General
Harleysville Savings Financial Corporation is a Pennsylvania corporation headquartered in Harleysville, Pennsylvania. The
Company became the bank holding company for Harleysville Savings Bank in connection with the holding company reorganization of the Bank in February 2000 (the Reorganization). In August 1987, the Banks predecessor, Harleysville
Savings Association, converted to the stock form of organization. The Bank, whose predecessor was originally, incorporated in 1915, converted from a Pennsylvania chartered, permanent reserve fund savings association to a Pennsylvania chartered stock
savings bank in June 1991. The Bank operates from six full-service offices located in Montgomery County and one office located in Bucks County, Pennsylvania. The Banks primary market area includes Montgomery County, which has the third largest
population and the second highest per capita income in the Commonwealth of Pennsylvania, and, to a lesser extent, Bucks County. As of September 30, 2012, the Company had $802.6 million of total assets, $542.9 million of deposits and $59.7
million of stockholders equity. The Companys stockholders equity constituted 7.4% of total assets as of September 30, 2012.
1
The Banks primary business consists of attracting deposits from the general public and
business customers through a variety of deposit programs and investing such deposits principally in first mortgage loans secured by residential properties in the Banks primary market area. The Bank also originates a variety of consumer loans,
predominately home equity loans and lines of credit also secured by residential properties in the Banks primary lending area. The Bank is also engaged in the general commercial banking business, and provides a full range of commercial loans
and commercial real estate loans to customers in the Banks primary market area. The Bank serves its customers through its full-service branch network as well as through remote ATM locations, the internet and telephone banking.
Deposits with the Bank are insured to the maximum extent provided by law through the Deposit Insurance Fund administered by the Federal
Deposit Insurance Corporation (FDIC). The Bank is subject to examination and comprehensive regulation by the FDIC and the Pennsylvania Department of Banking (Department). It is also a member of the Federal Home Loan Bank of
Pittsburgh (FHLB of Pittsburgh or FHLB), which is one of the 12 regional banks comprising the Federal Home Loan Bank System (FHLB System). The Bank is also subject to regulations of the Board of Governors of the
Federal Reserve System (Federal Reserve Board) governing reserves required to be maintained against deposits and certain other matters.
The Companys principal executive offices are located at 271 Main Street, Harleysville, Pennsylvania 19438 and its telephone number is (215) 256-8828.
Competition
The Company
faces significant competition in attracting deposits. Its most direct competition for deposits has historically come from commercial banks and other savings institutions located in its market area. The Company faces additional significant
competition for investors funds from other financial intermediaries. The Company competes for deposits principally by offering depositors a variety of deposit programs, convenient branch locations, hours and other services. The Company does
not rely upon any individual group or entity for a material portion of its deposits.
The Companys competition for real
estate loans comes principally from mortgage banking companies, other savings institutions, commercial banks and credit unions. The Bank competes for loan originations primarily through the interest rates and loan fees it charges, the efficiency and
quality of services it provides borrowers, referrals from real estate brokers and builders, and the variety of its products. Factors which affect competition include the general and local economic conditions, current interest rate levels and
volatility in the mortgage markets.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
(FIRREA) eliminated many of the distinctions between commercial banks and savings institutions and holding companies and allowed bank holding companies to acquire savings institutions. FIRREA has generally resulted in an increase in the
competition encountered by savings institutions and has resulted in a decrease in both the number of savings institutions and the aggregate size of the savings industry.
2
Lending Activities
Loan Portfolio Composition.
The Companys loan portfolio is predominantly comprised of loans secured by first mortgages on single-family residential properties. As of September 30, 2012,
first mortgage loans on residential properties, including loans on single-family, multi-family residential properties, construction loans and lot loans on such properties, amounted to $315.4 million or 63.0% of the Companys total loan
portfolio. Loans on the Companys residential properties are primarily long-term and are conventional (i.e., not insured or guaranteed by a federal agency).
As of September 30, 2012, loans secured by commercial real estate and commercial business loans comprised $97.7 million and $6.1 million or 19.5% and 1.2% of the total loan portfolio, respectively.
Home equity lines, including installment home equity loans and home equity lines of credit comprised $80.4 million or 16.1% of the total loan portfolio. Consumer loans, including automobile loans, loans on savings accounts and education loans,
constituted $1.3 million or 0.2% of the total loan portfolio as of September 30, 2012.
The following table sets forth
the composition of our loan portfolio by type of loan at the dates indicated.
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As of September 30,
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2012
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2011
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2010
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2009
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2008
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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(Dollars in Thousands)
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Real estate loans:
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Residential
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Single-family
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$
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308,983
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61.7
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%
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$
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332,642
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63.2
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%
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$
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336,081
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65.0
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%
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$
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343,155
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68.2
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%
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$
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333,885
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68.9
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%
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Multi-family
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1,422
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0.3
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1,612
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0.3
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1,807
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0.3
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1,997
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0.4
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2,392
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0.5
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Construction
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3,258
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0.7
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5,818
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1.1
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4,752
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0.9
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2,912
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0.6
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8,346
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1.7
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Lot loans
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1,721
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0.3
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2,125
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0.4
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1,986
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0.4
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1,141
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0.2
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1,167
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0.2
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Home equity
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80,402
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16.1
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85,521
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16.3
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90,511
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17.5
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92,343
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18.4
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92,254
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19.1
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Commercial real estate
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97,659
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19.5
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91,085
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17.3
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75,450
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14.6
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54,341
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10.8
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37,799
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7.8
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Total real estate loans
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493,445
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98.6
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%
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518,803
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98.6
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%
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510,587
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98.7
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%
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495,889
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98.6
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%
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475,843
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98.2
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%
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Non-real estate loans:
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Commercial business loans
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6,059
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1.2
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6,262
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1.2
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4,327
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0.8
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4,982
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1.0
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6,584
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1.4
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Consumer non-real estate loans
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1,272
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0.2
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1,136
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0.2
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1,980
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0.5
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2,242
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0.4
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1,955
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0.4
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Total consumer loans
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7,331
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1.4
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%
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7,398
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1.4
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%
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6,307
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1.3
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%
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7,224
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1.4
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%
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8,539
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1.8
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%
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Total loans receivable
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500,776
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100.0
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%
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526,201
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100.0
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%
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516,894
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100.0
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%
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503,113
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100.0
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%
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484,382
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100.0
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%
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Less:
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Loans in process
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(1,362
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)
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(3,401
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)
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(3,426
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)
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(1,873
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)
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(5,108
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)
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Deferred loan fees
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(1,015
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)
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(1,003
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)
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(871
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)
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(755
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)
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(428
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)
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Allowance for loan losses
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(4,032
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)
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(3,311
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)
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(2,504
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)
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(2,094
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)
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(1,988
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)
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Total loans receivable net
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$
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494,367
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$
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518,486
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$
|
510,093
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$
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498,391
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$
|
476,858
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3
Contractual Maturities
. The following table sets forth scheduled contractual
maturities of the loan and mortgage-backed securities portfolio of the Company as of September 30, 2012 by categories of loans and securities. The principal balance of the loan is set forth in the period in which it is scheduled to mature. This
table does not reflect loans in process or unamortized premiums, discounts and fees.
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Principal Balance
at September 30,
2012
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Principal Repayments Contractually Due in Year(s) Ended
September 30,
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2013
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2014
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2015-2017
|
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2018-2021
|
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2022-2026
|
|
|
2027-and
Thereafter
|
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(In Thousands)
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|
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Residential real estate loans:
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|
|
|
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Single-family
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$
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308,983
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|
|
$
|
4,635
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|
|
$
|
4,944
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|
|
$
|
16,685
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|
|
$
|
38,005
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|
|
$
|
54,380
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|
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$
|
190,334
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|
Multi-family
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|
1,422
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|
|
|
21
|
|
|
|
23
|
|
|
|
77
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|
|
|
175
|
|
|
|
250
|
|
|
|
876
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|
Construction
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|
3,258
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|
|
|
49
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|
52
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|
176
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|
401
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573
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|
|
2,007
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Lot loans
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1,721
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|
93
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|
101
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|
348
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|
780
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|
|
399
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Mortgage-backed securities
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|
162,710
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|
|
2,441
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|
2,766
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|
|
9,112
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|
|
|
20,501
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|
|
|
28,800
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|
|
|
99,090
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|
Home equity lines of credit
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|
80,402
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|
|
|
7,799
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|
|
|
8,281
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|
|
|
15,357
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|
|
|
36,824
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|
|
|
12,141
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|
|
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|
Commercial real estate
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|
|
97,659
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|
|
|
3,516
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|
|
|
3,809
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|
|
|
13,379
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|
|
30,958
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|
|
45,997
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|
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Commercial business loans
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6,059
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|
218
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|
85
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|
563
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|
52
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|
|
|
606
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|
|
|
4,535
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|
Consumer and other loans
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|
1,272
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|
|
|
156
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|
|
|
168
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|
|
|
582
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|
|
|
|
|
|
|
159
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|
|
207
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|
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|
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Total(1)
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|
$
|
663,486
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|
|
$
|
18,928
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|
|
$
|
20,229
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|
|
$
|
56,279
|
|
|
$
|
127,696
|
|
|
$
|
143,305
|
|
|
$
|
297,049
|
|
|
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|
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(1)
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With respect to the $644.6 million of loans and mortgage-backed securities with principal maturities contractually due after September 30, 2013, $582.0 million
have fixed rates of interest and $62.6 million have adjustable or floating rates of interest.
|
Contractual
principal maturities of loans do not necessarily reflect the actual term of the Companys loan portfolio. The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and because of
enforcement of due-on-sale clauses, which give the Company the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The
average life of mortgage loans tends to increase when current mortgage loan rates substantially exceed rates on existing mortgage loans and, conversely, decrease when rates on existing mortgage loans substantially exceed current mortgage loan rates.
Interest rates charged by the Company on loans are affected principally by the demand for such loans and the supply of funds
available for lending purposes. These factors are, in turn, affected by general economic conditions, monetary policies of the federal government, including the Federal Reserve Board, legislative tax policies and government budgetary matters. The
interest rates charged by the Company are competitive with those of other local financial institutions.
Origination,
Purchase and Sale of Loans.
