SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the quarterly period ended June 30, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the transition period from ______________ to _______________
Commission file number 0-27062
Horizon Financial Corp.
(Exact name of registrant as specified in its charter)
Chartered by the State of Washington
(State or other jurisdiction of incorporation or organization)
91-1695422
(IRS Employer Identification No.)
1500 Cornwall Avenue
Bellingham, Washington
(Address of principal executive offices)
98225
(Zip Code)
Registrant's telephone number including area code: (360) 733-3050
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
As of August 5, 1997, 7,416,797 common shares, $1.00 par value, were
outstanding.
<PAGE>
HORIZON FINANCIAL CORP.
INDEX PAGE
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Financial Condition 1
Consolidated Statements of Operations 2
Consolidated Statements of Stockholders' Equity 3
Consolidated Statements of Cash Flow 4-5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
PART II OTHER INFORMATION
Item 1 Legal Proceedings 10
Item 2 Changes in Securities 10
Item 3 Defaults Upon Senior Securities 10
Item 4 Submission of Matters to a Vote of Security Holders 10
Item 5 Other Information 10
Item 6 Exhibits and Reports on Form 8-K 10
SIGNATURES
<PAGE>
HORIZON FINANCIAL CORP.
Consolidated Statements of Financial Condition
June. 30, March 31,
1997 1997
(unaudited)
ASSETS:
Cash and Due from Banks $ 4,687,840 $ 4,416,862
Interest-Bearing Deposits 9,400,079 10,398,316
Investment Securities - Available
for Sale 25,201,728 26,238,895
Investment Securities-Held to Maturity 8,386,204 8,381,775
Mortgage-Backed Securities - Available
for Sale 35,545,341 35,229,087
Mortgage-Backed Securities - Held to
Maturity 18,964,665 19,690,598
Loans Receivable 404,934,675 399,078,123
Accrued Interest and Dividends
Receivable 3,427,351 3,545,380
Income Tax Receivable -0- 297,192
Property and Equipment, Net 6,080,189 6,130,683
Other Assets 2,033,313 1,934,428
Total Assets $518,661,385 $515,341,339
LIABILITIES:
Deposits $428,470,621 $424,811,286
Accounts Payable and Other
Liabilities 5,395,836 8,935,825
Advances by Borrowers for Taxes
and Insurance 454,427 898,950
Deferred Compensation 1,286,250 1,290,000
Net Deferred Income Tax Liabilities 1,419,299 896,264
Federal income Tax Payable 724,067 -0-
Total Liabilities 437,750,500 436,832,325
STOCKHOLDERS' EQUITY:
Serial Preferred Stock, $1.00 Par Value,
10,000,000 Shares Authorized;
None Issued or Outstanding
Common Stock, $1.00 Par Value,
30,000,000 Shares Authorized;
7,665,887 and 6,650,340 Issued
and Outstanding 7,665,887 6,650,340
Paid-in Capital 53,227,995 40,063,678
Retained Earnings 21,725,496 34,518,794
Net Unrealized Gain/(Loss) on Investments
Available for Sale 1,640,138 624,833
Debt Related to ESOP (450,000) (450,000)
Treasury Stock-249,090 and 216,600 Held (2,898,631) (2,898,631)
Total Stockholders' Equity 80,910,885 78,509,014
Total Liabilities and Stockholders'
Equity $518,661,385 $515,341,339
(See Notes to Financial Statements)
<PAGE>
HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
3 Months Ended
June 30
1997 1996
INTEREST INCOME:
Interest on Loans $8,412,847 $ 8,328,247
Interest and Dividends on Investment
and Mortgage-Backed Securities 1,529,766 1,181,292
Total Interest Income 9,942,613 9,509,539
INTEREST EXPENSE:
Interest on Deposits 5,387,132 5,125,258
Net Interest Income 4,555,481 4,384,281
Provision for Loan Losses 30,000 60,000
Net Interest Income After
Provision for Loan Losses 4,525,481 4,324,281
NON-INTEREST INCOME:
Service Fees 293,313 260,978
Net Gain(Loss) on Sale of Investments
and Trading Securities (61,325) -0-
Other 50,014 49,452
Total Non-Interest Income 282,002 310,430
NON-INTEREST EXPENSE:
Compensation and Employee Benefits 995,028 964,052
Building Occupancy 290,534 274,940
FDIC Insurance 13,436 500
Data Processing 105,493 99,547
Advertising 78,110 111,783
Other Expenses 312,575 339,524
Total Non-Interest Expense 1,795,176 1,790,346
Income Before Provision for
Income Taxes 3,012,307 2,844,365
Provision for Income Taxes 1,021,259 962,206
Net Income 1,991,048 1,882,159
Earnings Per Share $.27 $.25*
* Restated for 15% stock dividend declared April 22, 1997.
