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, 2000
------------------
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
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 September 30, 2000, 7,798,891 common shares, $1.00 par value, were
outstanding.
1
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HORIZON FINANCIAL CORP.
INDEX PAGE
----- ----
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
Independent Accountant's Report 3
Consolidated Statements of Financial Condition 4
Consolidated Statements of Income 5-6
Consolidated Statements of Stockholders' Equity 7
Consolidated Statements of Cash Flows 8
Notes to Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
PART II OTHER INFORMATION
Item 1 Legal Proceedings 16
Item 2 Changes in Securities 16
Item 3 Defaults Upon Senior Securities 16
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 5 Other Information 16
Item 6 Exhibits and Reports on Form 8-K 16
SIGNATURES
2
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INDEPENDENT ACCOUNTANT'S REPORT
Board of Directors and Stockholders'
Horizon Financial Corp.
We have reviewed the accompanying consolidated statements of financial
condition of Horizon Financial Corp. and subsidiaries as of September 30,
2000, and the related consolidated statements of income, stockholders' equity,
and cash flows for the three and six months ended September 30, 2000. These
financial statements are the responsibility of Horizon Financial Corp.'s
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statements of financial condition of Horizon
Financial Corp. and subsidiaries as of March 31, 2000, and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended (which are not presented herein), and in our report dated
April 25, 2000, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated statements of financial condition as of March 31,
2000, is fairly presented, in all material respects, in relation to the
consolidated statements of financial condition from which it has been derived.
/s/ Moss Adams LLP
Bellingham, Washington
November 1, 2000
3
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HORIZON FINANCIAL CORP.
Consolidated Statements of Financial Condition (unaudited)
ASSETS
September 30, March 31,
2000 2000
(unaudited)
------------ ------------
Cash and cash equivalents $ 10,960,764 $ 16,043,055
Interest-bearing deposits 5,118,522 3,960,522
Investment securities
Available-for-sale 19,302,546 14,203,332
Held-to-maturity 868,899 868,764
Mortgage-backed securities
Available-for-sale 60,135,702 50,796,431
Held-to-maturity 7,340,556 8,248,627
Federal Home Loan Bank Stock 5,646,100 5,254,200
Loans receivable 603,851,914 589,583,539
Accrued interest and dividends receivable 4,758,243 4,391,961
Bank premises and equipment, net 15,739,589 16,192,154
Goodwill, net 602,740 631,442
Income tax receivable 54,537 316,328
Real estate owned - 323,468
Other assets 3,070,084 3,100,220
------------ ------------
TOTAL ASSETS $737,450,196 $713,914,043
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $579,463,556 $564,327,085
Accounts payable and other liabilities 8,258,417 9,982,464
Securities sold under agreements to repurchase 18,221,000 17,853,000
Other borrowed funds 32,000,000 22,000,000
Advances by borrowers for taxes and insurance 1,519,655 1,083,905
Net deferred income tax liabilities 1,989,807 1,365,123
Deferred compensation 1,418,963 1,367,475
------------ ------------
Total liabilities 642,871,398 617,979,052
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Serial preferred stock, $1 par value,
10,000,000 shares authorized; none
issued or outstanding - -
Common stock, $1 par value, 30,000,000
shares authorized; 8,658,991 and 8,642,571
issued and outstanding, respectively 8,658,991 8,642,571
Additional paid-in capital 57,470,528 57,372,024
