,920         2,060   

Interest on other taxable investments

     425         803         794         1,534   

Interest on tax-exempt investments

     153         216         335         419   

Dividends on investment securities

     1         1         2         2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     8,736         9,291         17,740         18,722   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Expense:

           

Interest on deposits

     1,460         1,895         3,008         3,912   

Interest on borrowings

     2,495         2,869         4,914         5,827   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     3,955         4,764         7,922         9,739   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income

     4,781         4,527         9,818         8,983   

Provision for loan losses

     255         175         505         325   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income after Provision for Loan Losses

     4,526         4,352         9,313         8,658   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Income:

           

Customer service fees

     135         127         295         264   

Income on bank-owned life insurance

     121         121         243         244   

Other income

     206         184         495         425   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income

     462         432         1,033         933   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Expenses:

           

Salaries and employee benefits

     1,993         1,895         3,881         3,624   

Occupancy and equipment

     342         368         707         714   

Deposit insurance premiums

     138         263         270         489   

Data processing

     190         163         376         330   

Other

     750         651         1,476         1,345   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other expenses

     3,413         3,340         6,710         6,502   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before Income Tax Expense

     1,575         1,444         3,636         3,089   

Income tax expense

     354         350         1,051         779   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

   $ 1,221       $ 1,094       $ 2,585       $ 2,310   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic Earnings Per Share

   $ 0.33       $ 0.29       $ 0.69       $ 0.62   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted Earnings Per Share

   $ 0.32       $ 0.29       $ 0.68       $ 0.62   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends Per Share

   $ 0.19       $ 0.19       $ 0.38       $ 0.38   
  

 

 

    

 

 

    

 

 

    

 

 

 

See notes to unaudited consolidated financial statements.

 

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Table of Contents

Harleysville Savings Financial Corporation

Unaudited Consolidated Statements of Comprehensive Income

 

     Three Months Ended  
     March 31,  

(In Thousands)

   2012     2011  

Net Income

   $ 1,221      $ 1,094   

Other Comprehensive Income

    

Unrealized gain (loss) on securities available for sale, net of tax (benefit) expense 2012, $22; 2011, ($10)

     41 (1)      (20 )(1) 
  

 

 

   

 

 

 

Total Comprehensive Income

   $ 1,262      $ 1,074   
  

 

 

   

 

 

 
     2012     2011  

(1) Disclosure of change in components of unrealized gain (loss) on securities available for sale net of tax for the three month ended:

    

Net unrealized gain (loss) arising during the three months ended

   $ 63      $ (30

Reclassification adjustment for net losses (gains) included in net income

     —          —     
  

 

 

   

 

 

 
     63        (30

Tax (expense) benefit

     (22     10   
  

 

 

   

 

 

 

Net unrealized gain (loss) on securities available for sale

   $ 41      $ (20
  

 

 

   

 

 

 
Unaudited Consolidated Statements of Comprehensive Income
     Six Months Ended  
     March 31,  

(In Thousands)

   2012     2011  

Net Income

   $ 2,585      $ 2,310   

Other Comprehensive Income

    

Unrealized gain on securities available for sale, net of tax expense 2012, $58; 2011, $25

     110 (1)      50 (1) 
  

 

 

   

 

 

 

Total Comprehensive Income

   $ 2,695      $ 2,360   
  

 

 

   

 

 

 
     2012     2011  

(1) Disclosure of change in components of unrealized gain (loss) on securities available for sale net of tax for the six month ended:

    

Net unrealized gain arising during the six months ended

   $ 168      $ 75   

Reclassification adjustment for net losses (gains) included in net income

     —          —     
  

 

 

   

 

 

 
     168        75   

Tax expense

     (58     (25
  

 

 

   

 

 

 

Net unrealized gain on securities available for sale

   $ 110      $ 50   
  

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

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Table of Contents

Harleysville Savings Financial Corporation

Unaudited Consolidated Statements of Stockholders’ Equity

    
    
    Common                 Retained     Accumulated              
    Stock           Additional     Earnings-     Other           Total  
    Shares     Common     Paid-in     Partially     Comprehensive     Treasury     Stockholders’  

(In thousands, except share and per share data)

  Outstanding     Stock     Capital     Restricted     (Loss) / Income     Stock     Equity  

Balance at October 1, 2011

    3,758,751      $ 39      $ 8,346      $ 51,131      $ (29   $ (2,405   $ 57,082   

Net income

          2,585            2,585   

Dividends—$.38 per share

          (1,431         (1,431

Restricted stock

    565          (8         8        —     

Stock option compensation

        101              101   

Treasury stock delivered under 401(k) plan

    58,735          61            806        867   

Treasury stock repurchase

    (115,546             (1,679     (1,679

Treasury stock delivered under reinvestment plan

    19,817          51            273        324   

Employee options exercised

    5,767          (12         79        67   

Change in unrealized holding loss on available-for-sale securities, net of tax

            110          110   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

    3,728,089      $ 39      $ 8,539      $ 52,285      $ 81      $ (2,918   $ 58,026   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Unaudited Consolidated Statements of Stockholders' Equity
    Common                 Retained     Accumulated              
    Stock           Additional     Earnings-     Other           Total  
    Shares     Common     Paid-in     Partially     Comprehensive     Treasury     Stockholders’  

(In thousands, except share and per share data)

  Outstanding     Stock     Capital     Restricted     Income     Stock     Equity  

Balance at October 1, 2010

    3,687,409      $ 39      $ 8,126      $ 48,562      $ 7      $ (3,383   $ 53,351   

Net income

          2,310            2,310   

Dividends—$.38 per share

          (1,406         (1,406

Stock option compensation

        103              103   

Treasury stock delivered under ESOP

    10,000          10            137        147   

Treasury stock delivered under reinvestment plan

    20,380          26            280        306   

Employee options exercised

    13,785          (41         189        148   

Change in unrealized holding gain on available-for-sale securities, net of reclassification and tax

            50          50   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2011

    3,731,574      $ 39      $ 8,224      $ 49,466      $     57      $ (2,777   $ 55,009   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

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Table of Contents

Harleysville Savings Financial Corporation

Unaudited Consolidated Statements of Cash Flows

 

     Six Months Ended March 31,  
(In Thousands)    2012     2011  

Operating Activities:

    

Net Income

   $ 2,585      $ 2,310   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     306        309   