(See Notes to Financial Statements)
<PAGE>
<TABLE>
HORIZON FINANCIAL CORP.
Consolidated Statements of Changes in Stockholder's Equity
3 Months Ended June 30, 1997 and 1996
(unaudited)
Net Unrealized
Common Stock Additional Gains(Losses) Debt
Number Paid-In Retained on Related Treasury
of Shares at Par Capital Earnings Securities to ESOP Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at 3/31/96 6,579,954 $6,579,954 $39,415,875 $31,548,712 $1,602,673 -0- -0- $79,147,214
Cash div on common stk
at $.10 per share (659,527) (659,527)
Stock opts exercised 9,312 9,312 62,846 72,158
DRIP 5,620 5,620 65,326 70,946
Net change in unrealized
gain/loss - AFS (51,666) (51,666)
ESOP loan (500,000) (500,000)
Net income 1,882,159 1,882,159
Balance at 6/30/96 6,594,886 6,594,886 $39,544,047 $32,771,344 $1,551,007 $(500,000) $ -0- $79,961,284
Balance at 3/31/97 6,650,340 6,650,340 40,063,678 34,518,794 624,833 (450,000) ($2,898,631) 78,509,014
Cash div on common
stock at $.10 per sh. (741,712) (741,712)
Stock opts. exercised 11,484 11,484 86,317 97,801
DRIP 6,111 6,111 42,252 48,363
Net change in unrealized
gain/loss - AFS 1,015,305 1,015,305
15% stock dividend 997,952 997,952 13,035,748 (14,033,700) -0-
Cash paid for
fractional shares (8,934) (8,934)
Net income 1,991,048 1,991,048
Balance at 6/30/97 7,665,887 7,665,887 $53,227,995 $21,725,496 $1,640,138 $(450,000) $(2,898,631) $80,910,885
(See Notes to Financial Statements)
</TABLE>
<PAGE>
HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
3 Months Ended
June 30,
1997 1996
Cash Flows from Operating Activities:
Net Income $ 1,991,048 $ 1,882,159
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating
Activities:
Depreciation 111,600 111,718
Amortization and Deferrals, Net (39,582) 71,569
Provision for Loan Losses 30,000 60,000
Changes in Assets and Liabilities:
Interest & Dividends Receivable 118,029 92,354
Interest Payable (45,926) (498)
Federal Income Taxes Payable 724,067 962,206
Other Assets (98,885) (29,018)
Other Liabilities (3,942,336) (713,622)
Income Tax Receivable 297,192 -0-
Net Cash Flows from Operating Activities (854,793) 2,436,868
Cash Flows From Investing Activities:
Change in Interest-Bearing Deposits, Net $ 998,237 $ (53,481)
Purchases of Investment Securities - AFS (1,246,719) (609,699)
Proceeds from Sales and Maturities of
Investment Securities - AFS 2,971,648 4,524,293
Purchases of Investment Securities - HTM -0- -0-
Proceeds from Maturities of Investment
Securities - HTM (4,429) 1,410,106
Purchases of Mtge Backed Securities - HTM -0- -0-
Purchases of Mtge Backed Securities - AFS -0- (1,000,000)
Proceeds from Mat of Mtge Backed Sec - HTM 725,933 890,010
Proceeds from Mat of Mtge Backed Sec - AFS 534,325 21,224
Proceeds from Sale of Loans 9,304,402 -0-
Principal Payments on Loans 18,081,333 18,002,936
Originations and Purchases of Loans (33,232,705) (29,364,267)
Purchases of Bank Premises and
Equipment (61,106) (78,740)
Net Cash Flows From Investing
Activities $(1,929,081) $(6,257,618)
(See Notes to Financial Statements)
<PAGE>
HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
3 Months Ended
June 30,
1997 1996
Cash Flows From Financing Activities:
Change in Checking and
Savings Accounts, Net (2,154,046) 4,601,950
Proceeds From Issuance of Time Deposits 44,476,284 33,893,484
Payments for Maturing Time Deposits (38,662,903) (34,999,923)
Common Stock Issued, Net 137,229 143,104
Cash Dividends Paid (741,712) (659,527)
Net Cash Flows from Financing
Activities 3,054,852 2,979,088
Net Change in Cash and Cash Equivalents 270,978 (841,662)
Cash and Cash Equivalents,
Beginning of Year 4,416,862 4,844,146
Cash and Cash Equivalents,
End of Year $4,687,840 $4,002,484
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash Paid During the Period for:
Interest Expense $ 5,433,058 $ 5,125,756
Income Taxes $ -0- $ -0-
<PAGE>
HORIZON FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 1997
(unaudited)
NOTE A - Basis of Presentation
The unaudited consolidated financial statements have been prepared in
accordance with general accepted accounting principles for interim financial
information and with the instructions to the Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation are reflected in the interim financial statements. The results
of operations for the periods ended June 30, 1997 and 1996 are not
necessarily indicative of the operating results for the full year. The
March 31, 1997, consolidated statement of financial condition presented with
the interim financial statements was audited and received an unqualified
opinion. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Bank's annual report for
the year ended March 31, 1997.
