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, 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 February 5, 1999, 7,496,294 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
Dec. 31, March 31,
1998 1998
(unaudited)
ASSETS:
Cash and Due from Banks $ 7,383,137 $ 6,878,615
Interest-Bearing Deposits 4,271,516 9,980,349
Investment Securities - Available
for Sale 29,033,458 33,813,752
Investment Securities-Held to Maturity 992,718 1,985,941
Mortgage-Backed Securities - Available
for Sale 51,802,183 33,352,267
Mortgage-Backed Securities - Held to
Maturity 12,080,990 15,488,523
Loans Receivable 466,392,956 433,697,267
Accrued Interest and Dividends
Receivable 3,514,222 3,678,614
Property and Equipment, Net 9,531,911 6,046,468
Other Assets 2,628,275 2,224,500
Total Assets $587,631,366 $547,146,296
LIABILITIES:
Deposits $471,869,430 $450,125,058
Accounts Payable and Other
Liabilities 4,618,183 7,925,825
Other Borrowings 16,608,000 -0-
Advances by Borrowers for Taxes
and Insurance 502,893 920,995
Deferred Compensation 1,263,825 1,275,000
Net Deferred Income Tax Liabilities 3,262,585 2,879,728
Federal income Tax Payable 620,820 124,893
Total Liabilities 498,745,736 463,251,499
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;
7,759,284 and 7,726,762 Issued
and Outstanding 7,759,284 7,726,762
Paid-in Capital 54,249,855 53,821,396
Retained Earnings 26,500,092 22,509,593
Accumulated Other Comprehensive Income 3,878,868 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 88,885,630 83,894,797
Total Liabilities and Stockholders'
Equity $587,631,366 $547,146,296
(See Notes to Financial Statements)
<PAGE>
HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
3 Months Ended
Dec. 31
1998 1997
INTEREST INCOME:
Interest on Loans $ 9,569,770 $ 8,885,534
Interest and Dividends on Investment
and Mortgage-Backed Securities 1,404,825 1,486,292
Total Interest Income 10,974,595 10,371,826
INTEREST EXPENSE:
Interest on Deposits 5,741,944 5,679,271
Interest on Borrowings 144,424 0
Total Interest Expense 5,886,368 5,679,271
Net Interest Income 5,088,227 4,692,555
Provision for Loan Losses 75,000 0
Net Interest Income After
Provision for Loan Losses 5,013,227 4,692,555
NON-INTEREST INCOME:
Service Fees 389,963 284,359
Net Gain(Loss) on Sale of Loans (112,979) (144,233)
Net Gain(Loss) on Sale of Investments 0 25,487
Other 104,343 68,896
Total Non-Interest Income 381,327 234,509
NON-INTEREST EXPENSE:
Compensation and Employee Benefits 1,082,930 981,902
Building Occupancy 315,501 284,616
FDIC Insurance 13,976 13,704
Data Processing 136,902 116,875
Advertising 103,086 94,097
Other Expenses 449,765 296,885
Total Non-Interest Expense 2,102,160 1,788,079
Income Before Provision for
Income Taxes 3,292,394 3,138,985
Provision for Income Taxes 1,118,082 1,065,245
Net Income 2,174,312 2,073,740
Earnings Per Share
Basic Earnings Per Share $.29 $.28
Diluted Earnings Per Share $.29 $.27
(See Notes to Financial Statements)
<PAGE>
HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
9 Months Ended
Dec. 31
1998 1997
INTEREST INCOME:
Interest on Loans $ 27,910,903 $ 25,845,461
Interest and Dividends on Investment
and Mortgage-Backed Securities 4,338,609 4,564,166
Total Interest Income 32,249,512 30,409,627
INTEREST EXPENSE:
Interest on Deposits 17,208,981 16,664,730
Interest on Borrowings 288,605 0
Total Interest Expense 17,497,586 16,664,730
Net Interest Income 14,751,926 13,744,897
Provision for Loan Losses 395,000 180,000
Net Interest Income After
Provision for Loan Losses 14,356,926 13,564,897
NON-INTEREST INCOME:
Service Fees 1,171,008 859,398
Net Gain(Loss) on Sale of Loans (249,661) (236,534)
Net Gain(Loss) on Sale of Investments 304,866 422,949
Other 274,740 192,509
Total Non-Interest Income 1,500,953 1,238,322
NON-INTEREST EXPENSE:
Compensation and Employee Benefits 3,153,131 2,995,387
Building Occupancy 914,522 845,166
FDIC Insurance 40,786 40,622
Data Processing 390,142 334,695
Advertising 317,700 302,016
Other Expenses 1,258,582 1,038,133
Total Non-Interest Expense 6,074,863 5,556,019
Income Before Provision for
Income Taxes 9,783,016 9,247,200
Provision for Income Taxes 3,320,927 3,134,341
Net Income 6,462,089 6,112,859
Earnings Per Share:
Basic Earnings Per Share $.86 $.82
Diluted Earnings Per Share $.85 $.81
(See Notes to Financial Statements)
<PAGE>
<TABLE>
HORIZON FINANCIAL CORP.
