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 December 31, 1996
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 February 3, 1997, 6,423,910 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 2-3
Consolidated Statements of Stockholders' Equity 4
Consolidated Statements of Cash Flow 5-6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
PART II OTHER INFORMATION
Item 1 Legal Proceedings 12
Item 2 Changes in Securities 12
Item 3 Defaults Upon Senior Securities 12
Item 4 Submission of Matters to a Vote of Security Holders 12
Item 5 Other Information 12
Item 6 Exhibits and Reports on Form 8-K 12
SIGNATURES
<PAGE>
HORIZON FINANCIAL CORP.
Consolidated Statements of Financial Condition
Dec. 31, March 31,
1996 1996
(unaudited)
ASSETS:
Cash and Due from Banks $ 8,563,844 $ 4,844,146
Interest-Bearing Deposits 3,543,327 8,756,304
Investment Securities - Available
for Sale 28,629,731 34,623,256
Investment Securities-Held to Maturity 11,081,341 16,080,247
Mortgage-Backed Securities - Available
for Sale 9,873,573 279,473
Mortgage-Backed Securities - Held to
Maturity 20,632,808 23,078,825
Loans Receivable 410,589,188 389,650,547
Accrued Interest and Dividends
Receivable 3,479,832 3,614,937
Property and Equipment, Net 6,206,411 6,246,041
Other Assets 1,953,431 1,793,828
Total Assets $504,553,486 $488,967,604
LIABILITIES:
Deposits $417,248,704 $402,676,437
Accounts Payable and Other
Liabilities 6,400,023 4,582,712
Advances by Borrowers for Taxes
and Insurance 474,957 832,442
Deferred Compensation 1,307,726 1,087,684
Deferred Income Tax Payable 677,229 575,000
Income Taxes Currently Payable 434,208 66,115
Total Liabilities 426,542,847 409,820,390
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;
6,628,614 and 6,579,954 Issued
and Outstanding 6,628,614 6,579,954
Paid-in Capital 39,844,323 39,415,875
Retained Earnings 33,135,213 31,548,712
Net Unrealized Gain/(Loss) on Investments
Available for Sale 1,801,120 1,602,673
Debt Related to ESOP (500,000) -0-
Treasury Stock (2,898,631) -0-
Total Stockholders' Equity 78,010,639 79,147,214
Total Liabilities and Stockholders'
Equity $504,553,486 $488,967,604
(See Notes to Financial Statements)
<PAGE>
HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
3 Months Ended
Dec. 31
1996 1995
INTEREST INCOME:
Interest on Loans $8,663,101 $ 8,100,991
Interest and Dividends on Investment
Securities 1,215,518 1,257,004
Total Interest Income 9,878,619 9,357,995
INTEREST EXPENSE:
Interest on Deposits 5,267,939 5,345,005
Net Interest Income 4,610,680 4,012,990
Provision for Loan Losses 60,400 15,000
Net Interest Income After
Provision for Loan Losses 4,550,280 3,997,990
NON-INTEREST INCOME:
Service Fees 306,701 205,701
Net Gain(Loss) on Sale of Investments
and Trading Securities (32,704) 1,897
Other 81,016 107,386
Total Non-Interest Income 355,013 314,984
NON-INTEREST EXPENSE:
Compensation and Employee Benefits 991,479 894,752
Building Occupancy 276,527 274,830
FDIC Insurance 80,000 37,891
Data Processing 101,484 97,294
Advertising 77,165 108,789
Other Expenses 293,424 258,225
Total Non-Interest Expense 1,820,079 1,671,781
Income Before Provision for
Income Taxes 3,085,214 2,641,193
Provision for Income Taxes 1,042,909 885,935
Net Income 2,042,305 1,755,258
Earnings Per Share $.32 $.27
(See Notes to Financial Statements)
<PAGE>
HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
9 Months Ended
Dec. 31
1996 1995
INTEREST INCOME:
Interest on Loans $25,400,782 $23,929,582
Interest and Dividends on Investment
Securities 3,584,048 3,670,447
Total Interest Income 28,984,830 27,600,029
INTEREST EXPENSE:
Interest on Deposits 15,586,664 15,595,722
Net Interest Income 13,398,166 12,004,307
Provision for Loan Losses 170,400 45,000
Net Interest Income After
Provision for Loan Losses 13,227,766 11,959,307
NON-INTEREST INCOME:
Service Fees 799,058 713,649
Net Gain(Loss) on Sale of Investments
and Trading Securities 268,915 7,259
Other 196,508 267,957
Total Non-Interest Income 1,264,481 988,865
NON-INTEREST EXPENSE:
Compensation and Employee Benefits 3,238,380 2,738,536
Building Occupancy 835,170 786,061
FDIC Insurance 168,625 225,687
Data Processing 301,530 290,859
Advertising 257,002 253,973
Other Expenses 961,984 714,934
Total Non-Interest Expense 5,762,691 5,010,050
Income Before Provision for
Income Taxes 8,729,556 7,938,122
Provision for Income Taxes 2,953,093 2,623,589
Net Income 5,776,463 5,314,533
Earnings Per Share $.88 $.81
(See Notes to Financial Statements)
<PAGE>
<TABLE>
HORIZON FINANCIAL CORP.