Retained earnings 35,539,585 33,325,068
Unearned ESOP shares (432,621) (432,621)
Accumulated other comprehensive income 1,931,381 718,759
Treasury stock, 860,100 and 366,000 shares,
at cost (8,589,066) (3,690,810)
------------ ------------
Total stockholders' equity 94,578,798 95,934,991
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $737,450,196 $713,914,043
============ ============
(See Notes to Financial Statements)
4
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HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
3 months ended
September 30,
2000 1999
----------- -----------
INTEREST INCOME
Interest on loans $12,270,764 $10,817,675
Investment and mortgage-backed securities 1,710,962 1,391,857
----------- -----------
Total interest income 13,981,726 12,209,532
----------- -----------
INTEREST EXPENSE
Interest on deposits 7,277,612 5,986,201
Interest on other borrowings 782,147 339,702
----------- -----------
Total interest expense 8,059,759 6,325,903
----------- -----------
Net interest income 5,921,967 5,883,629
PROVISION FOR LOAN LOSSES 45,000 36,000
----------- -----------
Net interest income after provision for
loan losses 5,876,967 5,847,629
----------- -----------
NONINTEREST INCOME
Service fees 472,209 428,061
Other 230,559 146,255
Net gain (loss) on sales of loans (18,945) 0
Net gain on sale of investment securities 5,654 2,237
----------- -----------
Total noninterest income 689,477 576,553
----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 1,788,899 1,660,091
Building occupancy 560,311 522,064
Other expenses 738,383 592,510
Data processing 224,661 191,143
Advertising 192,946 116,335
----------- -----------
Total noninterest expense 3,505,200 3,082,143
----------- -----------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAX 3,061,244 3,342,039
PROVISION FOR INCOME TAX 1,041,319 1,188,269
----------- -----------
NET INCOME $ 2,019,925 $ 2,153,770
=========== ===========
BASIC EARNINGS PER SHARE $ .25 $ .25
===== =====
DILUTED EARNINGS PER SHARE $ .25 $ .25
===== =====
(See Notes to Financial Statements)
5
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HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
6 months ended
September 30,
2000 1999
----------- -----------
INTEREST INCOME
Interest on loans $24,118,723 $21,351,456
Investment and mortgage-backed securities 3,348,728 2,958,484
----------- -----------
Total interest income 27,467,451 24,309,940
----------- -----------
INTEREST EXPENSE
Interest on deposits 14,092,566 11,974,685
Interest on other borrowings 1,535,215 651,104
----------- -----------
Total interest expense 15,627,781 12,625,789
----------- -----------
Net interest income 11,839,670 11,684,151
PROVISION FOR LOAN LOSSES 140,000 80,000
----------- -----------
Net interest income after provision for
loan losses 11,699,670 11,604,151
----------- -----------
NONINTEREST INCOME
Service fees 980,778 971,167
Other 443,332 260,708
Net gain (loss) on sales of loans (57,942) (44,641)
Net gain on sale of investment securities 38,847 187,255
----------- -----------
Total noninterest income 1,405,015 1,374,489
----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 3,605,706 3,314,129
Building occupancy 1,158,589 1,054,631
Other expenses 1,311,991 1,425,218
Data processing 446,035 496,693
Advertising 347,707 256,322
----------- -----------
Total noninterest expense 6,870,028 6,546,993
----------- -----------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAX 6,234,657 6,431,647
PROVISION FOR INCOME TAX 2,090,865 2,194,491
----------- -----------
NET INCOME $ 4,143,792 $ 4,237,156
=========== ===========
BASIC EARNINGS PER SHARE $ .51 $ .50
====== ======
DILUTED EARNINGS PER SHARE $ .51 $ .49
====== ======
(See Notes to Financial Statements)
6
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<TABLE>
HORIZON FINANCIAL CORP.