Consolidated Statements of Changes in Stockholder's Equity
9 Months Ended December 31, 1998 and 1997
(unaudited)
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 $.32 per share (2,379,472) (2,379,472)
Stock opts exercised 35,342 35,342 234,668 270,010
DRIP 19,703 19,703 293,860 313,563
Net change in other
comprehensive income 2,040,852 2,040,852
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 6,112,859 6,112,859
Balance at 12/31/97 7,703,337 7,703,337 $53,627,954 $24,209,547 $2,665,685 $(450,000) $(2,898,631) $84,857,892
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 $.33 per sh. (2,471,590) (2,471,590)
Treasury stock
purchased (203,838) (203,838)
Stock opts. exercised 6,368 6,368 53,788 60,156
DRIP 26,154 26,154 374,671 400,825
Net change in other
comprehensive income 743,191 743,191
Net income 6,462,089 6,462,089
Balance at 12/31/98 7,759,284 7,759,284 $54,249,855 $26,500,092 $3,878,868 $(400,000) $(3,102,469) $88,885,630
(See Notes to Financial Statements)
</TABLE>
<PAGE>
HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
9 Months Ended
Dec. 31,
1998 1997
Cash Flows from Operating Activities:
Net Income $ 6,462,089 $ 6,112,859
Adjustments to Reconcile Net Income
Provided by Operating Activities
Depreciation 383,629 333,984
Amortization and Deferrals, Net 173,107 16,497
Provision for Loan Losses 395,000 180,000
Changes in Assets and Liabilities:
Interest & Dividends Receivable 164,392 (14,905)
Interest Payable 31,497 (78,976)
Federal Income Taxes (rec) Payable 495,927 806,769
Other Assets (403,775) (336,067)
Other Liabilities (3,768,416) (4,153,904)
Net Cash Flows from Operating Activities $ 3,933,450 $ 2,866,257
Cash Flows From Investing Activities:
Change in Interest-Bearing Deposits, Net $ 5,708,833 $ 2,893,021
Purchases of Investment Securities - AFS (5,563,600) (18,826,702)
Proceeds from Sales and Maturities of
Investment Securities - AFS 10,904,886 10,274,635
Purchases of Investment Securities - HTM -0- -0-
Proceeds from Maturities of Investment
Securities - HTM 993,223 3,378,288
Purchases of Mtge Backed Securities - HTM -0- -0-
Purchases of Mtge Backed Securities - AFS -0- 10,356,359
Proceeds from Mat of Mtge Backed Sec - HTM 3,407,533 3,276,665
Proceeds from Mat of Mtge Backed Sec - AFS 13,568,858 21,699,625
Proceeds from Borrowings 26,613,000 -0-
Payment on Borrowings (10,005,000) -0-
Proceeds from Sale of Loans 25,222,775 24,760,566
Principal Payments on Loans 95,911,862 53,060,451
Originations and Purchases of Loans (185,852,151) (104,026,434)
Purchases of Bank Premises and
Equipment (3,869,072) (268,791)
Net Cash Flows From Investing Activities: $ (22,958,853) $(14,135,035)
(See Notes to Financial Statements)
<PAGE>
HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
9 Months Ended
Dec. 31,
1998 1997
Cash Flows From Financing Activities:
Change in Checking and
Savings Accounts, Net 10,617,573 (1,254,039)
Proceeds From Issuance of Time Deposits 110,841,327 119,928,577
Payments for Maturing Time Deposits (99,714,528) (104,925,472)
Common Stock Issued, Net 460,981 583,573
Cash Dividends Paid (2,471,590) (2,388,406)
Treasury Stock Purchased (203,838) -0-
Net Cash Flows from Financing
Activities 19,529,925 11,944,233
Net Change in Cash and Cash Equivalents 504,522 675,455
Cash and Cash Equivalents,
Beginning of Year 6,878,615 4,416,862
Cash and Cash Equivalents,
End of Year $7,383,137 $5,092,317
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash Paid During the Period for:
Interest Expense $17,213,318 $16,743,706
Income Taxes $ 2,825,000 $ 2,335,000
<PAGE>
HORIZON FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED DECEMBER 31, 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 December 31, 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 nine months ended December 31, 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 December 31, 1998 and 1997 are
calculated on the basis of 7,490,851 and 7,445,497 weighted average shares
outstanding, respectively. Diluted earnings per share for the three months
ended December 31, 1998 and 1997 are calculated on the basis of 7,553,924 and
7,558,375 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 nine
months ended December 31, 1998, the Corporation repurchased 13,900 shares of its
common stock. This repurchase plan has been rescinded by the Board of Directors
effective January 18, 1999 with the signing of the definitive agreement to
merge with Bellingham Bancorporation as discussed below.