Provision for loan losses

     505        325   

Writedowns of foreclosed real estate

     9        —     

Amortization of deferred loan fees

     112        126   

Net accretion of premiums and discounts

     (85     (86

Increase in cash surrender value of bank owned life insurance

     (243     (244

Stock based compensation

     101        103   

Changes in assets and liabilities which provided (used) cash:

    

Decrease in accounts payable and accrued expenses

     (344     (206

Decrease in prepaid expenses and other assets

     (155     (649

Increase in accrued interest receivable

     210        43   

Decrease in accrued interest payable

     (215     (74
  

 

 

   

 

 

 

Net cash provided by operating activities

     2,786        1,957   

Investing Activities:

    

Purchase of mortgage-backed securities held to maturity

     (21,024     (36,930

Purchase of investment securities held to maturity

     (34,982     (39,228

Purchase of investment securities available-for-sale

     (50,271     (33,114

Net redemption FHLB stock

     1,278        1,570   

Proceeds from the redemption of investment securities available-for-sale

     53,615        43,717   

Proceeds from maturities of investment securities held to maturity

     35,450        36,665   

Principal collected on mortgage-backed securities held to maturity

     26,249        23,923   

Principal collected on long term loans

     91,539        60,948   

Long term loans originated or acquired

     (81,886     (52,672

Purchases of premises and equipment

     (107     (221
  

 

 

   

 

 

 

Net cash provided by investing activities

     19,861        4,658   

Financing Activities:

    

Net increase in demand deposits, NOW accounts and savings accounts

     36,898        9,196   

Net decrease in certificates of deposit

     (10,878     (6,024

Cash dividends

     (1,107     (1,100

Proceeds from long-term debt

     2,000        —     

Repayment of long-term debt

     (24,967     (8,415

Acquisition of treasury stock

     (1,679     —     

Treasury stock delivered under employee stock plans

     934        295   

Net increase in advances from borrowers for taxes and insurance

     3,115        3,203   
  

 

 

   

 

 

 

Used in (provided by) financing activities

     4,316        (2,845
  

 

 

   

 

 

 

INCREASE IN CASH AND CASH EQUIVALENTS

     26,963        3,770   

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

     22,582        20,190   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF YEAR

   $ 49,545      $ 23,960   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information

    

Cash paid during the period for:

    

Interest (credited and paid)

   $ 7,904      $ 9,813   

Income taxes

     1,475        1,020   

Foreclosed real estate acquired in settlement of loans

     126        186   

See notes to unaudited consolidated financial statements.

 

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Table of Contents

Harleysville Savings Financial Corporation

Notes to Unaudited Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation -The unaudited consolidated financial statements include the accounts of Harleysville Savings Financial Corporation (the “Company”) and its wholly owned subsidiary, Harleysville Savings Bank (the “Bank”). 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, a Pennsylvania limited liability Company that allows the Company to offer non deposit products, and HARL LLC, a limited liability Company that allows the Bank to invest in equity investments. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited 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 three and six months ended March 31, 2012 are not necessarily indicative of the results which may be expected for the entire fiscal year ending September 30, 2012 or any other period. The financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the period ended September 30, 2011.

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 statements and the reported amounts of income and expenses during the reporting period. The most significant of these estimates are the allowance for loan losses, the determination of other-than-temporary impairment on securities and the valuation of deferred tax assets. Actual results could differ from those estimates.

Subsequent Events

The Company has evaluated events and transactions occurring subsequent to the statement of financial condition date of March 31, 2012 for items that should potentially be recognized or disclosed in these financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

 

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Recent Accounting Pronouncements – In April 2011, the FASB issued Accounting Standard Update (ASU) 2011-03 (Reconsideration of Effective Control for Repurchase Agreements). The FASB has issued this Update to clarify the accounting principles applied to repurchase agreements, as set forth by FASB ASC Topic 860, Transfers and Servicing. This update, entitled Reconsideration of Effective Control for Repurchase Agreements, amends one of three criteria used to determine whether or not a transfer of assets may be treated as a sale by the transferor. Under Topic 860, the transferor may not maintain effective control over the transferred assets in order to qualify as a sale. This Update eliminates the criteria under which the transferor must retain collateral sufficient to repurchase or redeem the collateral on substantially agreed upon terms as a method of maintaining effective control. This Update is effective for both public and nonpublic entities for interim and annual reporting periods beginning on or after December 31, 2011, and requires prospective application to transactions or modifications of transactions which occur on or after the effective date. Early adoption is not permitted. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued Accounting Standard Update (ASU) 2011-04 (Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs). This update amends FASB ASC Topic 820, Fair Value Measurements, to bring U.S. GAAP for fair value measurements in line with International Accounting Standards. The Update clarifies existing guidance for items such as: the application of the highest and best use concept to non-financial assets and liabilities; the application of fair value measurement to financial instruments classified in a reporting entity’s stockholder’s equity; and disclosure requirements regarding quantitative information about unobservable inputs used in the fair value measurements of level 3 assets. The Update also creates an exception to Topic 820 for entities which carry financial instruments within a portfolio or group, under which the entity is now permitted to base the price used for fair valuation upon a price that would be received to sell the net asset position or transfer a net liability position in an orderly transaction. The Update also allows for the application of premiums and discounts in a fair value measurement if the financial instrument is categorized in level 2 or 3 of the fair value hierarchy. Lastly, the ASU contains new disclosure requirements regarding fair value amounts categorized as level 3 in the fair value hierarchy such as: disclosure of the valuation process used; effects of and relationships between unobservable inputs; usage of nonfinancial assets for purposes other than their highest and best use when that is the basis of the disclosed fair value; and categorization by level of items disclosed at fair value, but not measured at fair value for financial statement purposes. For public entities, this Update is effective for interim and annual periods beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

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2. INVESTMENT AND MORTGAGE-BACKED SECURITIES

The amortized cost and fair value of the Company’s securities gross unrealized gains and losses, as of March 31, 2012 and September 30, 2011 are as follows:

Available for sale securities:

 

      March 31, 2012  

(In Thousands)

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Equity securities

   $ 355       $ 126       $ (60   $ 421   

Collateralized mortgage obligations

     785         57         —          842   

U.S. Government money market funds

     14,018         —           —          14,018   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Available for Sale Securities

   $ 15,158       $ 183       $ (60   $ 15,281   
  

 

 

    

 

 

    

 

 

   

 

 

 
     September 30, 2011  

(In Thousands)

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Equity securities

   $ 355      $ 44       $ (110   $ 289   

Collateralized mortgage obligations

     785         21         —          806   

U.S. Government money market funds

     17,420         —           —          17,420   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Available for Sale Securities

   $ 18,560       $ 65       $ (110   $ 18,515   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held to maturity securities:

 

      March 31, 2012  

(In Thousands)

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Mortgage-backed securities- U.S.