On October 13, 1995, Horizon Bank, a savings bank, ("Bank") reorganized into
the holding company form of ownership ("Reorganization"), resulting in
the Registrant becoming the sole stockholder of the Bank. Each outstanding
share of common stock of the Bank and options to acquire shares of common
stock of the Bank, became outstanding shares of common stock of the
Registrant and options to acquire shares of common stock of the Registrant,
respectively, as a result of the Reorganization. The consolidated financial
statements for the three months ended June 30, 1997, include the accounts of
Horizon Financial Corp., the Bank and other subsidiaries of the Bank.
Significant intercompany balances and transactions have been eliminated in
consolidation.
Prior to Reorganization, Horizon Financial Corp. had no material assets or
liabilities and engaged in no business activity. Subsequent to the
acquisition of the bank, Horizon Financial Corp. has engaged in no
significant activity other than holding the stock of the Bank.
NOTE B - Net Income Per Share
Earnings per share for the three months ended June 30, 1997 and 1996 are
calculated on the basis of 7,407,760 and 7,574,798 weighted average shares
outstanding, respectively (restated to reflect a 15% stock dividend declared
April 22, 1997).
NOTE C - Reclassification
Certain reclassifications have been made to prior financial statements to
conform with current presentation. Such reclassifications have no effect on
net income.
<PAGE>
HORIZON FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
General
The Corporation was formed under Washington law on May 22, 1995, and became
the holding company of the Bank, effective October 13, 1995. As a bank
holding company, the Corporation has a number of additional options and
operating advantages over the Bank. these include, but are not limited to:
expanded business diversification options; flexibility in acquisitions; and
the ability to repurchase its own stock without incurring the adverse tax
consequences of recapturing portions of the Bank's bad debt reserve.
The Bank was organized in 1922 as a Washington state-chartered mutual savings
and loan association and converted to a federal mutual savings and loan
association in 1934. In 1979, the Bank converted to a Washington state-
chartered mutual savings bank, the deposits of which are insured by the
Federal Deposit Insurance Corporation ("FDIC"). On August 12, 1986, the Bank
then converted to a state-chartered stock savings bank. The primary business
of the Bank is to acquire funds in the form of savings deposits and to use
the funds to make loans secured by residential and commercial properties in
the Bank's primary market area. The Bank's operations are conducted through
twelve full-service office facilities, located in Whatcom, Skagit and
Snohomish counties in northwest Washington.
At its March 26, 1996, meeting, the Board of Directors authorized the
repurchase of up to 10% of the Corporation's outstanding common stock over a
24-month period. During the fiscal year ended March 31, 1997, the
Corporation repurchased 216,600 shares (249,090 shares on a restated basis)
of its common stock. No shares were repurchased during the quarter ended
June 30, 1997.
On April 22, 1997, the Corporation declared a 15% stock dividend. The
appropriate historical figures presented herein have been restated to reflect
this stock dividend.
Financial Condition
Total consolidated assets for the Corporation as of June 30, 1997, were
$518,661,385, an increase of .64% from the March 31, 1997, level of
$515,341,339. This increase in assets was due primarily to the growth in
loans receivable, which increased 1.47% to $404,934,675 at June 30, 1997,
from $399,078,123 at March 31, 1997.
Total liabilities increased .21% to $437,750,500 at June 30, 1997, from
$436,832,325 at March 31, 1997. The increase in liabilities was due
primarily to the growth in savings deposits, which increased .86% to
$428,470,621 from $424,811,286.
Total stockholders' equity increased 3.06% to $80,910,885 at June 30, 1997,
from $78,509,014 at March 31, 1997.
Liquidity and Capital Resources
The Bank maintains liquid assets in the form of cash and short-term
investments to provide a source to fund loans, savings withdrawals and other
short-term cash requirements. At June 30, 1997, the Bank had liquid assets
(cash and marketable securities with maturities of one year or less) with a
book value of $17,635,926.
As of June 30, 1997, the total book value of investments and mortgage-backed
securities was $85,612,881 compared to a market value of $88,173,730 ,
resulting in an unrealized gain of $2,560,849. On March 31, 1997, the book
value of investments and mortgage-backed securities was $88,593,639 compared
to a market value of $89,321,020, resulting in an unrealized gain of $727,381.
The primary reasons for this difference at June 30, 1997, compared to
March 31, 1997, was the overall lower level of interest rates which increased
the valuation of the Bank's investment portfolio, along with increases in the
value of the Bank's common stock holdings.
