Other-than-Temporary Impairment of Investment Securities Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term "other-than-temporary" is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a lack of evidence to support realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced, and a corresponding charge to earnings is recognized. Management has evaluated the financial condition and near term prospects of the Federal Home Loan Bank of Pittsburgh. Management believes no impairment charge is necessary related to the FHLB or restricted stock as of December 31, 2008. Changes in Financial Position for the Three-Month Period Ended December 31, 2008 Total assets at December 31, 2008 were $824.3 million, a decrease of $1.4 million for the three month period then ended. The decrease was offset by the retail growth in mortgage and commercial loans, resulting in an overall increase in loans receivable of approximately $6.7 million. There was a decrease in investments due to purchases less maturities of approximately $6.7 million. Asset growth was primarily funded by growth in borrowings during the three-month period ended December 31, 2008, total borrowings increased by $2.5 million to $350.3 million. There was also a decrease in deposits of $5.4 million. Advances from borrowers for taxes and insurance also increased by $2 million due to the timing of property tax payments.
Comparisons of Results of Operations for the Three Month Period Ended December 31, 2008 with the Three Month Period Ended December 31, 2007 Net Interest Income
Net interest income was $4.2 million for the three-month period ended December 31, 2008 compared to $2.9 million for the comparable period in 2007. The increase in the net interest income for the three-month period ended December 31, 2008 when compared to the same period in 2007 can be attributed to the increase in interest rate spread from 1.46% in 2007 to 2.08% in 2008, and in the difference between the average interest earning assets in relation to the average interest earning liabilities in comparable periods. Net income was $1.4 million for the three-month period ended December 31, 2008 compared to $801,000 for the comparable period in 2007.
In December 2008, Federal Home Loan Bank of Pittsburgh (FHLB) suspended payment of their stock dividend. As a result, the Bank's net interest income for the three-month period ended December 31, 2008 was impacted by approximately $131,000. The Bank anticipates the suspension of the FHLB stock dividend will have an adverse effect on interest income in future periods. Non-Interest Income
Non-interest income decreased to $471,000 for the three-month period ended December 31, 2008 from $499,000 for the comparable period in 2007. The decrease is primarily due to the fact that the Company had a decrease in income related to non deposit products.
Non-Interest Expenses
For the three-month period ended December 31, 2008, non-interest expenses increased by $368,000 or 1.5% to $2.8 million compared to $2.4 million for the same period in 2007. Management believes that these are reasonable increases in the cost of operations after considering the impact of additional expenses related to the Company's new commercial loan department and business banking. The annualized ratio of non-interest expenses to average assets for the three-month periods ended December 2008 and 2007 was 1.33% and 1.21%, respectively.
On October 16, 2008, the Federal Deposit Insurance Corporation published a restoration plan designed to replenish the Deposit Insurance Fund over a period of five years and to increase the deposit insurance reserve ratio to the statutory minimum of 1.15% of insured deposits by December 31, 2013. In order to implement the restoration plan, the Federal Deposit Insurance Corporation proposes to change both its risk-based assessment system and its base assessment rates. Assessment rates would increase by seven basis points across the range of risk weightings of depository institutions. Changes to the risk-based assessment system would include increasing premiums for institutions that rely on excessive amounts of brokered deposits, including CDARS, increasing premiums for excessive use of secured liabilities, including Federal Home Loan Bank advances, lowering premiums for smaller institutions with very high capital levels, and adding financial ratios and debt issuer ratings to the premium calculations for banks with over $10 billion in assets, while providing a reduction for their unsecured debt. These premium increases beginning in January 2009 and they will increase our non-interest expenses which would have an adverse effect on our future earnings.