Although the Company has general authority to originate, purchase and sell loans secured by real estate located throughout the United States, the Companys lending activities are focused in its assessment area of
Montgomery County, Pennsylvania and surrounding suburban counties.
The Company accepts loan applications through its branch
network, and also accepts mortgage applications from mortgage brokers who are approved by the Board of Directors to do business with the Company. The Company generally does not engage in the purchase of whole loans. The Company did engage in the
acquisition of participations of commercial loans on a limited basis during fiscal years ended September 30, 2012 and 2011.
On occasion, we have sold participation interests in loans originated by us to other institutions. When we have sold participation interests, we generally have sold them to mitigate our risks in certain
situations. During the years ended September 30, 2012 and 2011, we sold no loan participations.
4
The Companys total loan originations decreased by $36.2 million or 27.8% in fiscal
2012 and decreased by $4.8 million or 3.5% in fiscal 2011. Of the $94.2 million and $130.4 million of total loans originated in fiscal 2012 and 2011, respectively, $38.5 million and $50.4 million were originated to fund single-family residential
properties, $377,000 and $4.0 million were loans originated to fund construction properties and $48.5 million and $68.9 million were to fund commercial real estate and home equity lines of credits which are secured by real estate. The Companys
total real estate loan originations in fiscal 2012 decreased by $11.9 million or 23.7% from the prior year. The non-real estate loans originated totaled $6.8 million and $7.1 million in 2012 and 2011, respectively. Management intends to continue to
emphasize origination of consumer loans which may have adjustable rates, and generally have shorter terms than residential real estate loans.
The Companys total purchase of mortgage-backed securities increased by $12.7 million and $44.9 million in fiscal 2012 and 2011, respectively. The purchase of these mortgage-backed securities
reflects the use of excess funds.
The following table shows total loans originated, sold and repaid during the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In Thousands)
|
|
Real estate loan originations:
|
|
|
|
|
|
|
|
|
Residential:
|
|
|
|
|
|
|
|
|
Single-family
|
|
$
|
38,485
|
|
|
$
|
50,423
|
|
Construction
|
|
|
377
|
|
|
|
3,992
|
|
Home equity
|
|
|
28,413
|
|
|
|
31,569
|
|
Commercial real estate
|
|
|
20,095
|
|
|
|
37,285
|
|
Commercial business loans
|
|
|
6,059
|
|
|
|
6,262
|
|
Consumer non-real estate loans (1)
|
|
|
725
|
|
|
|
858
|
|
|
|
|
|
|
|
|
|
|
Total loan originations
|
|
|
94,154
|
|
|
|
130,389
|
|
Purchases of mortgage-backed securities
|
|
|
72,576
|
|
|
|
59,889
|
|
|
|
|
|
|
|
|
|
|
Total loan originations, and purchases
|
|
|
166,730
|
|
|
|
190,278
|
|
Principal loan and mortgage-backed securities repayments
|
|
|
188,426
|
|
|
|
161,443
|
|
Transfer of loans to foreclosed real estate
|
|
|
126
|
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
Total principal repayments and sales
|
|
|
188,552
|
|
|
|
161,727
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in loans and mortgage-backed securities
|
|
$
|
(21,822
|
)
|
|
$
|
28,551
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes installment vehicle loans, secured and unsecured personal loans and lines of credit.
|
Loan Underwriting Policies.
Each loan application received by the Company is underwritten to the standards of the Companys
written underwriting policies as adopted by the Companys Board of Directors. The Companys Board of Directors has granted loan approval authority to several officers and employees of the Company, provided that the loan meets the
guidelines set out in its written underwriting policies. Individual approval authority of $500,000 has been granted to the Companys Chief Executive Officer, the Companys Chief Operating and Financial Officer, and the Companys Chief
Lending Officer. Joint approval authority of $1.0 million has been granted to a combination of at least two of the above named individuals. Individual lending authority of $250,000 has been granted to the Banks Vice President/Loan
Administration Manager, the Vice President/Loan Customer Service Manager and to the Banks Consumer Loan and Residential Mortgage Underwriter, employed by the Company. Additional consumer loan lending authority of $50,000 has been granted to
several designated underwriters, employed by the Bank. Loans with policy exceptions require approval by the next highest approval authority. Loans over $1.0 million must be approved by the Companys Senior Loan Committee or the Board of
Directors.
5
In the exercise of any loan approval authority, the officers of the Company will take into
account the risk associated with the extension of credit to a single borrower, borrowing entity, or affiliation. The Company has aggregate loans to one borrower limit of 15% of the Companys unimpaired capital and unimpaired surplus in
accordance with federal regulations. At September 30, 2012, the largest aggregate amount of loans outstanding to any borrower, including related entities, was $5.2 million, which did not exceed the Companys loan to one borrower
limitation.
Single Family Residential Real Estate Lending.
The Company is permitted to lend up to 97% of the appraised
value or sales price of the security property for a residential real estate loan, provided that the borrower obtains private mortgage insurance on loans that exceed 80% of the appraised value or sales price, whichever is less, of the security
property. The Company will generally lend up to 95% of the lesser of the appraised value or the sale price for the purchase of single-family, owner-occupied dwellings which conform to the secondary market underwriting standards. Refinancings are
limited to 90% or less. Loans over $417,000 and other non-conforming loans, secured by 1-4 residential, owner-occupied dwellings, are limited to 90% of the lesser of the purchase price or appraised value. The purchase of non-owner occupied, 1-4 unit
dwellings may be financed to 80% of the lower of the appraisal or sale price; a refinance is limited to 80% of the appraised value if the borrowers FICO score is 680 or higher.
All appraisals and other property valuations are performed by independent fee appraisers approved by the Companys Senior Loan
Committee. On all amortizing real estate loans, the Company requires borrowers to obtain title insurance, insuring the Company has a valid first lien on the mortgaged real estate. Borrowers must also obtain and maintain a hazard insurance policy
prior to closing and, when the real estate is located in a flood hazard area designated by the Federal Emergency Management Agency, a flood insurance policy is required. Generally, borrowers advance funds on a monthly basis together with payment of
principal and interest into a mortgage escrow account from which the Company makes disbursements for items such as real estate taxes and insurance premiums as they fall due.
The Company presently originates fixed-rate loans on single-family residential properties pursuant to underwriting standards consistent with secondary market guidelines, and which may or may not be sold
into the secondary mortgage market as conditions warrant. Adjustable rate mortgages (ARMs), as well as non-conforming and jumbo fixed-rate loans in amounts up to $2.0 million, are held in the portfolio. It is the Companys policy to
originate both fixed-rate loans and ARMs for terms up to 30 years. As of September 30, 2012 and 2011, $312.3 million or 62.4% and $338.5 million or 64.3% of the Companys total loan portfolio consisted of single-family (including
construction loans) residential loans, respectively. As of September 30, 2012, approximately $301.1 million or 96.4% of the Companys total mortgage loans consisted of fixed-rate, single-family residential mortgage loans. As of such date,
$11.2 million or 3.6% of the total mortgage loan portfolio consisted of adjustable-rate single-family residential mortgage loans. Most of the Companys residential mortgage loans include due on sale clauses.
During the years ended September 30, 2012 and 2011, the Company originated $6.0 million and $4.0 million of ARM mortgages,
respectively. ARMs represented 6.3% and 3.1% of the Companys total mortgage loan portfolio originations in fiscal 2012 and 2011, respectively. The ARM mortgages offered by the Company are originated with initial adjustment periods varying from
one to 10 years, and provide for initial rates of interest below the rates which would prevail were the index used for repricing applied initially. The Company expects to emphasize the origination of ARMs as market conditions permit, in order to
reduce the impact of rising interest rates in the market place. Such loans, however, may not adjust as rapidly as changes in the Companys cost of funds.
Multi-family Residential Real Estate Lending.
The Company originates mortgage loans secured by multifamily dwelling units. At September 30, 2012, $1.4 million, or 0.3% of our total loan
portfolio consisted of loans secured by multifamily residential real estate. The majority of our multifamily residential real estate loans are secured by apartment buildings located in the Banks local market area. The interest rates for our
multifamily residential real estate loans generally adjust at five- to ten-year intervals, with the rate to be
6
negotiated at the end of such term or to automatically convert to a floating interest rate. These loans generally have a five-year term with an amortization period of no more than twenty years.
At September 30, 2012, we had no multifamily residential real estate loans that were delinquent in excess of 30 days.
Construction Loans.
The Company offers fixed-rate and adjustable-rate construction loans on residential properties. Residential
construction loans are originated for individuals who are building their primary residence as well as to selected local builders for construction of single-family dwellings. As of September 30, 2012, $3.3 million or 0.7% of the total loans
consisted of construction loans.
Construction loans to homeowners are usually made in connection with the permanent financing
on the property. The permanent loans have amortizing terms up to 30 years, following the initial construction phase during which time the borrower pays interest on the funds advanced. These loans are reclassified as permanent mortgage loans when the
residences securing the loans are completed. The Company will make construction/permanent loans up to a maximum of 90% of the fair market value of the completed project. The rate on the loan during construction is the same rate as the Company will
charge on the permanent loan on the completed project. Advances are made on a percentage of completion basis with the Companys receipt of a satisfactory inspection report of the project.
Historically, the Company has been active in on-your-lot home construction lending and intends to continue to emphasize such lending.
Although construction lending is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate, the Company historically has not experienced any significant problems.
The Company also offers mortgage loans on undeveloped single lots held for residential construction. These loans are generally fixed-rate
loans with terms not exceeding 15 years; they are not a significant part of the Companys lending activities. Additionally, the Bank has not been active in residential subdivision lending and has no acquisition/development loans in the
portfolio.
Home Equity.
Home equity loans and lines of credit continue to be a popular product and represented $80.4
million or 16.1% of the total loan portfolio at September 30, 2012. After taking into account first mortgage balances, the Company will lend up to 80% of the value of owner-occupied property on fixed rate terms up to 15 years. This amount may
be raised to 100% when considering other factors, such as excellent credit history and income stability. At September 30, 2012, the Company had outstanding 2,506 home equity loans, of which 630 were installment equity loans and 1,876 were line
of credit loans. As of such date, the Company had an outstanding balance on line of credit loans of approximately $61.1 million and there was approximately $55.3 million of unused credit available on such loans.