Consolidated Statements of Changes in Stockholder's Equity
9 Months Ended Dec. 31, 1996 and 1995
(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 3/31/95 6,514,652 $6,514,652 $39,036,616 $26,426,840 $ 731,652 $(25,000) -0- $72,684,760
Cash div on common stk
at $.24 per share (1,572,810) (1,572,810)
Stock opts exercised 34,852 34,852 69,920 104,772
DRIP 16,169 16,169 180,846 197,015
Net change in unrealized
gain/loss - AFS 993,591 993,591
Net income 5,314,533 5,314,533
Balance at 12/31/95 $6,565,673 $6,565,673 $39,287,382 $30,168,563 $1,725,243 $ (25,000) $ -0- $77,721,861
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
stock at $.65 per sh. (4,189,962) (4,189,962)
Stock opts. exercised 31,903 31,903 224,369 256,272
DRIP 16,757 16,757 204,079 220,836
Net change in unrealized
gain/loss - AFS 198,447 198,447
ESOP Loan (500,000) (500,000)
Treasury stock (2,898,631) (2,898,631)
Net income 5,776,463 5,776,463
Balance at 12/31/96 $6,628,614 $6,628,614 $39,844,323 $33,135,213 $1,801,120 $(500,000) $(2,898,631) $78,010,639
(See Notes to Financial Statements)
</TABLE>
<PAGE>
HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
9 Months Ended
Dec. 31,
1996 1995
Cash Flows from Operating Activities:
Net Income $ 5,776,463 $ 5,314,533
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating
Activities:
Depreciation 333,710 329,475
Amortization and Deferrals, Net (136,664) (1,641)
Provision for Loan Losses 170,400 45,000
Provision for Deferred Income Tax -0- -0-
Loss on Retirement of Bank Premises/Eqpt -0- -0-
Changes in Assets and Liabilities:
Interest & Dividends Receivable 135,105 (424,381)
Interest Payable (37,519) 149,226
Federal Income Taxes Receivable 368,093 954,889
Other Assets (159,603) (286,806)
Other Liabilities 1,717,387 128,320
Net Cash Provided by Operating
Activities 8,167,372 6,208,615
Cash Flows From Investing Activities:
Change in Interest-Bearing Deposits, Net $ 5,212,977 $ 7,084,597
Purchases of Investment Securities - AFS (6,357,003) (11,973,560)
Proceeds from Sales and Maturities of
Investment Securities - AFS 12,743,867 8,574,887
Purchases of Investment Securities - HTM -0- 10,127,115
Proceeds from Maturities of Investment
Securities - HTM 4,998,906 6,137,964
Purchases of Mtge Backed Securities - HTM -0- (1,802,457)
Purchases of Mtge Backed Securities - AFS (10,009,292) -0-
Proceeds from Mat of Mtge back Sec - HTM 2,446,017 1,789,233
Proceeds from Mat of Mtge back Sec - AFS 322,529 230,286
Proceeds from Sale of Loans 8,092,748 6,153,079
Principal Payments on Loans 52,253,175 40,718,594
Originations and Purchases of Loans (81,818,300) (67,961,501)
Purchases of Bank Premises and
Equipment (294,080) (204,640)
Net Cash Flows From Investing
Activities (12,408,456) (21,380,633)
(See Notes to Financial Statements)
<PAGE>
HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
9 Months Ended
Dec. 31,
1996 1995
Cash Flows From Financing Activities:
Change in Checking and
Savings Accounts, Net 9,708,966 2,836,362
Proceeds From Issuance of Time Deposits 111,535,112 111,693,662
Payments for Maturing Time Deposits (106,671,811) (97,357,654)
Common Stock Issued, Net 477,108 301,787
Cash Dividends Paid (4,189,962) (1,572,810)
Treasury Stock Purchased (2,898,631) -0-
Net Cash Flows from Financing
Activities 7,960,782 15,901,617
Net Change in Cash and Cash Equivalents 3,719,698 729,599
Cash and Cash Equivalents,
Beginning of Year 4,844,146 4,946,359
Cash and Cash Equivalents,
End of Year $8,563,844 $5,675,958
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash Paid During the Period for:
Interest Expense $15,624,183 $15,446,496
Income Taxes $ 2,585,000 $ 1,668,000
<PAGE>
HORIZON FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 1996
(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 December 31, 1996 and 1995 are not
necessarily indicative of the operating results for the full year. The
March 31, 1996, 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, 1996.