Consolidated Statements of Stockholder's Equity
6 Months Ended September 30, 2000 and 1999
(unaudited)
Common Stock
---------------------- Additional Unearned Other
Number of Paid-In Retained ESOP Comprehensive
Shares At Par Capital Earnings Shares Income (Loss)
---------- --------- ---------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1999
8,491,523 8,491,523 56,459,066 28,638,576 (350,000) 3,201,816
Comprehensive income
Net income - - - 4,237,156 - -
Other comprehensive income
Change in unrealized gains
on available-for-sale
securities, net taxes
of $(713,029) - - - - - (1,384,115)
Total other
comprehensive income - - - - - -
Comprehensive income - - - - - -
Unearned ESOP shares - - - - (154,725) -
Cash dividends on common
stock at $.23 per share - - - (1,965,050) - -
Dividend reinvestment plan 19,376 19,376 217,380 - - -
Stock options exercised 48,148 48,148 269,505 - - -
Treasury stock purchased - - - - - -
--------- ---------- ----------- ----------- --------- ----------
BALANCE,
September 30, 1999 8,559,047 $8,559,047 $56,945,951 $30,910,682 $(504,725) $1,817,701
========= ========== =========== =========== ========= ==========
BALANCE, March 31, 2000 8,642,571 $8,642,571 $57,372,024 33,325,068 (432,621) 718,759
Comprehensive income
Net income - - - 4,143,792 - -
Other comprehensive income
Change in unrealized gains
on available-for-sale
securities, net taxes of
$ 624,684 - - - - - 1,212,622
Total other
comprehensive income - - - - - -
Comprehensive income - - - - - -
Cash dividends on common
stock at $.24 per share - - - (1,929,275) - -
Stock options exercised 16,420 16,420 98,504 - - -
Treasury stock purchased - - - - - -
---------- ---------- ----------- ----------- --------- ----------
BALANCE,
September 30, 2000 8,658,991 $8,658,991 $57,470,528 $35,539,585 $(432,621) $1,931,381
========== ========== =========== =========== ========= ==========
</TABLE>
<TABLE>
Treasury Total
Stock Stockholders' Comprehensive
at Cost Equity Income
---------- ------------- ---------
<S> <C> <C> <C>
BALANCE, March 31, 1999 - 96,440,981
Comprehensive income
Net income - 4,237,156 $ 4,237,156
Other comprehensive income
Change in unrealized gains
on available-for-sale
securities, net taxes of $(713,029) - (1,384,115) (1,384,115)
-----------
Total other comprehensive income - - (1,384,115)
-----------
Comprehensive income - - $ 2,853,041
===========
Unearned ESOP shares - (154,725)
Cash dividends on common stock
at $.23 per share - (1,965,050)
Dividend reinvestment plan - 236,756
Stock options exercised - 317,653
Treasury stock purchased - -
---------- -----------
BALANCE, September 30, 1999 $ - $97,728,656
========== ===========
BALANCE, March 31, 2000 (3,690,810) 95,934,991
Comprehensive income
Net income - 4,143,792 $ 4,143,792
Other comprehensive income
Change in unrealized gains
on available-for-sale securities,
net taxes of $ 624,684 - 1,212,622 1,212,622
-----------
Total other comprehensive income - - 1,212,622
-----------
Comprehensive income - - $ 5,356,414
===========
Cash dividends on common stock
at $.24 per share - (1,929,275)
Stock options exercised - 114,924
Treasury stock purchased (4,898,256) (4,898,256)
----------- ----------
BALANCE, September 30, 2000 $(8,589,066) $94,578,798
=========== ===========
</TABLE>
(See Notes to Financial Statements)
7
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HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
6 Months Ended
September 30,
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,143,792 $ 4,237,156
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 782,876 647,839
Stock dividends - Federal Home Loan Bank stock (174,000) (17,900)
Provision for loan losses 140,000 80,000
Changes in assets and liabilities
Interest and dividends receivable (366,282) (425,088)
Interest payable 98,139 92,853
Federal income tax (receivable) payable 261,791 (583,125)
Goodwill 28,702 28,702
Other assets 30,136 225,345
Other liabilities (1,334,948) 647,800
----------- -----------
Net cash flows from operating activities 3,610,206 4,933,582
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in interest-bearing deposits, net (1,158,000) 4,344,982
Purchases of investment securities
available-for-sale (7,312,429) (6,280,000)
Proceeds from sales and maturities of
investment securities - available-for-sale 3,118,993 11,901,997
Proceeds from maturities of investment
securities - held-to-maturity - 25,982
Purchases of mortgage-backed securities
available-for-sale (102,333) -
Proceeds from maturities of mortgage-backed
securities - available-for-sale 13,398,031 3,144,244
Proceeds from maturities of mortgage-backed
securities - held-to-maturity 908,071 1,824,302
Purchase of Federal Home Loan Bank stock (217,900) -
Net change in loans (36,281,409) (29,123,338)
Purchases of bank premises and equipment (160,853) (2,832,295)
Sale of other real estate owned 323,468 (323,468)
----------- ------------
Net cash flows from investing activities (27,484,361) (17,317,594)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 15,136,471 109,883
Net change in borrowed funds 10,368,000 14,171,849
Common stock issued, net 114,924 554,409
Cash dividends paid (1,929,275) (1,965,050)
Treasury stock purchased (4,898,256) -
----------- ------------
Net cash flows from financing activities 18,791,864 12,871,091
----------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (5,082,291) 487,079
CASH AND CASH EQUIVALENTS, beginning of period 16,043,055 10,889,530
----------- ------------
CASH AND CASH EQUIVALENTS, end of period $10,960,764 $ 11,376,609
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest $15,529,642 $ 12,548,501
=========== ============
Cash paid during the period for income tax $ 1,930,000 $ 2,760,000
=========== ============
(See Notes to Financial Statements)
8
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HORIZON FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2000
(unaudited)
NOTE A - Basis of Presentation
------------------------------
The consolidated financial statements for the three months and six months
ended September 30, 2000, include the accounts of Horizon Financial Corp. (the
Corporation), Horizon Bank (the Bank), and other subsidiaries of the Bank.