          

Government Sponsored Enterprises (GSE’s)

   $ 126,053       $ 7,279       $ (2   $ 133,330   

Collateralized mortgage obligations

     18,510         131         (9     18,632   

Municipal bonds

     14,601         1,115         —          15,716   

U.S. Government Agencies

     66,984         52         (368     66,668   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Held to Maturity Securities

   $ 226,148       $ 8,577       $ (379   $ 234,346   
  

 

 

    

 

 

    

 

 

   

 

 

 
      September 30, 2011  

(In Thousands)

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Mortgage-backed securities- U.S.

          

Government Sponsored Enterprises (GSE’s)

   $ 124,576       $ 7,855       $ —        $ 132,431   

Collateralized mortgage obligations

     25,165         118         (33     25,250   

Municipal bonds

     16,022         814         (21     16,815   

U.S. Government Agencies

     65,993         146         (54     66,085   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Held to Maturity Securities

   $ 231,756       $ 8,933       $ (108   $ 240,581   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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All the Company’s mortgage-backed securities and collateralized mortgage obligations are secured by residential properties . At March 31, 2012, The Bank holds $19.3 million in Collateralized Mortgage Obligations (CMOs) of which $16.6 million are issued by Government Sponsored Enterprises and $2.7 million are privately-issued. These private label securities are adequately rated.

A summary of securities with unrealized losses, aggregated by category, at March 31, 2012 is as follows:

 

     Less than 12 Months      12 Months or Longer      Total  

(In Thousands)

   Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Total
Fair Value
     Total
Unrealized
Losses
 

Collateralized mortgage obligations

   $ 7,031       $ (2)       $ 833       $ (7)       $ 7,864       $ (9)   

Municipal bonds

     2,072         (2)         —           —           2,072         (2)   

U.S. Government Agencies

     34,622         (368)         —           —           34,622         (368)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal debt securities

     43,725         (372)         833         (7)         44,558         (379)   

Equity securities

     —           —           152         (60)         152         (60)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $  43,725       $  (372)       $  985       $  (67)       $  44,710       $ (439)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2012, debt securities in a gross unrealized loss position consisted of 17 securities that at such date had an aggregate depreciation of 0.84% 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 fair value has been less than cost; the financial condition and near term prospects of the issuer, including any specific events which may influence the operations of the issuer. The Company has the ability and intent to hold these securities until maturity and the Company does not believe it will be required to sell such securities prior to the recovery of the amortized cost basis. Management does not believe any individual unrealized loss as of March 31, 2012 represents an other-than-temporary impairment.

As of March 31, 2012, there were two equity securities in an unrealized loss position. 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, including any specific events which may influence the operations of the issuer such as changes in technology that may impair the earnings potential of the investment or the discontinuance of a segment of the business that may effect the future earnings potential. 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 of March 31, 2012 represents an other-than-temporary impairment.

A summary of securities with unrealized losses, aggregated by category, at September 30, 2011 is as follows:

 

     Less than 12 Months     12 Months or Longer     Total  

(In Thousands)

   Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Total
Fair Value
     Total
Unrealized
Losses
 

Collateralized mortgage obligations

   $ 11,830       $ (33   $ —         $ —        $ 11,830       $ (33

Municipal bonds

     —           —          1,517         (21     1,517         (21

U.S. Government Agencies

     12,942         (54     —           —          12,942         (54
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal debt securities

     24,772         (87     1,517         (21     26,289         (108

Equity Securities

     45         (13     114         (97     159         (110
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 24,817       $ (100   $ 1,631       $ (118   $ 26,448       $ (218
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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The following table sets forth the stated maturities of the investment and mortgage-backed securities at March 31, 2012. Money market funds and equity securities are not included in the table based on lack of maturity.

 

     March 31, 2012  

(In Thousands)

   Amortized
Cost
     Fair Value  

Available for sale:

     

Due in one year or less

   $ —         $ —     

Due after one year through five years

     —           —     

Due after five years through ten years

     785         842   

Due after ten years

     —           —     
  

 

 

    

 

 

 

Total

   $ 785       $ 842   
  

 

 

    

 

 

 

Held to maturity:

     

Due in one year or less

   $ 94,174       $ 94,420   

Due after one year through five years

     98,480         104,735   

Due after five years through ten years

     33,494         35,191   

Due after ten years

     —           —     
  

 

 

    

 

 

 

Total

   $ 226,148       $ 234,346   
  

 

 

    

 

 

 

Certain of the Company’s investment securities, totaling $8.4 million and $8.9 million at March 31, 2012 and September 30, 2011, respectively, were pledged as collateral to secure deposit sweep accounts and public deposits as required or permitted by law. Other securities, totaling $55.4 million and $52.8 million at March 31, 2012 and September 30, 2011, respectively, were pledged for long-term advances of $50 million as described in Note 8.

3. LOANS RECEIVABLE

Loans receivable consists of the following:

 

(In Thousands)

   March 31, 2012     September 30, 2011  

Residential Mortgages

   $ 325,315      $ 336,379   

Construction

     6,232        5,818   

Home Equity

     82,141        85,521   

Commercial Mortgages

     95,835        91,085   

Commercial Business Loans

     6,796        6,262   

Consumer Non-Real Estate

     1,057        1,136   
  

 

 

   

 

 

 

Total

     517,376        526,201   

Undisbursed portion of loans in process

     (4,397     (3,401

Deferred loan fees

     (1,080     (1,003

Allowance for loan losses

     (3,809     (3,311
  

 

 

   

 

 

 

Loans Receivable—net

   $ 508,090      $ 518,486   
  

 

 

   

 

 

 

 

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The total amount of loans being serviced for the benefit of others was approximately $796,000 and $1.7 million at March 31, 2012 and September 30, 2011, respectively.

The loans receivable portfolio is segmented into consumer and commercial loans. Consumer loans consist of the following classes: residential mortgage loans, construction loans, home equity loans and consumer non-real estate loans. Commercial loans consist of the following classes: commercial mortgages and commercial business loans. For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans including impaired loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.

The allowance for loan losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, 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 quarterly to ensure their relevance in the current economic environment.

 

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Residential mortgage lending generally entails a lower risk of default than other types of lending. Other consumer loans and commercial real estate loans generally involve more risk of collectability because of the type and nature of the collateral and, in certain cases, the absence of collateral. It is the Company’s policy to establish specific reserves for losses on delinquent consumer loans and commercial loans when it determines that losses are probable.

