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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-24036
HORIZON FINANCIAL SERVICES CORPORATION
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(Name of small business issuer in its charter)
Delaware 42-1419757
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
301 First Avenue East, Oskaloosa, Iowa 52577-0008
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (515) 673-8328
-------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
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 .
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
State the issuer's revenues for its most recent fiscal year:
$6,332,729.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the closing bid and
asked price of such stock as reported on the Nasdaq System as of September 12,
1997, was $6.4 million. (The exclusion from such amount of the market value of
the shares owned by any person shall not be deemed an admission by the
registrant that such person is an affiliate of the registrant.)
As of September 12, 1997, there were issued and outstanding 425,540
shares of the Registrant's Common Stock
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Annual Report to Stockholders for the fiscal
year ended June 30, 1997.
Part III of Form 10-KSB - Proxy Statement for the Annual Meeting of
Stockholders held in October 1997.
Transitional Small Business Disclosure Format: YES ; NO X .
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PART I
Item 1. Description of Business
General
The Company. Horizon Financial Services Corporation (the "Company"), a
Delaware corporation, was formed in March 1994 to act as the holding company
for Horizon Federal Savings Bank ("Horizon Federal" or the "Bank") upon the
Bank's conversion from the mutual to the stock form (the "Conversion"), which
occurred on June 28, 1994. On that date, the Company issued 506,017 shares of
common stock at a price of $10.00 per share in the Conversion. All references
to the Company, unless otherwise indicated, at or before June 28, 1994 are to
the Bank and its subsidiary on a consolidated basis. The Company's common
stock trades on the Nasdaq SmallCap Market under the Symbol "HZFS".
At June 30, 1997, the Company had $86.0 million of assets and
stockholders' equity of $8.4 million (or 9.8% of total assets).
The executive offices of the Company are located at 301 First Avenue
East, Oskaloosa, Iowa 52577, and its telephone number at that address is
(515) 673-8328.
Horizon Federal. Horizon Federal, a wholly-owned subsidiary of the
Company, is a federally chartered stock savings bank headquartered in
Oskaloosa, Iowa. Its deposits are insured up to applicable limits, by the
Federal Deposit Insurance Corporation (the "FDIC"), which is backed by the
full faith and credit of the United States. Horizon Federal's primary market
area covers Mahaska County, that portion of Marion County in and around
Knoxville, Iowa and to a lesser extent, Wapello County, Iowa. The Bank
services its market area through its three full service offices, two of which
are located in Oskaloosa, Iowa and one which is located in Knoxville, Iowa.
The principal business of the Bank consists of attracting deposits
from the general public and using such deposits, together with borrowings and
other funds, primarily to originate one- to four-family residential mortgage
loans. To a lesser extent, the Bank also originates consumer loans, commercial
business loans, multi-family and commercial real estate loans and residential
construction loans. The Bank also invests in mortgage-backed and related
securities, as well as investment securities. See "Business of the Bank -
Originations of Loans and Mortgage-Backed Securities." At June 30, 1997,
substantially all of the Bank's real estate mortgage loans (excluding
mortgage-backed securities) were secured by properties located in Iowa.
The Bank's revenues are derived principally from interest on mortgage
loans and securities, gains from sales of securities, service fee income and
dividends on FHLB stock. The Bank does not originate loans to fund leveraged
buyouts and has no loans to non-United States corporations or foreign
governments.
The Bank currently offers a variety of deposit accounts having a wide
range of interest rates and terms. The Bank's deposits include commercial
demand, savings, checking, money market and certificate accounts. The Bank
only solicits deposits in its primary market area and does not accept brokered
deposits.
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Horizon Federal's operations are materially affected by general
economic conditions, the monetary and fiscal policies of the federal
government and the policies of the various regulatory authorities, including
the Office of Thrift Supervision ("OTS") and the Board of Governors of the
Federal Reserve System ("Federal Reserve Board").
During fiscal 1995, the Company entered into a joint venture low
income apartment housing project to take advantage of certain tax benefits
available under Section 42 of the Internal Revenue Code of 1986, as amended.
The apartment housing project is composed of 62 units and is located in Des
Moines, Iowa. At June 30, 1997, the apartment complex was 94% leased. At June
30, 1997, the Company's equity investment in the project was $208,000,
representing a 16.5% limited partnership interest in the project. The Company
will receive tax credits of approximately $42,000 per year through 2005.
Forward-Looking Statements
When used in this Annual Report on Form 10-KSB or future filings by
the Company with the Securities and Exchange Commission, in the Company's
press releases or other public or shareholder communications, or in oral
statements made with the approval of an authorized executive officer, the
words or phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project", "believe" or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made, and to advise readers that
various factors--including regional and national economic conditions, changes
in levels of market interest rates, credit risks of lending activities, and
competitive and regulatory factors--could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from those anticipated or projected.
The Company does not undertake--and specifically disclaims any
obligation--to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
Market Area
Horizon Federal primarily serves Mahaska County and that portion of
Marion County in and around Knoxville, Iowa. The Bank has three offices, two
of which are located in Oskaloosa, Iowa and one which is located in Knoxville,
Iowa, approximately 25 miles west of Oskaloosa. The Bank competes in loan
originations and in deposit gathering activities with the eleven financial
institutions and three credit unions serving its primary market area. See " -
Competition." The Bank estimates its share of the savings market in its
primary market area to be approximately 10%.
Oskaloosa, Iowa is located in Mahaska County, approximately 60 miles
southeast of Des Moines, Iowa. Mahaska County has a population of
approximately 22,000 people. Oskaloosa, with a current population of
approximately 10,500 persons, is the county seat and the largest city in
Mahaska County. Oskaloosa has a mostly agricultural economy and, to a lesser
extent, light industrial and retail economies. Its light industrial economy,
however, is mainly agricultural support. Major employers in the area include
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the Clow Valve Company, the Pella Corporation, Cargill, Vermeer Manufacturing,
the V.A. Medical Center, 3-M Company, William Penn College and the Mahaska
County Hospital.
Lending Activities of the Bank
General. Historically, the Bank originated fixed-rate one- to
four-family mortgage loans. Since the early 1980s, however, the Bank has
emphasized, subject to market conditions, the origination and holding in
portfolio of short- and intermediate-term (one, three and seven year) loans
that convert to annual adjustable-rate mortgage ("ARM") loans after their
initial period. Management's strategy has been to increase the percentage of
assets in its portfolio with more frequent repricing characteristics or
shorter maturities. During periods of low demand for one- to four-family
loans, the Bank may seek to invest in mortgage-backed and related securities.
The Bank also originates for its loan portfolio fixed-rate, first lien
mortgages with terms generally not greater than 15 years. The Bank also
originates and sells from time to time in the secondary market 15 year and 30
year fixed-rate loans.
The Bank primarily focuses its lending activities on the origination
of loans secured by first mortgages on owner-occupied, one- to four-family
residences. To a lesser extent, the Bank also originates consumer loans,
commercial business loans, commercial and multi-family real estate loans and
residential construction loans. See "- Originations of Loans and
Mortgage-Backed Securities." At June 30, 1997, the Bank's net loan portfolio
totaled $52.2 million.
Several loan officers of the Bank and all members of the Board of
Directors serve as Loan Committee members on a rotating basis. At any given
time, the approval of at least one outside director and two other members of
the Loan Committee is required to approve real estate loans of $200,000 or
more. Loan Committee approval is currently required for unsecured and secured
consumer loans of more than $80,000 and $100,000, respectively, and unsecured
and secured commercial business loans of more than $25,000 and $50,000,
respectively. The Board of Directors must approve all commercial business loans
with a balance exceeding $200,000.
The aggregate amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower, including related
entities, or the aggregate amount that the Bank can invest in any one real
estate project is, with certain exceptions, generally the greater of 15% of
unimpaired capital and surplus or $500,000. See "Regulation - Federal
Regulation of Savings Banks." At June 30, 1997, the maximum amount which the
Bank could lend to any one borrower and the borrower's related entities under
the applicable federal regulations was approximately $970,000, however, at
June 30, 1997 the Board of Director's of the Company had a self-imposed
$800,000 limit. At June 30, 1997, the Bank had two loans or groups of loans to
related borrowers with outstanding balances in excess of the Board's self
imposed limit but not in excess of regulatory limits. The largest of such
lending relationships totaled $857,000 and consisted of a $260,000 commercial
real estate loan and five loans totaling $597,000 secured by residential real
estate. The other lending relationship in excess of the Board's self imposed
limit was a $800,000 line of credit on residential real estate with an
outstanding balance of $806,000. At June 30, 1997, all of the foregoing loans
were performing in accordance with their terms.
The Bank reserves the right to change or discontinue lending programs
to respond to regulatory or competitive factors.
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Portfolio Composition. The following table presents the composition of
the Bank's loan portfolio in dollar amounts and in percentages (before
deductions for loans in process, deferred fees and discounts and allowances
for losses) as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
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1997 1996 1995
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Amount Percent Amount Percent Amount Percent
-------- -------- -------- --------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family............................ $34,625 64.9% $32,511 64.7% $ 30,849 65.4%
Commercial real estate......................... 3,944 7.4 3,801 7.5 3,900 8.2
Multi-family................................... 658 1.2 789 1.6 931 2.0
Residential construction ...................... 829 1.6 1,335 2.7 507 1.1
------- ----- ------- ----- -------- ------
Total real estate loans.................... 40,056 75.1 38,436 76.5 36,187 76.7
------- ----- ------- ----- -------- ------
Other Loans:
Consumer Loans:
Automobile.................................... 4,051 7.6 3,516 7.0 3,598 7.6
Home improvement.............................. 2,353 4.4 1,966 3.9 1,845 3.9
Deposit account............................... 222 .4 175 .4 327 .7
Other......................................... 1,541 2.9 1,428 2.8 1,406 3.0
------- ----- ------- ----- -------- ------
Total consumer loans....................... 8,167 15.3 7,085 14.1 7,176 15.2
Commercial business loans...................... 5,124 9.6 4,707 9.4 3,807 8.1
------- ----- ------- ----- -------- ------
Total other loans.......................... 13,291 24.9 11,792 23.5 10,983 23.3
------- ----- ------- ----- -------- ------
Total loans receivable, gross.............. 53,347 100.00% 50,228 100.0% 47,170 100.0%
====== ===== =====
Less:
Loans in process............................... 732 730 315
Deferred fees and discounts.................... 74 76 86
Allowance for losses........................... 348 318 291
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Total loans receivable, net.................... $52,193 $49,104 $ 46,478
======= ======= ========
</TABLE>
4
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The following table shows the composition of the Bank's loan portfolio
by fixed and adjustable rate at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
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1997 1996 1995
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Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans:
Real estate:
One- to four-family.......................... $ 4,627 8.7% $ 4,865 9.7% $ 4,995 10.6%
Commercial real estate....................... 1,015 1.9 1,171 2.3 705 1.5
Multi-family................................. 87 .1 92 .2 240 .5
Residential construction..................... -- -- 146 .3 317 .7
------- ----- ------- ------ ------- ------
Total real estate loans................... 5,729 10.7 6,274 12.5 6,257 13.3
Consumer..................................... 7,831 14.7 6,884 13.7 6,879 14.6
Commercial business.......................... 4,839 9.1 4,479 8.9 3,596 7.6
------- ----- ------- ------ ------- ------
Total fixed-rate loans.................... 18,399 34.5 17,637 35.1 16,732 35.5
------- ----- ------- ------ ------- ------
Adjustable Rate Loans:
Real estate:
One- to four-family.......................... 29,998 56.2 27,646 55.0 25,854 54.8
Commercial real estate....................... 2,929 5.5 2,630 5.2 3,195 6.8
Multi-family................................. 571 1.1 697 1.4 691 1.5
Residential construction..................... 829 1.6 1,189 2.4 190 .4
------- ----- ------- ------ ------- ------
Total adjustable rate real estate loans... 34,327 64.4 32,162 64.0 29,930 63.5
Consumer..................................... 336 .6 201 .4 297 .6
Commercial business.......................... 285 .5 228 .5 211 .4
------- ----- ------- ------ ------- ------
Total adjustable rate loans............... 34,948 65.5 32,591 64.9 30,438 64.5
------- ----- ------- ------ ------- ------
Total loans, receivable, gross............ 53,347 100.0% 50,228 100.0% 47,170 100.0%
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Less:
Loans in process.............................. 732 730 315
Deferred fees and discounts................... 74 76 86
Allowance for loan losses..................... 348 318 291
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Total loans receivable, net............... $52,193 $49,104 $46,478
======= ======= =======
</TABLE>
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The following table illustrates the interest rate sensitivity of the
Bank's loan portfolio at June 30, 1997. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which
the contract is due. The table does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
--------------------------------------------
Residential Commercial
Mortgage(1) Construction Consumer Business Total
--------------------- ---------------------- -------------------- ------------------ -----
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ -------- ------ --------- ------ --------
(Dollars in Thousands)
Due During
Years Ending
June 30,
------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998(2)............. $ 476 9.36% $ -- --% $ 1,394 9.38% $2,973 9.68% $ 4,843 9.55%
1999 to 2002........ 1,738 8.81 -- -- 4,828 9.33 1,479 8.81 8,045 9.12
2003 and following.. 37,013 8.29 829 7.77 1,945 9.56 672 7.86 40,459 8.33
------- ----- ------ ------ -------
Total............ $39,227 $ 829 $ 8,167 $5,124 $53,347
======= ===== ====== ====== =======
</TABLE>
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(1) Includes one- to four-family, multi-family and commercial real estate
mortgage loans.
(2) Includes demand loans and loans having no stated maturity.
6
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The total amount of loans due after June 30, 1998 which have
predetermined interest rates is $13.7 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $34.8
million.
One- to Four-Family Residential Mortgage Lending. Residential loan
originations are generated by the Bank's marketing efforts (which include
radio ads, newspaper ads and direct mail), its present customers, walk-in
customers and referrals from real estate brokers and builders. The Bank
focuses its lending efforts primarily on the origination of loans secured by
first mortgages on owner-occupied, single-family residences in its market
area. See "- Originations of Loan and Mortgage-Backed Securities." At June 30,
1997, the Bank's permanent one- to four-family residential mortgage loans
totaled $34.6 million, or 64.9%, of the Bank's gross loan portfolio.
The Bank currently originates ARM loans and, to a lesser extent,
fixed-rate loans for retention in the Bank's loan portfolio. During the year
ended June 30, 1997, the Bank originated $6.3 million of adjustable-rate, one-
to four-family real estate loans (including $1.2 million of residential
construction loans) and $1.9 million of fixed-rate one- to four-family loans
(including $212,000 of residential construction loans). The Bank's one- to
four-family residential mortgage originations are primarily in its market
area.
The Bank currently originates adjustable-rate, one- to four-family
residential mortgage loans with a maximum term of 30 years. Fixed-rate loans
for portfolio are generally originated up to a maximum term of 15 years.
Fixed-rate mortgage loans originated by the Bank in excess of 15 years are
generally sold in the secondary market. The Bank originated $350,000 of fixed
rate loans for sale during fiscal 1997.
One- to four-family loan originations are generally made in amounts
of up to 95% of the appraised value or selling price of the security property,
whichever is less. For loans originated with loan-to-value ratios of greater
than 80%, the Bank typically requires private mortgage insurance to reduce the
Bank's exposure to 80% of the appraised value or selling price of the security
property.
The Bank currently offers one-year, three-year and seven-year balloon
loans that convert into ARM loans with annual adjustment after the initial
term. Rates are determined in accordance with market and competitive factors.
The Bank's ARM products generally carry interest rates which, pursuant to the
terms of the note, may be reset to a stated margin over the index utilized by
the Bank, which is currently the National Average Contract Rate for Previously
Owned Homes. The adjustable-rate loans currently originated by the Bank
provide for a maximum 2% annual cap, and a maximum 6% lifetime cap on the
interest rate over the rate in effect on the date of origination. The annual
and lifetime caps on interest rate increases reduce the extent to which these
loans can help protect the Bank against interest rate risk and may cause these
loans not to be as sensitive as the Bank's cost of funds. The Bank's ARM loans
are not convertible into fixed-rate loans. All of the Bank's one- to
four-family loans are not assumable, do not contain prepayment penalties and
do not produce negative amortization. Approximately 75.7% of the loans secured
by one- to four-family real estate originated by the Bank during fiscal 1997
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were originated with adjustable rates of interest. See "- Originations of Loans
and Mortgage-Backed Securities."
At June 30, 1997, the Bank was not servicing any loans other than
loans it originated. As of June 30, 1997, the Bank's residential ARM loan
portfolio totaled $30.0 million, or 56.2% of the Bank's gross loan portfolio
as compared to the residential fixed-rate, mortgage loan portfolio which
totaled $4.6 million, or 8.7% of the Bank's gross loan portfolio. ARM loans
decrease the risk associated with changes in interest rates but involve other
risks, primarily because as interest rates rise, the payment by the borrower
may rise to the extent permitted by the terms of the loan, thereby increasing
the potential for default. At the same time, the market value of the
underlying property may be adversely affected by higher interest rates.
In underwriting residential real estate loans, the Bank evaluates
both the borrower's ability to make monthly payments, employment history,
credit history and the value of the property securing the loan. Potential
borrowers are qualified for fixed-rate loans based upon the stated rate of the
loan. Borrowers on adjustable-rate loans are currently qualified at a rate
then in effect for seven-year loans on one- to four-family residential
property. Typically, the spread between a one-year ARM and a seven-year ARM
has been 150 basis points or more. The Bank generally requires that for
mortgage loan applications an appraisal of the security property be performed
by an independent fee appraiser approved by the Bank. In connection with
origination of residential real estate loans, the Bank generally requires an
opinion from an attorney regarding the title to the property, and fire and
casualty insurance in an amount not less than the amount of the loan.
To supplement loan demand in the Bank's primary market area the Bank
purchases mortgage-backed and related securities. The Bank purchased $12.0
million, $5.0 million and $6.0 million of mortgage-backed and related
securities during fiscal 1997, 1996 and 1995, respectively.
See "- Originations of Loans and Mortgage-Backed Securities."
Residential Construction Lending. The Bank makes construction loans
to individuals for the construction of their residences and, from time to
time, to established builders and developers, for the construction of
residential homes without an underlying sales contract. At June 30, 1997, the
Bank's construction loan portfolio totaled $829,000, or 1.6% of its gross loan
portfolio. As of that date substantially all of these loans were in the
Company's primary market area.
Construction loans to individuals for their residences are structured
to be converted to permanent loans at the end of the construction phase which
typically runs from six months to one year. These construction loans have
rates and terms which match one- to four-family loans then offered by the
Bank, except that during the construction phase the borrower pays interest
only. The maximum loan-to-value ratio of owner occupied single family
construction loans is 95%. Residential construction loans are generally
underwritten pursuant to the same guidelines used for originating permanent
one- to four-family residential loans.
Construction loans are obtained primarily from builder references and
individuals who have previously borrowed from the Bank, as well as from
referrals from existing customers. The application process includes a
submission to the Bank of the plans and costs of the project to be
constructed. These items are used as a basis to determine the appraised value
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of the subject property. Loans are based on the lesser of current appraised
value or the cost of construction (land plus building).
The uncertainties inherent in estimating construction costs and the
market for a project upon completion makes it relatively difficult to evaluate
accurately the total loan funds required to complete a project, the related
loan-to-value ratios and the likelihood of ultimate success of the project.
Construction loans to borrowers other than owner-occupants also involve many
of the same risks discussed below regarding commercial real estate loans and
tend to be more sensitive to general economic conditions than many other types
of loans.
Multi-Family/Commercial Real Estate Lending. Horizon Federal also
makes real estate loans secured by multi-family and non-residential
properties. Horizon Federal's multi-family residential loans are primarily
secured by apartment buildings located within the Bank's market area. The
commercial real estate loans originated by the Bank are primarily secured by
office buildings, churches, storage facilities, and other income-producing
properties. At June 30, 1997, $658,000, or 1.2%, of the Bank's gross loan
portfolio consisted of multi-family loans and $3.9 million, or 7.4%, of the
Bank's gross loan portfolio consisted of commercial real estate loans.
