This report contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by and information currently available to management. In addition, in those and other portions of this document, the words "anticipate," "believe," "estimate," "intend," "should" and similar expressions, or the negative thereof, as they relate to the Company or the Company's management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future-looking events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements.
The Company's business consists of attracting deposits from the general public through a variety of deposit programs and investing such deposits principally in first mortgage loans secured by residential properties, commercial loans and commercial lines of credit in the Company's primary market area. The Company also originates a variety of consumer loans, predominately home equity loans and lines of credit also secured by residential properties in the Company's primary lending area. The Company serves its customers through its full-service branch network as well as through remote ATM locations, the internet and telephone banking.
Critical Accounting Policies and Judgments The Company's consolidated financial statements are prepared based on the application of certain accounting policies. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect the Company's reported results and financial position for the period or in future periods. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on the Company's future financial condition and results of operations. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the consolidated financial statements: allowance for loan losses, other-than-temporary security impairment and valuation of deferred tax assets. Allowance for Loan Losses
Analysis and Determination of the Allowance for Loan Losses - The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. The Company evaluates the need to establish allowances against losses on loans on a monthly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.
Our methodology for assessing the appropriateness of the allowance for loan losses consists of three key elements: (1) specific allowances for certain impaired loans; (2) a general valuation allowance on certain identified problem loans; and (3) a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.
Specific Allowance Required for Certain Impaired Loans: We establish an allowance for certain impaired loans for the amounts by which the collateral value, present value of future cash flows or observable market price are lower than the carrying value of the loan. Under current accounting guidelines, a loan is defined as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due under the contractual terms of the loan agreement.
General Valuation Allowance on Certain Identified Problem Loans - We also establish a general allowance for classified loans that do not have an individual allowance. We segregate these loans by loan category and assign allowance percentages to each category based on inherent losses associated with each type of lending and consideration that these loans, in the aggregate, represent an above-average credit risk and that more of these loans will prove to be uncollectible compared to loans in the general portfolio. General Valuation Allowance on the Remainder of the Loan Portfolio - We establish another general allowance for loans that are not classified to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience, delinquency trends and management's evaluation of the collectibility of the loan portfolio. The allowance may be adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are reevaluated monthly to ensure their relevance in the current economic environment.

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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. Changes in Financial Position for the Nine-Month Period Ended June 30, 2009 Total assets at June 30, 2009 were $825.1 million, a decrease of $525,000 for the nine-month period then ended. The decrease was primarily due to mortgage-backed securities' pay-downs totaling $38.6 million. The decrease in assets was offset by the retail growth in mortgage and commercial loans, resulting in an overall increase in loans receivable of approximately $6.2 million.
In addition, the decrease was offset by an increase in investment securities and cash in combination, totaling approximately $30.8 million.
During the nine-month period ended June 30, 2009, the total deposits increased by $25.5 million to $451 million. The increase was offset by a decrease in borrowings of $31.8 million. Advances from borrowers for taxes and insurance also increased by $4.1 million due to the timing of property tax payments. Comparisons of Results of Operations for the Three Month and Nine Month Period Ended June 30, 2009 with the Three Month and Nine Month Period Ended June 30, 2008
Net Interest Income
Net interest income was $3.8 million for the three-month periods ended June 30, 2009 and June 30, 2008. Net interest income for the three-month period ended June 30, 2009 remained the same when compared to the same period in 2008. The interest rate spread decreased from 1.84% in 2008 to 1.72% in 2009, this was offset by an increase in the difference between the average interest earning assets in relation to the average interest bearing liabilities in comparable periods. The increase in the net interest income for the nine-month period ended June 30, 2009 when compared to the same period in 2008 can be attributed to the increase in interest rate spread from 1.32% in 2008 to 1.85% in 2009. Net interest income was $12.4 million for the nine-month period ended June 30, 2009 compared to $9.8 million for the comparable period in 2008. Non-Interest Income
Non-interest income increased to $460,000 for the three-month period ended June 30, 2009 from $201,000 for the comparable period in 2008. The increase is primarily due to an impairment write down of equity securities resulting in a loss of $252,000 in the June 30, 2008 period. Non-interest income decreased to $955,000 for the nine-month period ended June 30, 2009 from $1.17 million for the comparable period in 2008. The decrease is primarily due to a difference in impairment write downs of equity securities resulting in losses of $449,000 and $252,000 in the June 30, 2009 and June 30, 2008 periods, respectively. Non-Interest Expenses
For the three-month period ended June 30, 2009, non-interest expenses increased by $559,000 or 21.9% to $3.1 million compared to $2.6 million for the same period in 2008. For the nine month period ended June 30, 2009, non-interest expenses increased by $1.3 million or 18.0% to $8.7 million compared to $7.4 million for the same period in 2008. These increased costs are primarily due to the increase in FDIC insurance, normal salary increases and increases in healthcare costs. 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 business banking and additional FDIC premiums. The annualized ratio of non-interest expenses to average assets for the three and nine month periods ended June 30, 2009 and 2008 were 1.52%,1.41% and 1.25%, 1.22%, 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.