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral. Interest payments on impaired loans and non-accrual loans are applied to principal unless the ability to collect the principal amount is fully secured, in which case interest is recognized on the cash basis.

For residential mortgage loans, home equity loans and commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

For commercial business loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans criticized special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loan not classified are rated pass.

 

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In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of March 31, 2012 and September 30, 2011:

 

March 31, 2012

 
(In Thousands)    Pass      Special
Mention
     Substandard      Doubtful      Total  

Residential Mortgages

   $ 320,757       $ 73       $ 3,720       $ 765       $ 325,315   

Construction

     6,232         —           —           —           6,232   

Home Equity

     81,883         —           258         —           82,141   

Commercial Mortgages

     81,876         10,271         3,688         —           95,835   

Commercial Business Loans

     6,696         100         —           —           6,796   

Consumer Non-Real Estate

     1,057         —           —           —           1,057   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 498,501       $ 10,444       $ 7,666       $ 765       $ 517,376   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2011

 
(In Thousands)    Pass      Special
Mention
     Substandard      Doubtful      Total  

Residential Mortgages

   $ 333,243       $ 77       $ 2,417       $ 642       $ 336,379   

Construction

     5,818         —           —           —           5,818   

Home Equity

     85,285         50         186         —           85,521   

Commercial Mortgages

     80,615         10,343         —           127         91,085   

Commercial Business Loans

     6,162         100         —           —           6,262   

Consumer Non-Real Estate

     1,136         —           —           —           1,136   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 512,259       $ 10,570       $ 2,603       $ 769       $ 526,201   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table summarizes information in regards to impaired loans by loan portfolio class as of March 31, 2012 and September 30, 2011:

 

March 31, 2012

 
(In Thousands)    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
    Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

             

Residential Mortgages

   $ 1,654       $ 1,654       $ —        $ 1,671       $ 44   

Construction

     —           —           —          —           —     

Home Equity

     60         60         —          61         —     

Commercial Mortgages

     —           —           —          —           —     

Commercial Business Loans

     —           —           —          —           —     

Consumer Non-Real Estate

     —           —           —          3         —     

With an allowance recorded:

             

Residential Mortgages

   $ 2,832       $ 2,832       $ (387   $ 2,557       $ 8   

Construction

     —           —           —          —           —     

Home Equity

     197         197         (142     121         10   

Commercial Mortgages

     3,688         3,688         (439     3,693         27   

Commercial Business Loans

     —           —           —          —           —     

Consumer Non-Real Estate

     —           —           —          —           —     

Total:

             

Residential Mortgages

   $ 4,486       $ 4,486       $ (387   $ 4,228       $ 52   

Construction

     —           —           —          —           —     

Home Equity

     257         257         (142     182         10   

Commercial Mortgages

     3,688         3,688         (439     3,693         27   

Commercial Business Loans

     —           —           —          —           —     

Consumer Non-Real Estate

     —           —           —          3         —     

 

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September 30, 2011

 
(In Thousands)    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
    Average
Recorded
Investment
     Interest Income
Recognized
 

With no related allowance recorded:

             

Residential Mortgages

   $ 1,526       $ 1,530       $ —        $ 1,541       $ 87   

Construction

     —           —           —          —           —     

Home Equity

     77         77         —          77         —     

Commercial Mortgages

     127         232         —          194         —     

Commercial Business Loans

     —           —           —          —           —     

Consumer Non-Real Estate

     —           —           —          5         —     

With an allowance recorded:

             

Residential Mortgages

   $ 1,533       $ 1,632       $ (198   $ 1,639       $ 28   

Construction

     —           —           —          —           —     

Home Equity

     109         109         (79     111         2   

Commercial Mortgages

     —           —           —          —           —     

Commercial Business Loans

     —           —           —          —           —     

Consumer Non-Real Estate

     —           —           —          —           —     

Total:

             

Residential Mortgages

   $ 3,059       $ 3,162       $ (198   $ 3,180       $ 115   

Construction

     —           —           —          —           —     

Home Equity

     186         186         (79     188         2   

Commercial Mortgages

     127         232         —          194         —     

Commercial Business Loans

     —           —           —          —           —     

Consumer Non-Real Estate

     —           —           —          5         —     

 

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The performance and credit quality of the loan portfolio is also monitored by the analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of March 31, 2012 and September 30, 2011:

 

March 31, 2012

 
(In Thousands)    30-89 Days Past
Due
     Greater
than 90
Days
     Total
Past Due
     Current      Total
Loans
Receivables
     Loans
Receivable
> 90 Days
and
Accruing
 

Residential Mortgages

   $ 5,673       $ 2,856       $ 8,529       $ 316,786       $ 325,315       $ —     

Construction

     —           —           —           6,232         6,232         —     

Home Equity

     449         623         1,072         81,069         82,141         —     

Commercial Mortgages

     2,682         3,253         5,935         89,900         95,835         —     

Commercial Business Loans

     —           —           —           6,796         6,796         —     

Consumer Non-Real Estate

     9         3         12         1,045         1,057         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,813       $ 6,735       $ 15,548       $ 501,828       $ 517,376       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2011

 
(In Thousands)    30-89 Days Past
Due
     Greater
than 90
Days
     Total Past
Due
     Current      Total Loans
Receivables
     Loans
Receivable
> 90 Days
and
Accruing
 

Residential Mortgages

   $ 1,719       $ 2,771       $ 4,490       $ 331,889       $ 336,379       $ —     

Construction

     —           —           —           5,818         5,818         —     

Home Equity

     467         100         567         84,954         85,521         15   

Commercial Mortgages

     4,180         127         4,307         86,778         91,085         —     

Commercial Business Loans

     —           —           —           6,262         6,262         —     

Consumer Non-Real Estate

     —           4         4         1,132         1,136         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,366       $ 3,002       $ 9,368       $ 516,833       $ 526,201       $ 15   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table provides the activity in the allowance for loan losses by loan class for three and six-months ended March 31, 2012 and 2011. The balance in the allowance for loan losses at March 31, 2012 and March 31, 2011 disaggregated on the basis of the Company’s impairment method by loan class along with the balance of loans receivable by class disaggregated on the basis of the Company’s impairment methodology.