Significant intercompany balances and transactions have been eliminated in
consolidation. The Corporation has engaged in no significant activity other
than holding the stock of the Bank.
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect amounts reported in the consolidated
financial statements. Changes in these estimates and assumptions are
considered reasonably possible and may have a material impact on the financial
statements and thus actual results could differ from the amounts reported and
disclosed herein.
The unaudited consolidated financial statements have been prepared in
accordance with generally 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, 2000 and 1999 are not
necessarily indicative of the operating results for the full year. For
further information, refer to the consolidated financial statements and
footnotes thereto in the Horizon Financial Corp. annual report for the year
ended March 31, 2000.
NOTE B - Reclassification
-------------------------
Certain reclassifications have been made to prior financial statements to
conform with current presentation. Such reclassifications have no effect on
net income.
NOTE C - Net Income Per Share
-----------------------------
Basic earnings per share for the three months ended September 30, 2000 and
1999 are calculated on the basis of 8,196,571 and 8,542,973 weighted average
shares outstanding. Diluted earnings per share for the three months ended
September 30, 2000 and 1999 are calculated on the basis of 8,223,628 and
8,647,037 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 and warrants under the treasury stock
method.
9
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HORIZON FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Forward Looking Statements
--------------------------
Management's Discussion and Analysis and other portions of this report contain
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 Financial to the protections of such safe harbor
provisions of said Act with respect to all "forward looking statements."
Horizon Financial has used "forward looking statements" to describe future
plans and strategies, including expectations of Horizon Financial'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 affect 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.
General
-------
The Corporation was formed under Washington law on May 22, 1995, and became
the holding company of the Bank, effective October 13, 1995. Effective
September 19, 1999 the Corporation completed the acquisition of Bellingham
Bancorporation, whose wholly-owned subsidiary, Bank of Bellingham, was merged
with and into Horizon Bank. At September 30, 2000, the Corporation had total
assets of $737.5 million, total deposits of $579.5 million and total equity of
$94.6 million. The Corporation's business activities generally are limited to
passive investment activities and oversight of its investment in the Bank.
Accordingly, the information set forth herein, including the consolidated
financial statements and related data, relates primarily to the Bank and its
subsidiary.
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 under the name "Horizon
Bank, a savings bank". The Bank became a member of the Federal Home Loan Bank
("FHLB") of Seattle in December 1998. Effective March 1, 2000, the Bank
changed its name to "Horizon Bank".
The Bank's operations are conducted through 15 full-service office facilities,
located in Whatcom, Skagit and Snohomish counties in Northwest Washington.
The acquisition of Bellingham Bancorporation increased Horizon Financial's and
Horizon Bank's presence in Whatcom County. During fiscal 2000, the Bank
opened an additional office in Whatcom County, located in the Barkley Village
area of Bellingham, in the northeast portion of the city. In addition to
serving the growing population in this area, this new office (approximately
15,000 square feet) serves as an operation center to support additional growth
for the Corporation. The Bank also completed construction of a new office
building at Murphy's Corner near Mill Creek, which replaced the bank's leased
location in that area. During fiscal 2000, the Bank purchased a bank site in
Marysville, which will provide
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additional growth opportunities. The Bank's management continues to research
sites for future development, with emphasis on locations in the growing
Snohomish County markets.