Commercial real estate lending entails significant additional risks
as compared with residential property lending. Commercial real estate loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The payment experience on such loans is typically dependent on the
successful operation of the real estate project and as such may be subject to
a greater extent than residential loans to adverse conditions in the economy
generally. In dealing with these risk factors, the Bank generally limits
itself to a real estate market and/or borrowers with which it has knowledge
and experience.
Appraisals on properties securing multi-family and commercial real
estate property loans originated by the Bank are performed by an independent
fee appraiser approved by the Bank at the time the loan is made. All
appraisals on multi-family and commercial real estate loans are reviewed by
the Bank's management. In addition, the Bank's underwriting procedures
generally require verification of the borrower's credit history, income and
financial statements, banking relationships and income projections for the
property. In recent years, personal guarantees have been obtained for all or
most of the Bank's multi-family and commercial real estate loans. While the
Bank continues to monitor multi-family and commercial real estate loans on a
regular basis after origination, updated appraisals are not normally obtained
after closing unless the Bank believes that there are questions regarding the
status of the loan or the value of the collateral.
At June 30, 1997, the Bank had no multi-family or commercial real
estate loans to one borrower, or group of borrowers, which had an existing
carrying value in excess of $500,000.
Multi-family and commercial real estate lending affords the Bank an
opportunity to receive interest at rates higher than those generally available
from one- to four-family residential lending. Nevertheless, loans secured by
such properties are generally larger and involve a greater degree of risk than
one- to four-family residential mortgage loans. Because payments on loans
secured by multi-family and commercial real estate properties are often
dependent on the successful operation or management of the properties,
9
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repayment of such loans may be subject to adverse conditions in the real
estate market or the economy. If the cash flow from the project is reduced
(for example, if leases are not obtained or renewed), the borrower's ability
to repay the loan may be impaired. Horizon Federal's current lending
guidelines generally require, in the case of loans secured by multi-family or
commercial income-producing property, that the property securing such loans
generate net cash flow of 125% of debt service after payment of all operating
expenses, excluding depreciation, and a loan-to-value ratio of no more than
75%.
Consumer Lending. Management believes that offering consumer loan
products helps reinforce and expand the Bank's customer base. In addition,
because consumer loans generally have shorter terms to maturity and/or
adjustable rates and carry higher rates of interest than do residential
mortgage loans, they can be useful asset/liability management tools. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset/Liability Management" in the Annual Report to Stockholders
attached hereto as Exhibit 13 (the "Annual Report"). The Bank currently
originates substantially all of its consumer loans in its primary market area.
At June 30, 1997, the Bank's consumer loans totaled $8.2 million, or 15.3% of
the Bank's gross loan portfolio.
Horizon Federal offers a variety of consumer loans for various
purposes with terms up to 15 years. The majority of lending is for
automobiles, home improvement and other personal purposes. The Bank originates
consumer loans on both a direct and an indirect basis. Direct loans are made
when the Bank extends credit directly to the borrower. Indirect loans are
obtained when the Bank purchases loan contracts from retailers of goods or
services which have extended credit to their customers. Horizon Federal began
its indirect lending program in January 1993 with selected automobile dealers
located in the Bank's lending area. At June 30, 1997, the outstanding balances
on automobile loans and home improvement totaled $4.1 million and $2.4
million, or 49.6% and 28.8% of the Bank's gross consumer loan portfolio,
respectively.
In addition, Horizon Federal commenced offering Visa and MasterCard
credit cards in April 1994. Both types of lending generally present more
credit risk to the Bank than one- to four-family residential lending. At June
30, 1997, the Bank had $26,000 of credit card loans outstanding and $94,000 of
unused credit available under its credit card program.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and
an assessment of the ability to meet existing obligations and payments on the
proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the
value of the security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured, or are
secured by rapidly depreciable assets such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. In addition, consumer
loan collections are dependent on the borrower's continuing financial
stability and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount which can be
10
<PAGE>
recovered on such loans. At June 30, 1997, non-performing consumer loans
totaled $130,000, or 1.6% of total consumer loans and .2% of the Bank's gross
loan portfolio. See "Asset Quality - Non-Performing Assets."
Commercial Business Lending. The Bank also originates commercial
business loans. At June 30, 1997, Horizon Federal had $5.1 million in
commercial business loans outstanding, representing 9.6% of the Bank's gross
loan portfolio. The Bank offers commercial business loans to service existing
customers, to consolidate its banking relationships with these customers, and
to further its asset/liability management goals. Most of the Bank's commercial
business loans have been extended to finance local businesses and include
short-term loans to finance machinery and equipment purchases, inventory and
accounts receivable. Commercial loans also involve the extension of revolving
credit for a combination of equipment acquisitions and working capital in
expanding companies.
The maximum term for loans extended on machinery and equipment is
based on the projected useful life of such machinery and equipment. Generally,
the maximum term on non-mortgage lines of credit is one year. The
loan-to-value ratio on such loans may not exceed 75% of the value of the
collateral securing the loan.
The largest commercial business loan outstanding at June 30, 1997 was
an $806,000 business line of credit to a builder of one- to four-family
residential properties. At June 30, 1997, this line of credit was performing
in accordance with its terms.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment
and other income, and which are secured by real property whose value tends to
be more easily ascertainable, commercial business loans are of higher risk and
typically are made on the basis of the borrower's ability to make repayment
from the cash flow of the borrower's business. As a result, the availability
of funds for the repayment of commercial business loans may be dependent upon
the success of the business itself. The Bank's commercial business loans
almost always include personal guarantees and are usually, but not always,
secured by business assets, such as accounts receivable, equipment and
inventory, as well as real estate. However, the collateral securing the loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business.
The Bank recognizes the generally increased credit risks associated
with commercial business lending. Horizon Federal's commercial business
lending policy emphasizes credit file documentation and analysis of the
borrower's character, management capabilities, capacity to repay the loan, the
adequacy of the borrower's capital and collateral. Analysis of the borrower's
past, present and future cash flows is also an important aspect of Horizon
Federal's credit analysis.
11
<PAGE>
Originations of Loans and Mortgage-Backed Securities
The Bank originates real estate loans through marketing efforts, the
Bank's customer base, walk-in customers and referrals from real estate
brokers. The Bank originates both adjustable-rate and fixed-rate loans. Its
ability to originate loans is dependent upon the relative demand for
fixed-rate or ARM loans in the origination market, which is affected by the
term structure (short-term compared to long-term) of interest rates, as well
as the current and expected future level of interest rates and competition.
During the years ended June 30, 1997, 1996, and 1995, the Bank's dollar volume
of adjustable-rate real estate loan originations exceeded the dollar volume of
the same type of fixed-rate loan originations.
The Bank does not generally purchase loans or loan
participations. In times of low levels of loan demand, the Bank has invested
its excess funds in mortgage-backed and related securities. During fiscal
1997, 1996 and 1995 the Bank purchased $12.0 million, $5.0 million and $6.0
million, respectively, of mortgage-backed and related securities. The Bank
funded its purchases of mortgage-backed and related securities, specifically
collateralized mortgage obligations, during fiscal 1997, with advances from the
FHLB. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Asset/Liability Management" in the Annual Report.
The following table shows the loan origination, purchase and
repayment activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------
1997 1996 1995
-------- --------- --------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate
- one- to four-family .............. $ 5,153 $ 5,186 $ 4,091
- multi-family ..................... -- -- 35
- commercial real estate ........... 664 715 520
- residential construction ......... 1,154 2,245 1,253
Non-real estate
- consumer ......................... 102 -- 72
- commercial business .............. -- -- 158
-------- -------- --------
Total adjustable-rate ........ 7,073 8,146 6,129
-------- -------- --------
Fixed rate:
Real estate
- one- to four-family .............. 1,650 1,102 726
- multi-family ..................... 23 10 --
- commercial real estate ........... 362 1,209 --
- residential construction ......... 212 627 115
Non-real estate
- consumer ......................... 5,676 4,000 6,193
- commercial business .............. 1,356 1,057 1,857
-------- -------- --------
Total fixed-rate ............. 9,279 8,005 8,891
-------- -------- --------
Total loans originated ....... 16,352 16,151 15,020
Total loan purchases .................. -- -- --
Total loan sales ...................... (602) (1,724) --
Total loan repayments ................. (13,473) (11,048) (8,983)
Increase (decrease) in other items, net 812 (753) 32
-------- -------- --------
Net increase ................. $ 3,089 $ 2,626 $ 6,069
======== ======== ========
</TABLE>
12
<PAGE>
The following table shows the purchase, sale and repayment activities
of the Bank's mortgage-backed and related securities for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
1997 1996 1995
--------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Purchases:
Mortgage-backed and related securities $ -- $ -- $ 2,961
CMOs .................................. 12,259 5,179 3,053
-------- -------- --------
Total .......................... $ 12,259 $ 5,179 $ 6,014
-------- -------- --------
Sales:
Mortgage-backed and related securities (3,191) (631) --
CMOs .................................. (971) (1,071) --
-------- -------- --------
Total .......................... (4,162) (1,702) --
-------- -------- --------
Repayments:
Mortgage-backed and related securities (702) (1,717) (1,710)
CMOs .................................. (683) (211) --
Increase (decrease) in other items, net (120) (110) --
-------- -------- --------
Net increase (decrease) ........ $ 6,592 $ 1,439 $ 4,304
======== ======== ========
</TABLE>
Asset Quality
General. When a borrower fails to make a required payment on a loan,
the Bank attempts to cause the delinquency to be cured by contacting the
borrower. In the case of loans secured by real estate, a late notice is sent
by the 11th of the month if payment for the prior month is not received. If
the delinquency is not cured by the 15th of the month, an attempt to contact
the borrower is made by telephone. Additional written and verbal contacts are
made with the borrower to the extent necessary, and if required a personal
visit by a loan officer of the Bank is arranged. If the delinquency is not
cured or a payment plan arranged by the 61st day of delinquency or shortly
thereafter, the matter is generally referred to the Bank's collection manager
and action to foreclose on the property is initiated. After 90 days of
delinquency, interest income on loans is reduced by the full amount of accrued
and uncollected interest. If foreclosed, the property is sold at a sheriff's
sale and may be purchased by the Bank. Delinquent consumer loans are handled
in a similar manner. The Bank's procedures for repossession and sale of
consumer collateral are subject to various requirements under Iowa consumer
protection laws.
Real estate acquired by Horizon Federal as a result of foreclosure or
by deed in lieu of foreclosure is classified as real estate owned until it is
sold. When property is acquired, it is recorded at the lower of cost or
estimated fair value at the date of acquisition, and any write-down resulting
therefrom is charged to the allowance for losses on loans. After acquisition,
all costs incurred in maintaining the property are expensed. However, costs
relating to the development and improvement of the property are capitalized to
the extent of net realizable value.
13
<PAGE>
The following table sets forth the Bank's loan delinquencies by type,
by amount and by percentage of category at June 30, 1997. The amounts
presented represent the total remaining principal balances of the loans,
rather than the actual payment amounts which are overdue.
<TABLE>
<CAPTION>
Loans Delinquent For:
-----------------------------------------------------
30-59 Days 60-89 Days
-------------------------- --------------------------
Percent of Percent of
Loan Loan
Number Amount Category Number Amount Category
------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family .. 17 $651 1.9% 5 $136 .4%
Commercial real estate -- -- -- -- -- --
Consumer ............... 26 125 1.5 12 65 .8
Commercial business .... 1 6 .1 1 269 5.3
-- ---- -- ----
Total ............. 44 $782 1.5% 18 $470 .9%
== ==== == ====
</TABLE>
<TABLE>
<CAPTION>
Loans Delinquent For:
-------------------------------------------------------
90 Days and Over Total
-------------------------- ----------------------------
Percent of Percent of
Loan Loan
Number Amount Category Number Amount Category
------ ------ ---------- ------ ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family .. 13 $410 1.2% 35 $1,197 3.5%
Commercial real estate 1 9 .2 1 9 .2
Consumer ............... 26 130 1.6 64 320 3.9
Commercial business .... 1 140 2.7 3 415 8.1
-- ---- --- ------
Total ............. 41 $689 1.3% 103 $1,941 3.6%
== ==== === ======
</TABLE>
14
<PAGE>
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in the Bank's loan portfolio. Loans are
placed on non-accrual status when the collection of principal and/or interest
become doubtful. As a matter of policy, the Bank does not generally accrue
interest on loans past due 90 days or more. For all periods presented, the
Bank has had no troubled debt restructurings (which involve forgiving a
portion of interest or principal on any loans or making loans at a rate
materially less than that of market rates). Foreclosed assets include assets
acquired in settlement of loans. There were no loans deemed to be in-substance
foreclosed at June 30, 1997.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Non-accruing loans:
One- to four-family............................. $ 318 $504 $450
Commercial real estate.......................... 9 -- --
Consumer........................................ 130 151 68
Commercial business............................. 12 43 27
------- ---- ----
Total........................................ 469 698 545
------- ---- ----
Accruing loans 90 days or more:
One- to four-family............................. 92 -- --
Commercial...................................... 128 -- --
------- ---- ----
Total....................................... 220 -- --
------- ---- ----
Foreclosed assets:
One- to four-family............................. 137
Commercial real estate.......................... 206 205 190
Consumer........................................ 13 32 6
-------- ---- ----
Total........................................ 356 237 196
------- ---- ----
Total non-performing assets....................... $ 1,045 $935 $741
======= ==== ====
Total as a percentage of total assets............ 1.22% 1.27% 1.06%
===== ==== ====
</TABLE>
For the fiscal year ended June 30, 1997, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to $57,000, of which $37,000 was included
in interest income at such date.
At June 30, 1997, there were no non-accruing loans to a single
borrower or group of related borrowers in excess of $84,000. At June 30, 1997,
there were approximately $330,000 of non-accruing loans contained in the
foregoing table which are not described in "Other Loans of Concern" or
"Classified Assets" below. These loans are not required to be classified by
the OTS and are adequately capitalized such that management does not
anticipate any losses relating to these loans.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of June 30, 1997, there was also an aggregate of
$402,000 in net book value of loans ($319,000 secured by single family
residences, $75,000 secured by other commercial business and $8,000 in secured
consumer loans) with respect to which known information about the possible
15
<PAGE>
credit problems of the borrowers have caused management to have doubts as to
the ability of the borrowers to comply with present loan repayment terms and
which may result in the future inclusion of such items in the non-performing
asset categories.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by
the OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An
asset is considered "substandard" if it is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have
all of the weaknesses inherent in those classified "substandard" with the
added characteristic that the weaknesses present make "collection or
liquidation in full" on the basis of currently existing facts, conditions and
values, "highly questionable and improbable." Assets classified as "loss" are
those considered "uncollectible" and of such little value that their
continuance as assets without the establishment of a specific loss reserve is
not warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses
in an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of that portion of the
asset so classified or to charge-off such amount. An institution's
determination as to the classification of its assets and the amount of its
valuation allowances is subject to review by the regulatory authorities, who
may order the establishment of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS
and in accordance with its classification of assets policy, the Bank regularly
reviews problem loans and real estate acquired through foreclosure to
determine whether such assets require classification in accordance with
applicable regulations. On the basis of management's review of its assets, at
June 30, 1997, the Bank had classified a total of $386,000 of its assets as
substandard, none as doubtful and $83,000 as loss. All portions of a loan
which are classified as loss are reserved for at a rate of 100%.
At June 30, 1997, total classified assets comprised $469,000, or 5.6%
of the Bank's capital, or .55% of the Bank's total assets.
Allowance for Loan Losses. The allowance for loan losses is
established through a provision for loan losses based on management's
evaluation of the risk inherent in its loan portfolio and changes in the
nature and volume of its loan activity. Such evaluation, which includes a
review of all loans for which full collectibility may not be reasonably
assured, considers among other matters, the estimated fair value of the
underlying collateral, economic conditions, historical loan loss experience
and other factors that warrant recognition in providing for an adequate loan
loss allowance. Although management believes it uses the best information
available to make such determinations, future adjustments to the allowance may
16
<PAGE>
be necessary, and net income could be significantly affected, if circumstances
differ substantially from the assumptions used in making the initial
determinations. At June 30, 1997, the Bank had an allowance for loan losses of
$348,000, or approximately .65% of total loans. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations -- Provision for Losses on Loans" in the Annual Report.
The following table sets forth an analysis of the Bank's allowance
for losses on loans.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period ............................. $ 318 $ 291 $ 379
Charge-offs:
One- to four-family ...................................... (15) -- --
Commercial real estate ................................... -- (29) (78)
Commercial business ...................................... (150) (227) --
Consumer ................................................. (62) (63) (17)
----- ----- -----
Total charge-offs ...................................... (227) (319) (95)
----- ----- -----
Recoveries:
Commercial business ...................................... -- 11 --
Consumer ................................................. 5 7 5
----- ----- -----
Total recoveries ....................................... 5 18 5
Net charge-offs ............................................ (222) (301) (90)
Additions charged to operations ............................ 252 328 2
----- ----- -----
Balance at end of period ................................... $ 348 $ 318 $ 291
===== ===== =====
Ratio of net charge-offs during the period to average
loans outstanding during the period ....................... .43 % .63% .21%
===== ===== =====
</TABLE>
17
<PAGE>
The distribution of the Bank's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------
1997 1996 1995
------------------- --------------------- ------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family............. $116 64.9% $128 64.7% $129 65.4%
Multi-family.................... 2 1.2 2 1.6 2 2.0
Commercial real estate.......... 12 7.4 11 7.5 11 8.2
Residential construction........ 2 1.6 3 2.7 1 1.1
Consumer........................ 103 15.3 80 14.1 78 15.2
Commercial business............. 95 9.6 60 9.4 40 8.1
Unallocated..................... 18 -- 34 -- 30 --
----- ----- ---- ----- ---- -----
Total...................... $ 348 100.0% $318 100.0% $291 100.0%
===== ===== ==== ===== ==== =====
</TABLE>
Investment Activities
Horizon Federal must maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, the Bank has
maintained liquid assets at levels above the minimum requirements imposed by
the OTS regulations and at levels believed adequate to meet the requirements
of normal operations, including repayments of maturing debt and potential
deposit outflows. Cash flow projections are regularly reviewed and updated to
assure that adequate liquidity is maintained. At June 30, 1997, the Bank's
liquidity ratio (liquid assets as a percentage of net withdrawable savings
deposits and current borrowings) was 7.12%. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Annual
Report and "Regulation - Liquidity."
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies, certain certificates of
deposit of insured banks and savings institutions, certain bankers'
acceptances, repurchase agreements and federal funds. Subject to various
restrictions, federally chartered savings institutions may also invest their
assets in commercial paper, investment grade corporate debt securities and
mutual funds whose assets conform to the investments that a federally
chartered savings institution is otherwise authorized to make directly.
Generally, the investment policy of the Bank, as established by the
Board of Directors, is to invest funds among various categories of investments
and maturities based upon the Bank's liquidity needs, asset/liability
management policies, investment quality, marketability and performance
objectives. Subject to the Board's direction, the Investment Committee meets
monthly to review the Bank's investments and objectives for its investment
portfolio. The Bank's investment policy has established methods and strategies
18
<PAGE>
for each type of security. It is the Bank's general policy to purchase
investment securities which are U.S. Government securities or federal agency
obligations or other issues that are rated investment grade.
The Bank has a portfolio of mortgage-backed and related securities
and has utilized such investments to complement its mortgage lending
activities. At June 30, 1997, the Bank's mortgage-backed and related
securities totaled $22.4 million, or 26.1% of total assets. For information
regarding market values of the Bank's mortgage-backed and related securities
portfolio, see Note 2 of the Notes to Consolidated Financial Statements in the
Annual Report.
