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 September 30, 1998
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 November 6, 1998, 7,484,215 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 8-12
PART II OTHER INFORMATION
Item 1 Legal Proceedings 13
Item 2 Changes in Securities 13
Item 3 Defaults Upon Senior Securities 13
Item 4 Submission of Matters to a Vote of Security Holders 13
Item 5 Other Information 13
Item 6 Exhibits and Reports on Form 8-K 13
SIGNATURES
<PAGE>
HORIZON FINANCIAL CORP.
Consolidated Statements of Financial Condition
Sept. 30, March 31,
1998 1998
(unaudited)
ASSETS:
Cash and Due from Banks $ 5,499,423 $ 6,878,615
Interest-Bearing Deposits 10,981,516 9,980,349
Investment Securities - Available
for Sale 25,183,535 33,813,752
Investment Securities-Held to Maturity 991,247 1,985,941
Mortgage-Backed Securities - Available
for Sale 50,027,335 33,352,267
Mortgage-Backed Securities - Held to
Maturity 13,385,926 15,488,523
Loans Receivable 449,952,652 433,697,267
Accrued Interest and Dividends
Receivable 3,646,155 3,678,614
Property and Equipment, Net 6,901,345 6,046,468
Other Assets 2,415,083 2,224,500
Total Assets $568,984,217 $547,146,296
LIABILITIES:
Deposits $460,018,144 $450,125,058
Accounts Payable and Other
Liabilities 5,901,723 7,925,825
Other Borrowings 9,940,000 -0-
Advances by Borrowers for Taxes
and Insurance 918,938 920,995
Deferred Compensation 1,267,550 1,275,000
Net Deferred Income Tax Liabilities 3,081,044 2,879,728
Federal income Tax Payable 827,738 124,893
Total Liabilities 481,955,137 463,251,499
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;
7,747,205 and 7,726,762 Issued
and Outstanding 7,747,205 7,726,762
Paid-in Capital 54,108,242 53,821,396
Retained Earnings 25,149,636 22,509,593
Accumulated Other Comprehensive
Income 3,526,466 3,135,677
Debt Related to ESOP (400,000) (400,000)
Treasury Stock-262,990 and 249,090 Held (3,102,469) (2,898,631)
Total Stockholders' Equity 87,029,080 83,894,797
Total Liabilities and Stockholders'
Equity $568,984,217 $547,146,296
(See Notes to Financial Statements)
<PAGE>
HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
3 Months Ended
Sept. 30
1998 1997
INTEREST INCOME:
Interest on Loans $ 9,150,048 $ 8,547,080
Interest and Dividends on Investment
and Mortgage-Backed Securities 1,515,747 1,548,108
Total Interest Income 10,665,795 10,095,188
INTEREST EXPENSE:
Interest on Deposits 5,764,057 5,598,327
Interest on Borrowings 92,876 -0-
Total Interest Expense 5,856,933 5,598,327
Net Interest Income 4,808,862 4,496,861
Provision for Loan Losses -0- 150,000
Net Interest Income After
Provision for Loan Losses 4,808,862 4,346,861
NON-INTEREST INCOME:
Service Fees 372,012 281,726
Net Gain(Loss) on Sale of Loans (21,970) (7,050)
Net Gain(Loss) on Sale of Investments 3,030 373,536
Other 103,632 73,599
Total Non-Interest Income 456,704 721,811
NON-INTEREST EXPENSE:
Compensation and Employee Benefits 1,096,467 1,018,457
Building Occupancy 300,123 270,016
FDIC Insurance 13,075 13,482
Data Processing 128,981 112,327
Advertising 113,583 129,809
Other Expenses 366,882 428,673
Total Non-Interest Expense 2,019,111 1,972,764
Income Before Provision for
Income Taxes 3,246,455 3,095,908
Provision for Income Taxes 1,101,754 1,047,837
Net Income 2,144,701 2,048,071
Earnings Per Share:
Basic Earnings Per Share $.29 $.28
Diluted Earnings Per Share $.28 $.27
(See Notes to Financial Statements)
<PAGE>
HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
6 Months Ended
Sept. 30
1998 1997
INTEREST INCOME:
Interest on Loans $ 18,341,133 $ 16,959,927
Interest and Dividends on Investment
and Mortgage-Backed Securities 2,933,784 3,077,874
Total Interest Income 21,274,917 20,037,801
INTEREST EXPENSE:
Interest on Deposits 11,467,037 10,985,459
Interest on Borrowings 144,181 -0-
Total Interest Expense 11,611,218 10,985,459
Net Interest Income 9,663,699 9,052,342
Provision for Loan Losses 320,000 180,000
Net Interest Income After
Provision for Loan Losses 9,343,699 8,872,342
NON-INTEREST INCOME:
Service Fees 781,045 575,039
Net Gain(Loss) on Sale of Loans (136,682) (92,300)