At its January 19, 2000 meeting, the Board of Directors authorized the
repurchase of up to 10% (approximately 863,000 shares) of the Corporation's
outstanding Common Stock over a 24 month period. During the fiscal year ended
March 31, 2000, the Corporation repurchased 366,000 shares of its Common
Stock, compared to the repurchase of 13,900 shares of Common Stock during the
prior year. The Corporation had authorized a repurchase plan in March 1998,
which was 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. During the six months ended September 30,
2000, the Corporation repurchased 494,100 shares of its Common Stock which
fulfilled the existing plan.
At its October 24, 2000 meeting, the Board of Directors authorized a new
repurchase plan, allowing the repurchase of up to 10% (approximately 780,000
shares) of the Corporation's outstanding Common Stock over a 24 month period.
Acquisition
-----------
On June 19, 1999, the Corporation completed the acquisition of Bellingham
Bancorporation, a Washington corporation, headquartered in Bellingham,
Washington. The acquisition was accomplished in an all stock transaction
valued at approximately $15.5 million, including the assumption of outstanding
Bellingham Bancorporation stock options and warrants. The Corporation
exchanged 2.74 shares of its Common Stock for each Bellingham Bancorporation
share. In this regard, Horizon Financial issued approximately 1,129,264
shares of its Common Stock in the transaction. The acquisition was accounted
for as a pooling of interests.
Prior to the acquisition, Bellingham Bancorporation was a $64.3 million bank
holding company for the Bank of Bellingham, its primary subsidiary. The Bank
of Bellingham was founded in 1992 by a group of local business people for the
purpose of providing commercial banking services to the local community, and
operated three full-service banking facilities in Bellingham.
Operating Strategy
-------------------
The primary business of the Bank is to acquire funds in the form of savings
deposits and wholesale funds, and to use the funds to make consumer, real
estate, and commercial loans in the Bank's primary market area. In addition,
the Bank invests in U.S. Government and federal agency obligations,
mortgage-backed securities, and municipal securities. The Bank intends to
continue to fund its assets primarily with retail deposits, although FHLB
advances, and other wholesale borrowings, may be used as a supplemental source
of funds.
The Bank's profitability depends primarily on its net interest income, which
is the difference between the income it receives on its loan and investment
portfolio and its cost of funds, which consists of interest paid on deposits.
Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-
earning assets equal or exceed interest-bearing liabilities, any positive
interest rate spread will generate net interest income. The Bank's
profitability is also affected by the level of other income and expenses.
Other income includes income associated with the origination and sale of
mortgage loans, loan servicing fees, and net gains and losses on sales of
interest-earning assets. Other expenses include compensation and benefits,
11
<PAGE>
occupancy and equipment expenses, deposit insurance premiums, data servicing
expenses and other operating costs. The Bank's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government legislation and
regulation and monetary and fiscal policies.
The Bank's business strategy is to operate as a well-capitalized, profitable
and independent community bank, dedicated to commercial lending, home mortgage
lending, consumer lending, small business lending and providing quality
financial services to local personal and business customers. The Bank has
sought to implement this strategy by: (i) focusing on commercial banking
opportunities, subsequent to its acquisition of a commercial bank in 1999;
(ii) continuing efforts towards the origination of residential mortgage loans,
including one- to- four family residential construction loans; (iii) providing
high quality, personalized financial services to individuals and business
customers and communities served by its branch network; (iv) selling fixed
rate mortgages to the secondary market on a servicing-retained basis, thereby
increasing the loan servicing portfolio and income; (v) improving asset
quality; (vi) containing operating expenses; and (vii) maintaining capital in
excess of regulatory requirements combined with prudent growth.
Financial Condition
-------------------
Total consolidated assets for the Corporation as of September 30, 2000, were
$737,450,196, a 3.30% increase from the March 31, 2000, level of $713,914,043.
This increase in assets was due primarily to the growth in loans receivable
which increased 2.42% to $603,851,914 from $589,583,539 at March 31, 2000.