Allowance for Loan Loss:

 

    Residential
Mortgages
    Construction     Home
Equity
    Commercial
Mortgages
    Commercial
Business
Loans
    Consumer
Non-Real
Estate
    Unallocated     Totals  

Three Months ended March 31, 2012:

               

Beginning Balance, January 1, 2012

  $ 961      $ 40      $ 391      $ 1,650      $ 207      $ 5      $ 305      $ 3,559   

Charge-offs

    —          —          —          —          —          (7     —          (7

Recoveries

    —          —          —          —          —          2        —          2   

Provisions

    61        (2     95        96        19        7        (21     255   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, March 31, 2012

  $ 1,022      $ 38      $ 486      $ 1,746      $ 226      $ 7      $ 284      $ 3,809   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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Table of Contents
    Residential
Mortgages
    Construction     Home
Equity
    Commercial
Mortgages
    Commercial
Business
Loans
    Consumer
Non-Real
Estate
    Unallocated     Totals  

Six Months ended March 31, 2012:

               

Beginning Balance, October 1, 2011

  $ 871      $ 33      $ 431      $ 1,516      $ 214      $ 5      $ 241      $ 3,311   

Charge-offs

    —          —          —          —          (127     (11     —          (138

Recoveries

    —          —          —          —          128        3        —          131   

Provisions

    151        5        55        229        12        10        43        505   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, March 31, 2012

  $ 1,022      $ 38      $ 486      $ 1,746      $ 226      $ 7      $ 284      $ 3,809   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance:

               

Individually evaluated for impairment

  $ 387      $ —        $ 142      $ 439      $ —        $ —        $ —        $ 968   

Ending balance:

               

Collectively evaluated for impairment

  $ 635      $ 38      $ 344      $ 1,307      $ 226      $ 4      $ 287      $ 2,841   

Loans:

               

Ending balance:

  $ 325,315      $ 6,232      $ 82,141      $ 95,835      $ 6,796      $ 1,057      $ —        $ 517,376   

Ending balance:

               

Individually evaluated for impairment

  $ 4,486      $ —        $ 257      $ 3,688      $ —        $ —        $ —        $ 8,431   

Ending balance:

               

Collectively evaluated for impairment

  $ 320,829      $ 6,232      $ 81,884      $ 92,147      $ 6,796      $ 1,057      $ —        $ 508,945   

 

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Table of Contents
     Residential
Mortgages
    Construction      Home
Equity
     Commercial
Mortgages
    Commercial
Business
Loans
    Consumer
Non-Real
Estate
    Unallocated      Totals  

Three Months ended March 31, 2011:

                   

Beginning Balance, January 1, 2011

   $ 947      $ 8       $ 457       $ 983      $ 130      $ 10      $ 104       $ 2,639   

Charge-offs

     (15     —           —           —          —          (6     —           (21

Recoveries

     —          —           —           —          —          2        —           2   

Provisions

     60        1         43         (23     (13     4        103         175   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance, March 31, 2011

   $ 992      $ 9       $ 500       $ 960      $ 117      $ 10      $ 207       $ 2,795   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents
    Residential
Mortgages
    Construction     Home
Equity
    Commercial
Mortgages
    Commercial
Business
Loans
    Consumer
Non-Real
Estate
    Unallocated     Totals  

Six Months ended March 31, 2011:

               

Beginning Balance, October 1, 2010

  $ 821      $ 7      $ 405      $ 906      $ 4      $ 22      $ 339      $ 2,504   

Charge-offs

    (24     —          —          —          —          (12     —          (36

Recoveries

    —          —          —          —          —          2        —          2   

Provisions

    195        2        95        54        113        (2     (132     325   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, March 31, 2011

  $ 992      $ 9      $ 500      $ 960      $ 117      $ 10      $ 207      $ 2,795   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance:

               

Individually evaluated for impairment

  $ 317      $ —        $ 147      $ 105      $ —        $ 5      $ —        $ 574   

Ending balance:

               

Collectively evaluated for impairment

  $ 675      $ 9      $ 353      $ 855      $ 117      $ 5      $ 207      $ 2,221   

Loans:

               

Ending balance:

  $ 332,219      $ 6,129      $ 85,958      $ 79,203      $ 6,442      $ 1,125      $ —        $ 511,076   

Ending balance:

               

Individually evaluated for impairment

  $ 2,794      $ —        $ 212      $ 232      $ —        $ 5      $ —        $ 3,243   

Ending balance:

               

Collectively evaluated for impairment

  $ 329,425      $ 6,129      $ 85,746      $ 78,971      $ 6,442      $ 1,120      $ —        $ 507,833   

 

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Table of Contents

As a result of adopting the amendments in ASU No. 2011-02, the Company reassessed all restructurings that occurred on or after January 1, 2011 for identification as troubled debt restructurings. The Company identified no loans for which the allowance for loan losses had previously been measured under a general allowance for credit losses methodology that are now considered troubled debt restructurings in accordance with ASU No. 2011-02, and as such, there are no retroactive disclosures required. The company had no loans modified as troubled debt restructurings for the six months ended March 31, 2012.

The following table presents nonaccrual loans by classes of the loan portfolio as of March 31, 2012 and September 30, 2011:

 

     March 31,      September 30,  
(In Thousands)    2012      2011  

Residential Mortgages

   $ 4,584       $ 3,059   

Construction

     —           —     

Home Equity

     257         171   

Commercial Mortgages

     3,688         127   

Commercial Business Loans

     —           —     

Consumer Non-Real Estate

     3         —     
  

 

 

    

 

 

 

Total

   $ 8,532       $ 3,357   
  

 

 

    

 

 

 

4. FEDERAL HOME LOAN BANK STOCK

Federal law requires a member institution of the Federal Home Loan Bank (FHLB) to hold stock of its district FHLB according to a predetermined formula. The restricted stock is carried at cost. In December 2008, the FHLB of Pittsburgh notified member banks that it was suspending dividend payments and the repurchase of capital stock. During 2011 and 2012, the FHLB allowed certain redemptions. In February 2012, the FHLB of Pittsburgh reinstated the stock dividend at a rate of 0.10%.

Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.

Management believes no impairment charge is necessary related to the FHLB restricted stock as of March 31, 2012.

 

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5. DEPOSITS

Deposits are summarized as follows:

 

     (In Thousands)  
     March 31,      September 30,  
     2012      2011  

Non-interest bearing checking accounts

   $ 31,248       $ 20,836   

Now accounts

     38,287         30,175   

Interest bearing checking accounts

     42,630         39,135   

Money market deposit accounts

     149,555         134,611   

Passbook and club accounts

     4,129         4,194   

Certificate of deposits

     284,572         295,450   
  

 

 

    

 

 

 

Total Deposits

   $ 550,421       $ 524,401   
  

 

 

    

 

 

 

The aggregate amount of certificate accounts in denominations of $100,000 or more at March 31, 2012 and September 30, 2011 amounted to approximately $57.1 million and $61.5 million, respectively.