The Bank's primary sources of funds are cash flow from operations, which
consist primarily of mortgage loan repayments; deposit increases; loan sales;
and cash received from the maturity or sale of investment securities. These
funds are primarily used to originate mortgage loans on real estate.
The Bank's liquidity fluctuates with the supply of funds, and management
believes that the current level of liquidity is adequate at this time. If
additional liquidity is needed, the Bank's options include, but are not
necessarily limited to: (1) selling additional loans in the secondary market;
(2) reverse repurchase agreements; (3) accepting additional jumbo and/or
public funds deposits; or (4) accessing the discount window of the Federal
Reserve Bank of San Francisco. The Bank had no borrowings against any kind
of credit as of June 30, 1997.
Stockholders' equity to total assets was 15.60% as of June 30, 1997, well in
excess of the 5.0% minimum required by the FDIC in order to be considered
well capitalized.
<PAGE>
Comparative Results of Operations
For the Three Months Ended
June 30, 1997 and 1996
Net Interest Income
Net interest income for the three months ended June 30, 1997, increased 3.90%
to $4,555,481 from $4,384,281 in the same time period of the previous year.
While interest on loans for the quarter ended June 30, 1997, increased only
1.02% to $8,412,847 from $8,328,247, interest and dividends on investments
and mortgage-backed securities increased 29.50% to $1,529,766 from $1,181,292
for the comparable quarter a year ago. This is primarily due to the fact
that the Bank securitized approximately $25,000,000 in mortgages near the end
of fiscal 1997, which shifted these interest-earning assets from loans
receivable into mortgage-backed securities.
Total interest income increased 4.55% to $9,942,613 from $9,509,539. This
increase is primarily attributable to an overall increase in interest-earning
assets over the prior period. Total interest paid on deposits increased
5.11% to $5,387,132 from $5,125,258.
The weighted average yield on all earning assets for the quarter ended
June 30, 1997, decreased 5 basis points, or .05% to 8.02% from 8.07% for the
quarter ended June 30, 1996. The weighted average yield on loans decreased
6 basis points to 8.36% from 8.42%, and the weighted average yield on
investments increased 27 basis points to 6.55% from 6.28%. This increase in
the weighted average yield on investments can be attributed in large part to
the securitization of mortgages discussed above, which shifted long-term
mortgages from loans receivable to investment securities on the Bank's
balance sheet.
The Bank's cost of funds for the quarter ended June 30, 1997, decreased 2
basis points to 5.09% from 5.11% for the quarter ended June 30, 1996. As a
result, the Bank's interest rate spread decreased 3 basis points to 2.93%
from 2.96% from the comparable quarter one year ago.
Net interest income for the three months ended June 30, 1997, after provision
for loan losses, increased 4.65% to $4,525,481 from $4,324,281. Provision
for loan losses decreased to $30,000 from $60,000 for the same period one
year ago. At June 30, 1997, the Bank had no loans listed as over 90 days
delinquent.
Non Interest Income
Non interest income for the three months ended June 30, 1997, decreased 9.16%
to $282,002 from $310,430 for the same time period a year ago. Service fee
income increased 12.39% to $293,313 from $260,978. This increase is due in
large part to the receipt of a commercial loan assumption fee of
approximately $20,000 during the quarter, along with increased service fee
income on loans that have been sold or securitized in the secondary market.
The net gain/loss on the sale of investment securities showed a loss of
$61,325 during the quarter, compared to no activity in the comparable period
one year ago. This loss was due primarily to the sale of mortgages during
the period.
Non Interest Expense
Non interest expenses for the three months ended June 30, 1997, increased
.27% to $1,795,176 from $1,790,346. Compensation and employee benefits
increased 3.21% to $995,028 from $964,052. Building occupancy increased
5.67% to $290,534 from $274,940. The Bank's FDIC insurance expense for the
quarter ended June 30, 1997, was $13,436, compared to the statutory minimum
of $500 paid in the period one year ago. Data processing increased 5.67% to
$105,493 for the quarter ended June 30, 1997, from $99,547, due primarily to
the overall growth of the Bank. Advertising expenses decreased 30.12% to
$78,110 for the quarter from $111,783. Other non interest expenses decreased
7.94% to $312,575 from $339,524.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Horizon Financial Corporation has certain litigation and/or
negotiations in progress resulting from activities arising from
normal operations. In the opinion of management, none of these
matters is likely to have a materially adverse affect on the
Corporation's financial position or results of operation.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HORIZON FINANCIAL CORP.
By: /s/ V. Lawrence Evans
V. Lawrence Evans
President and Chief Executive Officer
By: /s/ Richard P. Jacobson
Richard P. Jacobson
Chief Financial Officer
Dated: August 13, 1997
<PAGE>
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