Total liabilities increased 4.03% to $642,871,398 at September 30, 2000, from
$617,979,052 at March 31, 2000. This increase in liabilities was due in large
part to the growth in deposits, which increased 2.68% to $579,463,556 at
September 30, 2000 from $564,327,085 at March 31, 2000. In addition, the
Bank's balance sheet included $50,221,000 in borrowed funds, compared to
$39,853,000 at March 31, 2000. Stockholders' equity showed a small decrease
to $94,578,798 at September 30, 2000, from $95,934,991 at March 31, 2000 due
primarily to the purchase of 494,100 shares of treasury stock for $4,898,256.
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, 2000, the Bank had liquid
assets (cash and marketable securities with maturities of one year or less)
with a book value of $26,680,774.
As of September 30, 2000, the total book value of investments and
mortgage-backed securities was $84,721,367 compared to a market value of
$87,653,191, resulting in an unrealized gain of $2,931,824. On March 31,
2000, the book value of investments and mortgage-backed securities was
$76,988,646 compared to a market value of $77,951,531 resulting in an
unrealized gain of $962,885. The primary reason for this difference at
September 30, 2000 compared to March 31, 2000 was the improved valuation of
the bank's mortgage-backed securities and common stock holdings.
The Bank's primary sources of funds are cash flow from operations, which
consist mainly of mortgage loan repayments; deposit increases; loan sales;
borrowings; and cash received from the maturity or sale of investment
securities. 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
12
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market; 2) entering into reverse repurchase agreements; 3) borrowing from the
Federal Home Loan Bank of Seattle; 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 as of September 30, 2000 was $94,578,798 or 12.83% of
assets, compared to $95,934,991 or 13.44% of assets at March 31, 2000. The
Bank continues to exceed the 5.0% minimum tier one capital required by the
FDIC in order to be considered well capitalized. The Bank's total
risk-adjusted capital ratio as of September 30, 2000 was 21.32%, compared to
March 31, 2000 of 22.93%. These figures are well above the well-capitalized
minimum of 10% required by the FDIC.
Comparative Results of Operations
For the Three Months and Six Months Ended
September 30, 2000 and 1999
Net Interest Income
-------------------
Net interest income for the three months ended September 30, 2000, increased
slightly to $5,921,967 from $5,883,629 in the same time period of the previous
year. Interest on loans for the quarter ended September 30, 2000, increased
13.43% to $12,270,764, from $10,817,675. This increase was due primarily to
an increasing rate environment, an increase in loans receivable, and an
overall effort to shift the concentration of loans receivable from primarily
residential first mortgages to commercial loans. Interest and dividends on
investments and mortgage-backed securities increased 22.93% to $1,710,962,
from $1,391,857 for the comparable quarter a year ago. This increase is
primarily attributable to the securitization of approximately $20 million in
mortgage loans towards the end of the first quarter of fiscal 2001 which
increased the bank's mortgage-backed securities portfolio. Total interest
income increased 14.51% to $13,981,726 from $12,209,532 due to the reasons
stated above.
Total interest paid on deposits increased 21.57% to $7,277,612 from
$5,986,201. This increase in interest expense is due to an overall growth in
deposits and a higher interest rate environment especially at the short end of
the yield curve, which greatly affects the rates paid by the Bank to attract
and retain deposits. Interest on borrowings increased to $782,147 during the
quarter, compared to $339,702 for the comparable period one year ago, due to a
higher level of borrowings outstanding and the increase in rates mentioned
above. During the quarter, the bank continued to carry wholesale borrowings
in order to further leverage its balance sheet and better manage its interest
rate risk profile.
Net interest income for the six-month period ended September 30, 2000
increased slightly to $11,839,670 from $11,684,151 for the comparable period
one year ago. Total interest income increased 12.99% to $27,467,451 from
$24,309,940, due primarily to the shift in interest earning assets as
mentioned above. Total interest expense for the six-month period increased
23.78% to $15,627,781 from $12,625,789 due to reasons stated above.
Provision for losses on loans
-----------------------------
The provision for losses on loans for the three months ended September 30,
2000, increased 25.00% to $45,000 from $36,000 in the same time period of the
previous year. At September 30, 2000, the loan loss reserve balance was
$4,807,054. This represents .80% of loans receivable, compared to .82% as
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of September 30, 1999. The Bank's management considers this to be an
adequate level of reserves at this time.