Net Gain(Loss) on Sale of
Investments 304,866 397,461
Other 170,397 123,613
Total Non-Interest Income 1,119,626 1,003,813
NON-INTEREST EXPENSE:
Compensation and Employee Benefits 2,070,201 2,013,485
Building Occupancy 599,021 560,550
FDIC Insurance 26,810 26,918
Data Processing 253,240 217,820
Advertising 214,614 207,919
Other Expenses 808,817 741,248
Total Non-Interest Expense 3,972,703 3,767,940
Income Before Provision for
Income Taxes 6,490,622 6,108,215
Provision for Income Taxes 2,202,845 2,069,096
Net Income 4,287,777 4,039,119
Earnings Per Share:
Basic Earnings Per Share $.57 $.54
Diluted Earnings Per Share $.57 $.54
(See Notes to Financial Statements)
<PAGE>
<TABLE>
HORIZON FINANCIAL CORP.
Consolidated Statements of Changes in Stockholder's Equity
6 Months Ended September 30, 1998 and 1997
(unaudited)
Net Unrealized
Common Stock Additional Accum Other Debt
Number Paid-In Retained Comprehensive Related Treasury
of Shares at Par Capital Earnings Income to ESOP Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 stk
at $.21 per share (1,559,419) (1,559,419)
Stock opts exercised 21,748 21,748 113,607 135,355
DRIP 12,751 12,751 181,766 194,517
Net change in other
comprehensive income 1,734,282 1,734,282
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 4,039,119 4,039,119
Balance at 9/30/97 7,682,791 $7,682,791 $53,394,799 $22,955,860 $2,359,115 $(450,000) $(2,898,631) 83,043,934
Balance at 3/31/98 7,726,762 $7,726,762 $53,821,396 $22,509,593 $3,135,677 $(400,000) $(2,898,631) 83,894,797
Cash div on common
stock at $.22 per sh. (1,647,734) (1,647,734)
Treasury stock purchased (203,838) (203,838)
Stock opts. exercised 4,201 4,201 37,309 41,510
DRIP 16,242 16,242 249,537 265,779
Net change in other
comprehensive income 390,789 390,789
Net income 4,287,777 4,287,777
Balance at 9/30/98 7,747,205 $7,747,205 $54,108,242 $25,149,636 $3,526,466 $(400,000) $(3,102,469) $87,029,080
(See Notes to Financial Statements)
</TABLE>
<PAGE>
HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
6 Months Ended
Sept. 30,
1998 1997
Cash Flows from Operating Activities:
Net Income $ 4,287,777 $ 4,039,119
Adjustments to Reconcile Net Income
Provided by Operating Activities:
Depreciation 244,488 223,269
Amortization and Deferrals, Net 72,527 (18,435)
Provision for Loan Losses -0- 180,000
Changes in Assets and Liabilities:
Interest & Dividends Receivable 32,459 (234,444)
Interest Payable 114,682 (77,559)
Federal Income Taxes Payable 702,845 796,524
Other Assets (190,000) (98,235)
Other Liabilities (2,148,291) (3,317,775)
Net Cash Flows from Operating Activities $ 3,115,904 $ 1,492,464
Cash Flows From Investing Activities:
Change in Interest-Bearing Deposits, Net $ (1,001,167) $ (2,745,727)
Purchases of Investment Securities - AFS -0- (15,606,797)
Proceeds from Sales and Maturities of
Investment Securities - AFS 8,224,816 4,357,379
Purchases of Investment Securities - HTM -0- -0-
Proceeds from Maturities of Investment
Securities - HTM 994,694 1,889,687
Purchases of Mtge Backed Securities - HTM -0- -0-
Purchases of Mtge Backed Securities - AFS -0- (5,942,010)
Proceeds from Mat of Mtge Backed Sec - HTM 2,102,597 1,963,252
Proceeds from Mat of Mtge Backed Sec - AFS 10,346,349 21,046,511
Proceeds from Borrowings 15,005,000 -0-
Payment on Borrowings (5,065,000) -0-
Proceeds from Sale of Loans 16,087,374 15,750,743
Principal Payments on Loans 59,889,152 35,704,479
Originations and Purchases of Loans (118,328,349) (68,716,213)
Purchases of Bank Premises and
Equipment (1,099,365) (153,150)
Net Cash Flows From Investing Activities: $ (12,843,899) $(12,451,846)
(See Notes to Financial Statements)
<PAGE>
HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
6 Months Ended
Sept. 30,
1998 1997
Cash Flows From Financing Activities:
Change in Checking and
Savings Accounts, Net 2,962,873 51,482
Proceeds From Issuance of Time Deposits 79,702,543 90,881,857
Payments for Maturing Time Deposits (72,772,330) (77,779,045)
Common Stock Issued, Net 307,289 329,872
Cash Dividends Paid (1,647,734) (1,568,353)