Commercial Real Estate Loans.
The Company originates mortgage loans for the acquisition and refinancing of commercial real estate
properties. At September 30, 2012, $97.7 million, or 19.5% of the Banks total loan portfolio consisted of loans secured by commercial real estate properties, owner occupied commercial real estate loans and non-owner occupied commercial
real estate loans. The majority of our commercial real estate loans are secured by office buildings, manufacturing facilities, distribution/warehouse facilities, and retail centers, which are generally located in our local market area. The interest
rates for our commercial real estate loans generally adjust at one- to five-year intervals, and are typically renegotiated at the end of such period or automatically converted to a floating interest rate. The loans generally have a five-year term
with an amortization period of no greater than twenty five years. At September 30, 2012, the largest such loan had a balance of $5.2 million.
The Company generally requires appraisals of the properties securing commercial real estate loans. Appraisals are performed by an independent appraiser designated by the Company and all appraisals are
reviewed by management. The Company considers the quality and location of the real estate, the credit of the borrower, the cash flow of the project and the quality of management involved with the property when making decisions on commercial real
estate loans.
7
Loan-to-value ratios on our commercial real estate loans are generally limited to 80% of the
appraised value of the secured property. As part of the criteria for underwriting commercial real estate loans, we generally impose a debt service coverage ratio (the ratio of net operating income before payment of debt service compared to debt
service) of not less than 1.2-to-1. It is also our general practice to obtain personal guarantees from the principals of our corporate borrowers on commercial real estate loans.
Loans secured by commercial real estate typically have higher balances and are more difficult to evaluate and monitor and, therefore,
involve a greater degree of credit risk than other types of loans. If the estimate of value proves to be inaccurate, the property may not provide us with full repayment in the event of default and foreclosure. Because payments on these loans are
often dependent on the successful development, operation, and management of the properties, repayment of these loans may be affected by adverse conditions in the real estate market or the economy. The Company seeks to minimize these risks by
limiting the maximum loan-to-value ratio and strictly scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan. The Company also generally obtains loan guarantees from
financially capable parties based on a review of personal financial statements.
Commercial Business Loans
. Our
commercial business loans amounted to $6.1 million or 1.2% of the total loan portfolio at September 30, 2012. The Company originates business loans typically for small to mid-sized businesses in our market area and may be for working capital,
equipment financing, inventory financing, or accounts receivable financing. Small business loans may have adjustable or fixed rates of interest and generally have terms of three years or less but may go up to 10 years. Our commercial business loans
generally are secured by equipment, machinery or other corporate assets. In addition, we generally obtain personal guarantees from the principals of the borrower with respect to all commercial business loans.
Commercial lending generally involves greater credit risk than residential mortgage or consumer lending, and involves risks that are
different from those associated with commercial real estate lending. Although commercial loans may be collateralized by equipment or other business assets, the liquidation of collateral in the event of a borrower default may represent an
insufficient source of repayment because equipment and other business assets may, among other things, be obsolete or of limited use. Accordingly, the repayment of a commercial loan depends primarily on the creditworthiness and projected cash flow of
the borrower (and any guarantors), while liquidation of collateral is considered a secondary source of repayment.
Our
commercial lenders actively solicit commercial business loans in our market area. Commercial business loans generally are deemed to involve a greater degree of risk than single-family residential mortgage loans. Repayment of our commercial business
loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value. Credit support provided by the borrower for most of these loans and the probability of repayment
is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists. As a result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be
substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing other loans, such as inventory or equipment, may depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business.
Consumer Non-Real Estate Loans.
The Company actively originates consumer loans
to provide a wider range of financial services to its customers and to improve the interest rate sensitivity of its interest-earning assets. Originations of consumer loans as a percent of total loan originations amounted to 0.8% and 0.7% during
fiscal 2012 and 2011, respectively. The shorter-term and normally higher interest rates on such loans help the Company to maintain a profitable spread between its average loan yield and its cost of funds. The Companys consumer loan department
offers vehicle loans, personal loans and personal lines of credit. Loans secured by deposit accounts at the Company are also made to depositors in an amount up to 90% of their account balances with terms of up to 15 years.
8
Consumer loans generally involve more risk of collectibility than mortgage loans because of
the type and nature of the collateral and, in certain cases, the absence of collateral. As continued payments are dependent on the borrowers continuing financial stability, these loans may be more likely to be adversely affected by job loss,
divorce, personal bankruptcy or by adverse economic conditions.
Loan Fee and Servicing Income.
The Company receives
fees both for the origination of loans and for making commitments to originate and purchase residential and commercial mortgage loans. The Company also receives servicing fees with respect to residential mortgage loans it has sold. It also receives
loan fees related to existing loans, including late charges, and credit life insurance commissions. Loan origination and commitment fees and discounts are a volatile source of income, varying with the volume and type of loans and commitments made
and purchased and with competitive and economic conditions.
Loans fees generated on origination of loans under accounting
principles generally accepted in the United States of America are deferred along with direct origination costs. Deferred loan fees, net and discounts on mortgage loans purchased are amortized to income as a yield adjustment over the estimated
remaining terms of such loans using the interest method.
As of September 30, 2012, the Company was servicing $1.2
million of loans for others, which consisted of loans sold by the Company to the Federal Home Loan Bank (FHLB), in the amount of $1.2 million. The Company receives a servicing fee of 0.25% on such loans, which totaled $14,000 as of
September 30, 2012, and are included in prepaid expenses and other assets on the statement of financial condition.
Non-performing Loans and Real Estate Owned.
When a borrower fails to make a required loan payment, the Company attempts to cure
the default by contacting the borrower; generally, after a payment is more than 15 days past due, at which time a late charge is assessed. Defaults are cured promptly in most cases. If the delinquency on a mortgage loan exceeds 60 days and is not
cured through the Companys normal collection procedures, or an acceptable arrangement is not worked out with the borrower, the Company will institute measures to remedy the default. This may include commencing a foreclosure action or, in
special circumstances, accepting from the borrower a voluntary deed of the secured property in lieu of foreclosure with respect to mortgage loans and equity loans, or title and possession of collateral in the case of other consumer loans.
Substantial delays may occur in instituting and completing residential foreclosure proceedings due to the extensive procedures and time periods required to be complied with under Pennsylvania law.
All interest accrued but not collected for loans that are placed on nonaccrual status or charged off are reversed against interest
income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured. Interest income is recognized using the interest method when the collection is reasonably assured. The Company had $10.8 million of non-accrual loans at September 30, 2012 and $3.4
million of non-accrual loans at September 30, 2011.
If foreclosure is effected, the property is sold at a public auction
in which the Company may participate as a bidder. If the Company is the successful bidder, the acquired real estate property is then included in the Companys real estate owned (REO) account until it is sold. When property is
acquired, it is recorded at the market value at the date of acquisition less estimated cost to sell and any write-down resulting is charged to the allowance for loan losses. Interest accrual, if any, ceases on the date of acquisition and all costs
incurred in maintaining the property from that date forward are expensed. Costs incurred for the improvement or developments of such property are capitalized. The Company is permitted under Department regulations to finance sales of real estate
owned by loans to facilitate, which may involve more favorable interest rates and terms than generally would be granted under the Companys underwriting guidelines.
9
Foreclosed Real Estate
. Real estate acquired through, or in lieu of, loan
foreclosures are carried at the fair value of the property, based on an appraisal, less cost to sell. Costs relating to the development and improvement of the property are capitalized, and those relating to holding the property are charged to
expense. The Company had no properties in other real estate owned at September 30, 2012 compared to two properties with balances totaling $196,000 at September 30, 2011.
The following table sets forth information regarding non-accrual loans, loans which are 90 days or more delinquent but on which the
Company is accruing interest, troubled debt restructurings, and other real estate owned held by the Company at the dates indicated. The Company continues to accrue interest on loans which are 90 days or more overdue where management believes that
such interest is collectible.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
Residential real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans
|
|
$
|
5,041
|
|
|
$
|
3,059
|
|
|
$
|
1,716
|
|
|
$
|
335
|
|
|
$
|
244
|
|
Accruing loans 90 days overdue
|
|
|
47
|
|
|
|
|
|
|
|
147
|
|
|
|
1,446
|
|
|
|
192
|
|
Troubled debt restructurings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,088
|
|
|
|
3,059
|
|
|
|
1,863
|
|
|
|
1,781
|
|
|
|
436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans
|
|
|
5,653
|
|
|
|
127
|
|
|
|
312
|
|
|
|
|
|
|
|
|
|
Accruing loans 90 days overdue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
815
|
|
Troubled debt restructurings
|
|
|
2,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,356
|
|
|
|
127
|
|
|
|
312
|
|
|
|
|
|
|
|
815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans
|
|
|
57
|
|
|
|
171
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
Accruing loans 90 days overdue
|
|
|
1
|
|
|
|
15
|
|
|
|
|
|
|
|
119
|
|
|
|
7
|
|
Troubled debt restructurings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
58
|
|
|
|
186
|
|
|
|
110
|
|
|
|
119
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans
|
|
|
10,751
|
|
|
|
3,357
|
|
|
|
2,138
|
|
|
|
335
|
|
|
|
244
|
|
Accruing loans 90 days overdue
|
|
|
48
|
|
|
|
15
|
|
|
|
147
|
|
|
|
1,565
|
|
|
|
1,014
|
|
Troubled debt restructurings
|
|
|
2,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,502
|
|
|
$
|
3,372
|
|
|
$
|
2,285
|
|
|
$
|
1,900
|
|
|
$
|
1,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans to total loans
|
|
|
1.85
|
%
|
|
|
.40
|
%
|
|
|
.28
|
%
|
|
|
.38
|
%
|
|
|
.26
|
%
|
Total real estate owned, net of related reserves
|
|
|
|
|
|
$
|
196
|
|
|
$
|
186
|
|
|
$
|
747
|
|
|
|
|
|
Total non-performing loans and other real estate owned to total assets
|
|
|
1.85
|
%
|
|
|
.43
|
%
|
|
|
.30
|
%
|
|
|
.32
|
%
|
|
|
.15
|
%
|
Management
establishes reserves for losses on delinquent loans when it determines that losses are probable. The Company has recorded a provision for loan losses totaling $930,000 in fiscal 2012 and $1.2 million in fiscal 2011. Although unemployment and
property values remain constant the decrease in the provision from fiscal 2011 to fiscal 2012 is primarily due to the decrease in average loan balances. Although management believes that it uses the best information available to make determinations
with respect to loan loss reserves, future adjustments to reserves may be necessary if economic conditions differ substantially from the assumptions used in making the initial determinations.