As of September 30, 2000, the Bank had $1,149,288, in loans over 90 days
delinquent, of which approximately $1 million was secured by residential and
commercial real estate, compared to $254,364 at September 30, 1999. This is
due in part to the changing mix of loans on the Bank's balance sheet, which
now includes more commercial, consumer, VISA and other unsecured loans.
Noninterest Income
-------------------
Noninterest income for the three months ended September 30, 2000, increased
19.59% to $689,477 from $576,553 for the same time period a year ago. Service
fee income increased 10.31% to $472,209 from $428,061. The net gain/loss on
the sale of loans showed a loss of $18,945 during the quarter, compared to a
loss of $-0- in the comparable period one year ago. When the Bank sells loans,
the remaining outstanding fees associated with these mortgages flow to the
income statement as interest income. The proceeds directly related to the
loan balances, however, are reflected as noninterest income. Therefore, even
when the sale of loans generate an overall profit to the Bank (including the
recognition of the fee income), the noninterest portion of the sale reflects a
loss, due to the pricing of the loans at the time of the sale. The net
gain/loss on sales of investment securities increased slightly to $5,654 for
the quarter ended September 30, 2000 from $2,237 for the comparable period one
year ago. Other noninterest income for the quarter increased 57.64% to
$230,559 from $146,255 due primarily to the receipt of approximately $125,000
for a trademark infringement settlement.
Noninterest income for the six months ended September 30, 2000 increased 2.22%
to $1,405,015 from $1,374,489. The net gain/loss on sale of loans showed a
loss of $57,942 during the six-months ended September 30, 2000, compared to a
loss of $44,641 in the prior period. The net gain/loss on sales of investment
securities decreased 79.25% to $38,847 from $187,255 for the comparable period
one year ago. The gains in the prior period were due primarily to the sale of
selected common stocks and mortgage backed securities from the Bank's
investment portfolio. Other noninterest income for the six-month period
increased 70.05% to $443,332 from $260,708, due primarily to the reasons
stated in the discussion above regarding the trademark infringement settlement
and the reversal of a REO reserve during the first quarter fiscal 2001 which
was determined to not be necessary after the sale of the property.
Noninterest Expense
--------------------
Noninterest expense for the three months ended September 30, 2000, increased
13.73% to $3,505,200 from $3,082,143. Compensation and employee benefits
increased 7.76% for the quarter ended September 30, 2000, to $1,788,899 from
$1,660,091. This is due primarily to the overall growth in employment at the
Bank from the prior year period. Building occupancy for the quarter ended
September 30, 2000 increased 7.33% to $560,311 from $522,064. Factors
contributing to this increase include: a new office in Bellingham opened
November 1999; a new office in Murphy's Corner, opened in February 2000; and
technology upgrades implemented over the past year. Data processing expenses
increased 17.54% to $224,661 from $191,143. Advertising expenses for the
quarter ended September 30, 2000 increased 65.85% to 192,946 from 116,335.
This increase is due primarily to the Bank's additional marketing efforts to
communicate its expanded commercial product lines and services. Other
noninterest expenses increased 24.62% to $738,383 from $592,510. Factors
contributing to this increase include legal expenses related to trademark
infringement suits and an
14
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increased mortgage servicing portfolio which results in increased amortization
of the associated mortgage servicing asset.
Noninterest expense for the six months ended September 30, 2000 increased
4.93% to $6,870,028 from $6,546,993. Compensation and employee benefits
increased 8.80% to $3,605,706 from $3,314,129. Building occupancy expenses
for the six months increased 9.86% to $1,158,589 from $1,054,631. Other
expenses decreased 7.94% to $1,311,991 at September 30, 2000 compared to
$1,425,218 for the prior period due primarily to the reasons stated in the
discussion above regarding the quarterly results and approximately $275,000 in
one time merger related expenses recognized during the prior period.
15
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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
(a) Exhibits
--------
(3.1) Articles of Incorporation of Horizon Financial, Corp.