Historically, most of the Bank's mortgage-backed securities were
long-term, fixed-rate securities. In more recent years, the Bank has begun to
purchase other types of mortgage-backed and related securities consistent with
its asset/liability management objectives. In this regard, the Bank emphasizes
the purchase of adjustable-rate, mortgage-backed and related securities for
asset/liability management purposes and in order to supplement the Bank's
origination of ARM loans. At June 30, 1997, all of the Bank's mortgage-backed
and related securities carried adjustable rates of interest.
The Bank's portfolio of Government National Mortgage Association
("GNMA"), FNMA and Federal Home Loan Mortgage Corporation ("FHLMC")
certificates are modified pass-through mortgage-backed securities that
generally represent undivided interests in underlying pools of fixed-rate, or
certain types of adjustable rate, single-family residential mortgages issued
by these government-sponsored entities. GNMA's guarantee to the holder of
timely payments of principal and interest is backed by the full faith and
credit of the U.S. government. FNMA and FHLMC provide the certificate holder a
guarantee of timely payments of interest and scheduled principal payments,
whether or not they have been collected. Under the OTS risk-based capital
requirements, GNMA mortgage-backed securities have a zero percent risk
weighting and FNMA, FHLMC and "AA" or higher-rated mortgage-backed securities
have a 20% risk weighting, in contrast to the 50% risk weighting carried by
one- to four-family performing residential mortgage loans.
At June 30, 1997, the Bank held $18.1 million of Collateralized
Mortgage Obligations ("CMOs") having estimated lives which ranged from less
than one year up to 23 years. CMOs are special types of pass-through debt in
which the stream of principal and interest payments on the underlying
mortgages or mortgage-backed securities is used to create classes with
different maturities and, in some cases, amortization schedules, as well as a
residual interest, with each such class possessing different risk
characteristics. Management believes these securities may represent attractive
alternatives relative to other investments due to the wide variety of maturity
and repayment options available through such investments. The CMOs acquired by
the Bank are not interest only, principal only or residual interests.
OTS guidelines regarding investment portfolio policy and accounting
require insured institutions to categorize securities and certain other assets
as held for "investment," "sale," or "trading." The portion of the investment
securities portfolio which is held with the intent to hold to maturity is
accounted for on an amortized cost basis. Securities which are categorized as
19
<PAGE>
available for sale are carried at fair value. At June 30, 1997, all of the
Bank's investment, mortgage-backed and related securities were classified as
available for sale.
The following table sets forth the composition of the Bank's
portfolio of investment and mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------
1997 1996 1995
----------------------- ---------------------- ---------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
-------- ----- --------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. government securities............................. $ 103 1.6% $ 105 2.9% $ 100 2.7%
Federal agency obligations............................. 849 13.3 839 22.9 848 --
Small business administration loans.................... 971 15.3 1,021 27.8 1,236 32.9
Equity Securities(1)................................... 589 9.3 247 6.7 -- --
------- ----- ------- ----- ------- -----
Subtotal............................................ 2,512 39.5 2,212 60.3 2,184 58.2
FHLB stock............................................... 956 15.0 559 15.2 471 12.5
------- ----- ------- ----- ------- -----
Total investment securities and FHLB stock.......... 3,468 54.5 2,771 75.5 2,655 70.7
Other Interest-Earning Assets:
Interest-bearing deposits with banks................... 2,890 45.5 900 24.5 1,100 29.3
------- ----- ------- ----- ------- -----
Total............................................... $ 6,358 100.0% $ 3,671 100.0% $ 3,755 100.0%
======= ===== ======= ===== ======= =====
Average remaining life or term to repricing of
investment securities and other interest-earning
assets excluding FNMA stock and FHLB stock.............. 5.5 9.3 10.3
Mortgage-Backed and Related Securities:
FNMA................................................... $ 1,399 6.2% $ 3,413 21.6% $ 4,938 34.3%
FHLMC.................................................. 704 3.1 1,688 10.6 2,235 15.5
GNMA................................................... 924 4.1 1,834 11.6 2,188 15.2
CMOs................................................... 18,138 80.9 8,895 56.1 5,016 34.8
Other.................................................. 1,265 5.7 8 .1 22 .2
------- ----- ------- ----- ------- -----
Total mortgage-backed and related securities......... $22,430 100.0% $15,838 100.0% $14,399 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
- ---------------------------
(1) Consists primarily of FNMA Stock and stocks of publicly traded thrift
institutions and thrift holding companies.
20
<PAGE>
The composition and maturities of the debt investment securities
portfolio, excluding equity securities and FHLB stock, are indicated in the
following table.
<TABLE>
At June 30, 1997
-----------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over 10 Total Debt Investment
1 Year Years Years Years Securities
------------- ----------- ------------ ----------- ------------------------
Carrying Carrying Carrying Carrying Book Market
Value Value Value Value Value Value
------------- ----------- ------------ ----------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government securities ........ $ 103 $-- $ -- $ -- $ 103 $ 103
Federal agency obligations ........ -- -- 849 -- 849 849
Small business administration
loans .......................... -- -- -- 971 971 971
------ ----- ------ ------ ------ ------
Total ...................... $ 103 $-- $ 849 $ 971 $1,923 $1,923
====== ===== ====== ====== ====== ======
Weighted average yield ............ 9.0% --% 4.0% 7.9% 6.2% 6.2%
</TABLE>
The following table sets forth the contractual maturities of the
Bank's mortgage-backed and related securities at June 30, 1997; however, the
expected average life to maturity of this portfolio is generally two to 10
years.
<TABLE>
<CAPTION>
Due in At
------------------------------------------------- June 30,
One to 5 to 10 and 1997
Less than Less than 5 Less than 10 Over Balance
One Year Years Years Years Outstanding
--------- ----------- ------------ ------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
FHLMC ............................... $ -- $ -- $ -- $ 704 $ 704
FNMA ................................ -- -- -- 1,399 1,399
GNMA ................................ -- -- -- 924 924
CMOs ................................ -- 4,353 1,975 11,810 18,138
Other ............................... -- -- 363 902 1,265
----- -------- ------- ------- -------
Total .............................. $ -- $ 4,353 $ 2,338 $15,739 $22,430
===== ======== ======= ======= =======
</TABLE>
At June 30, 1997, the Bank's portfolio of investment and
mortgage-backed securities contained no securities of any issuer with an
aggregate book value in excess of 10% of the Bank's stockholders' equity,
excluding those issued by the United States Government or its agencies.
For additional information on the Bank's investment and
mortgage-backed securities, see Note 2 of the Notes to Consolidated Financial
Statements in the Annual Report.
21
<PAGE>
Sources of Funds
General. The Bank's primary sources of funds are deposits,
amortization and repayment of loan principal (including mortgage-backed
securities), sales or maturities of investment securities, mortgage-backed
securities and short-term investments, FHLB advances and funds provided from
operations.
Borrowings, primarily FHLB advances, are used to compensate for
seasonal reductions in deposits or deposit inflows at less than projected
levels, and may be used on a longer-term basis to support lending activities.
At June 30, 1997, the Bank had total FHLB advances of $19.1 million.
Deposits. Horizon Federal offers a variety of deposit accounts having
a wide range of interest rates and terms. The Bank's deposits consist of
commercial demand, savings, checking, money market and certificate accounts.
The certificate accounts currently range in terms from 6 months to five years.
The Bank relies primarily on advertising (including radio, newspaper and
direct mail), competitive pricing policies and customer service to attract and
retain these deposits. Horizon Federal solicits deposits from its market area
only and does not use brokers to obtain deposits. The flow of deposits is
influenced significantly by general economic conditions, changes in money
market and prevailing interest rates and competition. The composition of the
Bank's deposits is set forth in Note 8 of the Notes to Consolidated Financial
Statement in the Annual Report.
The deposit accounts marketed by the Bank have allowed it to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. The Bank has become more susceptible to short-term
fluctuations in deposit flows as customers have become more interest rate
conscious. The Bank endeavors to manage the pricing of its deposits in keeping
with its asset/liability management and profitability objectives. The ability
of the Bank to attract and maintain savings accounts and certificates of
deposit, and the rates paid on these deposits, has been and will continue to
be significantly affected by market conditions.
The following table sets forth the savings flows at the Bank during
the periods indicated.
Year Ended June 30,
---------------------------------------------
1997 1996 1995
-------- -------- --------
(Dollars in Thousands)
Opening balance ......... $ 54,759 $ 51,330 $ 49,969
Deposits ................ 157,275 129,814 109,818
Withdrawals ............. 156,443 128,381 109,994
Interest credited ....... 2,050 1,996 1,537
-------- -------- --------
Ending balance .......... $ 57,641 $ 54,759 $ 51,330
======== ======== ========
Net increase ............ $ 2,882 $ 3,429 $ 1,361
======== ======== ========
Percent increase ........ 5.26% 6.68% 2.72%
======== ======== ========
22
<PAGE>
The following table sets forth the dollar amount of savings deposits
in the various types of deposit programs offered by the Bank for the periods
indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------------
1997 1996 1995
--------------------- ----------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
Commercial Demand........................... $ 1,964 3.4% $ 745 1.36% $ 599 1.17%
Checking Accounts (0.0% to 4.8%)............ 4,788 8.3 4,581 8.36 3,659 7.13
Savings Accounts (2.3% to 4.9%)............. 16,829 29.2 14,635 26.73 10,057 19.59
Money Market Accounts (2.0% to 2.5%)........ 836 1.5 1,006 1.84 1,385 2.70
------- ----- ------- ------ ------- ------
Total Non-Certificates...................... 24,417 42.4 20,967 38.29 15,700 30.59
------- ----- ------- ------ ------- ------
Certificates:
0.00 - 3.99%.............................. 52 .1 77 .14 4,520 8.81%
4.00 - 4.99%.............................. 5,354 9.3 7,656 13.98 4,707 9.17
5.00 - 5.99%.............................. 18,288 31.7 18,513 33.81 8,646 16.84
6.00 - 6.99%.............................. 7,359 12.7 4,724 8.63 12,935 25.20
7.00 - 7.99%.............................. 2,004 3.4 2,656 4.85 4,354 8.48
8.00 - 8.99%.............................. 160 .3 154 .28 353 .69
9.00% and above............................ 7 .1 12 .02 114 .22
------- ----- ------- ------ ------- ------
Total Certificates.......................... 33,224 57.6 33,792 61.71 35,629 69.41
------- ----- ------- ------ ------- ------
Total Deposits.............................. $57,641 100.00% $54,759 100.00% $51,329 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
The following table shows rate and maturity information for the
Bank's certificates of deposit as of June 30, 1997.
<TABLE>
<CAPTION>
0.00- 4.00- 6.00- 8.00- 9.00% Percent
3.99% 5.99% 7.99% 8.99% or more Total of Total
---------------------------------- ------------------------- --------- ---------
(Dollars in Thousands)
Certificate accounts maturing
in quarter ending:
<S> <C> <C> <C> <C> <C> <C> <C>
September 30, 1997.................. $ 52 $ 6,044 $ 895 $ 6 $ --- $ 6,997 21.1%
December 31, 1997................... --- 3,857 595 --- --- 4,452 13.4
March 31, 1998...................... --- 3,341 622 --- --- 3,963 11.9
June 30, 1998....................... --- 2,501 2,053 60 --- 4,614 13.9
September 30, 1998.................. --- 678 910 --- --- 1,588 4.8
December 31, 1998................... --- 937 49 --- --- 986 3.0
March 31, 1999...................... --- 1,117 466 82 7 1,672 5.0
June 30, 1999....................... --- 1,162 280 --- --- 1,442 4.3
September 30, 1999.................. --- 867 797 --- --- 1,664 5.0
December 31, 1999................... --- 610 773 --- --- 1,383 4.2
March 31, 2000...................... --- 202 1,133 7 --- 1,342 4.0
June 30, 2000...................... --- 341 279 --- --- 620 1.9
Thereafter.......................... --- 1,985 511 5 --- 2,501 7.5
Total............................... $ 52 $23,642 $9,363 $ 160 $ 7 $33,224 100.0%
==== ======= ====== ===== ==== ======= =====
Percent of total................. .2% 71.0% 28.2% .5 % .1% 100.0%
=== ===== ===== === == ======
</TABLE>
23
<PAGE>
The following table indicates the amount of the Bank's certificates
of deposit and other deposits by time remaining until maturity as of June 30,
1997.
<TABLE>
<CAPTION>
Maturity
Over Over ---------
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
------- ------ ------ --------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit of less
than $100,000.............................. $5,073 $4,002 $7,932 $12,976 $29,983
Certificates of deposit of
$100,000 or more........................... 359 300 645 222 1,526
Public funds(1)............................. 1,565 150 --- --- 1,715
------ ------ ------- --------- --------
Total certificates of
deposit.................................... $6,997 $4,452 $8,577 $13,198 $33,224
====== ====== ====== ======= =======
</TABLE>
- ------------------------------------
(1) Deposits from governmental and other public entities.
Borrowings. Although deposits are the Bank's primary source of funds,
the Bank's policy has been to utilize borrowings, primarily FHLB advances,
when they are a less costly source of funds or can be invested at a positive
rate of return. In addition, the Bank may rely upon borrowings for short-term
liquidity needs.
Horizon Federal may obtain advances from the FHLB of Des Moines upon
the security of its capital stock in the FHLB of Des Moines and certain of its
mortgage loans. Such advances may be made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. At
June 30, 1997, the Bank had $19.1 million in FHLB advances
The following table sets forth the maximum month-end balance and
average balance of FHLB advances. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Annual Report for a
discussion on the increase in the Bank's borrowings.
Year Ended June 30,
--------------------------
1997 1996 1995
---- ---- ----
Maximum Balance:
FHLB advances.............................. $19,107 $11,171 $8,718
Average Balance:
FHLB advances.............................. $13,254 $ 9,521 $5,274
24
<PAGE>
The following table sets forth certain information as to the Bank's
FHLB advances at the dates indicated. For additional information on the Bank's
advances, see Note 9 of the Notes to Consolidated Financial Statements in the
Annual Report.
At June 30,
-------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
FHLB advances................................... $19,102 $9,661 $8,718
======= ====== ======
Weighted average interest
rate of FHLB advances.......................... 5.71% 5.49% 6.04%
Subsidiary Activities
As a federally chartered savings bank, Horizon Federal is permitted
by OTS regulations to invest up to 2% of its assets, or $1.7 million at June
30, 1997, in the stock of, or loans to, service corporation subsidiaries. As
of such date, the net book value of Horizon Federal's investment in its
service corporation was approximately $20,600. Horizon Federal may invest an
additional 1% of its assets in service corporations where such additional
funds are used for inner-city or community development purposes and up to 50%
of its total capital in conforming loans to service corporations in which it
owns more than 10% of the capital stock. In addition to investments in service
corporations, federal associations are permitted to invest an unlimited amount
in operating subsidiaries engaged solely in activities in which a federal
association may engage.
Horizon Federal has one service corporation, Horizon Investment
Services, Inc. ("HISI"), an Iowa corporation, located in Oskaloosa, Iowa.
HISI, which changed its corporate name in August 1995 from SEI Service
Corporation, was organized by the Bank in 1983 in order to offer a variety of
products to customers of Horizon Federal. For the fiscal year ended June 30,
1997, HISI had a net gain of $6,500.
Regulation
General. Horizon Federal is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full faith and
credit of the United States Government. Accordingly, the Bank is subject to
broad federal regulation and oversight extending to all its operations.
Horizon Federal is a member of the FHLB of Des Moines and is subject to
certain limited regulation by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"). As the savings and loan holding company of
the Bank, the Company also is subject to federal regulation and oversight. The
purpose of the regulation of the Company and other holding companies is to
protect subsidiary savings associations. The Bank is a member of the Savings
Association Insurance Fund ("SAIF"), which together with the Bank Insurance
Fund (the "BIF") are the two deposit insurance funds administered by the FDIC,
and the deposits of the Bank are insured by the FDIC. As a result, the FDIC
has certain regulatory and examination authority over the Bank.
25
<PAGE>
Certain of these regulatory requirements and restrictions are
discussed below or elsewhere in this document.
Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, the Bank is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. The last regular OTS
and FDIC examinations of the Bank were as of September 23, 1996 and December
31, 1989, respectively. Under agency scheduling guidelines, it is likely that
another examination will be initiated in the near future. When these
examinations are conducted by the OTS and the FDIC, the examiners may require
the Bank to provide for higher general or specific loan loss reserves. All
savings associations are subject to a semi-annual assessment, based upon the
savings association's total assets, to fund the operations of the OTS. The
Bank's OTS assessment for the fiscal year ended June 30, 1997, was $24,700.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Bank is prescribed by federal law, and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution
may invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except
with approval of the OTS. Federal savings associations are also generally
authorized to branch nationwide. The Bank is in compliance with the noted
restrictions.
The Bank's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At June 30, 1997, the Bank's lending limit
under this restriction was approximately $970,000. The Bank is in compliance
with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to
comply with an approved plan will subject the institution to further
enforcement action.
26
<PAGE>
Insurance of Accounts and Regulation by the FDIC. Horizon Federal is
a member of the SAIF, which is administered by the FDIC. Deposits are insured
up to applicable limits by the FDIC and such insurance is backed by the full
faith and credit of the United States Government. As insurer, the FDIC imposes
deposit insurance premiums and is authorized to conduct examinations of and to
require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the SAIF of the BIF. The FDIC
also has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices, or is in an unsafe or unsound
condition.
The FDIC's deposit insurance premiums are assessed through a
risk-based system under which all insured depository institutions are placed
into one of nine categories and assessed insurance premiums based upon their
level of capital and supervisory evaluation. Under the system, institutions
classified as well capitalized (i.e., a core capital ratio of at least 5%, a
ratio of Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based
capital") of at least 6% and a risk-based capital ratio of at least 10%) and
considered healthy pay the lowest premium while institutions that are less
than adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of
less than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern pay the highest premium. Risk classification
of all insured institutions will be made by the FDIC for each semi-annual
assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than
the designated reserve ratio of 1.25% of SAIF insured deposits. In setting
these increased assessments, the FDIC must seek to restore the reserve ratio
to that designated reserve level, or such higher reserve ratio as established
by the FDIC. The FDIC may also impose special assessments on SAIF members to
repay amounts borrowed from the United States Treasury or for any other reason
deemed necessary by the FDIC.
As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the BIF of the FDIC in
order to maintain the reserve ratio of the BIF at 1.25% of BIF insured
deposits. As a result of the BIF reaching its statutory reserve ratio, the
FDIC revised the premium schedule for BIF insured institutions to provide a
range of .04% to .31% of deposits. The revisions became effective in the third
quarter of 1995. In addition, the BIF rates were further revised, effective
January 1996, to provide a range of 0% to .27%. The SAIF rates, however, were
not adjusted. At the time the FDIC revised the BIF premium schedule, it noted
that, absent legislative action (as discussed below), the SAIF would not
attain its designated reserve ratio until the year 2002. As a result, SAIF
insured members would continue to be generally subject to higher deposit
insurance premiums than BIF insured institutions until, all things being
equal, the SAIF attained its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provided for a one-time assessment to be imposed on all
deposits assessed at the SAIF rates, as of March 31, 1995, in order to
27
<PAGE>
recapitalize the SAIF. It also provided for the merger of the BIF and the SAIF
on January 1, 1999 if no savings associations then exist. The special
assessment rate was established at .657% of deposits by the FDIC and the
resulting assessment of $331,000 was paid in November 1996. This special
assessment significantly increased noninterest expense and adversely affected
the Company's and the Bank's results of operations for the year ended June 30,
1997. As a result of the special assessment, the Bank's deposit insurance
premiums was reduced to zero based upon its current risk classification and
the new assessment schedule for SAIF insured institutions. These premiums are
subject to change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations
issued by a federally chartered corporation to provide financing ("FICO") for
resolving the thrift crisis in the 1980s. Although the FDIC has proposed that
the SAIF assessment be equalized with the BIF assessment schedule, effective
October 1, 1996, SAIF-insured institutions will continue to be subject to a
FICO assessment as a result of this continuing obligation. Although the
legislation also now requires assessments to be made on BIF-assessable
deposits for this purpose, effective January 1, 1997, that assessment will be
limited to 20% of the rate imposed on SAIF assessable deposits until the
earlier of December 31, 1999 or when no savings association continues to
exist, thereby imposing a greater burden on SAIF member institutions such as
the Bank. Thereafter, however, assessments on BIF- member institutions will be
made on the same basis as SAIF-member institutions. The rates to be
established by the FDIC to implement this requirement for all FDIC-insured
institutions is uncertain at this time, but are anticipated to be about a 6.5
basis points assessment on SAIF deposits and 1.5 basis points on BIF deposits
until BIF insured institutions participate fully in the assessment.