Treasury Stock Purchased (203,838) -0-
Net Cash Flows from Financing
Activities 8,348,803 11,915,813
Net Change in Cash and Cash Equivalents (1,379,192) 956,431
Cash and Cash Equivalents,
Beginning of Year 6,878,615 4,416,862
Cash and Cash Equivalents,
End of Year $5,499,423 $5,373,293
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash Paid During the Period for:
Interest Expense $11,450,593 $11,063,018
Income Taxes $ 1,500,000 $ 1,280,000
<PAGE>
HORIZON FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 30, 1998
(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 September 30, 1998 and 1997 are not
necessarily indicative of the operating results for the full year. The
March 31, 1998, 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, 1998.
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 and six months ended September 30, 1998,
include the accounts of Horizon Financial Corp., the Bank and other sub-
sidiaries 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 September 30, 1998 and 1997 are
calculated on the basis of 7,487,745 and 7,424,120 weighted average shares
outstanding, respectively. Diluted earnings per share for the three months
ended September 30, 1998 and 1997 are calculated on the basis of 7,568,368 and
7,530,895 weighted average shares outstanding, respectively. Diluted EPS
figures are computed by determining the number of additional shares that are
deemed outstanding due to stock options under the treasury stock method.
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% (approximately 655,000 shares) of the Corporation's
outstanding common stock over a 24-month period. This authorization ended
in March of 1998. At its March 19, 1998 meeting, the Board of Directors
authorized the repurchase of up to 10% (approximately 747,000 shares) of the
Corporation's outstanding common stock over the subsequent 24-month period.
During the quarter and six months ended September 30, 1998, the Corporation
repurchased 13,900 shares of its common stock.
Financial Condition
Total consolidated assets for the Corporation as of September 30, 1998, were
$568,984,217, an increase of 3.99% from the March 31, 1998 level of
$547,146,296. This increase in assets was due primarily to the growth in
loans receivable, which increased 3.75% to $449,952,652 at September 30, 1998,
from $433,697,267 at March 31, 1998.
Total liabilities increased 4.04% to $481,955,137 at September 30, 1998, from
$463,251,499 at March 31, 1998. The increase in liabilities was due
in part to the growth in savings deposits, which increased 2.20% to
$460,018,144 from $450,125,058. Also contributing to the growth in liabilites
was an increase in Other Borrowings to $9,940,000 at September 30, 1998,
compared to -0- Other Borrowings at March 31, 1998.
Total stockholders' equity increased 3.74% to $87,029,080 at September 30,
1998, from $83,894,797 at March 31, 1998.
<PAGE>
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 September 30, 1998, the Bank had liquid assets
(cash and marketable securities with maturities of one year or less) with a
book value of $28,283,902.
As of September 30, 1998, the total amortized cost of investments and mortgage-
backed securities was $82,244,913 compared to a market value of $90,042,251,
resulting in an unrealized gain of $5,797,338. On March 31, 1998, the total
amortized cost of investments and mortgage-backed securities was $79,889,458
compared to a market value of $84,958,025, resulting in an unrealized gain of
$5,068,567. The primary reasons for this difference at September 30, 1998,
compared to March 31, 1998, 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.
Stockholders' equity to total assets was 15.30% as of September 30, 1998, well
in excess of the 5.0% minimum required by the FDIC in order to be considered
well capitalized.
Comparative Results of Operations
For the Three and Six Months Ended
September 30, 1998 and 1997
Net Interest Income
Net interest income for the three months ended September 30, 1998, increased
6.94% to $4,808,862 from $4,496,861 in the same quarter of the previous year.