As of December 11, 1998, the Bank became a member of the Federal Home Loan Bank
of Seattle. Membership with the FHLB will provide the Bank with wholesale
funding opportunities to supplement retail deposits in order to meet mortgage
loan demand and lengthen liabilities for protection against interest rate risk.
On January 18, 1999, the Corporation announced a definitive agreement to merge
with Bellingham Bancorporation, creating a company with combined assets in
excess of $652 million. As a result of the transaction, Bellingham
Bancorporation will be merged into Horizon Financial Corp. The acquisition will
be accomplished in an all stock offer valued at approximately $15.5 million,
including the assumption of outstanding Bellingham Bancorporation stock options
and warrants. According to the terms of the definitive agreement, the
Corporation will exchange 2.74 shares of its common stock for each Bellingham
Bancorporation share. The acquisition, which has been approved by the Board of
Directors of each company, is subject to, among other contingencies, approval by
regulators and Bellingham Bancorporation shareholders. The transaction is
expected to close by June 1, 1999. Horizon Financial Corp. expects the merger
to be accretive to earnings within one year of combined operations. The
transaction is expected to be accounted for as a pooling of interests.
Financial Condition
Total consolidated assets for the Corporation as of December 31, 1998, were
$587,631,366, an increase of 7.40% 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 7.54% to $466,392,956 at December 31, 1998,
from $433,697,267 at March 31, 1998.
Total liabilities increased 7.66% to $498,745,736 at December 31, 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 4.83% to
$471,869,430 from $450,125,058. Also contributing to the growth in liabilities
was an increase in Other Borrowings to $16,608,000 at December 31, 1998,
compared to -0- Other Borrowings at March 31, 1998.
Total stockholders' equity increased 5.95% to $88,885,630 at December 31,
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 December 31, 1998, the Bank had liquid assets
(cash and marketable securities with maturities of one year or less) with a
book value of $23,073,079.
As of December 31, 1998, the total amortized cost of investments and mortgage-
backed securities was $88,032,276 compared to a market value of $94,270,863,
resulting in an unrealized gain of $6,238,587. On March 31, 1998, the 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 December 31, 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) advances from the Federal Home Loan Bank of Seattle; (3) reverse repurchase
agreements; (4) accepting additional jumbo and/or public funds deposits; or
(5) accessing the discount window of the Federal Reserve Bank of San Francisco.
Stockholders' equity to total assets was 15.13% as of December 31, 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 Nine Months Ended
December 31, 1998 and 1997
Net Interest Income
Net interest income for the three months ended December 31, 1998, increased
8.43% to $5,088,227 from $4,692,555 in the same time period of the previous
year. Interest on loans was the primary reason for this change, increasing 7.70%
to $9,569,770 from $8,885,534. This increase was due to an active quarter for
loan originations (particulary refinances) which resulted in increased loan
fee recognition during the quarter. Interest and dividends on investments and
mortgage-backed securities decreased 5.48% to $1,404,825 from $1,486,292 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, istead of purchasing investments
for the investment portfolio. Total interest income increased 5.81% to
$10,974,595 from $10,371,826. This increase is primarily attributable to an
overall increase in interest-earning assets over the prior period.
<PAGE>
Total interest paid on deposits increased 1.10% to $5,741,944 from $5,679,271.
This increase in interest expense is due to the overall deposit growth of the
Bank, along with increasing competition facing the Bank in attracting deposits.
Interest on borrowings increased to $144,424 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 and FHLB
advances. 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 December 31, 1998, after
provision for loan losses, increased 6.83% to $5,013,227 from $4,692,555.
Provisions for loan losses increased to $75,000 for the quarter ended December
31, 1998, from -0- for the same period one year ago. The Bank had one loan in
the amount of $323,468 listed as over 90 days delinquent at December 31, 1998.