Regulatory Capital Requirements. Federally insured savings
associations, such as the Bank, are required to maintain a minimum level of
regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement
and a risk-based capital requirement applicable to such savings associations.
These capital requirements must be generally as stringent as the comparable
capital requirements for national banks. The OTS is also authorized to impose
capital requirements in excess of these standards on individual associations
on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At June 30, 1997, the Bank did not have any intangible assets
or purchased mortgage servicing rights.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities
permissible for national banks or engaged in certain other activities solely
as agent for its customers are "includable" subsidiaries that are consolidated
for capital purposes in proportion to the association's level of ownership.
For excludable subsidiaries the
28
<PAGE>
debt and equity investments in such subsidiaries are deducted from assets and
capital. All subsidiaries of the Bank are includable subsidiaries.
At June 30, 1997, the Bank had tangible capital of $6.2 million, or
7.4% of adjusted total assets, which is approximately $5.0 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3%
of adjusted total assets. Core capital generally consists of tangible capital
plus certain intangible assets, including a limited amount of purchased credit
card relationships. As a result of the prompt corrective action provisions
discussed below, however, a savings association must maintain a core capital
ratio of at least 4% to be considered adequately capitalized unless its
supervisory condition is such to allow it to maintain a 3% ratio. At June 30,
1997, the Bank had no intangibles which were subject to these tests.
At June 30, 1997, the Bank had core capital equal to $6.2 million, or
7.4% of adjusted total assets, which is $3.7 million above the minimum
leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists
of core capital, as defined above, and supplementary capital. Supplementary
capital consists of certain permanent and maturing capital instruments that do
not qualify as core capital and general valuation loan and lease loss
allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary
capital may be used to satisfy the risk-based requirement only to the extent
of core capital. The OTS is also authorized to require a savings association
to maintain an additional amount of total capital to account for concentration
of credit risk and the risk of non-traditional activities. At June 30, 1997,
the Bank had no capital instruments that qualify as supplementary capital, and
$265,000 of general loss reserves, which was less than 1.25% of risk-weighted
assets.
Certain exclusions from capital and assets are required to be made
for the purpose of calculating total capital. Such exclusions consist of
equity investments (as defined by regulation) and that portion of land loans
and nonresidential construction loans in excess of an 80% loan-to-value ratio
and reciprocal holdings of qualifying capital instruments. Horizon Federal had
a $9,000 exclusion from capital and assets at June 30, 1997.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk
weight, ranging from 0% to 100%, based on the risk inherent in the type of
asset. For example, the OTS has assigned a risk weight of 50% for prudently
underwritten permanent one- to four-family first lien mortgage loans not more
than 90 days delinquent and having a loan to value ratio of not more than 80%
at origination unless insured to such ratio by an insurer approved by the FNMA
or FHLMC.
OTS regulations also require that every savings association with more
than normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to
50% of its interest-rate risk exposure multiplied by the
29
<PAGE>
present value of its assets. This exposure is a measure of the potential
decline in the net portfolio value of a savings association, greater than 2%
of the present value of its assets, based upon a hypothetical 200 basis point
increase or decrease in interest rates (whichever results in a greater
decline). Net portfolio value is the present value of expected cash flows from
assets, liabilities and off-balance sheet contracts. The rule will not become
effective until the OTS evaluates the process by which savings associations
may appeal an interest rate risk deduction determination. It is uncertain as
to when this evaluation may be completed. Any savings association with less
than $300 million in assets and a total capital ratio in excess of 12% is
exempt from this requirement unless the OTS determines otherwise.
On June 30, 1997, the Bank had total capital of $6.5 million
(including $6.2 million in core capital and $265,000 in qualifying
supplementary capital) and risk-weighted assets of $45.0 million (including
$286,000 in converted off-balance sheet assets); or total capital of 14.4% of
risk-weighted assets. This amount was $2.9 million above the 8% requirement in
effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to
meet their capital requirements. The OTS is generally required to take action
to restrict the activities of an "undercapitalized association" (generally
defined to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized
associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions, which may cover all aspects of its operations and include a
forced merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less)
is subject to further mandatory restrictions on its activities in addition to
those applicable to significantly undercapitalized associations. In addition,
the OTS must appoint a receiver (or conservator with the concurrence of the
FDIC) for a savings association, with certain limited exceptions, within 90
days after it becomes critically undercapitalized. Any undercapitalized
association is also subject to the general enforcement authority of the OTS
and the FDIC, including the appointment of a conservator or a receiver.
30
<PAGE>
The OTS is also generally authorized to reclassify an association
into a lower capital category and impose the restrictions applicable to such
category if the institution is engaged in unsafe or unsound practices or is in
an unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Company or the Bank may have a substantial adverse effect on the Company's
operations and profitability. Company shareholders do not have preemptive
rights, and therefore, if the Company is directed by the OTS or the FDIC to
issue additional shares of Common Stock, such issuance may result in the
dilution in the percentage of ownership of the Company.
Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions on savings associations with respect
to their ability to make distributions of capital, which include dividends,
stock redemptions or repurchases, cash-out mergers and other transactions
charged to the capital account. OTS regulations also prohibit a savings
association from declaring or paying any dividends or from repurchasing any of
its stock if, as a result, the regulatory capital of the association would be
reduced below the amount required to be maintained for the liquidation account
established in connection with its mutual to stock conversion.
Generally, savings associations, such as the Bank, that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four quarter
period. However, an association deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
Horizon Federal may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to
the distribution during that 30-day period based on safety and soundness
concerns. See "--Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current
capital distribution restrictions. Under the proposal a savings association
may make a capital distribution without notice to the OTS (unless it is a
subsidiary of a holding company) provided that it has a CAMEL 1 or 2 rating,
is not of supervisory concern, and would remain adequately capitalized (as
defined in the OTS prompt corrective action regulations) following the
proposed distribution. Savings associations that would remain adequately
capitalized following the proposed distribution but do not meet the other
noted requirements must notify the OTS 30 days prior to declaring a capital
distribution. The OTS stated it will generally regard as permissible that
amount of capital distributions that do not exceed 50% of the institution's
excess regulatory capital plus net income to date during the calendar year. A
savings association may not make a capital distribution without prior approval
of the OTS and the FDIC if it is undercapitalized before, or as a result of,
such a distribution. As under the current rule, the OTS may object to a
capital distribution if it would constitute an unsafe or unsound practice. No
assurance may be given as to whether or in what form the regulations may be
adopted.
31
<PAGE>
Liquidity. All savings associations, including the Bank, are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of their average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. For a discussion
of what the Bank includes in liquid assets, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" in the Annual Report. This liquid asset ratio requirement
may vary from time to time (between 4% and 10%) depending upon economic
conditions and savings flows of all savings associations. At the present time,
the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's
average daily balance of net withdrawable deposit accounts and current
borrowings. Penalties may be imposed upon associations for violations of
either liquid asset ratio requirement. At June 30, 1997, the Bank was in
compliance with both requirements, with an overall liquid asset ratio of 7.12%
and a short-term liquid assets ratio of 6.98%.
Accounting. An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance
with GAAP. Under the policy statement, management must support its
classification of and accounting for loans and securities (i.e., whether held
for investment, sale or trading) with appropriate documentation. The Bank is
in compliance with these amended rules.
OTS accounting regulations, which may be made more stringent than
GAAP by the OTS, require that transactions be reported in a manner that best
reflects their underlying economic substance and inherent risk and that
financial reports must incorporate any other accounting regulations or orders
prescribed by the OTS.
Qualified Thrift Lender Test. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out
of every 12 months on a rolling basis. As an alternative, the savings
association may maintain 60% of its assets in those assets specified in
Section 7701(a)(19) of the Internal Revenue Code of 1996, as amended (the
"Code"). Such assets primarily consist of residential housing related loans
and investments. At June 30, 1997, the Bank met the test and has always met
the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert
to a national bank charter, unless it requalifies as a QTL and thereafter
remains a QTL. If an association does not requalify and converts to a national
bank charter, it must remain SAIF-insured until the FDIC permits it to
32
<PAGE>
transfer to the BIF. If such an association has not yet requalified or
converted to a national bank, its new investments and activities are limited
to those permissible for both a savings association and a national bank, and
it is limited to national bank branching rights in its home state. In
addition, the association is immediately ineligible to receive any new FHLB
borrowings and is subject to national bank limits for payment of dividends. If
such association has not requalified or converted to a national bank within
three years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any association that fails the QTL test is controlled by a
holding company, then within one year after the failure, the holding company
must register as a bank holding company and become subject to all restrictions
on bank holding companies. See "- Holding Company Regulation."
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with the examination of the Bank, to assess
the institution's record of meeting the credit needs of its community and to
take such record into account in its evaluation of certain applications, such
as a merger or the establishment of a branch, by the Bank. An unsatisfactory
rating may be used as the basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently
revised the CRA regulations and the methodology for determining an
institution's compliance with the CRA. Due to the heightened attention being
given to the CRA in the past few years, the Bank may be required to devote
additional funds for investment and lending in its local community. The Bank
was examined for CRA compliance in December 1995 and received a rating of
"satisfactory."
Transactions with Affiliates. Generally, transactions between a
savings association or its subsidiaries and its affiliates are required to be
on terms as favorable to the association as transactions with non-affiliates.
In addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the
Bank include the Company and any company which is under common control with
the Bank. In addition, a savings association may not lend to any affiliate
engaged in activities not permissible for a bank holding company or acquire
the securities of most affiliates. The Bank's subsidiaries are not deemed
affiliates; however, the OTS has the discretion to treat subsidiaries of
savings associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS.
These conflict of interest regulations and other statutes also impose
restrictions on loans to such persons and their related interests. Among other
things, such loans must be made on terms substantially the same as for loans
to unaffiliated individuals.
33
<PAGE>
Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the
Company is required to register and file reports with the OTS and is subject
to regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally
is not subject to activity restrictions. If the Company acquires control of
another savings association as a separate subsidiary, it would become a
multiple savings and loan holding company, and the activities of the Company
and any of its subsidiaries (other than the Bank or any other SAIF-insured
savings association) would become subject to such restrictions unless such
other associations each qualify as a QTL and were acquired in a supervisory
acquisition.
If the Bank fails the QTL test, the Company must obtain the approval
of the OTS prior to continuing after such failure, directly or through its
other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In
addition, within one year of such failure, the Company must register as, and
will become subject to, the restrictions applicable to bank holding companies.
The activities authorized for a bank holding company are more limited than are
the activities authorized for a unitary or multiple savings and loan holding
company. See "--Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law. The stock of the Company is registered with
the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company is subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super
NOW checking accounts). At June 30, 1997, the Bank was in compliance with
these reserve requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements that may be imposed by the OTS. See "--Liquidity."
34
<PAGE>
Savings associations are authorized to borrow from the Federal
Reserve Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds,
including FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Des Moines, which is one of 12 regional FHLBs that administer the home
financing credit function of savings associations. Each FHLB serves as a
reserve or central bank for its members within its assigned region. Each is
funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes loans to members (i.e., advances) in
accordance with policies and procedures, established by the board of directors
of the FHLB, which are subject to the oversight of the Federal Housing Finance
Board. All advances from the FHLB are required to be fully secured by
sufficient collateral as determined by the FHLB. In addition, all long-term
advances are required to provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in
the FHLB of Des Moines. At June 30, 1997, the Bank had $955,600 in FHLB stock,
which was in compliance with this requirement. In past years, the Bank has
received substantial dividends on its FHLB stock. For the year ended June 30,
1997, dividends paid by the FHLB of Des Moines to Horizon Federal totaled
$47,000, compared to $36,000 received in fiscal 1996. The $13,900 dividend
received for the quarter ended June 30, 1997 reflects an annualized rate of
7.00%, the same rate as received in calendar 1996. Over the past five fiscal
years such dividends have averaged 7.73%.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies
on advances targeted for community investment and low- and moderate-income
housing projects. These contributions have affected adversely the level of
FHLB dividends paid and could continue to do so in the future. These
contributions could also have an adverse effect on the value of FHLB stock in
the future. A reduction in value of the Bank's FHLB stock may result in a
corresponding reduction in the Bank's capital.
Federal and State Taxation
Federal Taxation. For years prior to 1997, savings associations such
as the Bank that meet certain definitional tests relating to the composition
of assets and other conditions prescribed by the Code, were permitted to
establish reserves for bad debts and to make annual additions thereto which
may, within specified formula limits, be taken as a deduction in computing
taxable income for federal income tax purposes. The amount of the bad debt
reserve deduction for "non-qualifying loans" was computed under the experience
method. The amount of the bad debt reserve deduction for "qualifying real
property loans" (generally loans secured by improved real estate) was computed
under either the experience method or the percentage of taxable income method
(based on an annual election). Under the experience method, the bad debt
reserve deduction is an amount determined under a formula based generally upon
the bad debts actually sustained by the savings association over a period of
years.
35
<PAGE>
The percentage of specially computed taxable income that is used to
compute a savings association's bad debt reserve deduction under the
percentage of taxable income method (the "percentage bad debt deduction") is
8%. The percentage bad debt deduction thus computed is reduced by the amount
permitted as a deduction for non-qualifying loans under the experience method.
The availability of the percentage of taxable income method permits qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming
the maximum percentage bad debt deduction).
Under the percentage of taxable income method, the percentage bad
debt deduction cannot exceed the amount necessary to increase the balance in
the reserve for "qualifying real property loans" to an amount equal to 6% of
such loans outstanding at the end of the taxable year or the greater of (i)
the amount deductible under the experience method or (ii) the amount which
when added to the bad debt deduction for "non-qualifying loans" equaled the
amount by which 12% of the amount comprising savings accounts at year-end
exceeds the sum of surplus, undivided profits and reserves at the beginning of
the year.
In August 1996, legislation was enacted that repealed the reserve
method of accounting (including the percentage of taxable income method which
was used in prior years) used by many thrifts to calculate their bad debt
reserve for federal income tax purposes. Thrift institutions with $500 million
or less in assets may, however, continue to use the experience method. As a
result, the Bank must recapture that portion of the reserve that exceeds the
amount that could have been taken under the experience method for post-1987
tax years. At June 30, 1997, the Bank's post-1987 excess reserves amounted to
approximately $280,000. The recapture will be approximately $55,000 per year
and will occur over a six-year period which began in Fiscal 1997. The
legislation also requires thrift institutions to account for bad debts for
federal income tax purposes on the same basis as commercial banks for tax
years beginning after December 31, 1995. As a result, the Company computes its
bad debt deduction on the experience method.
In addition to the regular income tax, corporations, including
savings associations such as the Bank, generally are subject to a minimum tax.
An alternative minimum tax is imposed at a minimum tax rate of 20% on
alternative minimum taxable income, which is the sum of a corporation's
regular taxable income (with certain adjustments) and tax preference items,
less any available exemption. The alternative minimum tax is imposed to the
extent it exceeds the corporation's regular income tax and net operating
losses can offset no more than 90% of alternative minimum taxable income. For
taxable years beginning after 1986 and before 1996, corporations, including
savings associations such as the Bank, were also subject to an environmental
tax equal to 0.12% of the excess of alternative minimum taxable income for the
taxable year (determined without regard to net operating losses and the
deduction for the environmental tax) over $2 million.
To the extent earnings appropriated to a savings association's bad
debt reserves for "qualifying real property loans" and deducted for federal
income tax purposes exceed the allowable amount of such reserves computed
under the experience method and to the extent of the association's
supplemental reserves for losses on loans ("Excess"), such Excess may not,
36
<PAGE>
without adverse tax consequences, be utilized for the payment of cash
dividends or other distributions to a shareholder (including distributions on
redemption, dissolution or liquidation) or for any other purpose (except to
absorb bad debt losses). As of June 30, 1997, the Bank's Excess for tax
purposes totaled approximately $1.6 million.
The Company, the Bank and its subsidiary file consolidated federal
income tax returns on a fiscal year basis using the accrual method of
accounting.
The federal income tax returns of the Company for the last three
years are open to possible audit by the Internal Revenue Service (the "IRS").
No returns are being audited by the IRS at the current time. In the opinion of
management, any examination of still open returns (including returns of
subsidiary and predecessors of, or entities merged into, the Bank) would not
result in a deficiency which could have a material adverse effect on the
financial condition of the Bank and its subsidiary.
Iowa Taxation. Iowa imposes a franchise tax on the taxable income of
both mutual and stock savings banks. The tax rate is 5%, which may effectively
be increased, in individual cases, by application of a minimum tax provision.
Taxable income under the franchise tax is generally similar to taxable income
under the federal corporate income tax, except that, under the Iowa franchise
tax, no deduction is allowed for Iowa franchise tax payments and taxable
income includes interest on state and municipal obligations. Interest on U.S.
obligations is taxable under the Iowa franchise tax and under the federal
corporate income tax. For Iowa state tax purposes, the Company and SEI file
income tax returns and the Bank files a franchise tax return.
Delaware Taxation. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is
also subject to an annual franchise tax imposed by the State of Delaware.
Competition
Horizon Federal faces strong competition, both in originating real
estate loans and in attracting deposits. Competition in originating real
estate loans comes primarily from commercial and savings banks, and to a
lesser extent, credit unions located in the Bank's market area. Commercial
banks, savings banks, credit unions and finance companies provide vigorous
competition in consumer lending. The Bank competes for real estate and other
loans principally on the basis of the quality of services it provides to
borrowers, the interest rates it charges, loan fees it charges, and the types
of loans it originates. See "- Lending Activities."
The Bank attracts all of its deposits through its retail banking
offices, primarily from the communities in which those retail banking offices
are located. Therefore, competition for those deposits is principally from
commercial banks, savings banks, credit unions and investment banking firms
located in these communities. The Bank competes for these deposits by offering
a variety of account alternatives at competitive rates and by providing
convenient business hours, branch locations and interbranch deposit and
withdrawal privileges at each.
37
<PAGE>
The Bank serves Mahaska County and that portion of Marion County in
and around Knoxville, Iowa. There are eight commercial banks, three savings
banks, other than Horizon Federal, and three credit unions which compete for
deposits and loans in Horizon Federal's primary market area. The Bank
estimates its share of the savings market in its primary market area to be
approximately 10%.
Employees
At June 30, 1997, the Bank had a total of 25 full-time and five
part-time employees. The Bank's employees are not represented by any
collective bargaining group. Management considers its employee relations to be
good.
Executive Officers of the Company and the Bank Who Are Not Directors
The following information as to the business experience during the
past five years is supplied with respect to executive officers of the Company
and the Bank who do not serve on the Company's Board of Directors. There are
no arrangements or understandings between the persons named and any other
person pursuant to which such officers were selected.
Sharon K. McCrea - Ms. McCrea, age 55, joined Horizon Federal in
1959, as a teller, was appointed Assistant Treasurer in 1974 and promoted to
Treasurer and Comptroller of the Bank in 1979. Ms. McCrea is in charge of the
accounting department of the Bank.
Kent R. Frankenfeld - Mr. Frankenfeld, age 41, joined the Bank in
October 1994, as Vice President in charge of Marketing and Product
Development. Mr. Frankenfeld was the Vice President of a savings bank located
in Des Moines, Iowa prior to joining the Bank.