Interest on loans for the quarter ended September 30, 1998 was the primary
reason for this change, increasing 7.05% to $9,150,048 from $8,547,080. This
increase was due to an active quarter for loan originations (particularly
refinances) which resulted in increased loan fee recognition during the quarter.
Interest and dividends on investments and mortgage-backed securities decreased
2.09% to $1,515,747 from $1,548,108 for the comparable quarter a year ago.
This is primarily due to the lower level of interest rates and the lack of
significant growth in the Bank's security portfolio compared to the growth in
loans receivable. Available funds were used primarily to fund mortgages during
the period, instead of purchasing investments for the investment portfolio.
Total interest income increased 5.65% to $10,665,795 from $10,095,188. This
increase is primarily attributable to an overall increase in interest-earning
assets over the prior period.
<PAGE>
Total interest paid on deposits increased 2.96% to $5,764,057 from $5,598,327.
This increase in interest expense is due to the overall deposit growth of the
Bank, along with increased competition facing the Bank in attracting deposits.
Interest on borrowings increased to $92,876 during the quarter, compared to -0-
for the comparable period one year ago. During the quarter, the Bank borrowed
additional funds in the wholesale markets using repurchase agreements. The
Bank's management intends to further utilize wholesale funding in the future,
as appropriate opportunities arise.
Net interest income for the three months ended September 30, 1998, after
provision for loan losses, increased 10.63% to $4,808,862 from $4,346,861.
No provisions for loan losses were made during the quarter, compared to $150,000
for the same period one year ago. The Bank's management considers the existing
levels of reserves to be adequate at this time and will continue to closely
monitor the Bank's loan loss reserves.
Net interest income for the six-month period ended September 30, 1998,
increased 6.75% to $9,663,699 from $9,052,342 for the comparable period one
year ago. Total interest income increased 6.17% to $21,274,917 from $20,037,801
due primarily to the increase in the Bank's earning assets. Total interest
expense for the six-month period increased 5.70% to $11,611,218 from
$10,985,459. As discussed above, this increase is due to the overall growth
of the Bank, along with the wholesale market borrowings utilized during the
period. Net interest income after provisions for loan losses increased 5.31%
to $9,343,699 from $8,872,342.
Non Interest Income
Non interest income for the three months ended September 30, 1998, decreased
36.73% to $456,704 from $721,811 for the same time period a year ago. Service
fee income increased 32.05% to $372,012 from $281,726. This is due in large
part to the increase in servicing fee income on loans which have been sold or
securitized in the secondary market, along with increases in fee income as a
result of a productive quarter in terms of loan volume. The net gain/loss on
the sale of loans showed a loss of $21,970 during the quarter, compared to a
loss of $7,050 in the comparable period one year ago. When the Bank sells
loans, the gains or losses related to the loan balances and the prices received
in the secondary market are reflected as non-interest income. When the Bank
sells low coupon, long-term fixed rate mortgages to reduce its interest rate
risk exposure, the non-interest portion of the income statement may show a loss.
The remaining outstanding fees associated with these mortgages, however, flow to
the income statement as interest income. Therefore, even when the non-interest
income portion of the sale reflects a loss, it is possible that the loan sales
(including the fee recognition) generate an overall profit to the Bank. The net
gain on the sale of securities decreased to $3,030 for the quarter, compared to
$373,536 for the previous period. During the prior year period, the Bank
recognized gains from the sale of common stocks and mortgage backed securities.
Other non interest income for the quarter ended September 30, 1998, increased
40.81% to $103,632 from $73,599. Contributing to this change was an increase in
VISA debit card fee income during the quarter, along with an adjustment of
$25,000 in specific loan loss reserves due to the payoff of a loan with an
allocated reserve.
<PAGE>
Non interest income for the six months ended September 30, 1998, increased
11.54% to $1,119,626 from $1,003,813. Service fee income increased 35.83% to
$781,045 from $575,039 due primarily to the increased service fee income from
loans and increased fee income related to loan production, as discussed above.
The net gain/loss on sale of loans showed a loss of $136,682 during the six-
months ended September 30, 1998, compared to a loss of $92,300 in the prior
period. The net gain/loss on sales of investment securities decreased 23.30% to
$304,866 from $397,461. This change reflects the amounts recognized in each
period on the sale of common stock and mortgage-backed securities in the
respective periods. Other non-interest income for the six-month period
increased 37.85% to $170,397 from $123,613, due primarily to the reasons stated
in the discussion above regarding the quarterly results.