6. COMMITMENTS

At March 31, 2012, the following commitments were outstanding:

 

     (In Thousands)  

Letters of credit

   $ 203   

Commitments to originate loans

     11,480   

Unused portion of home equity lines of credits

     55,429   

Unused portion of commercial lines of credits

     8,572   

Undisbursed portion of construction loans in process

     4,012   
  

 

 

 

Total

   $ 79,696   
  

 

 

 

Outstanding letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The majority of these standby letters of credit expire within the next twelve months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Company requires collateral supporting these letters of credit as deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of March 31, 2012 for guarantees under standby letters of credit issued is not material.

 

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7. 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,  
     2012      2011      2012      2011  

Basic

     3,738,430         3,723,236         3,750,800         3,708,140   

Diluted

     3,794,487         3,758,260         3,790,592         3,741,864   

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 and unvested restricted stock grants. There were 167,170 stock options and 5,263 unvested restricted stock grants that were anti-dilutive for the three months and six months ended March 31, 2012, respectively. There were 223,831 stock options and 2,822 unvested restricted stock grants that were anti-dilutive for the three month and six months periods ended March 31, 2011, respectively.

8. LONG-TERM DEBT

Advances consists of the following:

 

     March 31,     September 30,  
     2012     2011  
     (In Thousands)  
            Weighted            Weighted  
            Interest            Interest  

Maturing Period

   Amount      Rate     Amount      Rate  

1 to 12 months

   $ 39,509         4.39   $ 53,029         4.50

13 to 24 months

     51,465         4.17     32,778         4.07

25 to 36 months

     2,297         3.58     27,563         4.13

37 to 48 months

     15,000         3.89     17,656         3.84

49 to 60 months

     35,000         4.86     10,000         4.71

61 to 72 months

     55,000         3.94     45,000         4.52

73 to 84 months

     28,956         4.05     64,168         4.38
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 227,227         4.22   $ 250,194         4.34
  

 

 

    

 

 

   

 

 

    

 

 

 

Federal Home Loan Bank (FHLB) advances are collateralized by Federal Home Loan Bank stock and substantially all first mortgage loans. The Company has a line of credit with the FHLB of which $0 out of $75.0 million was used at March 31, 2012 and September 30, 2011, respectively. Included in the table above at March 31, 2012 and September 30, 2011 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 $329.7 million of which $177.2 million was used as of March 31, 2012. In addition, there are four long-term advances from other financial institutions totaling $50 million that are secured by investment and mortgage-backed securities.

 

 

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Table of Contents

9. REGULATORY CAPITAL REQUIREMENTS

The Company and the Bank are 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 Company’s 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 Company and 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, 2012, that the Bank meets all capital adequacy requirements to which it is subject.

As of March 31, 2012, the most recent notification from the Federal Deposit Insurance Corporation categorized the Company and 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 at March 31, 2012 and September 30, 2011 are also presented in the table below. The Company’s capital ratios are not significantly different than the Bank’s disclosed below.

 

                 To Be Considered Well  
                        Capitalized Under  
                  For Capital     Prompt Corrective  
     Actual     Adequacy Purposes     Action Provisions  
(Dollars in Thousands)    Amount      Ratio     Amount      Ratio     Amount      Ratio  

At March 31, 2012

               

Tier 1 Capital (to assets)

   $ 57,627         6.98   $ 33,045         4.00   $ 41,306         5.00

Tier 1 Capital (to risk weighted assets)

     57,627         12.31     18,721         4.00     28,081         6.00

Total Capital (to risk weighted assets)

     61,466         13.13     37,442         8.00     46,802         10.00

At September 30, 2011

               

Tier 1 Capital (to assets)

   $ 57,055         6.77   $ 33,722         4.00   $ 42,153         5.00

Tier 1 Capital (to risk weighted assets)

     57,055         12.23     18,662         4.00     27,993         6.00

Total Capital (to risk weighted assets)

     60,366         12.94     37,325         8.00     46,656         10.00

10. FAIR VALUE MEASUREMENTS AND DISCLOSURES

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with accounting guidance, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

 

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The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is determined at a reasonable point within the range that is most representative of fair value under current market conditions.

The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2012 and September 30, 2011 are as follows:

 

Description

(In Thousands)

   March 31,
2012
     (Level 1)
Quoted Prices in
Active Markets
for Identical
Assets
     (Level 2)
Significant
Other
Observable

Inputs
     (Level 3)
Significant
Unobservable
Inputs
 

Available for sale securities: (1)

           

Equity securities

   $ 421       $ 421       $ —         $ —     

U.S. Government money market funds

     14,018         14,018         —           —     

Collateralized mortgage obligations

     842         —           842         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,281       $ 14,439       $ 842       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Description

(In Thousands)

   September
30, 2011
     (Level 1)
Quoted Prices in
Active Markets
for Identical
Assets
     (Level 2)
Significant
Other
Observable

Inputs
     (Level 3)
Significant
Unobservable
Inputs
 

Available for sale securities: (1)

           

Equity securities

   $ 289       $ 289       $ —         $ —     

U.S. Government money market funds

     17,420         17,420         —           —     

Collateralized mortgage obligations

     806         —           806         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,515       $ 17,709       $ 806       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

(1) Securities are measured at fair value on a recurring basis, generally monthly.

 

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Table of Contents

There were no transfers in and out of Level 1 and Level 2 fair value measurements for the quarter ended March 31, 2012.

For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2012 and September 30, 2011 are as follows:

 

Description

(In Thousands)

   March 31,
2012
     (Level 1)
Quoted Prices in
Active Markets
for Identical
Assets
     (Level 2)
Significant
Other
Observable

Inputs
     (Level 3)
Significant
Unobservable
Inputs
 

Impaired Loans

   $  5,749       $ —         $ —         $ 5,749   

Foreclosed Real Estate

     313         —           —           313   
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 6,062       $ —         $ —         $ 6,062   
  

 

 

    

 

 

    

 

 

    

 

 

 

Description

(In Thousands)

   September 30,
2011
     (Level 1)
Quoted Prices in
Active Markets
for Identical
Assets
     (Level 2)
Significant
Other
Observable

Inputs
     (Level 3)
Significant
Unobservable
Inputs
 

Impaired Loans

   $ 1,365       $ —         $ —         $ 1,365   

Foreclosed Real Estate

     196         —           —           196   
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 1,561       $ —         $ —         $ 1,565   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following valuation techniques were used to measure fair value of the Company’s financial instruments in the tables above and below:

Cash and Cash Equivalents (Carried at Cost)

The carrying amounts for cash and cash equivalents approximate those assets’ fair values.