Item 2. Description of Property
The Bank conducts its business through its three offices, two of
which are located in Oskaloosa, Iowa and one in Knoxville, Iowa. The following
table sets forth information relating to each of the Bank's offices as of June
30, 1997. The total net book value of the Bank's premises and equipment
(including land, buildings and leasehold improvements and furniture, fixtures
and equipment) at June 30, 1997 was approximately $1.1 million. See Note 6 of
Notes to Consolidated Financial Statements in the Annual Report.
<TABLE>
<CAPTION>
Total
Approximate
Date Square Net Book Value at
Location Acquired Footage June 30, 1997
- -------------------------------------------------- ---------- --------- -----------------
<S> <C> <C> <C>
Main Office:
301 First Avenue East 1964 4,230 $303,000
Oskaloosa, Iowa
Branch Offices:
509 A Avenue, West 1992 3,277 $651,000
Oskaloosa, Iowa
1022 West Pleasant Street 1979 1,598 $128,000
Knoxville, Iowa
</TABLE>
Horizon Federal believes that its current facilities are adequate to
meet the present and foreseeable needs of the Bank and the Company.
38
<PAGE>
The Bank maintains an on-line data base with a service bureau
servicing financial institutions. The net book value of the data processing
and computer equipment utilized by the Bank at June 30, 1997 was approximately
$93,000.
Item 3. Legal Proceedings
Horizon Federal is involved, from time to time, as plaintiff or
defendant in various legal actions arising in the normal course of their
businesses. While the ultimate outcome of these proceedings cannot be
predicted with certainty, it is the opinion of management, after consultation
with counsel representing Horizon Federal in the proceedings, that the
resolution of these proceedings should not have a material effect on Horizon
Federal's results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year ended June 30, 1997.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Page 40 of the attached 1997 Annual Report to Stockholders is
incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
Pages 4 through 14 of the attached 1997 Annual Report to Stockholders
are incorporated herein by reference.
Item 7. Financial Statements
The following information appearing in the Company's 1997 Annual
Report to Stockholders for the year ended June 30, 1997, is incorporated
herein by reference.
Annual Report Section Pages in Annual Report
- --------------------- ----------------------
Independent Auditors' Report 15
Consolidated Balance Sheets as of June 30, 1997 and 1996 16
Consolidated Statements of Operations for the Years Ended
June 30, 1997, 1996 and 1995 17
Consolidated Statements of Stockholders' Equity for Years
Ended June 30, 1997, 1996 and 1995 18
Consolidated Statements of Cash Flows for Years Ended
June 30, 1997, 1996 and 1995 19
Notes to Consolidated Financial Statements 20 - 39
39
<PAGE>
With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended June 30, 1997, is not deemed
filed as part of this Annual Report on Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change
of accountants and/or reporting disagreements on any matter of accounting
principle or financial statement disclosure.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors
Information concerning Directors of the Company is incorporated
herein by reference from the definitive Proxy Statement for the Annual Meeting
of Stockholders to be held in October 1997, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
Executive Officers
Information regarding the business experience of the executive
officers of the Company and the Bank contained in Part I of this Form 10-KSB
is incorporated herein by reference.
Compliance with Section 16(a)
Information concerning compliance with Section 16(a) of the
Securities Exchange Act of 1934 is incorporated herein by reference from the
definitive Proxy Statement for the Annual Meeting of Stockholders to be held
in October 1997, a copy of which will be filed not later than 120 days after
the close of the fiscal year.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein
by reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in October 1997, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
40
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial
owners and management is incorporated herein by reference from the definitive
Proxy Statement for the Annual Meeting of Stockholders to be held in October
1997, a copy of which will be filed not later than 120 days after the close of
the fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for
the Annual Meeting of Stockholders to be held in October 1997, a copy of which
will be filed not later than 120 days after the close of the fiscal year.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
See Index to Exhibits.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three-month
period ended June 30, 1997.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 SERVICES
CORPORATION
Date: September 25, 1997 By: /s/ Robert W. DeCook
----------------------
Robert W. DeCook, President and
Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Robert W. DeCook /s/ Thomas L. Gillespie
- ----------------------------------------- ---------------------------------
Robert W. DeCook, Director, President and Thomas L. Gillespie, Director and
Chief Executive Officer (Principal Vice President
Executive Officer)
Date: September 25, 1997 Date: September 25, 1997
/s/ Gary L. Rozenboom /s/ Dwight L. Groves
- ----------------------------------------- ---------------------------------
Gary L. Rozenboom, Director Dwight L. Groves, Director
Date: September 25, 1997 Date: September 25, 1997
/s/ Norman P. Zimmerman /s/ Sharon K. McCrea
- ----------------------------------------- ---------------------------------
Norman P. Zimmerman, Director Sharon K. McCrea, Treasurer and
Comptroller, (Principal Financial
and Accounting Officer)
Date: September 25, 1997 Date: September 25, 1997
<PAGE>
Index to Exhibits
Exhibit
Number Document
- ------- ----------------------------------------------------------------------
3 The Articles of Incorporation and Bylaws, filed on March 18, 1994 as
exhibits 3.1 and 3.2, respectively, to Registrant's Registration
Statement on Form S-1 (File No. 33-76674), are incorporated herein by
reference.
4 Registrant's Specimen Stock Certificate, filed on March 18, 1994 as
Exhibit 4 to Registrant's Registration Statement on Form S-1 (File
No. 33-76674), is incorporated herein by reference.
10.1 Registrant's Employee Stock Ownership Plan, filed on March 18, 1994
as Exhibit 10.3 to Registrant's Registration Statement on Form S-1
(File No. 33-76674), is incorporated herein by reference.
10.2 Employment Agreements between the Bank and Messrs. DeCook and
Gillespie, filed as Exhibits 10.1 and 10.2, respectively, to
Registrant's Report on Form 10-KSB for the fiscal year ended June 30,
1994 (File No. 0-24036), are incorporated herein by reference.
10.3 1994 Stock Option and Incentive Plan, filed as Exhibit 10.3 to
Registrant's Report on Form 10-KSB for the fiscal year ended June 30,
1994 (File No. 0-24036), is incorporated herein by reference.
10.4 Recognition and Retention Plan, filed as Exhibits 10.4 to
Registrant's Report on Form 10-KSB for the fiscal year ended June 30,
1994 (File No. 0-24036), is incorporated herein by reference.
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule (electronic filing only)
<PAGE>
- -------------------------------------------------------------------------------
1997 ANNUAL REPORT
- -------------------------------------------------------------------------------
[LOGO]
HORIZON FINANCIAL SERVICES
CORPORATION
<PAGE>
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
President's Letter to Shareholders........................... 1
Selected Consolidated Financial Information.................. 2
Management's Discussion and Analysis of Financial
Condition and Results of Operation......................... 4
Consolidated Financial Statements............................ 15
Stockholder Information...................................... 40
Corporate Information........................................ 41
<PAGE>
[HORIZON FINANCIAL LETTERHEAD]
September 26, 1997
Dear Stockholder:
I am pleased to report to you that the Company's fiscal year ended June 30,
1997, was again one of increased profitability from recurring operations. Net
interest income after provision for losses on loans was $2.24 million, an
increase of $259,000 or 13.1%.
Disregarding the one-time assessment by the FDIC to recapitalize the Savings
Association Insurance Fund, which cost the Company $207,000 (net of taxes),
net earnings for the year were $485,000, representing a return on average
assets of .61%. This represents an increase of $109,000, or 29.0%, over last
year's net earnings. Loans receivable increased by $3.1 million as residential
real estate, consumer and commercial business loans increased. Total assets
increased by $12.5 million, an increase of 17.0%. The Company's average
interest rate spread, the difference between the yield earned on
interest-earning assets and the rates paid on interest-bearing liabilities,
was a healthy 3.12%, and its net interest margin was 3.41%, compared to 3.09%
and 3.44%, respectively, for fiscal 1996.
Your Board and management are committed to continue building value in Horizon
Financial. We will also continue to be an organization which builds family
financial relationships and demonstrates commitment to our customers and to
the communities we serve.
On behalf of all of us at Horizon Financial and Horizon Federal, we thank you
for your support of and your investment in Horizon Financial.
Yours very truly,
Robert W. DeCook
President and Chief Executive Officer
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
- ----------------------------------
Total assets..................................... $85,969 $73,464 $69,624 $60,589 $56,181
Cash and cash equivalents........................ 5,621 3,471 3,812 5,081 2,962
Securities available for sale.................... 24,942 18,049 5,170 2,079 ---
Investment securities............................ --- --- 100 600 1,094
Mortgage-backed and related securities........... --- --- 11,311 10,095 13,716
Loans receivable, net............................ 52,193 49,104 46,478 40,409 35,711
Deposits......................................... 57,641 54,759 51,330 49,969 51,467
Advances from FHLB............................... 19,102 9,661 8,718 1,447 ---
Stockholders' equity............................. 8,412 8,390 8,786 8,584 4,149
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
- -------------------------
Total interest income ..................... $ 5,895 $ 5,454 $ 4,752 $ 4,147 $ 4,321
Total interest expense .................... 3,402 3,144 2,443 2,160 2,403
------- ------- ------- ------- -------
Net interest income ..................... 2,493 2,310 2,309 1,987 1,918
Provision for losses on loans ............. 252 328 2 --- ---
------- ------- ------- ------- -------
Net interest income after
provision for losses on loans ............ 2,241 1,982 2,307 1,987 1,918
Noninterest income
Fees, commissions and service charges ... 338 345 238 230 173
Gain (loss) on sale of securities, net .. 81 39 --- (273) 1
Other noninterest income ................ 19 94 23 21 16
------- ------- ------- ------- -------
Total noninterest income .................. 438 478 261 (22) 190
Total noninterest expense ................. 2,255(1) 1,886 1,904 1,526 1,250
------- ------- ------- ------- -------
Earnings before taxes on income ........... 424 573 664 439 858
Taxes on income ........................... 146 197 245 166 313
------- ------- ------- ------- -------
Net earnings before change in accounting
principle ............................... 278 376 419 273 545
Cumulative effect from change in accounting
principle, net of taxes on income ....... --- --- --- 160 ---
------- ------- ------- ------- -------
Net earnings .............................. $ 278 $ 376 $ 419 $ 433 $ 545
======= ======= ======= ======= =======
Earnings per share ........................ $ 0.66 $ 0.84 $ 0.88 N\A N\A
Dividends per share ....................... $ 0.32 $ 0.32 $ 0.16 N\A N\A
</TABLE>
- -----------------------
(1) Includes the special assessment of $331,000 paid by the Company to
the Federal Deposit Insurance Fund (the"FDIC") to recapitalize the
Savings Association Insurance Fund (the "SAIF").
2
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
- -----------------------------------------
Performance Ratios:
Return on assets (ratio of net earnings to average
total assets)(1)...................................... .61% .53% .64% .74% .99%
Interest rate spread information:
Average during year..................................... 3.12 3.09 3.42 3.59 3.60
End of year............................................. 3.07 3.06 2.59 3.41 3.79
Net interest margin(2)................................... 3.41 3.44 3.82 3.70 3.72
Ratio of operating expense to average total
assets(1).............................................. 2.41 2.64 2.92 2.61 2.28
Return on stockholders' equity (ratio of net
earnings to average equity)(1)......................... 5.77 4.38 4.82 9.84 14.06
Efficiency ratio(3)....................................... 67.51 68.61 74.09 68.19 59.33
Asset Quality Ratios:
Non-performing assets to total assets at end of
year(4)................................................. 1.22 1.27 1.06 1.21 1.06
Allowance for losses on loans to non-performing
loans(4)............................................... 50.51 34.01 39.27 51.85 64.08
Allowance for losses on loans to total loans............. .65 .63 .62 .91 1.04
Other Ratios:
Stockholders' equity to total assets at end of
year.................................................... 9.78 11.42 12.62 14.17 7.39
Average stockholders' equity to average assets............ 10.54 12.00 13.34 7.54 7.07
Average interest-earning assets to average
interest-bearing liabilities........................... 106.13% 107.31% 109.88% 102.58% 102.36%
Number of full-service offices............................. 3 3 3 3 3
</TABLE>
-------------------
(1) Does not include one-time SAIF assessment paid in fiscal 1997 of
$331,000 ($207,000, net of taxes).
(2) Net interest income divided by average interest-earning assets.
(3) Noninterest expense (not including one-time SAIF assessment paid in
fiscal 1997) divided by net interest income and other income,
(excluding gain (loss) on sale of securities, net).
(4) Nonperforming assets consist of nonaccruing loans, accruing loans
past-due 90 or more days and real estate owned. Nonperforming loans
are nonperforming assets less real estate owned.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Horizon Financial Services Corporation (the "Company") is a savings
and loan holding company the primary asset of which is Horizon Federal Savings
Bank (the "Bank"). The Company was incorporated in March 1994 and sold 506,017
shares of common stock on June 28, 1994 for the purpose of acquiring all of
the capital stock of the Bank in connection with the Bank's conversion from
mutual to stock form of ownership (the "Conversion"). All references to the
Company prior to June 28, 1994, except where otherwise indicated, are to the
Bank and its subsidiary on a consolidated basis.
The principal business of the Company has historically consisted of
attracting deposits from the general public and making loans secured by
residential and, to a lesser extent, other properties. The Company's results
of operations are primarily dependent on net interest rate spread, which is
the difference between the average yield on loans, mortgage-backed securities
and investments and the average rate paid on deposits and other borrowings.
The interest rate spread is affected by regulatory, economic and competitive
factors that influence interest rates, loan demand and deposit flows. In
addition, the Company, like other non-diversified savings institution holding
companies, is subject to interest rate risk to the degree that its
interest-earning assets mature or reprice at different times, or on a
different basis, than its interest-bearing liabilities.
The Company's results of operations are also affected by, among other
things, fee income received, loss or profit on securities available for sale,
the establishment of provisions for possible losses on loans, income derived
from subsidiary activities, the level of operating expenses and income taxes.
The Company's operating expenses principally consist of employee compensation
and benefits, occupancy expenses, federal deposit insurance premiums, data
processing expenses and other general and administrative expenses.
The Company is significantly affected by prevailing economic
conditions including federal monetary and fiscal policies and federal
regulation of financial institutions. Deposit balances are influenced by a
number of factors including interest rates paid on competing personal
investments and the level of personal income and savings within the
institution's market area. Lending activities are influenced by the demand for
housing as well as competition from other lending institutions. The primary
sources of funds for lending activities include deposits, loan repayments,
borrowings and funds provided from operations.
Certain statements in this report that relate to the Corporation's
plans, objectives or future performance may be deemed to be forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are based on Management's current expectations.
Actual strategies and results in future periods may differ materially from
those currently expected because of various risks and uncertainties.
Additional discussion of factors affecting the Corporation's business and
prospects is contained in the Corporation's periodic filings with the
Securities and Exchange Commission.
Financial Condition
June 30, 1997 Compared to June 30, 1996. Total assets increased $12.5
million, or 17.0%, to $85.9 million at June 30, 1997 from $73.4 million at
June 30, 1996. The increase was reflected in a $6.9 million increase in
securities available for sale, a $3.1 million increase in net loans
receivable, a $2.1 million increase in cash and cash equivalents, and a
4
<PAGE>
$400,000 increase in Federal Home Loan Bank stock. The increases were funded
primarily through additional advances of $9.4 million from the Federal Home
Loan Bank (the "FHLB") of Des Moines and a $2.9 million increase in deposits.
During fiscal 1997, the Company leveraged its capital through FHLB advances in
an effort to increase earnings. See "Asset/Liability Management."
Total liabilities increased $12.5 million, or 19.2%, to $77.6 million
at June 30, 1997 from $65.1 million at June 30, 1996, primarily as a result of
the $9.4 million increase in FHLB advances and a $2.9 million increase in
deposits.
Stockholders' equity increased $22,000, or .27%, during fiscal 1997,
primarily through the retention of net income and a positive adjustment of net
unrealized losses on securities available for sale, offset by the repurchase
of the Company's common stock and the payment of dividends declared on common
stock. The Company paid dividends totaling approximately $130,000 or $.32 per
share. The Company repurchased five percent of its common stock, 22,397
shares, under a stock repurchase program completed during fiscal 1997. The
common stock was repurchased during 1997 at a cost of $337,354, or $15.06 per
share. As of September 10, 1997, the Company's shares traded at $18.875.
June 30, 1996 Compared to June 30, 1995. Total assets increased $3.8
million, or 5.5%, to $73.4 million at June 30, 1996 from $69.6 million at June
30, 1995. The increase was reflected in a $2.6 million increase in net loans
receivable and a $1.4 million net increase in securities available for sale.
In December 1995, the Company transferred and reclassified its entire held to
maturity portfolio of investment, mortgage-backed and related securities to
available for sale. See "Asset/Liability Management." The increases in loans
and investment and mortgage-backed and related securities were funded
primarily through a $3.4 million increase in deposits, advances of $943,000
from the FHLB and a $341,000 decrease in cash and cash equivalents.
Total liabilities increased $4.3 million to $65.1 million at June 30,
1996, from $60.8 million at June 30, 1995, primarily as a result of a $3.4
million increase in deposits and additional advances of $943,000 from the
FHLB. Management attributes the increase in deposits to the attractive rates
it is currently offering on savings accounts which are competitive with mutual
fund rates.
Stockholders' equity decreased $396,000, or 4.50%, during fiscal 1996
primarily as a result of the Company's stock repurchases and the payment of
dividends on common stock. The decrease in Stockholders' equity was partially
offset by net earnings. The Company paid dividends totaling $138,166, or $.32
per share. The Company repurchased nine percent of its common stock, 48,312
shares, under a stock repurchase program completed during fiscal 1996. The
common stock was repurchased during 1996 at a cost of $699,431, or $14.48 per
share.
Results of Operations
Comparison of Years Ended June 30, 1997 and June 30, 1996
General. Net earnings for the year ended June 30, 1997 decreased
$98,000 to $278,000 from $376,000 for the year ended June 30, 1996. This
decrease was primarily due to the one time special assessment of $207,000, net
of taxes, by the FDIC to recapitalize the SAIF. Net earnings, without the SAIF
assessment, for the year ended June 30, 1997 would have been $485,000 as
compared to $376,000 for the same period ended June 30, 1996, resulting in an
increase of $109,000 or 29.0%.
5
<PAGE>
Interest Income. Interest income increased $441,000 to $5.9 million
for the year ended June 30, 1997 compared to $5.5 million for the year ended
June 30, 1996. The increase was attributable primarily to interest earned on
loans receivable as a result of an increase in the average outstanding balance
of loans, and to a lesser extent, the yield earned on such loans. The average
outstanding balance of loans receivable increased $3.2 million to $51.2
million during fiscal 1997, while the yield earned on such loans increased 8
basis points to 8.62%. An increase of $2.7 million in the average outstanding
balance of the Company's securities available for sale also contributed to the
increase in interest income. These increases were funded with FHLB advances
and customer deposits. The yield on all average interest-earning assets
decreased slightly during fiscal 1997 to 8.06% from 8.11% during fiscal 1996.
Interest Expense. Interest expense increased $258,000 to $3.4 million
for the year ended June 30, 1997 compared to $3.1 million for the year ended
June 30, 1996. The increase in interest expense was primarily attributable to
increases in the average outstanding balance of FHLB advances and deposits,
combined with increased rates paid on savings deposits. The average rate paid
on savings deposits increased by 60 basis points to 4.43% during fiscal 1997
from 3.83% during fiscal 1996. The average rate paid on all interest-bearing
liabilities decreased 8 basis points to 4.94% during fiscal 1997 from 5.02%
during fiscal 1996.
Net Interest Income. Net interest income increased $183,000 to $2.5
million in fiscal 1997 from $2.3 in fiscal 1996. The ratio of the Company's
average interest-earning assets to average interest-bearing liabilities
decreased to 106.14% during fiscal 1997 from 107.31% during fiscal 1996.