On October 13, 1995, Horizon Bank, a savings bank, ("Bank") reorganized into
the holding company form of ownership ("Reorganization"), resulting in
Horizon Financial Corp. ("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.
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. At its March 26, 1996,
meeting, the Board of Directors authorized the repurchase of up to 10%
(approximately 655,000 shares) of the Corporation's outstanding common stock
over a 24-month period. Through December 31, 1996, Horizon Financial Corp.
had repurchased 216,600 shares of its common stock.
NOTE B - Net Income Per Share
Earnings per share for the three months ended December 31, 1996 and 1995
are calculated on the basis of 6,441,625 and 6,562,601 weighted average
shares outstanding, respectively.
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
Horizon Financial Corporation was formed on October 13, 1995, as the parent
company of Horizon Bank, a savings bank, its wholly-owned subsidiary.
Horizon Bank, a savings 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 in 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 to a lesser extent, commercial properties made in the Bank's primary
market area. The Bank's operations are conducted through twelve
full-service office facilities, all located in Northwestern Washington.
Financial Condition
Total assets for the Corporation as of December 31, 1996, were
$504,553,486, an increase of 3.19% from the March 31, 1996, level of
$488,967,604. This increase in assets was due primarily to the growth in
loans receivable, which increased 5.37% to $410,589,188 at December 31,
1996, from $389,650,547 at March 31, 1996.
Total liabilities increased 4.08% to $426,542,847 at December 31, 1996,
from $409,820,390 at March 31, 1996. The increase in liabilities was due
primarily to the growth in savings deposits, which increased 3.62% to
$417,248,704 from $402,676,437.
Total stockholders' equity decreased 1.44% to $78,010,639 at December 31,
1996, from $79,147,214 at March 31, 1996. This was primarily due to the
effect of the share repurchases which includes 105,600 shares of stock
repurchased during the quarter, bringing the total number of shares
repurchased to 216,600. Also during the quarter, the Corporation paid a
special cash dividend of $0.35 per share to its shareholders in addition
to the normal $0.10 per share cash dividend.
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 December 31, 1996, the Bank had liquid
assets (cash and marketable securities with maturities of one year or less)
with a book value of $23,700,235.
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 December 31, 1996.
Stockholders' equity to total assets was 15.46% as of December 31, 1996,
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 and Nine Months Ended
December 31, 1996 and 1995
Net Interest Income
Net interest income for the three months ended December 31, 1996, increased
14.89% to $4,610,680 from $4,012,990 in the same time period of the previous
year. Total interest income increased 5.56% to $9,878,619 from $9,357,995.
This increase is primarily attributable to an increase in interest-earning
assets during the period. The most significant contribution to the increase
in net interest income came in the form of a reduction in the Bank's cost of
funds. Total interest paid on deposits decreased 1.44% to $5,267,939 from
$5,345,005 for the quarter ending a year ago. This reduction in interest
expense occurred in spite of an increase in deposits payable of 3.62% for
the year to $417,248,704 at December 31, 1996, from $402,676,437.
The weighted average yield on all earning assets at December 31, 1996,
decreased 3 basis points, or .03% to 8.17% from 8.20% at December 31, 1995.
The weighted average yield on loans decreased 7 basis points to 8.48% from
8.55%, and the weighted average yield on investments was unchanged at
6.43%. The Bank's cost of funds decreased 36 basis points to 5.05% at
December 31, 1996, from 5.41% at December 31, 1995. As a result, the
Bank's interest rate spread increased 33 basis points to 3.12% from 2.79%.