Securities

The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.

Loans Receivable (Carried at Cost)

The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Due to the significant judgment involved in evaluating credit quality, loans are classified within level 3 of the fair value hierarchy.

 

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Impaired loans are those loans which the Company has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

Foreclosed real estate is real estate owned and is carried at the lower of the investment in the assets or the fair value of the assets less estimated selling costs. The use of independent appraisals and management’s best judgment are significant inputs in arriving at the fair value measure of the underlying collateral and therefore foreclosed real estate are classified within level 3 of the fair value hierarchy. Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

Federal Home Loan Bank Stock (Carried at Cost)

The carrying amount of this restricted investment in bank stock approximates fair value, and considers the limited marketability of such securities.

Accrued Interest Receivable and Payable (Carried at Cost)

The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

Deposit Liabilities (Carried at Cost)

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of a aggregated expected monthly maturities on time deposits.

Borrowings (Carried at Cost)

Fair values of borrowings are estimated using discounted cash flow analysis, based on quoted prices for new advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.

Off-Balance Sheet Financial Instruments (Disclosed at Cost)

Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing. The fair value of these off-balance sheet financial instruments are not considered material as of March 31, 2012 and September 30, 2011.

The estimated fair value amounts have been determined by the Company using available market information appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret the data to develop the estimates.

 

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The carrying amounts and estimated fair values of financial instruments as of March 31, 2012 and September 30, 2011 are as follows.

 

            Fair Value Measurements at
March 31, 2012
 

(In Thousands)

   Carrying
Amount
     Estimated
Fair

Value
     Quoted Prices in
Active Markets

For Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Observable

Inputs
(Level 3)
 

Assets:

              

Cash and cash equivalents

   $ 49,545       $ 49,545       $ 49,545       $ —         $ —     

Securities held to maturity

     226,148         234,346         —           234,346         —     

Securities available-for-sale

     15,281         15,281         14,439         842         —     

Loans receivable—net

     508,090         531,711         —           —           531,711   

Federal Home Loan Bank stock

     11,832         11,832         11,832         —           —     

Accrued interest receivable

     2,637         2,637         2,637         —           —     

Liabilities:

              

Checking, passbook, club and NOW deposit accounts

     116,294         116,294         116,294         —           —     

Money Market deposit accounts

     149,555         149,555         149,555         —           —     

Certificate of deposit accounts

     284,572         291,938         —           291,938         —     

Borrowings

     227,227         251,492         —           251,492         —     

Accrued interest payable

     1,100         1,100         1,100         —           —     

Off balance sheet financial instruments

     —           —           —           —           —     

 

     September 30, 2011  

(In Thousands)

   Carrying
Amount
     Estimated Fair
Value
 

Assets:

     

Cash and cash equivalents

   $ 22,582       $ 22,582   

Securities held to maturity

     231,756         240,581   

Securities available-for-sale

     18,515         18,515   

Loans receivable—net

     518,486         543,732   

Federal Home Loan Bank stock

     13,110         13,110   

Accrued interest receivable

     2,847         2,847   

Liabilities:

     

Checking, passbook, club and NOW deposit accounts

     94,340         94,340   

Money Market deposit accounts

     134,611         134,611   

Certificate of deposit accounts

     295,450         303,290   

Borrowings

     250,194         276,735   

Accrued interest payable

     1,315         1,315   

Off balance sheet financial instruments

     —           —     

 

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Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been and have not been considered in the estimate.

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. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the consolidated financial statements: allowance for loan losses, other-than-temporary security impairment and deferred income taxes.

Allowance for Loan Losses

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.

 

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Our methodology for assessing the appropriateness of the allowance for loan losses consists of three key elements: (1) specific allowances for certain impaired 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 Loans: We establish an allowance for certain impaired loans for the amounts by which the collateral value, present value of future cash flows or observable market price are lower than the carrying value of the loan. Under current accounting guidelines, a loan is defined as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due under the contractual terms of the loan agreement.

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

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

Other-than-Temporary Impairment of Investment Securities

Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a lack of evidence to support realizable value equal to or greater than the carrying value of the investment.

Deferred Tax Assets

In evaluating our ability to recover deferred tax assets, management considers all available positive and negative evidence, including our past operating results and our forecast of future taxable income. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.

 

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Changes in Financial Position for the Six-Month Period Ended March 31, 2012

Total assets at March 31, 2012 were $842.3 million, an increase of $6.6 million or 0.8% for the six-month period then ended. The increase was primarily due to the growth in cash and cash equivalents of approximately $27 million. The increase was partially offset by decreases in loans receivable of $10.4 million, investments available for sale of $3.2 million and repurchase of Federal Home Loan Bank Stock of $1.3 million.

Total deposits increased $26.0 million to $550.4 million or 5.0% during the six-month period ended March 31, 2012. Advances from borrowers for taxes and insurance also increased by $3.1 million or 227.7% due to the timing of property tax payments. The increases were primarily offset by a decrease in borrowings of $23.0 million or 9.2% due to normal repayments for the period.

Comparisons of Results of Operations for the Three-Month and Six-Month Period Ended March 31, 2012 with the Three-Month and Six-Month Period Ended March 31, 2011

Net Income

Net income for the three-month period ended March 31, 2012 was $1.2 million compared to $1.1 million for the comparable period in 2011. Basic and diluted earnings per share for the three-month period ending March 31, 2012 was $0.33 and $0.32 compared to $0.29 and $0.29 for the 2011 period. Net income for the six-month period ended March 31, 2012 was $2.6 million compared to $2.3 million for the comparable period in 2011. Basic and diluted earnings per share for the six-month period ended March 31, 2012 was $0.69 and $0.68 compared to $0.62 and $0.62 for the comparable period in 2011.

Net Interest Income

Net interest income was $4.8 million for the three-month period ended March 31, 2012 compared to $4.5 million for the comparable period in 2011. Net interest income increased to $9.8 million for the six-month period ended March 31, 2012 compared to $9.0 million for the six-month period in 2011. Although our average balance of interest-earning assets and interest-bearing liabilities decreased our average interest rate spread increased from 2.16% to 2.43% in the respective six-month periods ended March 31, 2011 and 2012.