Residential mortgage lending generally entails a lower risk of default than other types of lending. Consumer loans and commercial real
estate loans generally involve more risk of collectibility because of the type and nature of the collateral and, in certain cases, the absence of collateral. It is the Companys policy to establish specific reserves for losses on delinquent
consumer loans and commercial loans when it determines that losses are probable. In addition, consumer loans are charged against reserves if they are more than 120 days delinquent unless a satisfactory repayment schedule is arranged.
10
The following table summarizes activity in the Companys allowance for loan losses
during the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars In Thousands)
|
|
Total loans outstanding at end of period
|
|
$
|
500,776
|
|
|
$
|
526,201
|
|
|
$
|
516,894
|
|
|
$
|
503,113
|
|
|
$
|
484,382
|
|
Average loans outstanding
|
|
|
513,489
|
|
|
|
521,548
|
|
|
|
510,004
|
|
|
|
493,748
|
|
|
|
454,305
|
|
|
|
|
|
|
|
Allowance for loan losses, beginning of year
|
|
$
|
3,311
|
|
|
$
|
2,504
|
|
|
$
|
2,094
|
|
|
$
|
1,988
|
|
|
$
|
1,933
|
|
Provision for loan losses
|
|
|
930
|
|
|
|
1,150
|
|
|
|
600
|
|
|
|
400
|
|
|
|
85
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family
|
|
|
(190
|
)
|
|
|
(224
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate and multi family residential
|
|
|
|
|
|
|
(105
|
)
|
|
|
(147
|
)
|
|
|
(288
|
)
|
|
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
Consumer non-real estate
|
|
|
(29
|
)
|
|
|
(14
|
)
|
|
|
(52
|
)
|
|
|
(33
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
(219
|
)
|
|
|
(343
|
)
|
|
|
(199
|
)
|
|
|
(321
|
)
|
|
|
(40
|
)
|
Recoveries of loans previously charged off
|
|
|
10
|
|
|
|
|
|
|
|
9
|
|
|
|
27
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses, end of year
|
|
$
|
4,032
|
|
|
$
|
3,311
|
|
|
$
|
2,504
|
|
|
$
|
2,094
|
|
|
$
|
1,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses as a percent non- performing loans
|
|
|
27.12
|
%
|
|
|
98.19
|
%
|
|
|
109.58
|
%
|
|
|
110.21
|
%
|
|
|
158.03
|
%
|
Ratio of net charge-offs during the period to average loans outstanding during the period
|
|
|
0.04
|
%
|
|
|
0.07
|
%
|
|
|
0.04
|
%
|
|
|
0.06
|
%
|
|
|
0.01
|
%
|
The following table shows how our allowance for loan losses is allocated by type of loan at each of the
dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Amount
of
Allowance
|
|
|
Loan
Category
as a %
of total
Loans
|
|
|
Amount
of
Allowance
|
|
|
Loan
Category
as a %
of total
Loans
|
|
|
Amount
of
Allowance
|
|
|
Loan
Category
as a %
of total
Loans
|
|
|
Amount
of
Allowance
|
|
|
Loan
Category
as a %
of total
Loans
|
|
|
Amount
of
Allowance
|
|
|
Loan
Category
as a %
of total
Loans
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family residential
|
|
$
|
1,644
|
|
|
|
63.0
|
%
|
|
$
|
855
|
|
|
|
63.6
|
%
|
|
$
|
803
|
|
|
|
65.4
|
%
|
|
$
|
811
|
|
|
|
68.4
|
%
|
|
$
|
425
|
|
|
|
69.1
|
%
|
Multi-family residential
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
0.3
|
|
|
|
18
|
|
|
|
0.3
|
|
|
|
20
|
|
|
|
0.4
|
|
|
|
24
|
|
|
|
0.5
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
1.1
|
|
|
|
7
|
|
|
|
0.9
|
|
|
|
4
|
|
|
|
0.6
|
|
|
|
13
|
|
|
|
1.7
|
|
Home equity
|
|
|
351
|
|
|
|
16.1
|
|
|
|
431
|
|
|
|
16.3
|
|
|
|
405
|
|
|
|
17.5
|
|
|
|
357
|
|
|
|
18.4
|
|
|
|
202
|
|
|
|
19.1
|
|
Commercial real estate
|
|
|
1,729
|
|
|
|
19.5
|
|
|
|
1,516
|
|
|
|
17.3
|
|
|
|
906
|
|
|
|
14.6
|
|
|
|
542
|
|
|
|
9.7
|
|
|
|
396
|
|
|
|
7.8
|
|
Commercial business loans
|
|
|
65
|
|
|
|
1.2
|
|
|
|
214
|
|
|
|
1.2
|
|
|
|
4
|
|
|
|
0.8
|
|
|
|
104
|
|
|
|
2.1
|
|
|
|
188
|
|
|
|
1.4
|
|
Consumer non-real estate loans
|
|
|
45
|
|
|
|
0.2
|
|
|
|
5
|
|
|
|
0.2
|
|
|
|
22
|
|
|
|
0.5
|
|
|
|
21
|
|
|
|
0.4
|
|
|
|
20
|
|
|
|
0.4
|
|
Unallocated
|
|
|
198
|
|
|
|
|
|
|
|
241
|
|
|
|
|
|
|
|
339
|
|
|
|
|
|
|
|
235
|
|
|
|
|
|
|
|
720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable
|
|
$
|
4,032
|
|
|
|
100.0
|
%
|
|
$
|
3,311
|
|
|
|
100.0
|
%
|
|
$
|
2,504
|
|
|
|
100.0
|
%
|
|
$
|
2,094
|
|
|
|
100.0
|
%
|
|
$
|
1,988
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Investment Activities
The Companys investment portfolio consists primarily of United States government agency mortgage-backed securities and debt obligations of United States government agencies. The other investments
include tax-exempt municipal obligations, money market mutual funds, and stock of the FHLB of Pittsburgh.
As of
September 30, 2012, the Company had $153.0 million of mortgage-backed securities, invested in Federal Home Loan Mortgage Corporation (FHLMC), Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), all Government Sponsored Entities. FHLMC securities are guaranteed by the FHLMC, GNMA securities by the Federal Housing Administration and FNMA securities by the FNMA, which are instrumentalities of the United States
government, and, pursuant to federal regulations, are deemed to be part of the Companys loan portfolio.
At
September 30, 2012, the Bank held $9.7 million in Collateralized Mortgage Obligations of which $7.6 million are issued by Government Sponsored Enterprises and $2.1 million are privately-issued. These private label securities are adequately
rated.
The following table sets forth certain information relating to our investment and mortgage-backed securities
portfolios and our investments in FHLB stock at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Mortgage-backed securities and collateralized mortgage obligations (CMOs)
|
|
$
|
162,657
|
|
|
$
|
170,858
|
|
|
$
|
150,526
|
|
|
$
|
158,487
|
|
|
$
|
131,604
|
|
|
$
|
138,539
|
|
U.S. Government Sponsored Enterprises (GSE) Agency Notes
|
|
|
51,876
|
|
|
|
52,074
|
|
|
|
65,993
|
|
|
|
66,085
|
|
|
|
108,807
|
|
|
|
109,530
|
|
Municipal securities
|
|
|
13,270
|
|
|
|
14,444
|
|
|
|
16,022
|
|
|
|
16,815
|
|
|
|
16,462
|
|
|
|
17,188
|
|
Equity securities
|
|
|
331
|
|
|
|
388
|
|
|
|
355
|
|
|
|
289
|
|
|
|
355
|
|
|
|
343
|
|
U.S. Government Money Market funds
|
|
|
10,462
|
|
|
|
10,462
|
|
|
|
17,420
|
|
|
|
17,420
|
|
|
|
20,261
|
|
|
|
20,261
|
|
FHLB stock
|
|
|
10,165
|
|
|
|
10,165
|
|
|
|
13,110
|
|
|
|
13,110
|
|
|
|
16,096
|
|
|
|
16,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment and mortgage-backed securities and FHLB stock
|
|
$
|
248,761
|
|
|
$
|
258,391
|
|
|
$
|
263,426
|
|
|
$
|
272,206
|
|
|
$
|
293,585
|
|
|
$
|
301,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the amount of investment and mortgage-backed securities which mature
during each of the periods indicated and the weighted average yields for each range of maturities at September 30, 2012. No tax-exempt yields have been adjusted to a tax-equivalent basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts at September 30, 2012 Which Mature in
|
|
|
|
One year
Or less
|
|
|
Weighted
Average
Yield
|
|
|
Over One
Year
Through
Five
Years
|
|
|
Weighted
Average
Yield
|
|
|
Over
Five
Through
Ten
Years
|
|
|
Weighted
Average
Yield
|
|
|
Over
Ten
Years
|
|
|
Weighted
Average
Yield
|
|
|
|
(Dollars in Thousands)
|
|
Bonds and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities and CMOs
|
|
$
|
811
|
|
|
|
4.32
|
%
|
|
$
|
1,648
|
|
|
|
4.26
|
%
|
|
$
|
28,878
|
|
|
|
3.15
|
%
|
|
$
|
131,320
|
|
|
|
3.18
|
%
|
U.S. Government Agency Notes
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
3,000
|
|
|
|
2.25
|
%
|
|
|
48,876
|
|
|
|
2.41
|
%
|
Municipal securities
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
2,176
|
|
|
|
5.56
|
%
|
|
|
11,094
|
|
|
|
4.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
811
|
|
|
|
4.32
|
%
|
|
$
|
1,648
|
|
|
|
4.26
|
%
|
|
$
|
34,054
|
|
|
|
3.22
|
%
|
|
$
|
191,290
|
|
|
|
3.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
The Companys investment strategy is set and reviewed periodically by the entire Board of Directors.
Sources of Funds
General.