Net interest income for the three months ended December 31, 1996, after
provision for loan losses, increased 13.81% to $4,550,280 from $3,997,990.
Provision for loan losses increased to $60,400 from $15,000 for the same
period one year ago. At December 31, 1996, the Bank had one loan listed as
over 90 days delinquent, with an outstanding balance of $60,290. That
loan has since been paid in full.
Net interest income for the nine months ended December 31, 1996, increased
11.61% to $13,398,166 from $12,004,307 for the same time period one year ago.
Total interest income for the nine-month period increased 5.02% to
$28,984,830 from $27,600,029. Total interest expense declined .06% to
$15,586,664 from $15,595,722. Net interest income for the nine months
ended December 31, 1996, after provision for loan losses, increased 10.61%
to $13,227,766 from $11,959,307. The loan loss provision for the nine
months ended December 31, 1996, was $170,400, compared to $45,000 for the
nine-month period one year ago.
Non Interest Income
Non interest income for the three months ended December 31, 1996, increased
12.71% to $355,013 from $314,984 for the same time period a year ago.
Service fee income increased 49.10% to $306,701 from $205,701. The primary
factor affecting this increase was the receipt of a prepayment penalty in
excess of $76,000 on a commercial loan payoff. During the quarter ended
December 31, 1996, the Bank recognized a loss on the sale of investments
in the amount of $32,704, compared to a gain of $1,897 during the comparable
quarter one year ago. Other non interest income decreased to $81,016 from
$107,386. A contributing factor to this difference was the recognition of
$23,847 as final accounting for the sale of the Bank's Trust Department,
which was received during the quarter ending December 31, 1995.
<PAGE>
Non interest income for the nine months ended December 31, 1996, increased
27.87% to $1,264,481 from $988,865. Service fee income increased 11.97% to
$799,085 from $713,649, due primarily to the receipt of the commercial loan
prepayment penalty referenced above. The net gain on sale of investments
increased to $268,915 from $7,259 primarily due to the sale of certain equity
securities during the nine-month period ended December 31, 1996. Other non
interest income for the nine-month period decreased to $196,508 from $267,957.
The primary reason for this difference was the receipt of payments totalling
$83,813 from First Interstate Bank for the sale of the Trust Department
during the nine-month period ended December 31, 1995.
Non Interest Expense
Non interest expenses for the three months ended December 31, 1996, increased
8.87% to $1,820,079 from $1,671,781. Compensation and employee benefits
increased 10.81% to $991,479 from $894,752. Other non interest expenses
increased 13.63% to $293,424 from $258,225.
Non interest expense for the nine months ended December 31, 1996, increased
15.02% to $5,762,691 from $5,010,050. Compensation and employee benefits
increased 18.25% to $3,238,380 from $2,738,536. The primary reason for
this increase was a one-time recognition of $277,525 in expenses relating
to the Bank's deferred compensation program. Without this one-time
expense recognition, compensation and employee benefits would have increased
8.12% over the comparable nine-month period one year ago. Building occupancy
expense increased 6.25% to $835,170 from $786,061, due primarily to the
opening of the Mill Creek office in September 1995. For the nine
months ended December 31, 1996, the Bank's FDIC insurance expense declined
to $168,625 from $225,687 in 1995 due to a significant reduction in
premiums over the comparable period one year ago. Other non interest
expense increased 34.56% to $961,984 from $714,934 during this nine-month
period. This increase in other expenses was due to a number of factors,
including the recognition of expenses relating to the Bank reaching
$500 million in assets (which results in additional FDICIA compliance
expenses), an LID affecting one of the Bank's offices, and expenses relating
to the development of new products to be offered by the Bank. These new
products include telephone banking, a home equity line of credit, and a
debit card program.
<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: February 13, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
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<PERIOD-END> DEC-31-1996
<CASH> 8563844
<INT-BEARING-DEPOSITS> 3543327
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<INVESTMENTS-HELD-FOR-SALE> 38503304
<INVESTMENTS-CARRYING> 31714149
<INVESTMENTS-MARKET> 31848723
<LOANS> 410589188
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<TOTAL-ASSETS> 504553486
<DEPOSITS> 417248704
<SHORT-TERM> 6874980
<LIABILITIES-OTHER> 2419163
<LONG-TERM> 0
0
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<COMMON> 6628614
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