Non-Interest Income

Non-interest income increased to $462,000 for the three-month period ended March 31, 2012 from $432,000 for the comparable period in 2011. Non-interest income increased to $1.0 million for the six-months ended March 31, 2012 from $933,000 for the comparable period in 2011. The increase is primarily due to an increase in income on non-deposit products and customer service fees due to the increase in transaction accounts over the current period.

 

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Non-Interest Expenses

For the three-month period ended March 31, 2012, non-interest expenses increased by $73,000 or 2.2% to $3.4 million compared to $3.3 million for the same period in 2011. For the six month period ended March 31, 2012, non-interest expenses increased by $208,000 or 3.2% to $6.7 million compared to $6.5 million for the same period in 2011. Salary and employee benefits increased $98,000 to $2.0 million and $257,000 to $3.9 million for the three and six month period ended March 31, 2012. These increases are primarily due to normal salary increases and additional employee benefits expenses. Occupancy and equipment decreased $26,000 and $7,000 for the three and six month period ended March 2012. FDIC insurance expense decreased to $138,000 and $270,000 for the three and six month period ended March 31, 2012 compared to $263,000 and $489,000 for the same periods in 2011 due to the new deposit insurance assessment calculation using assets and tier one capital. Other expenses increased by $99,000 and $131,000 for the three and six month period ended March 31, 2012. The increase was primarily due to the growth in commercial loans, ATM processing, and advertising expenses. The annualized ratio of non-interest expenses to average assets for the three and six month periods ended March 31, 2012 and 2011 were 1.64%, 1.62% and 1.56%, 1.52%, respectively.

Income Taxes

The Company made provisions for income taxes of $354,000 and $1.1 million for the three-month and six-month periods ended March 31, 2012, compared to $350,000 and $779,000 for the comparable periods in 2011. These provisions are based on the levels of pre-tax income, adjusted primarily for tax-exempt interest income on investments.

Liquidity and Capital Recourses

For a financial institution, liquidity is a measure of the ability to fund customers’ needs for loans and deposit withdrawals. The 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.

The Company also relies upon cash flow from operations and other financing activities, generally short-term and long-term debt. Liquidity is also provided by investing activities including the repayment and maturity of loans and investment securities as well as the management of asset sales when considered necessary. The 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, 2012, the Company had $79.7 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 $329.7 million at March 31, 2012 of which $177.2 million was outstanding at March 31, 2012.

The Bank’s net income for the six-month period ended March 31, 2012 was $2.6 million compared to $2.3 million for the comparable period in 2011. This increased the Bank’s stockholder’s equity to $58.0 million or 6.89% of total assets. This amount is well in excess of the Bank’s minimum regulatory capital requirement.

 

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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 decrease the interest rate sensitivity by shortening the repricing intervals and the maturities of the Company’s interest-earning assets. Although management of the Company believes that the steps taken have reduced the Company’s overall vulnerability to increases 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, 2012, which are expected to mature, prepay or reprice in each of the future time periods shown. Except as stated below, the amounts of assets or liabilities shown which mature or reprice during a particular period were determined in accordance with the contractual terms of the asset or liability. Adjustable and floating-rate assets are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due and fixed-rate loans and mortgage-backed securities are included in the periods in which they are anticipated to be repaid.

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.

 

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(In Thousands)

   1 Year
or less
    1 to 3
Years
    3 to 5
Years
    Over 5
Years
    Total  

Interest-earning assets:

          

Mortgage loans

   $ 83,995      $ 89,362      $ 57,192      $ 100,999      $ 331,547   

Commercial loans

     51,369        18,463        16,377        16,422        102,631   

Mortgage-backed securities

     56,478        45,353        22,223        21,351        145,405   

Consumer and other loans

     69,840        8,666        3,002        1,690        83,198   

Investment securities and other investments

     102,871        14,413        19,700        16,225        153,209   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     364,553        176,257        118,494        156,687        815,990   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

          

Passbook and Club accounts

     397        —          —          3,732        4,129   

NOW and checking accounts

     8,092        —          —          72,825        80,917   

Consumer Money Market Deposit accounts

     58,266        —          —          64,589        122,855   

Business Money Market Deposit accounts

     20,025        —          —          6,675        26,700   

Certificate accounts

     111,699        123,974        48,899        —          284,572   

Borrowed money

     41,911        52,725        51,008        81,583        227,227   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     240,390        176,699        99,907        229,404        746,400   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Repricing GAP during the period

   $ 124,163      $ (442   $ 18,587      $ (72,718   $ 69,590   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative GAP

   $ 124,163      $ 123,721      $ 142,308      $ 69,590     
  

 

 

   

 

 

   

 

 

   

 

 

   

Ratio of GAP during the period to total assets

     14.74     -0.05     2.21     -8.63  
  

 

 

   

 

 

   

 

 

   

 

 

   

Ratio of cumulative GAP to total assets

     14.74     14.69     16.90     8.26  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

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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.

Part II OTHER INFORMATION

Item 1. Legal Proceedings

The Company is involved in various legal proceedings occurring in the ordinary course of business. It is the opinion of management that these matters will not materially affect the Company’s consolidated financial position or results of operations.

Item 1A. Risk Factors

Not applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

  (a) Not applicable.

 

  (b) Not applicable.

 

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

 

Period

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

January 1-31, 2012

     —           —           —           50,492   

February 1-29, 2012

     —           —           —           50,492   

March 1-31, 2012

     —           —           —           50,492   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           —           50,942   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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Item 3. Defaults upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other information.

Not applicable.

Item 6. Exhibits

 

No.

  

Descriptions

31.1    Certification of Chief Executive Officer
31.2    Certification of Chief Operating and Financial Officer
32.0    Section 1350 Certification of Chief Executive Officer and Chief Operating and Financial Officer

The following Exhibits are being furnished* as part of this report:

 

No.

  

Description

101.INS    XBRL Instance Document.*
101.SCH    XBRL Taxonomy Extension Schema Document.*
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.*
101.LAB    XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.*
101.DEF    XBRL Taxonomy Extension Definitions Linkbase Document.*

 

* These interactive data files are being furnished as part of this Quarterly Report, and, in accordance with Rule 402 of Regulation S-T, shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

 

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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 11, 2012     By:  

/s/ Ronald B. Geib

     

Ronald B. Geib

Chief Executive Officer

     

Date: May 11, 2012

    By:  

/s/ Brendan J. McGill

     

Brendan J. McGill

Executive Vice President

Chief Operating and Financial Officer

 

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