Deposits are the primary source of the Companys funds for use in lending and for other general business purposes. In addition to deposits, the Company obtains funds from loan
payments and prepayments, FHLB advances and other borrowings, and, to a lesser extent, sales of loans. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general market
interest rates and economic conditions.
Deposits.
The Company has a number of different programs designed to attract
both short-term and long-term deposits from the general public by providing an assortment of accounts and rates consistent with FDIC regulations. These programs include passbook and club savings accounts, NOW and regular checking accounts, money
market deposit accounts, retirement accounts, certificates of deposit ranging in terms from 90 days to 60 months and jumbo certificates of deposit in denominations of $100,000 or more. The interest rates on the Companys various accounts are
determined weekly by the Interest Rate Risk Management Officer based on reports prepared by members of senior management. The Company attempts to control the flow of deposits by pricing its accounts to remain competitive with other financial
institutions in its market area.
The Companys deposits are obtained primarily from residents of Montgomery and Bucks
Counties; the Company does not utilize brokered deposits. The principal methods used by the Company to attract deposit accounts include local advertising, offering a wide variety of services and accounts, competitive interest rates and convenient
office locations. The Company also is a member of the STAR ATM network.
The following table shows the
distribution of, and certain other information relating to, the Companys deposits by type as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
2012
|
|
|
2011
|
|
|
Amount
|
|
|
Percent of
Deposits
|
|
|
Amount
|
|
|
Percent of
Deposits
|
|
|
|
(Dollars in Thousands)
|
|
Passbook and club accounts
|
|
$
|
4,739
|
|
|
|
0.9
|
%
|
|
$
|
4,194
|
|
|
|
0.8
|
%
|
NOW and interest-bearing checking accounts
|
|
|
74,867
|
|
|
|
13.8
|
|
|
|
69,310
|
|
|
|
12.5
|
|
Non-interest-bearing checking accounts
|
|
|
26,166
|
|
|
|
4.8
|
|
|
|
20,836
|
|
|
|
4.7
|
|
Money market demand accounts
|
|
|
155,744
|
|
|
|
28.7
|
|
|
|
131,919
|
|
|
|
25.2
|
|
Certificates of deposit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 month
|
|
|
1,065
|
|
|
|
0.2
|
|
|
|
948
|
|
|
|
0.2
|
|
6 month
|
|
|
2,907
|
|
|
|
0.5
|
|
|
|
3,783
|
|
|
|
0.7
|
|
7 month
|
|
|
13,882
|
|
|
|
2.6
|
|
|
|
17,989
|
|
|
|
3.4
|
|
9 month
|
|
|
5,305
|
|
|
|
1.0
|
|
|
|
7,023
|
|
|
|
1.3
|
|
12 month
|
|
|
18,815
|
|
|
|
3.5
|
|
|
|
22,813
|
|
|
|
4.4
|
|
15 month
|
|
|
3,767
|
|
|
|
0.7
|
|
|
|
4,849
|
|
|
|
0.9
|
|
17 month
|
|
|
3,057
|
|
|
|
0.6
|
|
|
|
3,487
|
|
|
|
0.7
|
|
18 month
|
|
|
3,514
|
|
|
|
0.6
|
|
|
|
3,607
|
|
|
|
0.7
|
|
20 month
|
|
|
16,315
|
|
|
|
3.0
|
|
|
|
24,776
|
|
|
|
4.7
|
|
24 month
|
|
|
15,292
|
|
|
|
2.8
|
|
|
|
12,783
|
|
|
|
2.4
|
|
36 month
|
|
|
22,151
|
|
|
|
4.0
|
|
|
|
27,968
|
|
|
|
5.3
|
|
48 month
|
|
|
54,496
|
|
|
|
10.0
|
|
|
|
52,711
|
|
|
|
10.1
|
|
60 month
|
|
|
49,760
|
|
|
|
9.2
|
|
|
|
43,483
|
|
|
|
8.3
|
|
Other
|
|
|
100
|
|
|
|
0.0
|
|
|
|
100
|
|
|
|
0.0
|
|
Retirement accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market deposit accounts
|
|
|
2,236
|
|
|
|
0.4
|
|
|
|
2,692
|
|
|
|
0.5
|
|
Certificates of deposit
|
|
|
68,745
|
|
|
|
12.7
|
|
|
|
69,130
|
|
|
|
13.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
542,923
|
|
|
|
100.0
|
%
|
|
$
|
524,401
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
The large variety of deposit accounts offered by the Company has increased the
Companys ability to retain deposits and has allowed it to be competitive in obtaining new funds, although the threat of disintermediation (the flow of funds away from savings institutions into direct investment vehicles such as government and
corporate securities and non-deposit products) still exists. The new types of accounts; however, have been more costly than traditional accounts during periods of high interest rates. In addition, the Company has become more vulnerable to short-term
fluctuations in deposit flows as customers have become more rate-conscious and willing to move funds into higher yielding accounts. The ability of the Company to attract and retain deposits and the Companys cost of funds have been, and will
continue to be, significantly affected by money market conditions.
The following table presents certain information
concerning the Companys deposit accounts as of September 30, 2012 and the scheduled quarterly maturities of its certificates of deposit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Percentage of
Total
Deposits
|
|
|
Weighted
Average
Nominal
Rate
|
|
|
|
(Dollars in Thousands)
|
|
Passbook and club accounts
|
|
$
|
4,739
|
|
|
|
0.9
|
%
|
|
|
0.69
|
%
|
NOW and interest-bearing checking accounts
|
|
|
74,867
|
|
|
|
13.8
|
|
|
|
0.07
|
|
Non-interest-bearing checking accounts
|
|
|
26,166
|
|
|
|
4.8
|
|
|
|
0.00
|
|
Money market deposits accounts(1)
|
|
|
157,980
|
|
|
|
29.1
|
|
|
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
263,752
|
|
|
|
48.6
|
%
|
|
|
0.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate accounts maturing by quarter:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
$
|
35,004
|
|
|
|
6.4
|
%
|
|
|
1.04
|
%
|
|
|
|
|
March 31, 2013
|
|
|
36,229
|
|
|
|
6.7
|
|
|
|
1.29
|
|
June 30, 2013
|
|
|
27,042
|
|
|
|
5.0
|
|
|
|
1.39
|
|
September 30, 2013
|
|
|
21,940
|
|
|
|
4.0
|
|
|
|
1.45
|
|
December 31, 2013
|
|
|
22,666
|
|
|
|
4.2
|
|
|
|
2.55
|
|
|
|
|
|
March 31, 2014
|
|
|
22,350
|
|
|
|
4.1
|
|
|
|
2.31
|
|
June 30, 2014
|
|
|
16,121
|
|
|
|
3.0
|
|
|
|
2.19
|
|
September 30, 2014
|
|
|
16,900
|
|
|
|
3.1
|
|
|
|
2.00
|
|
December 31, 2014
|
|
|
11,199
|
|
|
|
2.0
|
|
|
|
2.13
|
|
|
|
|
|
March 31, 2015
|
|
|
7,972
|
|
|
|
1.5
|
|
|
|
2.27
|
|
June 30, 2015
|
|
|
5,447
|
|
|
|
1.0
|
|
|
|
2.19
|
|
September 30, 2015
|
|
|
8,742
|
|
|
|
1.6
|
|
|
|
1.93
|
|
|
|
|
|
Thereafter
|
|
|
47,559
|
|
|
|
8.8
|
|
|
|
1.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total certificate accounts(1)
|
|
|
279,171
|
|
|
|
51.4
|
|
|
|
1.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
542,923
|
|
|
|
100.0
|
%
|
|
|
1.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes retirement accounts.
|
Management of the Company expects, based on historical experience and its pricing policies, to retain a significant portion of the $120.2
million of certificates of deposit which mature during the 12 months ending September 30, 2013.
14
The following table sets forth the net deposit flows of the Company during the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In Thousands)
|
|
Increase (decrease) before interest credited
|
|
$
|
13,782
|
|
|
$
|
(9,828
|
)
|
Interest credited
|
|
|
4,740
|
|
|
|
6,129
|
|
|
|
|
|
|
|
|
|
|
Net deposit (decrease) increase
|
|
$
|
18,522
|
|
|
$
|
(3,699
|
)
|
|
|
|
|
|
|
|
|
|
The following table presents by various interest rate categories the amounts of certificate accounts as
of the dates indicated and the amounts of certificate accounts as of September 30, 2012 which mature during the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of
September 30,
2012
|
|
|
Amounts at September 30, 2012 Maturing
|
|
|
|
One Year
or Less
|
|
|
Two Years
|
|
|
Three Years
|
|
|
Thereafter
|
|
|
|
(In Thousands)
|
|
Certificate accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01% to 2.00%
|
|
$
|
162,270
|
|
|
$
|
86,141
|
|
|
$
|
28,914
|
|
|
$
|
18,760
|
|
|
$
|
28,455
|
|
2.01% to 4.00%
|
|
|
113,110
|
|
|
|
32,635
|
|
|
|
46,790
|
|
|
|
14,600
|
|
|
|
19,085
|
|
4.01% to 6.00%
|
|
|
3,791
|
|
|
|
1,439
|
|
|
|
2,333
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total certificate accounts(1)
|
|
$
|
279,171
|
|
|
$
|
120,215
|
|
|
$
|
78,037
|
|
|
$
|
33,360
|
|
|
$
|
47,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes retirement accounts.
|
The following table sets forth the maturity of our certificates of deposit of $100,000 or more at September 30, 2012, by time
remaining to maturity.
|
|
|
|
|
|
|
|
|
At September 30,
2012
|
|
Quarter Ending:
|
|
Amount
|
|
|
Weighted
Average
Rate
|
|
|
|
(Dollars in Thousands)
|
|
December 31, 2012
|
|
$
|
6,325
|
|
|
|
1.38
|
%
|
March 31, 2013
|
|
|
5,229
|
|
|
|
1.57
|
|
June 30, 2013
|
|
|
3,904
|
|
|
|
1.32
|
|
September 30, 2013
|
|
|
5,326
|
|
|
|
1.85
|
|
After September 30, 2013
|
|
|
35,386
|
|
|
|
2.26
|
|
|
|
|
|
|
|
|
|
|
Total certificates of deposit with balances of $100,000 or more
|
|
$
|
56,170
|
|
|
|
1.99
|
%
|
|
|
|
|
|
|
|
|
|
Borrowings.
