Harleysville Financial : Annual Report 2023

HARLEYSVILLE

FINANCIAL CORPORATION

2023

Annual Report

HARLEYSVILLE FINANCIAL CORPORATION

2023 ANNUAL REPORT

TABLE OF CONTENTS

Page

Corporate Profile	1
Stock Market Information	2
Management's Discussion and Analysis of Financial Condition and Results of
Operations	3	- 6
Independent Auditor's
Report……………………………..………………………	7	- 8
Consolidated Financial Statements	9 - 13
Notes to Consolidated Financial Statements	14 - 45

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CORPORATE PROFILE

Harleysville Financial Corporation, (the "Company") is a Pennsylvania corporation headquartered in Harleysville, Pennsylvania. The Company became the bank holding company for Harleysville Bank, in connection with the holding company reorganization of the Bank in February 2000 (the "Reorganization"). In August 1987, the Bank's 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 Bank's 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, 2023, the Company had $842.3 million of total assets, $647.8 million of deposits and $87.2 million of stockholders' equity. The Company's stockholders' equity constituted 10.4% of total assets as of September 30, 2023.

The Bank's 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 Bank's 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 Bank's 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 Bank's primary market area. The Bank serves its customers through its full-service branch network, the internet, telephone, and mobile 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 11 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 Company's principal executive offices are located at 271 Main Street, Harleysville, Pennsylvania 19438, and its telephone number is [phone].

Competition

The Company's most direct competition for deposits has historically come from commercial banks and 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 Company's competition for real estate loans comes principally from mortgage banking companies, other savings institutions, and commercial banks. 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.

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STOCK MARKET INFORMATION

Harleysville Financial Corporation's common stock trades on the OTC Bulletin Board under the symbol "HARL". Prices shown below reflect the prices reported on the OTC Bulletin Board during the indicated periods. The closing price of the common stock on September 30, 2023, was $22.60 per share. There were 3,670,488 shares of common stock outstanding as of September 30, 2023, held by approximately 1,000 stockholders of record, not including the number of persons or entities whose stock is held in nominee or "street" name through various brokerage firms and banks.

								Cash Dividends
For The Quarter Ended		High		Low		Close		Declared
September 30, 2023	$23.85	$22.38	$22.60	$0.30
June 30, 2023	25.00	22.25	22.25	0.30
March 31, 2023	26.00	24.55	24.55	0.30
December 31, 2022	33.68	25.12	25.12	1.45
September 30, 2022	$27.50	$25.50	$25.50	$0.29
June 30, 2022	27.25	26.00	26.00	0.29
March 31, 2022	27.75	25.66	25.95	0.29
December 31, 2021	25.70	24.96	24.96	0.28

On November 16, 2022 the Company declared a special cash dividend of $1.16 per share on the Company's common stock. The special cash dividend will be payable on December 14, 2022 to shareholders of record on November 30, 2022.

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Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion is intended to assist in understanding the financial condition, and the results of operations for Harleysville Financial Corporation, and its subsidiary Harleysville Bank, for the fiscal years ended September 30, 2023 and 2022. The information in this section should be read in conjunction with the Company's financial statements and the accompanying notes included elsewhere herein.

Overview

Harleysville Financial Corporation, a bank holding company, of which Harleysville Bank (the "Bank"), is a wholly owned subsidiary, was formed in February 2000. For purposes of this discussion, the Company, including its wholly owned subsidiary, will be referred to as the "Company." The Company's earnings are primarily dependent upon its net interest income, which is determined by (i) the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities ("interest rate spread") and (ii) the relative amounts of interest-earning assets and interest-bearing liabilities outstanding. The Company's interest rate spread is affected by regulatory, economic, and competitive factors that influence interest rates, loan demand and deposit flows. The Company, like other institutions, is vulnerable to an increase in interest rates to the extent that interest-bearing liabilities mature or reprice more rapidly than interest-earning assets. To reduce the effect of adverse changes in interest rates on its operations, the Company has adopted certain asset and liability management strategies, described below. The Company's earnings are also affected by, among other factors, other non- interest income, other expenses, and income taxes.