During this same period the Company's interest rate spread increased slightly
to 3.12% from 3.09%.
Provision for Losses on Loans. The provision for losses on loans is a
result of management's periodic analysis of the adequacy of the Company's
allowance for losses on loans. During the year ended June 30, 1997, the
Company had a $252,000 addition to its allowance for losses on loans compared
to a $328,000 provision in fiscal 1996. The Company continues to monitor and
adjust its allowance for losses on loans as management's analysis of its loan
portfolio and economic conditions dictate. The Company believes it has taken
an appropriate approach toward reserve levels, consistent with the Company's
loss experiences and considering, among other factors, the composition of the
Company's loan portfolio, the level of the Company's classified and
non-performing assets and their estimated value. Future additions to the
Company's allowance for losses on loans and any change in the related ratio of
the allowance for losses on loan to non-performing loans are dependent upon
the economy, changes in real estate values and interest rates. In addition,
federal regulators may require additional reserves as a result of their
examination of the Company. The allowance for losses on loans reflects what
the Company currently believes is an adequate level of reserves, although
there can be no assurance that future losses will not exceed the estimated
amounts, thereby adversely affecting future results of operations. As of June
30, 1997 the Company's allowance for losses on loans was $348,000 compared to
$318,000 at June 30, 1996.
As of June 30, 1997, the Company's non-performing assets, consisting
of nonaccruing loans, accruing loans 90 days or more delinquent, real estate
owned and repossessed consumer property, totaled $1,045,000, or 1.22% of total
assets, compared to $935,000, or 1.27% of total assets, as of June 30, 1996.
The increase in non-performing assets related primarily to a $119,000 increase
to foreclosed assets and a $220,000 increase in accruing loans past-due 90 or
more days. The increase was partially offset by a $229,000 decrease in
non-accruing loans.
Noninterest Income. Noninterest income decreased $40,000 to $438,000
for the year ended June 30, 1997 from $478,000 for the year ended June 30,
1996. The decrease was primarily attributable to the $37,000 nonrecurring
special patronage dividend received by the Company from its data processing
6
<PAGE>
servicer and a $33,000 gain on the sale of the data processing center during
fiscal 1996 while no similar noninterest income was received for fiscal 1997.
This decrease was partially offset by a $42,000 increase in the gain on sale
of securities to $81,000 for fiscal 1997 as compared to $39,000 for the year
ended June 30, 1996.
Noninterest Expense. Noninterest expense increased $369,000, or
19.6%, to $2.3 million for the year ended June 30, 1997 from $1.9 million for
the year ended June 30, 1996. The increase was primarily the result of the one
time special assessment of $331,000 by the FDIC to recapitalize the SAIF. Also
contributing to the increase in noninterest expense was a $121,000 increase in
compensation costs generally associated with the Company's stock-based
compensation plans as a result of an increase in the Company's stock price,
partially offset by a $51,000 decrease in other general expense.
Income Tax Expense. Income taxes decreased $52,000 to $145,000 for
the year ended June 30, 1997 from $197,000 for the same period in 1996. The
decrease was primarily due to a decrease in earnings prior to taxes on income.
Income tax expense was reduced by low income housing credits of approximately
$42,000, which are expected to continue annually through 2005.
Comparison of Years Ended June 30, 1996 and June 30, 1995
General. Net earnings for the year ended June 30, 1996 decreased
$43,000 to $376,000 from $419,000 for the year ended June 30, 1995. This
decrease was primarily the result of a $326,000 increase in the provision for
losses on loans from $2,000 in fiscal 1995 to $328,000 in fiscal 1996.
Partially offsetting this decrease was a $217,000 increase in noninterest
income, an $18,000 decrease in noninterest expense, and a $48,000 decrease in
income taxes.
Interest Income. Interest income increased $702,000 to $5.4 million
for the year ended June 30, 1996 compared to $4.7 million for the year ended
June 30, 1995. The increase was attributable primarily to interest earned on
loans receivable as a result of an increase in both the average outstanding
balance of, and the yield earned on, such loans. The average outstanding
balance of loans receivable increased $5.0 million to $48.0 million during
fiscal 1996, while the yield earned on such loans increased 35 basis points to
8.54%. An increase in the average outstanding balance of the Company's
investment, mortgage-backed and related securities (all currently classified
as securities for sale) of $936,000 also contributed to the increase in
interest income. These increases were funded with customer deposits and
advances from the FHLB. The yield on all average interest-earning assets
increased during fiscal 1996 to 8.11% from 7.86% during fiscal 1995.
Interest Expense. Interest expense increased $701,000 to $3.1 million
for the year ended June 30, 1996 compared to $2.4 million for the year ended
June 30, 1995. The increase in interest expense was primarily attributable to
increases in the average outstanding balances of savings deposits and FHLB
advances, combined with increased rates paid on savings deposits and
certificates of deposit. The rates paid on savings deposits and certificates
of deposit increased by 91 basis points and 70 basis points, respectively. The
average rate paid on all interest-bearing liabilities increased 58 basis
points to 5.02% during fiscal 1996 from 4.44% during fiscal 1995.
Net Interest Income. Net interest income remained constant at $2.3
million for fiscal years 1996 and 1995. The ratio of the Company's average
interest-earning assets to average interest-bearing liabilities decreased
2.57% to 107.31% during fiscal 1996 from 109.88% during fiscal 1995. During
this same period the Company's interest rate spread narrowed to 3.09% from
3.42%.
7
<PAGE>
Provision for Losses on Loans. The provision for losses on loans is a
result of management's periodic analysis of the adequacy of the Company's
allowance for losses on loans. During the year ended June 30, 1996, the
Company had a $328,000 addition to its allowance for losses on loans compared
to a $2,000 provision in fiscal 1995. The increase in the provision for loss
on loans was predominantly attributable to a $227,000 commercial business
operating loan which defaulted during fiscal 1996 and subsequently was written
off. The Company continues to monitor and adjust its allowance for losses on
loans as management's analysis of its loan portfolio and economic conditions
dictate. The Company believes it has taken an appropriate approach toward
reserve levels, consistent with the Company's loss experiences and
considering, among other factors, the composition of the Company's loan
portfolio, the level of the Company's classified and non-performing assets and
their estimated value. Future additions to the Company's allowance for losses
on loans and any change in the related ratio of the allowance for losses on
loan to non-performing loans are dependent upon the economy, changes in real
estate values and interest rates. In addition, federal regulators may require
additional reserves as a result of their examination of the Company. The
allowance for losses on loans reflects what the Company currently believes is
an adequate level of reserves, although there can be no assurance that future
losses will not exceed the estimated amounts, thereby adversely affecting
future results of operations. As of June 30, 1996 the Company's allowance for
losses on loans was $318,000 compared to $291,000 at June 30, 1995.
As of June 30, 1996, the Company's non-performing assets, consisting
of nonaccruing loans, accruing loans 90 days or more delinquent, real estate
owned and repossessed consumer property, totaled $935,000 or 1.27% of total
assets compared to $741,000 or 1.06% of total assets as of June 30, 1995. The
increase in non-performing assets related primarily to a $153,000 increase in
nonaccruing loans (consisting of residential loans totaling $54,000, consumer
loans totaling $83,000 and commercial business loans totaling $16,000) and a
$31,000 increase in foreclosed assets.
Noninterest Income. Noninterest income increased $217,000, or 83.3%,
to $478,000 for the year ended June 30, 1996 from $261,000 for the year ended
June 30, 1995. The increase was primarily attributable to a $108,000 increase
in fees, commissions and service charges resulting from increased fees charged
on checking accounts and increased commission income on sales of alternative
financial products sold through the wholly-owned financial services subsidiary
of the Bank. Also contributing to the increase in noninterest income was a
$37,000 nonrecurring special patronage dividend received by the Company from
its data processing servicer, a $33,000 gain in connection with the sale of
the data processing center during fiscal 1996 and a $39,000 gain on the sale
of securities.
Noninterest Expense. Noninterest expense decreased by $17,000 in
fiscal 1996. Decreases of $43,000 in office occupancy expense, $19,000 in
advertising expense, and $14,000 in data processing expense were partially
offset by increases of $28,000 in real estate expense and $22,000 in other
general expense.
Income Tax Expense. Income taxes decreased $48,000 to $197,000 for
the year ended June 30, 1996 from $245,000 for the same period in 1995. The
decrease was primarily due to a decrease in earnings prior to taxes on income
and a 2.6% decrease in the Company's effective tax rate as a result of low
income housing credits.
8
<PAGE>
Average Balances, Interest Rates and Yields
The following table presents for the periods indicated the total
dollar amount of interest income earned on average interest-earning assets and
total dollar amount of interest expense paid on average interest-bearing
liabilities, as well as their resultant yields and rates, respectively. No tax
equivalent adjustments were made. All average balances are monthly average
balances. Non-accruing loans have been included in the table as loans carrying
a zero yield.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ------------------------------ -----------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate(2) Balance Paid Rate
----------- -------- ------ ----------- -------- ------- ----------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1)............... $51,166 $ 4,408 8.62% $47,993 $4,101 8.54% $42,982 $3,522 8.19%
Securities available for sale..... 19,445 1,332 6.85 16,779 1,159 6.91 3,752 330 8.80
Mortgage-backed securities(2)..... -- -- -- -- -- -- 11,453 731 6.38
Investment securities(2).......... -- -- -- -- -- -- 638 48 7.43
Other interest-earning assets..... 1,814 108 5.96 1,954 158 8.09 1,161 85 4.91
FHLB stock........................ 666 47 7.03 507 36 7.10 471 36 7.76
------- ------- ------- ------ ------- ------
Total interest-earning assets(1). 73,091 5,895 8.06 67,233 5,454 8.11 60,457 4,752 7.86
------- ------- ------- ------ ------- ------
Interest-Bearing Liabilities:
Savings deposits.................. 15,829 701 4.43 11,577 443 3.83 7,672 224 2.92
Money market deposits............. 935 22 2.42 1,163 28 2.41 2,513 71 2.82
Demand and NOW deposits........... 5,371 93 1.66 4,590 83 1.81 4,202 71 1.70
Certificates of deposit........... 33,759 1,866 5.53 35,820 2,040 5.70 35,652 1,783 5.00
FHLB Advances..................... 12,978 720 5.54 9,502 550 5.79 4,980 294 5.90
------- ------- ------- ------ ------- ------
Total interest-bearing liabilities $68,872 3,402 4.94 $62,652 3,144 5.02 $55,019 2,443 4.44
------- ------- ------- ------ ------- ------
Net interest income................ $ 2,493 $2,310 $2,309
======= ====== ======
Net interest rate spread........... 3.12% 3.09% 3.42%
===== ==== ====
Net interest-earning assets........ $ 4,219 $ 4,581 $ 5,438
======= ======= =======
Net interest margin(3)............. 3.41% 3.44% 3.82%
===== ==== ====
Average interest-earning assets to
average interest-bearing liabilities 106.13% 107.31% 109.88%
======= ====== ======
</TABLE>
- -------------------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in
process and loss reserves
(2) In late 1995, the FASB issued "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt Securities,
Questions and Answers." This guide permitted a one-time reassessment
of the appropriateness of classification of securities. Upon adoption
of the guide, the Bank elected to redesignate its entire portfolio of
investment, mortgage-backed and related securities from securities
held to maturity to securities available for sale. For additional
information regarding these securities, see Note 1 of the Notes to
Consolidated Financial Statements presented elsewhere in the Annual
Report.
(3) Net interest income divided by average interest-earning assets.
9
<PAGE>
Rate/Volume Analysis of the Net Interest Income
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets
and interest-bearing liabilities. For each category of interest-earning assets
and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (i.e., changes in volume multiplied by
old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old
volume). For purposes of this table, changes attributable to both rate and
volume which cannot be segregated have been allocated proportionately to the
change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
--------------------------------- ----------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
------------------ Increase ------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable...................... $ 217 $ 90 $ 307 $ 312 $ 267 $ 579
Securities available for sale......... 153 20 173 486 (436) 50
Other interest-earning assets......... (49) (1) (50) 39 34 73
FHLB Stock............................ 11 -- 11 -- -- --
------- -------- -------- ------- ------ -------
Total interest-earning assets....... $ 331 $ 109 $ 441 $ 837 $ (135) $ 702
======= ======== -------- ======= ====== -------
Interest-bearing liabilities:
Savings deposits...................... 199 59 258 217 2 219
Money market deposits................. (5) -- (5) (20) (23) (43)
Demand and NOW deposits............... 60 (50) 10 12 -- 12
Certificates of deposits.............. (1,248) 1,074 (174) 163 94 257
FHLB advances......................... 162 7 169 1,608 (1,352) 256
------- -------- -------- ------- ------ -------
Total interest-bearing liabilities.. $ (832) $ 1,090 $ 258 $ 1,980 $1,279 $ 701
======== ======== -------- ======= ====== -------
Net interest income..................... $ 183 $ 1
======== =======
</TABLE>
10
<PAGE>
Interest Rate Spread
The following table sets forth the weighted average yields on
interest-earning assets, the weighted average rates on interest-bearing
liabilities and the interest rate spread between weighted average yields and
rates at the end of each of the years presented. Non-accruing loans have been
included in the table as carrying a zero yield.
At June 30,
----------------------------
1997 1996 1995
------ ------ -----
Weighted average yield on:
Loans receivable, net(1).................. 8.65% 8.43% 8.04%
Securities available for sale............. 6.99 6.66 7.67
Mortgage-backed securities................ -- -- 6.69
Investment securities..................... -- -- 9.00
Other interest-earning assets............. 5.45 5.15 6.15
FHLB stock................................ 7.00 7.00 7.00
Combined weighted average yield on
interest-earning assets................. 8.00 7.90 7.74
Weighted average rate paid on:
Savings deposits.......................... 4.24 4.06 4.04
Money market deposits..................... 2.43 2.41 3.53
Demand and NOW deposits................... 1.39 1.79 1.80
Certificates of Deposit................... 5.62 5.54 5.71
FHLB advances............................. 5.71 5.49 6.04
Combined weighted average rate paid
on interest-bearing liabilities......... 4.93 4.84 5.15
Spread.................................... 3.07% 3.06% 2.59%
- ---------------------
(1) Calculated net of deferred loan fees, loan discounts, loans
in process and loan loss reserves.
Asset/Liability Management
The Company currently focuses lending efforts toward originating
competitively priced adjustable-rate loan products and fixed-rate loan
products with relatively short terms to maturity, generally fifteen years or
less. This allows the Company to maintain a portfolio of loans which will be
sensitive to changes in the level of interest rates while providing a
reasonable spread to the cost of liabilities used to fund the loans. The
Company, however, also makes long-term, fixed-rate mortgage loans which are
sold in the secondary market.
The Company's primary objective for its investment portfolio is to
provide the liquidity necessary to meet loan funding needs. This portfolio is
used in the ongoing management of changes to the Company's assets/liability
mix, while contributing to profitability through earnings flow. The investment
policy generally calls for funds to be invested among various categories of
security types and maturities based upon the Company's need for liquidity,
11
<PAGE>
desire to achieve a proper balance between minimizing risk while maximizing
yield, the need to provide collateral for borrowings, and to fulfill the
Company's asset/liability management goals.
The Company's cost of funds are typically responsive to changes in
interest rates due to the relatively short-term nature of its deposit
portfolio. Consequently, the results of operations are influenced by the
levels of short-term interest rates. The Company offers a range of maturities
on its deposit products at competitive rates and monitors the maturities on an
ongoing basis.
The Company emphasizes and promotes its savings, money market, demand
and NOW accounts and, subject to market conditions, certificates of deposit
with maturities of six months through five years, principally within its
primary market area. The savings and NOW accounts tend to be less susceptible
to rapid changes in interest rates.
In managing its asset/liability mix, the Company, at times, depending
on the relationship between long- and short-term interest rates, market
conditions and consumer preference, may place somewhat greater emphasis on
maximizing its net interest margin than on strictly matching the interest rate
sensitivity of its assets and liabilities. In this regard, the Company has
borrowed and may continue to borrow from the FHLB to purchase securities when
advantageous interest rate spreads can be obtained. Management believes that
the increased net income which may result from an acceptable mismatch in the
actual maturity or repricing of its asset and liability portfolios can, during
periods of declining or stable interest rates, provide sufficient returns to
justify the increased exposure to sudden and unexpected increases in interest
rates which may result from such a mismatch. The Company has established
limits, which may change from time to time, on the level of acceptable
interest rate risk. There can be no assurance, however, that in the event of
an adverse change in interest rates the Company's efforts to limit interest
rate risk will be successful.
Net Portfolio Value. The OTS provides a Net Portfolio Value ("NPV")
approach to the quantification of interest rate risk. This approach calculates
the difference between the present value of expected cash flows from assets
and the present value of expected cash flows from liabilities, as well as cash
flows from off-balance sheet contracts. Management of the Bank's assets and
liabilities is done within the context of the marketplace, but also within
limits established by the Board of Directors on the amount of change in NPV
which is acceptable given certain interest rate changes.
The OTS issued a regulation which uses a net market value methodology
to measure the interest rate risk exposure of thrift institutions. Under OTS
regulations, an institution's "normal" level of interest rate risk in the
event of an assumed change in interest rates is a decrease in the
institution's NPV in an amount not exceeding 2% of the present value of its
assets. Thrift institutions with greater than "normal" interest rate exposure
must take a deduction from their total capital available to meet their risk
based capital requirement. The amount of that deduction is one-half of the
difference between (a) the institution's actual calculated exposure to a 200
basis point interest rate increase or decrease (whichever results in the
greater pro forma decrease in NPV) and (b) its "normal" level of exposure
which is 2% of the present value of its assets. The regulation, however, will
not become effective until the OTS evaluates the process by which savings
associations may appeal an interest rate risk deduction determination. It is
uncertain as to when this evaluation may be completed. Notwithstanding the
foregoing and the fact that the Bank, due to its asset size and level of
risk-based capital, is exempt from this requirement, utilizing this measuring
concept, the Bank's interest rate risk was considered normal under OTS
regulations and no additional risk-based capital would have been required at
June 30, 1997.
12
<PAGE>
Presented below, as of June 30, 1997, is an analysis of the Bank's
interest rate risk as measured by changes in NPV for instantaneous and
sustained parallel shifts in the yield curve, in 100 basis point increments,
up and down 300 basis points and compared to Board policy limits and in
accordance with OTS regulations. Such limits have been established with
consideration of the dollar impact of various rate changes and the Bank's
strong capital position. As illustrated in the table, NPV is more sensitive to
rising rates than declining rates. This occurs principally because, as rates
rise, the market value of fixed-rate loans declines due to both the rate
increase and slowing prepayments. When rates decline, the Bank does not
experience a significant rise in market value for these loans because
borrowers prepay at relatively high rates.
Change in At June 30, 1997
Interest Rate Board Limit ----------------------
(Basis Points) % Change $ Change % Change
-------------- ----------- -------- --------
(Dollars in Thousands)
+300 (60)% $(4,651) (51)%
+200 (45) (3,003) (33)
+100 (25) (1,409) (15)
0 -- -- --
-100 (25) 793 9
-200 (45) 836 9
-300 (60) 1,230 13
Management reviews the OTS measurements on a quarterly basis. In
addition to monitoring selected measures on NPV, management also monitors
effects on net interest income resulting from increases or decreases in rates.
This measure is used in conjunction with NPV measures to assess interest rate
risk.
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in
different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Additionally, certain assets, such as
adjustable-rate mortgage loans, have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Further,
in the event of a change in interest rates, prepayments and early withdrawal
levels would likely deviate significantly from those assumed in calculating
the tables. Finally, the ability of many borrowers to service their debt may
decrease in the event of an interest rate increase.