(incorporated by reference to Exhibit 3.1 to the Registrant's
Current Report on Form 8-K dated October 13, 1995)
(3.2) Bylaws of Horizon Financial Corp. (incorporated by reference to
Exhibit 3.2 to the Registrant's Current Report on Form 8-K dated
October 13, 1995)
(10.1) Amended and Restated Employment Agreement with V. Lawrence Evans
(incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended March 31, 1996)
(10.2) Deferred Compensation Plan (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year ended March
31, 1996)
(10.3) 1986 Stock Option and Incentive Plan (incorporated by reference
to Exhibit 99.1 to the Registrant's Registration Statement on
Form S-8 (File No. 33-99780))
(10.4) 1995 Stock Option Plan (incorporated by reference to Exhibit 99.2
to the Registrant's Registration Statement on Form S-8 (File No.
33-99780))
(21) Subsidiaries of the Registrant (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 2000)
(27) Financial Data Schedule
(b) Reports on Form 8-K:
--------------------
None
16
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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 10, 2000
----------------------
17
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Exhibit 27
Financial Data Schedule
This schedule contains financial information extracted from the consolidated
financial statements of Horizon Financial Corp. for the year ended September
30, 2000 and is qualified in its entirety by reference to such financial
statements.
Financial Data
as of or for the year
Item Number ended September 30, 2000 Item Description
----------- ------------------------ ----------------
9-03(1) 10,960,764 Cash and due from the Banks
9-03(2) 5,118,522 Interest-bearing deposits
9-03(3) -- Federal funds sold - purchased
securities for resale
9-03(4) -- Trading account assets
9-03(6) 79,438,248 Investment and mortgage backed
securities held for sale
9-03(6) 8,209,455 Investment and mortgage backed
securities held to maturity
- carrying value
9-03(6) 8,214,943 Investment and mortgage backed
securities held to maturity
- market value
9-03(7) 603,851,914 Loans
9-03(7)(2) 4,807,054 Allowance for losses
9-03(11) 737,450,196 Total assets
9-03(12) 579,463,556 Deposits
9-03(13) 48,221,000 Short-term borrowings
9-03(15) 8,258,417 Other liabilities
9-03(16) 2,000,000 Long-term debt
9-03(19) -- Preferred stock - mandatory
redemption
9-03(20) -- Preferred stock - no mandatory
redemption
9-03(21) 8,658,991 Common stocks
9-03(22) 85,919,807 Other stockholders' equity
9-03(23) 737,450,196 Total liabilities and
stockholders' equity
9-04(1) 24,118,723 Interest and fees on loans
9-04(2) 3,348,728 Interest and dividends on
investments
9-04(4) -- Other interest income
9-04(5) 27,467,451 Total interest income
9-04(6) 14,092,566 Interest on deposits
9-04(9) 15,627,781 Total interest expense
9-04(10) 11,839,670 Net interest income
9-04(11) 140,000 Provision for loan losses
9-04(13)(h) 38,847 Investment securities
gains/(losses)
9-04(14) 6,870,028 Other expenses
9-04(15) 6,234,657 Income/loss before income tax
9-04(17) 6,234,657 Income/loss before extraordinary
items
9-04(18) -- Extraordinary items, less tax
9-04(19) -- Cumulative change in accounting
principles
9-04(20) 4,143,792 Net income or loss
9-04(21) .51 Earnings per share - basic
9-04(21) .51 Earnings per share - diluted
I.B.5 7.99 Net yield - interest earning
assets - actual
III.C.1.(a) 2,622 Loans on non-accrual
III.C.1.(b) 1,146,666 Accruing loans past due 90 days
or more
III.C.2.(c) -- Troubled debt restructuring
III.C.2 -- Potential problem loans
IV.A.1 4,757,152 Allowance for loan loss -
beginning of period
IV.A.2 40,629 Total chargeoffs
IV.A.3 531 Total recoveries
IV.A.4 4,807,054 Allowance for loan loss - end of
period
IV.B.1 1,210,000 Loan loss allowance to allocated
to domestic loans
IV.B.2 -- Loan loss allowance to foreign
loans
IV.B.3 3,597,054 Loan loss allowance - unallocated
<PAGE>