The Bank obtains advances from the FHLB of Pittsburgh upon the security of its capital
stock in the FHLB of Pittsburgh and a portion of its first mortgages. See Regulation - Regulation of the Bank - Federal Home Loan Bank System. At September 30, 2012, the Bank had advances with maturities of one year or less totaling
$15.5 million at an interest rate of 3.7% and FHLB advances with maturities of 13 months to 10 years totaling $127.0 million at interest-rates ranging from 3.3% to 4.7%. Such advances are made pursuant to several different credit programs, each of
which has its own interest rate and range of maturities. In addition, there are four long-term advances from other financial institutions that are secured by investment and mortgage-backed securities totaling $50 million at interest-rates ranging
from 3.3% to 4.8%.
Depending on the program, limitations on the amount of advances are based on either a fixed percentage of
assets or the FHLB of Pittsburghs assessment of the Banks creditworthiness. FHLB advances are generally available to meet seasonal and other withdrawals of deposit accounts, to purchase mortgage-backed securities, investment securities
and to expand lending.
15
The following table sets forth certain information regarding the borrowings of the Company
as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Balance
|
|
|
Weighted
Average
Rate
|
|
|
Balance
|
|
|
Weighted
Average
Rate
|
|
|
|
(Dollars In Thousands)
|
|
Advances
|
|
$
|
192,483
|
|
|
|
4.17
|
%
|
|
$
|
250,194
|
|
|
|
4.34
|
%
|
The following table sets forth certain information concerning the short-term borrowings of the Company
for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In Thousands)
|
|
Advances:
|
|
|
|
|
|
|
|
|
Average balance outstanding
|
|
$
|
34
|
|
|
$
|
918
|
|
Maximum amount outstanding at any month-end during the period
|
|
$
|
2,000
|
|
|
$
|
7,500
|
|
|
|
|
Weighted average interest rate during the period
|
|
|
0.32
|
%
|
|
|
0.72
|
%
|
Employees
The Company had 81 full-time employees and 47 part-time employees as of September 30, 2012. None of these employees is represented by a collective bargaining agent, and the Company believes that it
enjoys good relations with its personnel.
Regulation
The references to laws and regulations which are applicable to the Company and the Bank set forth below and elsewhere herein are brief summaries thereof which do not purport to be complete and are
qualified in their entirety by reference to such laws and regulations
.
Regulation of the Company
General.
The Company is a registered bank holding company pursuant to the Bank Holding Company Act (BHCA) and, as such,
is subject to regulation and supervision by the Federal Reserve Board and the Department. The Company is required to file annually a report of its operations with, and is subject to examination by, the Federal Reserve Board and the Department.
BHCA Activities and Other Limitations.
The BHCA prohibits a bank holding company from acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any bank, or increasing such ownership or control of any bank, without prior approval of the Federal Reserve Board. The BHCA also generally prohibits a bank holding company from acquiring
any bank located outside of the state in which the existing bank subsidiaries of the bank holding company are located unless specifically authorized by applicable state law. No approval under the BHCA is required, however, for a bank holding company
already lawfully owning or controlling more than 50% of the voting shares of a bank to acquire additional shares of such bank.
16
The BHCA also prohibits a bank holding company, with certain exceptions, from acquiring more
than 5% of the voting shares of any company that is not a bank (or engaged in related activities as described below) and from engaging in any business other than banking or managing or controlling banks. Under the BHCA, the Federal Reserve Board is
authorized to approve the ownership of shares by a bank holding company in any company, the activities of which the Federal Reserve Board has determined to be so closely related to banking or to managing or controlling banks as to be a proper
incident thereto. In making such determinations, the Federal Reserve Board is required to weigh the expected benefit to the public, such as greater convenience, increased competition or gains in efficiency, against the possible adverse effects, such
as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The BHCA permits a bank holding company to elect to be considered a financial holding company (FHC). A bank holding
company that makes an FHC election is permitted to engage in activities that are financial in nature or incidental to such financial activities. The BHCA lists certain activities that are considered financial in nature and permits the Federal
Reserve Board to expand that list to include other activities that are complementary to the activities on the preapproved list. The preapproved activities include (1) securities underwriting, dealing and market making; (2) insurance
underwriting; (3) merchant banking; and (4) insurance company portfolio investments. The Company has not made the FHC election.
The Federal Reserve Board has by regulation determined that certain activities are closely related to banking within the meaning of the BHCA. These activities include operating a mortgage company, finance
company, credit card company, factoring company, trust company or savings association; performing certain data processing operations; providing limited securities brokerage services; acting as an investment or financial advisor; acting as an
insurance agent for certain types of credit-related insurance; leasing personal property on a full-payout, non-operating basis; providing tax planning and preparation services; operating a collection agency; and providing certain courier services.
The Federal Reserve Board also has determined that certain other activities, including real estate brokerage and syndication, land development, property management and underwriting of life insurance not related to credit transactions, are not
closely related to banking and a proper incident thereto. However, under the BHCA certain of these activities are permissible for a bank holding company that becomes an FHC.
Limitations on Transactions with Affiliates.
Transactions between savings banks and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings bank
includes any company or entity which controls the savings bank or that is controlled by a company that controls the savings bank. In a holding company context, the parent holding company of a savings bank (such as the Company) and any companies
which are controlled by such parent holding company are affiliates of the savings bank. Generally, Section 23A (i) limits the extent to which the savings bank or its subsidiaries may engage in covered transactions with any one
affiliate to an amount equal to 10% of such banks capital stock and surplus, and (ii) contains an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus. Section 23B
applies to covered transactions as well as certain other transactions and requires that all transactions be on terms substantially the same, or at least favorable, to the bank or subsidiary as those provided to a non-affiliate. The term
covered transaction includes the making of loans to, purchase of assets from, issuance of a guarantee to an affiliate and similar transactions. Section 23B transactions also include the provision of services and the sale of assets
by a savings bank to an affiliate.
In addition, Sections 22(h) and (g) of the Federal Reserve Act place restrictions on
loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, an executive officer and a greater than 10% stockholder of a savings bank, and certain affiliated interests of either, may not exceed,
together with all other outstanding loans to such person and affiliated interests, the savings banks loans to one borrower limit (generally equal to 15% of the banks unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons and also requires prior board approval for certain loans. In addition, the aggregate
amount of extensions of credit by a savings bank to all insiders cannot exceed the banks unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers.
17
Capital Requirements.
The Federal Reserve Board has adopted capital adequacy
guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the BHCA. The Federal Reserve Board capital adequacy guidelines generally require bank
holding companies to maintain total capital equal to 8% of total risk-adjusted assets, with at least one-half of that amount consisting of Tier I or core capital and up to one-half of that amount consisting of Tier II or supplementary capital.
Tier I capital for bank holding companies generally consists of the sum of common stockholders equity and perpetual preferred stock (subject in the case of the latter to limitations on the kind and amount of such stocks which may be
included as Tier I capital), less goodwill and, with certain exceptions, intangibles. Tier II capital generally consists of hybrid capital instruments; perpetual preferred stock which is not eligible to be included as Tier I capital; term
subordinated debt and intermediate-term preferred stock; and, subject to limitations, general allowances for loan losses. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics, with the categories
ranging from 0% (requiring no additional capital) for assets such as cash to 100% for the bulk of assets which are typically held by a bank holding company, including multi-family residential and commercial real estate loans, commercial business
loans and consumer loans. Single-family residential first mortgage loans which are not past-due (90 days or more) or non-performing and which have been made in accordance with prudent underwriting standards are assigned a 50% level in the
risk-weighing system, while certain privately-issued mortgage-backed securities representing indirect ownership of such loans are assigned a level ranging from 20% to 100% in the risk-weighting system. Off-balance sheet items also are adjusted to
take into account certain risk characteristics.
In addition to the risk-based capital requirements, the Federal Reserve Board
requires bank holding companies to maintain a minimum leverage capital ratio of Tier I capital to total assets of 3.0%. Total assets for this purpose does not include goodwill and any other intangible assets and investments that the Federal Reserve
Board determines should be deducted from Tier I capital. The Federal Reserve Board has announced that the 3.0% Tier I leverage capital ratio requirement is the minimum for the top-rated bank holding companies without any supervisory, financial or
operational weaknesses or deficiencies or those which are not experiencing or anticipating significant growth. Other bank holding companies will be expected to maintain Tier I leverage capital ratios of at least 4.0% to 5.0% or more, depending on
their overall condition. At September 30, 2012, the Company was in compliance with the above-discussed Federal Reserve Board regulatory capital requirements.
Financial Support of Affiliated Institutions.
Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the
Bank in circumstances when it might not do so absent such policy. Recently enacted legislation amended the Federal Deposit Insurance Act (FDIA) to incorporate this policy into law. No regulations implementing that provision have been
promulgated. Section 18 of the FDIA describes the circumstances under which a Federal banking agency would be protected from a claim by an affiliate or a controlling shareholder of an insured depository institution seeking the return of assets
of such an affiliate or controlling shareholder. Under that provision, a claim would not be permitted if (1) the insured depository institution was under a written Federal directive to raise capital, (2) the institution was
undercapitalized, and (3) the subject Federal banking agency followed the procedures set forth in Section 5(g) of the BHCA
Sarbanes-Oxley Act of 2002.
The Sarbanes-Oxley Act of 2002 generally established a comprehensive framework to modernize and reform the oversight of public company auditing, improve the quality and
transparency of financial reporting by those companies and strengthen the independence of auditors. Among other things, the legislation (i) created a public company accounting oversight board which is empowered to set auditing, quality control
and ethics standards, to inspect registered public accounting firms, to conduct investigations and to take disciplinary actions, subject to SEC oversight and review; (ii) strengthened auditor independence from corporate management by, among
other things, limiting the scope of consulting services that auditors can offer their public company audit clients; (iii) heightened the responsibility of public company directors and senior managers for the quality of the financial reporting
and disclosure made
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by their companies; (iv) adopted a number of provisions to deter wrongdoing by corporate management; (v) imposed a number of new corporate disclosure requirements; (vi) adopted
provisions which generally seek to limit and expose to public view possible conflicts of interest affecting securities analysts; and (vii) imposed a range of new criminal penalties for fraud and other wrongful acts, as well as extended the
period during which certain types of lawsuits can be brought against a company or its insiders.