Liquidity and Capital Resources
The OTS requires minimum levels of liquid assets. OTS regulations
presently require the Bank to maintain an average daily balance of liquid
assets (United States Treasury and federal agency securities and other
investments having maturities of five years or less) equal to at least 5.0% of
the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. Such requirements may be changed from
time to time by the OTS to reflect changing economic conditions. Such
investments are intended to provide a source of relatively liquid funds upon
which the Bank may rely, if necessary, to fund deposit withdrawals and other
short-term funding needs. The Bank has historically maintained its liquidity
ratio in excess of that required. The Bank's liquidity ratios were 7.1%, 6.6%
and 5.4% at June 30, 1997, 1996 and 1995, respectively.
Liquidity management is both a daily and long-term responsibility of
management. The Bank adjusts its investments in liquid assets based upon
13
<PAGE>
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-bearing investments and (iv) the
objectives of its asset/liability management program. Excess liquidity generally
is invested in interest-bearing overnight deposits and other short-term
government and agency obligations. If the Bank requires additional funds beyond
its internal ability to generate such funds it has additional borrowing capacity
with the FHLB of Des Moines and collateral eligible for repurchase agreements.
The Company principally uses its liquidity resources to meet ongoing
commitments, to fund maturing certificates of deposit and deposit withdrawals,
to invest, to fund existing and future loan commitments, to maintain
liquidity, and to meet other operating needs. At June 30, 1997, the Company
had $238,000 of loan commitments. The Company anticipates that it will have
sufficient funds available to meet outstanding loan commitments. Management
believes that loan repayments and other sources of funds will be adequate to
meet and exceed the Bank's foreseeable short- and long-term liquidity needs.
Certificates of deposit scheduled to mature in a year or less at June
30, 1997 totaled $20.0 million or 60.3% of the Company's total certificates of
deposit. Based on historical experience, management believes that a
significant portion of such deposits will remain with the Company. There can
be no assurance, however, that the Company can retain all such deposits. At
June 30, 1997, the Company had outstanding borrowings of $19.1 million from
the FHLB of Des Moines and had the capacity to borrow up to approximately
$20.9 million.
The primary investing activities of the Company include the
origination of loans and the purchase of mortgage-backed securities. At June
30, 1997, these assets accounted for over 89.7% of the Company's total assets.
Such origination and purchases are funded primarily from loan repayments,
repayments of mortgage-backed and investment securities, FHLB advances, net
income and, to a lesser extent, increases in deposits.
At June 30, 1997, the Bank had tangible and core capital of $6.2
million, or 7.4% of adjusted total assets, which was approximately $5.0
million and $3.7 million above the minimum requirements of 1.5% and 3.0%,
respectively, of the adjusted total assets in effect on that date. At June 30,
1997, the Bank had risk-based capital of $6.5 million (including $6.2 million
in core capital), or 14.4% of risk-weighted assets of $45.0 million. This
amount was $2.9 million above the 8% requirement in effect on that date. The
Bank is presently in compliance with the fully phased-in capital requirements.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial position and results of
operations in terms of historical dollars without considering changes in the
relative purchasing power of money over time because of inflation. The impact
of inflation is reflected in the increased cost of the Company's operations.
Unlike most industrial companies, virtually all of the assets and liabilities
of the Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services.
Effect of New Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share," will be effective for the Company for the periods ending
after December 15, 1997. SFAS No. 128 simplifies the standards of computing
earnings per share and changes the presentation of earnings per share in the
financial statements. The Company expects to adopt SFAS No. 128 when required,
and management believes the adoption will not have a material effect on
disclosures of earnings per share.
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Horizon Financial Services Corporation
Oskaloosa, Iowa:
We have audited the accompanying consolidated balance sheets of Horizon
Financial Services Corporation and subsidiaries as of June 30, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the years in the three-year period ended June 30,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Horizon
Financial Services Corporation and subsidiaries as of June 30, 1997 and 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended June 30, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Des Moines, Iowa
July 30, 1997
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Assets
------
Cash and cash equivalents $ 5,621,242 3,470,538
Securities available for sale (note 2) 24,942,234 18,049,483
Loans receivable, net (notes 3 and 4) 52,193,285 49,104,188
Real estate (note 5) 550,690 504,457
Stock in Federal Home Loan Bank, at cost 955,600 558,800
Office property and equipment, net (note 6) 1,082,013 1,133,315
Accrued interest receivable (note 7) 554,239 513,629
Prepaid expenses and other assets 70,160 129,776
-------------- -----------
Total assets $ 85,969,463 73,464,186
============== ===========
Liabilities and
Stockholders'Equity
-------------------
Deposits (note 8) $ 57,641,372 54,758,967
Advances from Federal Home Loan Bank (note 9) 19,101,533 9,661,271
Advance payments by borrowers for taxes and insurance 400,663 386,272
Accrued taxes on income (note 10):
Current 39,923 36,347
Deferred 51,000 11,000
Accrued expenses and other liabilities 322,311 220,103
-------------- -----------
Total liabilities 77,556,802 65,073,960
============== ===========
Commitments and contingencies (notes 3 and 5).
Stockholders' equity:
Preferred stock, $.01 par value;
authorized 250,000 shares; none issued - -
Common stock, $.01 par value; 1,500,000 shares
authorized; issued and outstanding
523,099 shares in 1997 and 1996 5,231 5,231
Additional paid-in capital 4,795,400 4,752,930
Retained earnings, substantially restricted (note 12) 5,305,946 5,157,486
Treasury stock, at cost (97,559 and 75,162 shares
at 1997 and 1996, respectively) (1,360,275) (1,022,921)
Unearned employee stock ownership plan shares (note 11) (193,798) (260,303)
Unearned recognition and retention plan shares (note 11) (47,655) (83,871)
Unrealized losses on securities available for sale (92,188) (158,326)
-------------- -----------
Total stockholders' equity 8,412,661 8,390,226
-------------- -----------
Total liabilities and stockholders' equity $ 85,969,463 73,464,186
============== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended June 30,
---------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans $ 4,408,308 4,100,960 3,522,117
Mortgage-backed securities available for sale - - 730,819
Investment securities available for sale 1,331,322 1,159,091 330,286
Interest on investment securities - - 47,433
Other investment income 154,960 193,756 121,089
----------- ---------- ----------
Total interest income 5,894,590 5,453,807 4,751,744
----------- ---------- ----------
Interest expense:
Deposits (note 8) 2,682,335 2,593,419 2,148,548
Advance from Federal Home Loan Bank 719,415 550,293 293,703
----------- ---------- ----------
Total interest expense 3,401,750 3,143,712 2,442,251
----------- ---------- ----------
Net interest income 2,492,840 2,310,095 2,309,493
Provision for losses on loans (note 4) 252,110 328,192 2,000
----------- ---------- ----------
Net interest income after provision for losses on loans 2,240,730 1,981,903 2,307,493
----------- ---------- ----------
Noninterest income
Fees, service charges, and commissions 338,107 345,241 237,513
Gain on sale of securities, net 81,403 39,198 -
Other 18,629 93,295 23,066
----------- ---------- ----------
Total noninterest income 438,139 477,734 260,579
----------- ---------- ----------
Noninterest expense:
Compensation, payroll taxes,
and employee benefits (note 11) 1,051,597 931,089 925,826
Advertising 60,447 65,448 84,778
Office property and equipment 319,765 312,592 355,961
Federal insurance premiums and
special assessments (note 13) 404,489 118,908 115,931
Data processing services 108,337 97,938 111,576
Other real estate expense 52,701 50,996 22,644
Other 257,741 309,205 286,971
----------- ---------- ----------
Total noninterest expense 2,255,077 1,886,176 1,903,687
----------- ---------- ----------
Earnings before taxes on income 423,792 573,461 664,385
Taxes on income (note 10) 145,300 197,000 245,000
----------- ---------- ----------
Net earnings $ 278,492 376,461 419,385
=========== ========== ==========
Earnings per common share $ .66 .84 .88
=========== ========== ==========
Weighted-average common shares outstanding $ 431,721 468,359 513,324
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Additional
Preferred Common paid-in Retained Treasury
stock stock capital earnings stock
----- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1994 $ - 5,060 4,547,810 4,581,313 -
Net earnings - - - 419,385 -
Dividends declared ($.16 per share) - (81,507) -
Treasury stock acquired - - - - (323,490)
Recognition and retention plan - 171 188,279 - -
ESOP shares allocated - - - - -
Amortization of recognition
and retention plan - - - - -
Adjust valuation allowance on
securities available for sale - - - - -
-------- ------ --------- --------- --------
Balance at June 30, 1995 - 5,231 4,736,089 4,919,191 (323,490)
Net earnings - - - 376,461 -
Dividends declared ($.32 per share) - - - (138,166) -
Treasury stock acquired - - - - (699,431)
ESOP shares allocated - - - - -
Stock appreciation of
allocated ESOP shares - - 16,841 - -
Amortization of recognition
and retention plan - - - - -
Adjust valuation allowance on
securities available for sale - - - - -
-------- ------ --------- --------- --------
Balance at June 30, 1996 5,231 4,752,930 5,157,486 (1,022,921)
Net earnings - - - 278,492 -
Dividends declared ($.32 per share) - - - (130,032) -
Treasury stock acquired - - - - (337,354)
ESOP shares allocated - - -
Stock appreciation of
allocated ESOP shares - - 42,470 - -
Amortization of recognition
and retention plan - - - - -
Adjust valuation allowance on
securities available for sale - - - - -
-------- ------ --------- --------- --------
Balance at June 30, 1997 $ - 5,231 4,795,400 5,305,946 (1,360,275)
======== ====== ========= ========= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Recognition Net unrealized
Unearned and gain (loss) on
ESOP retention securities available
shares plan for sale Total
------ ---- -------- -----
<S> <C> <C> <C> <C>
Balance at June 30, 1994 (390,353) - (159,484) 8,584,346
Net earnings - - - 419,385
Dividends declared ($.16 per share) - - - (81,507)
Treasury stock acquired - 7,986 - (315,504)
Recognition and retention plan - (188,450) - -
ESOP shares allocated 57,830 - - 57,830
Amortization of recognition
and retention plan - 60,371 - 60,371
Adjust valuation allowance on
securities available for sale - - 61,344 61,344
-------- -------- ------- ---------
Balance at June 30, 1995 (332,523) (120,093) (98,140) 8,786,265
Net earnings - - - 376,461
Dividends declared ($.32 per share) - - - (138,166)
Treasury stock acquired - - - (699,431)
ESOP shares allocated 72,220 - - 72,220
Stock appreciation of
allocated ESOP shares - - - 16,841
Amortization of recognition
and retention plan - 36,222 - 36,222
Adjust valuation allowance on
securities available for sale - - (60,186) (60,186)
-------- -------- ------- ---------
Balance at June 30, 1996 (260,303) (83,871) (158,326) 8,390,226
Net earnings - - - 278,492
Dividends declared ($.32 per share) - - - (130,032)
Treasury stock acquired - - - (337,354)
ESOP shares allocated 66,505 - - 66,505
Stock appreciation of
allocated ESOP shares - - - 42,470
Amortization of recognition
and retention plan - 36,216 - 36,216
Adjust valuation allowance on
securities available for sale - - 66,138 66,138
-------- -------- ------- ---------
Balance at June 30, 1997 (193,798) (47,655) (92,188) 8,412,661
======== ======== ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended June 30,
--------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 278,492 376,461 419,385
Aqjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 163,658 166,803 196,006
Amortization of fees, premiums, and accretion of discounts, net 23,807 63,035 30,589
Federal Home Loan Bank stock dividend - (9,500) -
Provision for losses on loans 252,111 328,192 2,000
Amortization of stock compensation plans 145,191 119,283 118,201
Gain on sale of securities (81,403) (39,198) -
Increase in accrued interest receivable (40,610) (45,073) (40,426)
Deferred taxes on income - - 15,000
Other, net 159,263 (51,759) 59,362
----------- --------- ----------
Net cash provided by operating activities 900,509 908,244 800,117
----------- --------- ----------
Cash flows from investing activities:
Investment in certificates of deposit in other financial institutions, net - - 100,000
Securities available for sale:
Purchases (12,835,616) (5,429,589) (3,053,377)
Proceeds from sale 4,434,596 1,701,971 -
Proceeds from maturity and principal collected 1,672,003 1,273,989 62,418
Held to maturity securities:
Purchases - - (3,946,050)
Proceeds from maturity and principal collected - 866,251 3,197,251
Loans to customers, net (3,446,538) (3,219,704) (6,261,173)
Proceeds from sale of real estate 65,233 260,000 -
Purchase of investment real estate - (65,000) (250,000)
Purchase of Federal Home Loan Bank stock (396,800) (68,996) (183,250)
Proceeds from sale of fixed assets - 17,900 -
Purchase of office property and equipment, net (112,356) (78,600) -
----------- --------- ----------
Net cash used in investing activities (10,619,478) (4,741,778) (10,334,181)
----------- --------- ----------
Cash flows from financing activities:
Increase in customer deposit accounts, net 2,882,405 3,429,309 1,360,284
Increase (decrease) in advance payments by borrowers for taxes and insurance 14,391 (42,981) 30,853
Proceeds from advances from Federal Home Loan Bank 15,000,000 7,500,000 8,400,000
Principal payments on advances from Federal Home Loan Bank (5,559,738) (6,556,324) (1,129,504)
Payment of dividends (130,031) (138,166) (81,507)
Treasury stock acquired (337,354) (699,431) (315,504)
----------- --------- ----------
Net cash provided by financing activities 11,869,673 3,492,407 8,264,622
----------- --------- ----------
Net increase (decrease) in cash and cash equivalents 2,150,704 (341,127) (1,269,442)
Cash and cash equivalents at beginning of year 3,470,538 3,811,665 5,081,107
----------- --------- ----------
Cash and cash equivalents at end of year $ 5,621,242 3,470,538 3,811,665
=========== ========= ==========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 3,336,641 3,144,844 2,419,307
Cash paid for taxes 134,941 205,000 164,711
Issuance of stock to recognition and retention plan, net - - 188,450
Transfers of loans to real estate acquired through foreclosures 105,330 265,060 190,000
Transfer of investment and mortgage-backed securities to
securities available for sale - 10,725,869 -
=========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997 and 1996
(1) Summary of Significant Accounting Policies
Description of the Business and Concentration of Credit
Horizon Financial Services Corporation and subsidiaries (the Company or
the Parent Company) is a thrift holding company headquartered in
Oskaloosa, Iowa. The Company was organized for the purpose of
owning the outstanding stock of Horizon Federal Savings Bank, FSB,
(the Bank).
The Bank serves Mahaska County, Marion County, and to a lesser extent
Wapello County through its three retail offices, two of which are
located in Oskaloosa, Iowa, and one located in Knoxville, Iowa. The
Bank is primarily engaged in attracting retail deposits from the
general public and investing those funds in residential and
commercial real estate loans, and other consumer and commercial
loans in its central Iowa market area. Although the Bank has a
diversified loan portfolio, a substantial portion of its borrowers
ability to repay their loans is dependent upon the economic
conditions in the Company's market area.
Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Horizon
Financial Services Corporation and its wholly owned subsidiary, the
Bank and its wholly owned subsidiary, Horizon Investment Services,
Inc. Horizon Investment Services, Inc. provides investment products
and sells credit life insurance to customers of the Bank. All
material intercompany accounts and transactions have been
eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant changes
relate to the determination of the allowance for losses on loans.
Regulatory Capital
The Bank is required by the Office of Thrift Supervision (OTS) to
maintain prescribed levels of regulatory capital. At June 30, 1997,
the requirements were met, and management anticipates meeting the
requirements at June 30, 1998.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
short-term investments with a maturity of three months or less at
date of purchase to be cash equivalents. Cash and cash equivalents
include interest earning deposits of $2,890,000 and $900,000 at
June 30, 1997 and 1996, respectively.
20 (Continued)
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Earnings Per Share
Earnings per share is computed using the weighted-average number of
common shares outstanding, after giving effect to additional shares
assumed to be issued in relation to the Company's stock options and
decreased by unearned employee stock ownership plan (ESOP) shares.
The additional shares, related to the stock options, are assumed to
be issued after acquisition of shares at the average price per
share for the period under the treasury stock method with the
assumed proceeds from the exercise of outstanding stock options.
Such additional shares were 12,205 and 8,002 for the years ended
June 30, 1997 and 1996, respectively. Weighted-average unearned
ESOP shares were 22,251 and 29,501 for the years ended June 30,
1997 and 1996, respectively.
Securities Available for Sale
The Company classifies investment securities based on the Company's
intended holding period. Securities which may be sold prior to
maturity to meet liquidity needs, to respond to market changes, or
to adjust the Company's asset-liability position are classified as
available for sale. Securities which the Company intends to hold
to maturity are classified as held to maturity.
Securities available for sale are recorded at fair value. The aggregate
unrealized gains or losses, net of the effect of taxes on income,
are recorded as a component of stockholders' equity. Discounts and
premiums are accreted and amortized, respectively, over the term of
the security except for mortgage-backed and related securities and
stripped mortgage-backed securities which are accreted and
amortized over the period of estimated cash flows using the
interest method. Actual prepayment experience on mortgage-backed
and related securities and stripped mortgage-backed securities is
periodically reviewed, and the timing of accretion or amortization
is adjusted accordingly.
In November 1995, the Financial Accounting Standards Board announced
it would permit companies to make a one-time reclassification of
their investment securities in conjunction with the issuance of a
special report entitled A Guide to Implementation of Statement of
115 on Accounting for Certain Investments in Debt Securities. The
Company transferred all remaining investment and mortgage-backed
securities with amortized costs of $10,777,268 from investment and
mortgage-backed securities to securities available for sale.
Unrealized gains related to the securities transferred were
$59,602.
Gain or loss on sale is recognized in the statements of operations
using the specific identification method.
Allowance for Losses on Loans
The allowance for losses on loans and real estate are maintained at
amounts considered adequate to provide for such losses. The
allowance for losses on loans is based on management's periodic
evaluation of the loan portfolio and reflects an amount that, in
management's opinion, is adequate to absorb losses in the existing
portfolio. In evaluating the portfolio, management takes into
consideration numerous factors, including current economic
conditions, prior loan loss experience, the composition of the loan
portfolio, and management's estimates of anticipated credit losses.
21 (Continued)
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Allowance for Losses on Loans, Continued
Accrued interest receivable on loans which become more than 90 days in
arrears is charged to income. Subsequently, interest income is not
recognized on such loans until collected or until determined by
management to be collectable.
Loans Receivable
Underthe Company's credit policies, all loans with interest more than
90 days in arrears and restructured loans are considered to meet
the definition of impaired loans. Loan impairment is measured
based on the present value of expected future cash flows
discounted at the loan's effective interest rate except, where
more practical, at the observable market price of the loan or the
fair value of the collateral if the loan is collateral dependent.
Loan Origination Fees and Related Costs
Mortgage loan origination fees and certain direct loan origination
costs, if material, are deferred and the net fee or cost is
recognized in operations using the interest method. Direct loan
origination costs for other loans are expensed, as such costs are
not material in amount.
Real Estate
Investment real estate represents a limited partnership interest in a
low income housing apartment complex. The investment in the low
income housing complex is carried at cost, adjusted for earnings
and losses of the limited partnership. In 1996, investment real
estate included a real estate property in Oskaloosa, Iowa, which
was sold during 1997.
Real estate acquired in settlement of loans is carried at the lower of
cost or fair value. When property is acquired through foreclosure
or a loan is considered impaired, any excess of the related loan
balance over fair value is charged to the allowance for losses on
loans. An allowance for real estate is provided as circumstances
indicate additional loss on the property and is charged to
noninterest expense.
Financial Instruments with Off Balance Sheet Risk
In the normal course of business to meet the financing needs of its
customers, the Bank is a party to financial instruments with off
balance sheet risk, which include commitments to extend credit. The
Bank's exposure to credit loss in the event of nonperformance by
the other party to the commitments to extend credit is represented
by the contractual amount of those instruments. The Bank uses the
same credit policies in making commitments as it does for on
balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer, as
long as there is no violation of any conditions established in the
contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent
future cash requirements (see note 3). Each customer's
creditworthiness is evaluated on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Bank, upon
extension of credit is based on management's credit evaluation of
the counterparty.