Non Interest Expense
Non interest expense for the three months ended September 30, 1998, increased
2.35% to $2,019,111 from $1,972,764. Compensation and employee benefits
increased 7.66% to $1,096,467 from $1,018,457, due primarily to the overall
growth of the Bank. Building occupancy for the quarter ended September 30,
1998, increased 11.15% to $300,123 from $270,016. The Bank's FDIC insurance
expense for the quarter ended September 30, 1998, was little changed at $13,075,
compared $13,482 paid in the quarter one year ago. Data processing increased
14.83% to $128,981 from $112,327, due primarily to the overall growth of the
Bank. Advertising expenses decreased 12.50% to $113,583 for the quarter from
$129,809. Other non interest expenses decreased 14.41% to $366,882 from
$428,673. The primary reason for this decline relates to additions to the
Bank's contingency loss reserve in the quarter ended September 30, 1997.
Non interest expense for the six months ended September 30, 1998, increased
5.43% to $3,972,703 from $3,767,940. Compensation and employee benefits
increased 2.82% to $2,070,201 from $2,013,485. Building occupancy expenses for
the six months increased 6.86% to $599,021 from $560,550. FDIC insurance
expenses were basically unchanged for the six-month period ended September 30,
1998 at $26,810, compared to $26,918 for the prior period. Data processing
expenses increased 16.26% to $253,240 from $217,820 due primarily to the growth
of the Bank. Advertising expenses for the six-month period ended September 30,
1998 increased 3.22% to $214,614 from $207,919. Other expenses increased 9.12%
to $808,817 from $741,248 due to the overall growth of the Bank and expenses
related to upgrading the Bank's computer systems.
<PAGE>
Year 2000 Compliance
The Year 2000 computer problem involves the way in which a computer will
interpret the Year 2000 when expressed as "00". Many computer systems, if left
unchanged, will interpret "00" as the year 1900, rather than as the Year 2000.
This problem could affect you in many ways. We want you to understand what
Horizon Bank is doing to address the issue.
First, Horizon is working hard at testing its computers and software programs
for compliance with the Year 2000. Second, we are working with our data
processor, Fiserv, as well as our other vendors, to make sure that all of their
computers and software programs have been tested for the Year 2000. Lastly, we
are working with our banking regulators to complete the mandatory testing of our
systems well in advance of the change of the century.
In addition, over the next several months, the Bank is replacing or upgrading
most of its personal computers, which should assist in the Year 2000 compliance
efforts since computers with older BIOS chips are more likely to be susceptible
to Year 2000 issues than newer machines. The Bank has decided, however, that
even the new personal computers being purchased will be tested for Year 2000
compliance.
The Bank will also be conducting an extensive test of its interface with its
service provider, Fiserv, in December 1998. The Bank will also have the
opportunity to perform additional tests with Fiserv early in 1999, as needed.
In addition to preparing for testing, the Bank is currently in the process of
refining its contingency plan for the Year 2000. This will be an ongoing
process as the Bank continues to prepare for the turn of the century.
Given the amount of media attention that has been focused on the Year 2000
computer problem, we understand that this is an emotional and upsetting issue
for many people. It is important, however, to realize that this is not the
first time Horizon has had to deal with the Year 2000 computer problem.
Horizon, and its data processor, first had to deal with the issue in 1970 when
the Bank was originating 30-year mortgages that would mature in the Year 2000
and beyond. And again, in 1990, the Bank dealt with the issue when it offered
10-year certificates of deposit that would mature in the Year 2000. In each
case, the issue was resolved successfully.
While there can be no guarantee of total Year 2000 compliance, please be assured
that Horizon Bank is taking this issue very seriously and is working diligently
to minimize potential impacts to its customers and shareholders as a result of
the turn of the century.
Forward Looking Statements
In this document, Horizon has included certain "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
This statement is for the express purpose of availing Horizon to the protections
of such safe harbor with respect to all "forward looking statements". Horizon
has used "forward looking statements" to describe future plans and strategies,
including expectations of Horizon's potential future financial results.
Management's ability to predict results or the effect of future plans and
strategies is inherently uncertain. Factors that could effect results include,
but are not limited to: the future level of interest rates, industry trends,
general economic conditions, loan delinqency rates, and changes in state and
federal regulations. These factors should be considered when evaluating the
"forward looking statements" and undue reliance should not be placed on such
statements.
<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 effect 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: November 13, 1998
<PAGE>
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