Regulation of the Bank
General
. The Bank is subject to extensive regulation and examination by the Department and by the FDIC, which insures its deposits
to the maximum extent, permitted by law and is subject to certain requirements by the Federal Reserve Board. The federal and state laws and regulations which are applicable to banks regulate, among other things, the scope of their business, their
investments, their reserves against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. There are periodic examinations by the Department and the FDIC to test the Banks
compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets
and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulation, whether by the Department, the FDIC, the Federal Reserve Board or the Congress could have a material adverse impact on the Bank and its
operations.
Pennsylvania Savings Bank Law
. The Pennsylvania Banking Code of 1965, as amended (the Banking
Code) contains detailed provisions governing the organization, location of offices, rights and responsibilities of directors, officers and employees, as well as corporate powers, savings and investment operations and other aspects of the Bank
and its affairs. The Banking Code delegates extensive rulemaking power and administrative discretion to the Department so that the supervision and regulation of state-chartered savings banks may be flexible and readily responsive to changes in
economic conditions and in savings and lending practices.
One of the purposes of the Banking Code is to provide savings banks
with the opportunity to be competitive with each other and with other financial institutions existing under other Pennsylvania laws and other state, federal and foreign laws. A Pennsylvania savings bank may locate or change the location of its
principal place of business and establish an office anywhere in Pennsylvania, with the prior approval of the Department.
The
Department generally examines each savings bank not less frequently than once every two years. Although the Department may accept the examinations and reports of the FDIC in lieu of the Departments examination, the present practice is for the
Department to conduct individual examinations. The Department may order any savings bank to discontinue any violation of law or unsafe or unsound business practice and may direct any trustee, director, officer, attorney or employee of a savings bank
engaged in an objectionable activity, after the Department has ordered the activity to be terminated, to show cause at a hearing before the Department why such person should not be removed.
Interstate Acquisitions
. The Interstate Banking Act allows federal regulators to approve mergers between adequately capitalized
banks from different states regardless of whether the transaction is prohibited under any state law, unless one of the banks home states has enacted a law expressly prohibiting out-of-state mergers before June 1997. This act also allows a
state to permit out-of-state banks to establish and operate new branches in this state. The Commonwealth of Pennsylvania has not opted out of this interstate merger provision. Therefore, the federal provision permitting interstate
acquisitions applies to banks chartered in Pennsylvania. Pennsylvania law, however, retained the requirement that an acquisition of a Pennsylvania institution by a Pennsylvania or a non-Pennsylvania-based holding company must be approved by the
Banking Department. The Interstate Act also allows a state to permit out-of-state banks to establish and operate new
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branches in this state. Pennsylvania law permits an out of state banking institution to establish a branch office in Pennsylvania only if the laws of the state where that institution is located
would permit an institution chartered under the laws of Pennsylvania to establish and maintain a branch in such other state on substantially the same terms and conditions.
FDIC Insurance Premiums
. The deposits of the Bank are insured by the Deposit Insurance Fund, which is administered by the FDIC. The recently enacted financial institution reform legislation
permanently increased deposit insurance on most accounts to $250,000. In addition, pursuant to Section 13(c)(4)(G) of the Federal Deposit Insurance Act, the FDIC has implemented two temporary programs to provide deposit insurance for the full
amount of most noninterest bearing transaction deposit accounts and to guarantee certain unsecured debt of financial institutions and their holding companies. Under the unsecured debt program, the FDICs guarantee expires on the earlier of the
maturity date of the debt or December 31, 2012. The unlimited deposit insurance for non-interest-bearing transaction accounts was extended by the recently enacted legislation through the end of 2012 for all insured institutions without a
separate insurance assessment (but the cost of the additional insurance coverage will be considered under the risk-based assessment system). The Bank participates in the FDIC Transaction Account Guarantee (TAG) Program, but does not participate in
the guarantee of certain unsecured debt of financial institutions and their holding companies.
The FDICs risk-based
premium system provides for quarterly assessments. Each insured institution is placed in one of four risk categories depending on supervisory and capital considerations. Within its risk category, an institution is assigned to an initial base
assessment rate which is then adjusted to determine its final assessment rate based on its brokered deposits, secured liabilities and unsecured debt. The FDIC recently amended its deposit insurance regulations (1) to change the assessment base
for insurance from domestic deposits to average assets minus average tangible equity and (2) to lower overall assessment rates. The revised assessments rates are between 2.5 to 9 basis points for banks in the lowest risk category and between 30
to 45 basis points for banks in the highest risk category. The amendments became effective for the quarter beginning April 1, 2011 with the new assessment methodology being reflected in the premium invoices that were due September 30,
2011.
In 2009, the FDIC collected a five basis point special assessment on each insured depository institutions assets
minus its Tier 1 capital as of June 30, 2009. The amount of our special assessment, which was paid on September 30, 2009, was $382,000. The special assessment was fully expensed by the Company in the second quarter of 2009. In 2009,
the FDIC also required insured deposit institutions on December 30, 2009 to prepay 13 quarters of estimated insurance assessments. At the time, our initial prepayment totaled $3.1 million. As of September 30, 2012 our prepayment balance is
$1.2 million. Unlike a special assessment, this prepayment did not immediately affect bank earnings. Banks will book the prepaid assessment as a non-earning asset and record the actual risk-based premium payments at the end of each quarter. In
addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership government corporation established to recapitalize a predecessor
to the Deposit Insurance Fund. The assessment rate for the third quarter of fiscal 2012 was .00165% of insured deposits and is adjusted quarterly. These assessments will continue until the Financing Corporation bonds mature in 2019.
The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing
that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the
FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the
time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances which would result in termination of the
Banks deposit insurance.
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Capital Requirements
. The FDIC has promulgated regulations and adopted a statement of
policy regarding the capital adequacy of state-chartered banks which, like the Bank, are not members of the Federal Reserve System. The FDICs capital regulations establish a minimum 3.0% Tier I leverage capital requirement for the most
highly-rated state-chartered, non-member banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively will increase the minimum Tier I leverage ratio for such other banks to
4.0% to 5.0% or more. Under the FDICs regulation, highest-rated banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure,
excellent asset quality, high liquidity, good earnings and, in general, which are considered a strong banking organization, rated composite 1 under the Uniform Financial Institutions Rating System. Leverage or core capital is defined as the sum of
common stockholders equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain qualifying supervisory
goodwill, and certain purchased mortgage servicing rights and purchased credit and relationships.
The FDIC also requires that
savings banks meet a risk-based capital standard. The risk-based capital standard for savings banks requires the maintenance of total capital which is defined as Tier I capital and supplementary (Tier 2 capital) to risk weighted assets of 8%. In
determining the amount of risk-weighted assets, all assets, plus certain off balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item.
The components of Tier I capital are equivalent to those discussed above under the 3% leverage standard. The components of supplementary
(Tier 2) capital include certain perpetual preferred stock, certain mandatory convertible securities, certain subordinated debt and intermediate preferred stock and general allowances for loan losses. Allowance for loan losses includable in
supplementary capital is limited to a maximum of 1.3% of risk-weighted assets. Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of core capital. At September 30, 2012, the Bank met each of its capital
requirements.
Prompt Corrective Action.
Under Section 38 of the FDIA, each federal banking agency is required to
implement a system of prompt corrective action for institutions which it regulates. The federal banking agencies (including the FDIC) have adopted substantially similar regulations to implement Section 38 of the FDIA. Under the regulations, a
savings bank shall be deemed to be (i) well capitalized if it has total risk-based capital of 10.0% or more, has a Tier 1 risk-based ratio of 6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or more and is not subject to
any order or final capital directive to meet and maintain a specific capital level for any capital measure, (ii) adequately capitalized if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of
4.0% or more and a Tier 1 leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of well capitalized, (iii) undercapitalized if it has a total risk-based capital ratio
that is less than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% (3.0% under certain circumstances), (iv) significantly undercapitalized if it has a total
risk-based ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is less than 3.0%, and (v) critically undercapitalized if it has a ratio of tangible equity to
total assets that is equal to or less than 2.0%. Section 38 of the FDIA and the regulations promulgated thereunder also specify circumstances under which the FDIC may reclassify a well capitalized savings bank as adequately capitalized and may
require an adequately capitalized savings bank or an undercapitalized savings bank to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized savings bank as
critically undercapitalized). At September 30, 2012, the Bank was in the well capitalized category.
The Bank
is also subject to more stringent Department capital guidelines. Although not adopted in regulation form, the Department utilizes capital standards requiring a minimum of 6% leverage capital and 10% risk-based capital. The components of leverage and
risk-based capital are substantially the same as those defined by the FDIC.
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Loans-to-One Borrower Limitation
. With certain limited exceptions, a Pennsylvania
chartered savings bank may lend to a single or related group of borrowers on an unsecured basis an amount equal to no greater than 15% of its capital account.
Activities and Investments of Insured State-Chartered Banks
. Section 24 of the FDIA generally limits the activities and equity investments of FDIC-insured, state-chartered banks to those that
are permissible for national banks. Under regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a
national bank. An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in a partnership the sole purpose of which is direct or
indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the banks total assets, (iii) acquiring up to 10% of the
voting stock of a company that solely provides or reinsures directors, trustees and officers liability insurance coverage or bankers blanket bond group insurance coverage for insured depository institutions, and
(iv) acquiring or retaining the voting shares of a depository institution if certain requirements are met.
Pursuant to
FDIC regulations promulgated under Section 24 of the FDIA, insured savings banks engaging in impermissible activities may seek approval from the FDIC to continue such activities. Savings banks not engaging in such activities but that desire to
engage in otherwise impermissible activities may apply for approval from the FDIC to do so; however, if such bank fails to meet the minimum capital requirements or the activities present a significant risk to the FDIC insurance funds, such
application will not be approved by the FDIC. The FDIC has authorized the Banks subsidiary HARL, LLC, to invest up to 15% of its capital in the equity securities of bank holding companies, banks or thrifts. As of September 30, 2012,
$331,000 was invested by HARL, LLC in such equity securities.