The Company's total assets at September 30, 2023 amounted to $842.3 million compared to $912.1 million as of September 30, 2022. The decrease in assets was primarily due to a decrease in cash and investments of $144.3 million. The decrease was partially offset by an increase in loans receivable of $71.7 million. Total liabilities at September 30, 2023 were $755.0 million compared to $827.3 million at September 30, 2022. The decrease in liabilities was due to a decrease in total deposits of $108.1 million. The decrease was partially offset by an increase in borrowings of $36.2 million. Stockholders' equity totaled $87.2 million at September 30, 2023 compared to $84.8 million at September 30, 2022.

During fiscal 2023, net interest income increased $6.2 million or 25.7% from the prior fiscal year. This increase was primarily due to an increase in the interest rate spread to 3.49% in fiscal year 2023 from 2.60% in fiscal year 2022. There was a 7.0% decrease in the average interest-earning assets balances and a 9.7% decrease in average interest-bearing liabilities balances. Net income for fiscal 2023 was $12.2 million compared to $8.8 million for the fiscal year 2022. The Company's return on average assets (net income divided by average total assets) was 1.4% during fiscal 2023 compared to 1.0% during fiscal 2022. Return on average equity (net income divided by average equity) was 14.2% during fiscal 2023 compared to 10.6% during fiscal 2022.

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Results of Operations

The following table sets forth as of the periods indicated, information regarding: (i) the total dollar amounts of interest income from interest-earning assets and the resulting average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resulting average costs; (iii) net interest income; (iv) interest rate spread; (v) net interest-earning assets; (vi) the net yield earned on interest-earning assets; and (vii) the ratio of total interest-earning assets to total interest-bearing liabilities. Average balances are calculated on a monthly basis. Yields on tax-exempt assets have not been calculated on a fully tax-exempt basis.

								For The Year Ended September 30,
						2023											2022
	Average								Average
	Balance	Interest		Yield/Rate	Balance	Interest	Yield/Rate
Interest-earning assets:
Mortgage loans (2)(3)	$248,106	$	11,038		4.45%	$228,320		$	9,695		4.25%
Mortgage-backed securities	158,264				4,213		2.66%	120,994					2,334		1.93%
Commercial loans (3)	306,674				13,837		4.51%	269,158					11,712		4.35%
Consumer and other loans (3)	59,886				2,674		4.47%	63,217					1,917		3.03%
Cash and investments		63,166				2,470			3.91%		216,583					1,657			0.77%
Total interest-earning assets	836,096				34,232	4.09%	898,272					27,315	3.04%
Interest-bearing liabilities:
Savings and money market	292,779				1,181		0.40%	313,809					488		0.16%
Checking	175,133				4	0.00%	193,253					5	0.00%
Certificates of deposit		119,961				1,173	0.98%	137,795					1,285		0.93%
Total deposits		587,873				2,358			0.40%		644,857					1,778			0.28%
Borrowings		56,312			1,518		2.70%	68,339				1,379		2.02%
Total interest-bearing liabilities		644,185				3,876	0.60%	713,196					3,157		0.44%
Net interest income/interest rate
			$	30,356	3.49%
spread								$	24,158	2.60%
Net interest-earning assets/net
yield on interest-earning	$ 191,911						3.63%	$ 185,076							2.69%
assets (1)
Ratio of average interest-earning
assets to average interest-bearing								129.8%
liabilities																	126.0%

__________________

1. Net interest income divided by average interest-earning assets.
2. Loan fee income is immaterial to this analysis.
3. There were 33 non-accruing loans totaling $3.0 million at September 30, 2023 and 25 non-accruing loans totaling $2.9 million at September 30, 2022.

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Net Interest Income

Net interest income increased by $6.2 million or 25.7% in fiscal 2023, over the prior year. The increase in the net interest income in fiscal 2023 was due to an increase in the interest rate spread between interest earning assets and interest- bearing liabilities. The driving factors are further explained below under "- Interest Income" and "- Interest Expense."