Income Taxes
The Company made provisions for income taxes of $426,000 for the three-month period ended December 31, 2008, respectively, compared to $182,000 for the comparable periods in 2007. These provisions are based on the levels of pre-tax income, adjusted primarily for tax-exempt interest income on investments. Liquidity and Capital Recourses
For a financial institution, liquidity is a measure of the ability to fund customers' needs for loans and deposit withdrawals. Harleysville Savings Bank regularly evaluates economic conditions in order to maintain a strong liquidity position. One of the most significant factors considered by management when evaluating liquidity requirements is the stability of the Bank's core deposit base. In addition to cash, the Bank maintains a portfolio of short-term investments to meet its liquidity requirements. Harleysville Savings also relies upon cash flow from operations and other financing activities, generally short-term and long-term debt. Liquidity is also provided by investing activities including the repayment and maturity of loans and investment securities as well as the management of asset sales when considered necessary. The Bank also has access to and sufficient assets to secure lines of credit and other borrowings in amounts adequate to fund any unexpected cash requirements. As of December 31, 2008, the Company had $65.1 million in commitments to fund loan originations, disburse loans in process and meet other obligations. Management anticipates that the majority of these commitments will be funded within the next six months by means of normal cash flows and new deposits. The Company invests excess funds in overnight deposits and other short-term interest-earning assets, which provide liquidity to meet lending requirements. The Company also has available borrowings with the Federal Home Loan Bank of Pittsburgh up to the Company's maximum borrowing capacity, which was $516.7 million at December 31, 2008 of which $300.3 million was outstanding at December 31, 2008.
The Bank's net income for the three months ended December 31, 2008 of $1.4 million increased the Bank's stockholder's equity to $48 million or 5.8% of total assets. This amount is well in excess of the Bank's minimum regulatory capital requirement.
Item 3.Quantitative and Qualitative Disclosures About Market Risk The Company has instituted programs designed to decrease the sensitivity of its earnings to material and prolonged increases in interest rates. The principal determinant of the exposure of the Company's earnings to interest rate risk is the timing difference between the repricing or maturity of the Company's interest-earning assets and the repricing or maturity of its interest-bearing liabilities. If the maturities of such assets and liabilities were perfectly matched, and if the interest rates borne by its assets and liabilities were equally flexible and moved concurrently, neither of which is the case, the impact on net interest income of rapid increases or decreases in interest rates would be minimized. The Company's asset and liability management policies seek to decrease the interest rate sensitivity by shortening the repricing intervals and the maturities of the Company's interest-earning assets. Although management of the Company believes that the steps taken have reduced the Company's overall vulnerability to increases in interest rates, the Company remains vulnerable to material and prolonged increases in interest rates during periods in which its interest rate sensitive liabilities exceed its interest rate sensitive assets. The authority and responsibility for interest rate management is vested in the Company's Board of Directors. The Chief Executive Officer implements the Board of Directors' policies during the day-to-day operations of the Company. Each month, the Chief Financial Officer ("CFO") presents the Board of Directors with a report, which outlines the Company's asset and liability "gap" position in various time periods. The "gap" is the difference between interest- earning assets and interest-bearing liabilities which mature or reprice over a given time period.
The CFO also meets weekly with the Company's other senior officers to review and establish policies and strategies designed to regulate the Company's flow of funds and coordinate the sources, uses and pricing of such funds. The first priority in structuring and pricing the Company's assets and liabilities is to maintain an acceptable interest rate spread while reducing the effects of changes in interest rates and maintaining the quality of the Company's assets. The following table summarizes the amount of interest-earning assets and interest-bearing liabilities outstanding as of December 31, 2008, which are expected to mature, prepay or reprice in each of the future time periods shown. Except as stated below, the amounts of assets or liabilities shown which mature or reprice during a particular period were determined in accordance with the contractual terms of the asset or liability. Adjustable and floating-rate assets are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due, and fixed-rate loans and mortgage-backed securities are included in the periods in which they are anticipated to be repaid.
The passbook accounts, negotiable order of withdrawal ("NOW") accounts, interest bearing accounts, and money market deposit accounts, are included in the "Over 5 Years" categories based on management's beliefs that these funds are core deposits having significantly longer effective maturities based on the Company's retention of such deposits in changing interest rate environments.

Generally, during a period of rising interest rates, a positive gap would result in an increase in net interest income while a negative gap would adversely affect net interest income. Conversely, during a period of falling interest rates, a positive gap would result in a decrease in net interest income while a negative gap would positively affect net interest income. However, the following table does not necessarily indicate the impact of general interest rate movements on the Company's' net interest income because the repricing of certain categories of assets and liabilities is discretionary and is subject to competitive and other pressures. As a result, certain assets and liabilities indicated as repricing within a stated period may in fact reprice at different rate levels.

                             1 Year         1 to 3         3 to 5         Over 5
                             or less         Years          Years          Years          Total
Interest-earning assets:
Mortgage loans              $  68,445      $  55,784      $  23,431      $ 194,792      $ 342,452
Commercial loans               18,945          5,314          7,698         14,953         46,910
Mortgage-backed
securities                     68,396         70,520         20,327         47,431        206,674
Consumer and other loans       47,729         23,545          6,523         24,585        102,382
Investment securities
and other investments          67,572         27,145          5,766          3,398        103,881


Total interest-earning
assets                        271,087        182,308         63,745        285,159        802,299


Interest-bearing
liabilities:
Passbook and Club
accounts                            -              -              -          2,467          2,467
NOW and checking
accounts                            -              -              -         45,918         45,918
Money market deposit
accounts                       17,894              -              -         33,421         51,315
Certificate accounts          188,037         91,149         30,302              -        309,488
Borrowed money                 53,204         58,465         84,218        154,458        350,345


Total interest-bearing
liabilities                   259,135        149,614        114,520        236,264        759,533


Repricing GAP during the
period                      $  11,952      $  32,694      $ (50,775 )    $  48,895      $  42,766


Cumulative GAP              $  11,952      $  44,646      $  (6,129 )    $  42,766


Ratio of GAP during the
period to total assets           1.45 %         3.97 %        -6.16 %         5.93 %


Ratio of cumulative GAP
to total assets                  1.45 %         5.42 %        -0.74 %         5.19 %