Regulatory Enforcement Authority
. Federal banking
regulators have substantial enforcement authority over the financial institutions that they regulate including, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive
actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. Except under certain circumstances, federal law requires public disclosure of final enforcement actions by the federal banking
agencies.
Federal Home Loan Bank System.
The Bank is a member of the Federal Home Loan Bank of Pittsburgh, which is
one of 12 regional Federal Home Loan Banks that administers a home financing credit function primarily for its members. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. The Federal Home Loan
Bank of Pittsburgh is funded primarily from proceeds derived from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes loans to members (
i.e.
, advances) in accordance with policies and procedures established by
the board of directors of the Federal Home Loan Bank. At September 30, 2012, the Bank had $142.5 million of Federal Home Loan Bank advances and $75.0 million available on its credit line with the Federal Home Loan Bank.
As a member, the Bank is required to purchase and maintain stock in the Federal Home Loan Bank of Pittsburgh in an amount equal to 1% of
its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of its outstanding advances from the Federal Home Loan Bank. At September 30, 2012, the Bank was in compliance
with the applicable requirement.
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The Federal Home Loan Banks are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected
the level of Federal Home Loan Bank dividends paid in the past and could do so in the future. These contributions also could have an adverse effect on the value of Federal Home Loan Bank stock in the future.
Federal Reserve System.
The Federal Reserve Board requires all depository institutions to maintain reserves against their
transaction accounts (primarily NOW and Super NOW checking accounts) and non-personal time deposits. The required reserves must be maintained in the form of vault cash or an account at a Federal Reserve Bank. At September 30, 2012, the Bank was
in compliance with its reserve requirements.
Community Reinvestment Act.
All insured depository institutions have
a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. An institutions failure to comply with the provisions of the
Community Reinvestment Act could result in restrictions on its activities. The Bank received a satisfactory Community Reinvestment Act rating in its most recently completed examination.
Recent Legislation
On
July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). This law significantly changes the bank regulatory structure and affects the lending, deposit,
investment, trading and operating activities of financial institutions and their holding companies.
The Dodd-Frank Act
requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare various studies and reports for Congress. The federal agencies are given significant discretion in drafting such rules and regulations, and
consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for months or years.
Certain
provisions of the Dodd-Frank Act are expected to have a near term impact on the Company. For example, effective July 21, 2011, a provision of the Dodd-Frank Act eliminated the federal prohibitions on paying interest on demand deposits, thus
allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change could have an adverse impact on the Companys interest expense.
The Dodd-Frank Act also broadens the base for Federal Deposit Insurance Corporation insurance assessments. Assessments are now based on
the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per
depositor, retroactive to January 1, 2008, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012.
Bank and thrift holding companies with assets of less than $15 billion as of December 31, 2009, such as the Company, are permitted to include trust preferred securities that were issued before
May 19, 2010, as Tier 1 capital; however, trust preferred securities issued by a bank or thrift holding company (other than those with assets of less than $500 million) on or after May 19, 2010, will no longer count as Tier 1
capital. Trust preferred securities still will be entitled to be treated as Tier 2 capital.
The Dodd-Frank Act also
require publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called golden parachute payments, and allow greater access by shareholders to the companys proxy material by authorizing the
SEC to promulgate rules that would allow stockholders to nominate their own candidates using a companys proxy materials. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank
holding company executives, regardless of whether the company is publicly traded.
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The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to
supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to
prohibit unfair, deceptive or abusive acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and
savings institutions with $10 billion or less in assets such as the Bank will continue to be examined for compliance with the consumer laws by their primary bank regulators. The Dodd-Frank Act also weakens the federal preemption rules that have been
applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.
Many of the regulations implementing the Dodd-Frank Act have not yet been promulgated, so we cannot determine the full impact on our business and operations at this time. However, it is expected that at a
minimum they will increase our operating and compliance costs and could increase our interest expense.
Recent Regulatory Capital Proposals
The Federal Reserve Board and the FDIC were part of a joint proposal in June 2012 seeking comment on three notices of
proposed rulemaking (NPR) that would revise and replace the agencies current capital rules in connection with the Basel accords. The two NPRs discussed below concern capital issues of significant importance to the Bank and, under
certain circumstances, the Company. The third NPR, relates to advanced approaches and market risk capital rules, is not applicable to the organizations current operations.
The first NPR relates to Basel III and proposes to revise risk-based and leverage capital requirements, including the implementation of
new common equity Tier 1 capital requirements and a higher minimum Tier 1 capital requirement. Also included in the NPR are proposed limitations on capital distributions and certain discretionary bonus payments for any banking organization not
holding a specified buffer of common equity Tier 1 capital in excess of its minimum risk-based capital requirement. Revisions to the prompt correction action framework and the tangible common equity definition are also included in the NPR. The other
NPR applicable to the organizations operations proposes a standardized approach for risk-weighted assets to enhance risk sensitivity and to address certain weaknesses identified over recent years, including methods for determining
risk-weighted assets for residential mortgages, securitization exposures and counterparty credit risk. The proposed changes in the two NPRs would be applicable to the Bank and the Company (as long as the Companys assets continue to exceed $500
million).
The comment period for these NPRs ended on October 22, 2012. Since Basel III is intended to be implemented
beginning January 1, 2013 the regulators intended to finalize the rules by that date. However, on November 9, 2012, the federal agencies, including the Federal Reserve Board and FDIC, that proposed the NPRs announced that they do not
expect that any of the proposed rules would become effective on January 1, 2013. Moreover, the announcement did not indicate the likely new effective date.
Federal and State Taxation
General
. The Bank is subject to federal
income taxation in the same general manner as other corporations with some exceptions, including particularly the reserve for bad debts discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent
federal income tax matters and is not a comprehensive description of the tax rules applicable to the Bank.
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Method of Accounting.
For federal income tax purposes, the Bank currently reports its
income and expenses on the accrual method of accounting and uses a tax year ending September 30 for filing its federal income tax returns.
Bad Debt Reserves.
The Company computes its reserve for bad debts under the specific charge-off method. The bad debt deduction allowable under this method is available to large banks with assets
greater than $500 million. Generally, this method allows the Company to deduct an annual addition to the reserve for bad debts equal to its net charge-offs. Retained earnings at September 30, 2012 and 2011 includes approximately $1.3 million
representing bad debt deductions for which no deferred income taxes have been provided.
Distributions.
If the Bank
distributes cash or property to its stockholders, and the distribution is treated as being from its accumulated pre-1988 tax bad debt reserves, the distribution will cause the Bank to have additional taxable income. A distribution to stockholders is
deemed to have been made from accumulated bad debt reserves to the extent that (a) the reserves exceed the amount that would have been accumulated on the basis of actual loss experience, and (b) the distribution is a non-dividend
distribution. A distribution in respect of stock is a non-dividend distribution to the extent that, for federal income tax purposes, (i) it is in redemption of shares, (ii) it is pursuant to a liquidation of the institution, or
(iii) in the case of a current distribution, together with all other such distributions during the taxable year, it exceeds the Banks current and post-1951 accumulated earnings and profits. The amount of additional taxable income created
by a non-dividend distribution is an amount that when reduced by the tax attributable to it is equal to the amount of the distribution.
Minimum Tax.
The Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences (alternative minimum taxable income or
AMTI). The alternative minimum tax is payable to the extent such AMTI is in excess of an exemption amount. The Code provides that an item of tax preference is the excess of the bad debt deduction allowable for a taxable year pursuant to
the percentage of taxable income method over the amount allowable under the experience method. The other items of tax preference that constitute AMTI include (a) tax exempt interest on newly-issued (generally, issued on or after August 8,
1986) private activity bonds other than certain qualified bonds and (b) for taxable years beginning after 1989, 75% of the excess (if any) of (i) adjusted current earnings as defined in the Code, over (ii) AMTI (determined without
regard to this preference and prior to reduction by net operating losses). Net operating losses can offset no more than 90% of AMTI. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years.
Net Operating Loss Carryovers.
A financial institution may carry back net operating losses to the preceding three
taxable years and forward to the succeeding 15 taxable years. Effective for net operating losses arising in tax years beginning after October 1, 1997, the carryback period is reduced from three years to two years and the carryforward period is
extended from 15 years to 20 years. At September 30, 2012, the Bank had no net operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction.
The corporate dividends-received deduction is 80% in the case of dividends received from corporations with which a corporate recipient does not file a
consolidated tax return, and corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct only 70% of dividends received or accrued on their behalf. However, a corporation may deduct 100% of dividends from a
member of the same affiliated group of corporations.
Other Matters.
The Companys federal income tax returns for
its tax years 2008 and beyond are open under the statute of limitations and are subject to review by the Internal Revenue Service (IRS).
Pennsylvania Taxation
. The Bank is subject to tax under the Pennsylvania Mutual Thrift Institutions Tax Act, which imposes a tax at the rate of 11.5% on the Banks net earnings, determined in
accordance with accounting principles generally accepted in the United States of America, as shown on its books. For fiscal
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years beginning in 1983, and thereafter, net operating losses may be carried forward and allowed as a deduction for three succeeding years. This Act exempts the Bank from all other corporate
taxes imposed by Pennsylvania for state tax purposes, and from all local taxes imposed by political subdivisions thereof, except taxes on real estate and real estate transfers.
Subsidiary
The Bank is the only direct wholly owned subsidiary of the
Company. The Bank formed HSB, Inc., a Delaware company, as a wholly owned subsidiary of the Bank during fiscal 1997. HSB, Inc. was formed in order to accommodate the transfer of certain assets that are legal investments for the Bank and to provide
for a greater degree of protection to claims of creditors. The laws of the State of Delaware and the court system create a more favorable environment for the business affairs of the subsidiary. HSB, Inc. currently manages the investment securities
for the Bank, which as of September 30, 2012 amounted to approximately $175.7 million. The Bank has two limited liability company subsidiaries, Freedom Financial Solutions LLC (FFS) and HARL, LLC. FFS was established to engage in
the sale of insurance products through a third party. HARL, LLC was established for the purpose of investing in FDIC insured financial institutions/holding company equity securities.
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