Interest Income

Interest income on mortgage loans increased by $1.3 million or 13.9% in fiscal 2023 from the prior year. During fiscal 2023, the average balance of mortgage loans increased $19.8 million or 8.7% and the yield increased by 20 basis points. The majority of loans during the year were fixed rate mortgages. The increase in interest on mortgage-backed securities reflects an increase in the yield of 73 basis points and an increase in the average balance of $37.3 million in fiscal 2023. During fiscal 2023, the consumer and other loan average balance decreased $3.3 million or 5.3% while the yield increased by 144 basis points.

Interest income on commercial loans increased $2.1 million or 18.1% in fiscal 2023 from the prior year. The increase in interest on commercial loans during fiscal 2023 reflected an increase in the average balance of $37.5 million and an increase in yield of 16 basis points.

Interest and dividends on cash and investments increased by $813,000 or 49.1% in fiscal 2023 from fiscal 2022. During fiscal 2023, the increase in income resulted from an increase in the yield of 314 basis points as well as a decrease in the average balance of $153.4 million or 70.5%.

Interest Expense

Interest expense on deposits increased $580,000 or 32.6% in fiscal 2023 as compared to the prior year. In fiscal 2023, the average balance of deposits decreased by $57.0 million. The average rate paid on deposits increased to 0.4% for the year ended September 30, 2023, compared to 0.3% for year ended September 30, 2022.

Interest expense on borrowings increased by $139,000 or 10.1% in fiscal 2023 compared to the prior year. The decrease in fiscal 2023 was primarily the result of a decrease in the average balance of borrowings of $12.0 million or 17.6%.

Provision for Loan Losses

Management establishes reserves for losses on loans when it determines that losses are probable. The adequacy of loan loss reserves is based upon a regular monthly review of loan delinquencies and "classified assets", as well as local and national economic trends. The allowance for loan losses totaled $4.9 million at September 30, 2023, compared to $5.0 million for fiscal year ended September 30, 2022 or 0.8% and 0.9% of total loans at September 30, 2023 and 2022, respectively. The Company recorded a provision for loan losses of $0 in fiscal 2023 compared to $280,000 in fiscal 2022. The provision for loan loss reflects the Company's analysis and review of its loan portfolio and assessment of the underlying risks associated with delinquent loans as well as loans classified for regulatory purposes. For additional analysis of the allowance refer to Note 4 - Loans Receivable in the Consolidated Financial Statements.

Other Income

The Company's total other income decreased to $2.7 million in fiscal 2023 compared to $3.0 million in fiscal 2022. The decrease in fiscal 2023 was primarily due to decreases in interchange fees of $110,000 and miscellaneous other income of $164,000.

Customer service fees and debit card income were $1.5 million and $1.7 million in fiscal 2023 and 2022, respectively.

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Other, which consists primarily of loan servicing fees, the sale of non-deposit products, and insurance commissions, decreased by $164,000 or 17.7% during fiscal 2023. The fees, which comprise other income, are set by the Company at a level that is intended to cover the cost of providing the related services and expenses to customers.

Other Expenses

Salaries and employee benefits increased by $375,000 or 4.3% in fiscal 2023 as compared to fiscal 2022. The increased expenses of salaries and employee benefits during the periods are attributable to an increase to both salary increases, and increases to incentive based compensation.

Occupancy and equipment expense increased $1,000 or 0.07% in fiscal year 2023 as compared to fiscal 2022. Data processing costs increased by $87,000 in fiscal 2023.

Other expenses, which consist primarily of advertising expenses, directors' fees, ATM network fees, professional fees, checking account costs, rewards expenses, REO expenses, stockholders expense and other operating expenses increased by $789,000 or 23.7% in fiscal 2023 compared to fiscal 2022.

Deposit insurance premiums for the fiscal year 2023 increased $63,000 or 25.4% from fiscal 2022 due to an increase in the assessment base.

Income Taxes

The Company recorded income tax provisions of $4.1 million in fiscal year 2023 and $2.7 million in 2022. The effective tax rate was 25.3% in fiscal 2023 compared to 23.5% in fiscal 2022. See Note 8 of the Consolidated Financial Statements which provides an analysis of the provision for income taxes.

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