Net interest income for the nine-month period ended December 31, 1998,
increased 7.33% to $14,751,926 from $13,744,897 for the comparable period one
year ago. Total interest income increased 6.05% to $32,249,512 from
$30,409,627, due primarily to the increase in the Bank's earning assets. Total
interest expense for the nine-month period increased 5.00% to $17,497,586 from
$16,664,730. As discussed above, this increase is due to the overall growth
of the Bank, along with wholesale market borrowings and FHLB advances utilized
during the period. Net interest income after provisions for loan losses
increased 5.84% to $14,356,926 from $13,564,897.
Non Interest Income
Non interest income for the three months ended December 31, 1998, increased
62.61% to $381,327 from $234,509 for the same time period a year ago. Service
fee income increased 37.14% to $389,963 from $284,359. This is due in
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 $112,979 during the quarter, compared to a
loss of $144,233 in the comparable period one year ago. These losses were due
primarily to the sale of approximately $15 million in 30 year fixed rate
mortgage loans during the quarter. 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 income 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
profit on the sale of loans for the quarter (including fee recognitions) ended
December 31, 1998 was $10,183. Other non interest income for the quarter ended
December 31, 1998 increased 51.45% to $104,343 from $68,896. 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 a
payoff of a loan with an allocated reserve.
<PAGE>
Non interest income for the nine months ended December 31, 1998, increased
21.21% to $1,500,953 from $1,238,322. Service fee income increased 36.26% to
$1,171,008 from $859,398, due primarily to the increased service fee income from
loans sold, and increased fee income related to loan production, as discussed
above. The net gain/loss on sale of loans showed a loss of $249,661 during the
nine months ended December 31, 1998, compared to a loss of $236,534 in the prior
period. The net profit on the sale of loans for the nine months ending December
31, 1998, inclusive of the deferred fee recognition, was $114,365. The net
gain/loss on sale of investment securities decreased 27.92% to $304,866 from
$422,949. The gains during both of these periods can be attributed primarily to
the sale of selected common stocks from the Bank's portfolio. Other non
interest income for the nine months ended December 31, 1998 increased 42.72% to
$274,740 from $192,509, due primarily to the reasons stated above in the
discussion regarding the quarterly results.
Non Interest Expense
Non interest expense for the three months ended December 31, 1998, increased
17.57% to $2,102,160 from $1,788,079. Compensation and employee benefits
increased 10.29% to $1,082,930 from $981,902 due primarily to the overall
growth of the Bank. Building occupancy for the quarter ended December 31, 1998,
increased 10.85% to $315,501 from $284,616. The Bank's FDIC insurance expense
for the quarter ended December 31, 1998 was little changed at $13,976, compared
to $13,704 paid in the quarter one year ago. Data processing increased 17.14% to
$136,902 for the quarter ended December 31, 1998, from $116,875, due primarily
to the overall growth of the Bank. Advertising expenses increased 9.55% to
$103,086 for the quarter, from $94,097. Other non interest expenses increased
51.49% to $449,765 from $296,885, due to the overall growth of the Bank and
expenses related to upgrading the Bank's computer systems.
Non interest expense for the nine months ended December 31, 1998, increased
9.34% to $6,074,863 from $5,556,019. Compensation and employee benefits
increased 5.27% to $3,153,131 from $2,995,387. Building occupancy expenses for
the nine months increased 8.21% to $914,522 from $845,166. FDIC insurance
expenses were basically unchanged for the nine month period ended December 31,
1998, at $40,786 compared to $40,622 for the prior period. Data processing
expenses increased 16.57% to $390,142 from $334,695, due primarily to the growth
of the Bank. Advertising expenses for the nine month period ended December 31,
1998 increased 5.19% to $317,700 from $302,016. Other expenses increased 21.24%
for the nine-month period to $1,258,582 from $1,038,133. The primary reasons
for these differences was 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 past several months, the Bank has replaced or upgraded
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
all the new computers being purchased will be tested for Year 2000 compliance.
The Bank also conducted an extensive test of its interface with its service
provider, Fiserv, in December 1998. The test was successful and produced very
satisfactory results. Based on these results, management does not feel that
there are any serious problems relating to Year 2000 that would impact the
Bank's ability to deliver products and services to our customers. The Bank will
also have the opportunity to perform additional tests with Fiserv in April 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 contines to prepare for the turn of the century.
Costs associated with Year 2000 compliance testing were under $30,000 for the
nine months ended December 31, 1998. Any future expenses relating to Year 2000
are not anticipated to have a material impact on the Bank's financial
statements.
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.
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 of the protections of
the safe harbor provisions of said Act, 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 delinquency 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
January 22, 1999 - Announcement of signing of Definitive Agreement
to merge with Bellingham Bancorporation
<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 11, 1998
<PAGE>
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