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FDIC insurance expense increased to $604,000 for the three-month period ended June 30, 2009 from $12,000 for the comparable period in 2008. The $592,000 increase was due to a $382,000 special assessment, in addition to an increase in assessment rates, which was effective January 1, 2009. FDIC insurance premiums were reduced by $54,000 for one-time credits in the three-month period ended June 30, 2008.
For the nine month period ended June 30, 2009, FDIC insurance expense increased $824,000 to $861,000 compared to $37,000 for the same period in 2008. The increase is due to the $382,000 special assessment, in addition to an increase in assessment rates, which was effective January 1, 2009. FDIC insurance premiums were reduced by $88,000 and $166,000 for one-time credits in the nine-month period ended June 30, 2009 and 2008, respectively. Income Taxes
The Company made provisions for income taxes of $246,000 and $930,000 for the three-month period and nine-month period ended June 30, 2009, respectively, compared to $332,000 and $720,000 for the comparable periods in 2008. These provisions are based on the levels of pre-tax income, adjusted primarily for tax-exempt interest income on investments.
In evaluating our ability to recover deferred tax assets, management considers all available positive and negative evidence, including our past operating results and our forecast of future taxable income. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.
Liquidity and Capital Resources
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 June 30, 2009, the Company had $73.6 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 $501.1 million at June 30, 2009 of which $266.1 million was outstanding at June 30, 2009.
The Bank's net income for the nine months ended June 30, 2009 is $3.4 million compared to $2.9 million for the comparable period in 2008. This increased the Bank's stockholder's equity to $49.3 million or 5.98% 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.

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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 June 30, 2009, 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              $  56,495      $  56,325      $  44,842      $ 179,261      $ 336,923
Commercial loans               23,962          5,746         12,225         12,268         54,201
Mortgage-backed
securities                     58,028         60,213         29,503         28,347        176,091
Consumer and other loans       55,236         19,752          9,206         11,888         96,082
Investment securities
and other investments          90,843         18,759         18,020          6,119        133,741


Total interest-earning
assets                        284,564        160,795        113,796        237,883        797,038


Interest-bearing
liabilities:
Passbook and Club
accounts                            -              -              -          2,858          2,858
NOW and checking
accounts                            -              -              -         48,285         48,285
Consumer Money Market
Deposit accounts               14,057              -              -         35,772         49,829
Business Money Market
Deposit accounts                9,470              -              -          3,156         12,626
Certificate accounts          209,842         76,078         39,659              -        325,579
Borrowed money                 32,358         79,965         70,219        133,546        316,088


Total interest-bearing
liabilities                   265,727        156,043        109,878        223,617        755,265


Repricing GAP during the
period                      $  18,837      $   4,752      $   3,918      $  14,266      $  41,773


Cumulative GAP              $  18,837      $  23,589      $  27,507      $  41,773


Ratio of GAP during the
period to total assets           2.28 %         0.58 %         0.47 %         1.73 %


Ratio of cumulative GAP
to total assets                  2.28 %         2.86 %         3.33 %         5.06 %

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