22 (Continued)
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Office Property and Equipment
Office property and equipment are recorded at cost, and depreciation is
accumulated on a straight-line basis over the estimated useful
lives of the related assets. Estimated lives are 40 years for
office buildings and 5 to 10 years for furniture, fixtures, and
equipment.
Maintenance and repairs are charged against income. Betterments are
capitalized and subsequently depreciated. The cost and accumulated
depreciation of properties retired or otherwise disposed of are
eliminated from the asset and accumulated depreciation accounts.
Related profit or loss from such transactions is credited or
charged to income.
Treasury Stock
Treasury stock is accounted for by the cost method, whereby shares of
common stock reaquired are recorded at their purchase price.
Taxes on Income
The Company files a consolidated federal income tax return. For
financial statement purposes, taxes on income are also presented on
a consolidated basis. For state purposes, the Company and Horizon
Investment Services, Inc. file income tax returns and the Bank
files a franchise tax return.
Generally accepted accounting principles require use of the asset and
liability method of accounting for income taxes, and deferred tax
assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Stock Option Plan
On July 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which permits entities to record compensation
expense at the date of the grant if the current market price of the
underlying stock exceeds the exercise price, or provide pro forma
net income and pro forma earnings per share disclosures for
employee stock option grants made in 1996 and 1997 (none were made)
and future years as if the fair-value-based method, which
recognizes as expense over the vesting period the fair value of
stock-based awards at the date of grant, had been applied.
23 (Continued)
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Fair Value of Financial Instruments
The Company's fair value estimates, methods, and assumptions for its
financial instruments are set forth below:
Cash and Cash Equivalents and Accrued Interest Receivable and Payable
The carrying amount approximates the estimated fair value due to
the short-term nature of those instruments.
Securities Available for Sale
The fair value of securities available for sale is estimated based
on bid prices published in financial newspapers, bid quotations
received from securities dealers, or quoted market prices of
similar instruments, adjusted for differences between the quoted
instruments and the instruments being valued.
Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type, such as
commercial, real estate, and installment.
The fair value of loans is calculated by discounting scheduled cash
flows through the estimated maturity using the current rates at
which similar loans would be made to borrowers with similar credit
ratings. The estimate of maturity is based on the historical
experience, with repayments for each loan classification, modified
as required by an estimate of the effect of current economic and
lending conditions. The effect of nonperforming loans is considered
in assessing the credit risk inherent in the fair value estimate.
Federal Home Loan Bank (FHLB) Stock
The value of the FHLB stock is equivalent to its carrying value
because the stock is redeemable at par value.
Deposits
The fair value of deposits with no stated maturity, such as
checking, savings, and money market accounts, is equal to the
amount payable on demand. The fair value of certificates of deposit
is based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities. The fair value estimates
do not include the benefit that results from the low-cost funding
provided by the deposit liabilities compared to the cost of
borrowing funds in the market.
24 (Continued)
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Fair Value of Financial Instruments, Continued
Advances from the FHLB
The fair value of advances from the FHLB is calculated by
discounting the scheduled payments through maturity. The discount
rate is estimated using the rates currently offered for similar
instruments.
Off Balance Sheet Instruments
The fair value of commitments to extend credit and unused lines of
credit is estimated using the difference between current levels of
interest rates and committed rates.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. Because no market exists for a significant portion of
the Company's financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Effect of New Accounting Standards
SFAS128, "Earnings Per Share," will be effective for the Company for
the periods ending after December 15, 1997. SFAS 128 simplifies the
standards of computing earnings per share and changes the
presentation of earnings per share in the financial statements. The
Company expects to adopt SFAS 128 when required, and management
believes the adoption will not have a material effect on
disclosures of earnings per share.
25 (Continued)
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Securities Available for Sale
Securities available for sale at June 30, 1997 and 1996, were as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Fair
Description cost gains losses value
----------- ----- ----- ------ ------
<S> <C> <C> <C> <C>
1997:
U.S. treasury note, due within one year $ 99,925 2,861 - 102,786
FHLB bonds -
Due beyond five years, but within ten years 1,000,000 - 150,946 849,054
Small Business Administration
guaranteed loan participation certificates 983,898 - 12,303 971,595
Mortgage-backed and related securities:
Mortgage-backed securities 3,021,148 29,546 24,018 3,026,676
Collateralized mortgage obligations 18,131,580 88,307 82,043 18,137,844
Equity securities 579,775 9,800 625 588,950
--------------- ----------- ---------- ------------
23,816,326 130,514 269,935 23,676,905
Stripped mortgage-backed securities:
Principal only 13,862 - 6,089 7,773
Interest only 1,259,083 2,587 4,114 1,257,556
--------------- ----------- ---------- ------------
$ 25,089,271 133,101 280,138 24,942,234
=============== =========== ========== ============
1996:
U.S. treasury note, due within one year $ 99,843 4,876 - 104,719
FHLB bonds:
Due beyond five years, but within ten years 500,000 - 77,080 422,920
Due beyond ten years 500,000 83,750 416,250
Small Business Administration
guaranteed loan participation certificates 1,058,332 - 37,303 1,021,029
Mortgage-backed and related securities:
Mortgage-backed securities 6,959,877 41,922 66,357 6,935,442
Collateralized mortgage obligations 8,916,075 107,223 128,698 8,894,600
Equity securities 250,825 - 3,950 246,875
--------------- ----------- ---------- ------------
18,284,952 154,021 397,138 18,041,835
Stripped mortgage-backed securities:
Principal only 17,048 - 9,400 7,648
Interest only - - - -
--------------- ----------- ---------- ------------
$ 18,302,000 154,021 406,538 18,049,483
=============== =========== ========== ============
</TABLE>
26 (Continued)
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Securities Available for Sale, Continued
Sales of securities available for sale resulted in the following for
the three years ended June 30:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
---- ---- ----
Proceeds $ 4,434,596 1,701,971 -
Gross realized gains 87,499 41,442 -
Gross realized losses 6,096 2,244 -
============ =========== =======
</TABLE>
At June 30, 1997, certain securities available for sale with a fair
value of approximately $4,700,000 were pledged as collateral for
public funds deposits.
(3) Loans Receivable
At June 30, 1997 and 1996, loans receivable consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Residential real estate loans:
One- to four-family $ 34,625,097 32,510,761
Multi-family 657,818 789,063
Construction 829,266 1,335,000
------------ -----------
36,112,181 34,634,824
Commercial real estate loans 3,944,435 3,801,094
------------ -----------
Total real estate 40,056,616 38,435,918
------------ -----------
Consumer loans:
Automobile 4,051,259 3,515,734
Home improvement 2,352,928 1,966,572
Deposit accounts 221,613 174,826
Other 1,541,457 1,428,182
------------ -----------
Total consumer 8,167,257 7,085,314
------------ -----------
Commercial business loans 5,123,735 4,707,233
------------ -----------
53,347,608 50,228,465
Less:
Loans in process 732,186 730,420
Deferred fees and discounts 74,109 76,212
Allowance for losses on loans 348,028 317,645
------------ -----------
Total loans receivable, net $ 52,193,285 49,104,188
============ ===========
</TABLE>
27 (Continued)
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Loans Receivable, Continued
At June 30, 1997, the Bank had committed to originate $238,000 of fixed
rate loans. In addition, the Bank had customers with unused lines
of credit totaling $422,000 at June 30, 1997.
At June 30, 1997 and 1996, the Bank had nonaccrual loans of $469,378
and $697,933, respectively. The allowance for losses on loans
related to these impaired loans was approximately $16,961 and
$62,701, respectively. The average balances of such loans for the
years ended June 30, 1997, 1996, and 1995, were $522,500; $874,750;
and $488,000, respectively. For the years ended June 30, 1997,
1996, and 1995, interest income which would have been recorded
under the original terms of such loans was approximately $57,029;
$82,138; and $65,974, respectively, and interest income actually
recorded amounted to approximately $37,272; $42,987; and $36,555,
respectively.
Loan customers of the Bank include certain executive officers and
directors and their related interests and associates. All loans to
this group were made in the ordinary course of business at
prevailing terms and conditions. Changes in loans outstanding to
executive officers and directors for the years ended June 30, 1997
and 1996, were as follows:
1997 1996
---- ----
Balance at beginning of year $ 25,440 31,463
Advances 175,000 -
Repayments (8,334) (6,023)
---------- -----------
Balance at end of year $ 192,106 25,440
========== ===========
(4) Allowance for Losses on Loans
Following is a summary of the allowance for losses on loans for the
three years ending June 30, 1997:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 317,645 291,005 379,015
Provision for losses 252,111 328,192 2,000
Charge-offs (226,701) (319,155) (95,186)
Recoveries 4,973 17,603 5,176
---------- ---------- ----------
Balance at end of year $ 348,028 317,645 291,005
========== ========== ==========
</TABLE>
(5) Real Estate
Following is a summary of real estate as of June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Real estate acquired through foreclosure $ 342,816 205,508
Real estate acquired for investment 207,874 298,949
---------- ----------
$ 550,690 504,457
========== ==========
</TABLE>
There were no allowances for losses on real estate for the years ended
June 30, 1997, 1996, and 1995, respectively.
28 (Continued)
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Office Property and Equipment
At June 30, 1997 and 1996, the cost and accumulated depreciation of
office property and equipment were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 142,595 142,595
Office buildings 1,091,698 1,091,698
Furniture, fixtures, and equipment 994,183 881,827
Automobile 17,380 17,380
------------ ------------
2,245,856 2,133,500
Less accumulated depreciation 1,163,843 1,000,185
------------ ------------
$ 1,082,013 1,133,315
============ ============
</TABLE>
(7) Accrued Interest Receivable
At June 30, 1997 and 1996, accrued interest receivable consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Loans receivable $ 449,104 400,897
Securities available for sale 105,135 112,732
---------- ----------
$ 554,239 513,629
========== ==========
</TABLE>
(8) Deposits
Savings account balances at June 30, 1997 and 1996, are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance by account type:
Savings $ 16,828,605 14,634,471
Money market 835,832 1,006,145
Demand and NOW 6,752,306 5,326,731
Certificates of deposit 33,224,629 33,791,620
-------------- --------------
$ 57,641,372 54,758,967
============== ==============
</TABLE>
The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was approximately $3,241,000 and
$3,256,000 at June 30, 1997 and 1996, respectively.
29 (Continued)
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Deposits, Continued
At June 30, 1997, scheduled maturities of certificates of deposit were
as follows:
1998 $ 20,025,963
1999 5,687,810
2000 5,009,417
2001 1,912,099
2002 and thereafter 589,340
-------------
$ 33,224,629
=============
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Years ended June 30,
-----------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Savings $ 701,023 442,927 223,751
Money market 22,275 28,029 70,599
Demand and NOW 93,254 82,600 71,320
Certificates of deposit 1,865,783 2,039,863 1,782,878
------------ ------------ ------------
$ 2,682,335 2,593,419 2,148,548
============ ============ ============
</TABLE>
At June 30, 1997 and 1996, accrued interest payable on deposits totaled
$102,501 and $32,405, respectively.
(9) Advances from FHLB
Advances from FHLB at June 30, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------- ---------------------------------
Weighted- Weighted-
average average
Amount rates Amount rates
------ ----- ------ -----
<S> <C> <C> <C> <C>
Advance maturity:
Within 1 year:
Variable $ 16,000,000 various $ 8,500,000 various
Fixed 2,063,358 6.20% 59,737 5.90%
Beyond 1 year,
but within 5 years -
Fixed 1,038,175 5.89 1,101,534 5.89
-------------- ==== ----------- ====
$ 19,101,533 $ 9,661,271
============== ===========
</TABLE>
Advances from FHLB are secured by stock in FHLB. In addition, the Bank
has agreed to maintain unencumbered additional security in the form
of certain residential mortgage loans aggregating no less than 150
percent of outstanding advances. Variable rate advances are based
on LIBOR.
30 (Continued)
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Taxes on Income
Taxes on income for the years ended June 30, 1997, 1996, and 1995, were
as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------ --------------------------------------------------
Federal State Total Federal State Total
------- ----- ----- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Current $ 121,300 24,000 145,300 169,000 28,000 197,000
Deferred - - - - - -
---------- -------- --------- ---------- -------- --------
$ 121,300 24,000 145,300 169,000 28,000 197,000
========== ======== ========= ========== ======== =========
1995
-------------------------------------------------
Federal State Total
------- ----- -----
Current $ 200,000 30,000 230,000
Deferred 13,000 2,000 15,000
---------- -------- ---------
$ 213,000 32,000 245,000
========== ======== =========
</TABLE>
Taxes on income differ from the amounts computed by applying the federal
income tax rate of 34 percent to earnings before taxes on income
for the following reasons, expressed in percentages:
<TABLE>
<CAPTION>
Years ended June 30,
--------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal income tax rate 34.0% 34.0 34.0
Items affecting federal income tax rate:
State tax, net of federal benefit 3.7 3.2 3.3
Low income housing tax credits (9.9) (5.3) -
Other, net 6.5 2.5 (.4)
----- ----- -----
34.3% 34.4 36.9
===== ===== =====
</TABLE>
31 (Continued)
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Taxes on Income, Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities
at June 30, 1997 and 1996, are presented below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Accrued expenses not deducted $ 44,000 45,000
Unrealized losses on securities available for sale 54,000 94,000
Other, net 3,000 1,000
----------- -----------
Total gross deferred tax assets 101,000 140,000
----------- -----------
Deferred tax liabilities:
FHLB stock dividends 62,000 60,000
Accrued interest receivable not taxed 7,000 7,000
Deferred loan fees 60,000 41,000
Loan loss allowance 23,000 43,000
----------- -----------
Total gross deferred tax liabilities 152,000 151,000
----------- -----------
Net deferred tax liabilities $ 51,000 11,000
=========== ===========
</TABLE>
There was no valuation allowance for deferred tax assets during the
years ended June 30, 1997, 1996, and 1995.
Based upon the Company's level of historical taxable income and
anticipated future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more
likely than not the Bank will realize the benefits of these
deductible differences.
(11) Employee Benefits
Pension Plan
The Bank has a noncontributory, nontrusteed pension plan for all
eligible employees. The plan's assets include bonds, stocks,
commercial and residential mortgages, and cash. The Bank's policy
is to fund pension cost accrued.
32 (Continued)
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Employee Benefits, Continued
Pension Plan, Continued
The following table sets forth the plan's funded status and amounts
recognized in the consolidated financial statements at June 30, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $507,481 and $429,126
at June 30, 1997 and 1996, respectively $ 558,929 474,351
=========== =========
Projected benefit obligation for
services rendered to date $ (981,480) (903,300)
Plan assets at fair value 829,431 673,316
----------- ---------
Projected benefit obligation in
excess of plan assets (152,049) (229,984)
Unrecognized net loss from past experience
different from that assumed and
effects of changes in assumptions 53,604 115,632
Unrecognized net assets at transition
date being recognized over 18 years (18,347) (20,108)
----------- ---------
Accrued pension liability $ (116,792) (134,460)
=========== =========
</TABLE>
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value
of the projected benefit obligation at June 30, 1997 and 1996, were
each 6.25 percent. The expected long-term rate of return on assets
was 7.75 percent.
<TABLE>
<CAPTION>
Years ended June 30,
--------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net pension expense included the following
components:
Service cost - benefits earned
during the period $ 55,038 44,511 43,765
Interest cost on projected
benefit obligation 54,529 46,894 42,208
Actual return on plan assets (80,873) (103,298) (43,239)
Net amortization and deferral 28,880 60,280 3,760
--------- ---------- ---------
Net periodic pension expense $ 57,574 48,387 46,494
========= ========== =========
</TABLE>
33 (Continued)
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Employee Benefits, Continued
ESOP Plan
All employees meeting age and service requirements are eligible to
participate in an ESOP established on June 28, 1994. Contributions
made by the Bank to the ESOP are allocated to participants by a
formula based on compensation. Participant benefits become 100
percent vested after five years of service. The ESOP purchased
40,481 shares in the Bank's conversion and is accounted for under
"Employers' Accounting for Employee Stock Ownership Plans," (SOP
93-6). At June 30, 1997 and 1996, 21,834 and 15,590 shares,
respectively, were committed to be released, and the fair value of
the 17,890 and 24,744 unearned shares was approximately $347,000
and $371,000. ESOP expense was $108,973; $79,085; and $57,830 for
the years ended June 30, 1997, 1996, and 1995, respectively.
Employment Agreements
The Company has entered into employment agreements, which expire in
July 1999, with two of its executive officers. The agreements
provide, among other things, for payment to the officers of up to
299 percent of the officers' then current annual compensation in
the event there is a change of control of the Company where
employment terminates involuntarily in connection with such change
of control.
Stock Options
Certain officers and directors of the Company have been granted options
to purchase up to 44,611 shares of the Company's $.01 par common
stock. The exercise price is equal to the fair market value of the
shares at the date the options are granted. The options are subject
to certain vesting requirements and, if unused, the options will
expire October 2004.
Changes in options outstanding and exercisable during 1997 and 1996,
were as follows:
<TABLE>
<CAPTION>
Exercisable Outstanding Option price
options options per share
------- ------- ---------
<S> <C> <C> <C>
June 30, 1994 - - $ -
Granted - 44,611 11.00 - 12.13
Vested 8,922 - 11.00 - 12.13
Canceled (1,518) (7,590) 11.00
------ ---------
June 30, 1995 7,404 37,021 11.00 - 12.13
Vested 7,404 - 11.00 - 12.13
------- ---------
June 30, 1996 14,808 37,021 11.00 - 12.13
Vested 7,404 - 11.00 - 12.13
------- ---------
June 30, 1997 22,212 37,021 11.00 - 12.13
======= ========= =============
</TABLE>
34 (Continued)
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Employee Benefits, Continued
Recognition and Retention Plan
In 1995, the Company established a recognition and retention plan
(RRP) for certain executive officers and directors. The Company
authorized the RRP to award shares equal to approximately 4 percent
of the shares of common stock of the Company. The employees become
vested in the shares of stock over a five-year period. RRP expense
for the years ended June 30, 1997, 1996, and 1995, was $36,216;
$36,222; and $60,371, respectively.
(12) Stockholders' Equity
Stock Conversion
In order to grant priority to eligible account holders in the event of
future liquidation, the Bank, at the time of conversion to a stock
savings bank, established a liquidation account in the amount equal
to the regulatory capital as of March 31, 1993. In the event of the
future liquidation of the Bank, eligible account holders who
continue to maintain their deposit accounts shall be entitled to
receive a distribution from the liquidation account. The total
amount of the liquidation account will be decreased as the balance
of the eligible account holders is reduced subsequent to the
conversion, based on an annual determination of such balances.
Regulatory Capital Requirements
The Financial Institution Reform, Recovery and Enforcement Act of 1989
(FIRREA) and the capital regulations of the OTS promulgated
thereunder require institutions to have a minimum regulatory
tangible capital equal to 1.5 percent of total assets, a minimum 3
percent leverage capital ratio, and a minimum 8 percent risk-based
capital ratio. These capital standards set forth in the capital
regulations must generally be no less stringent than the capital
standards applicable to national banks. FIRREA also specifies the
required ratio of housing-related assets in order to qualify as a
savings institution.
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) established additional capital requirements which require
regulatory action against depository institutions in one of the
undercapitalized categories defined in implementing regulations.
Institutions such as the Bank, which are defined as well
capitalized, must generally have a leverage capital (core) ratio of
at least 5 percent, a tier risk-based capital ratio of at least 6
percent, and a total risk-based capital ratio of at least 10
percent. FDICIA also provides for increased supervision by federal
regulatory agencies, increased reporting requirements for insured
depository institutions, and other changes in the legal and
regulatory environment for such institutions. The Bank met the
regulatory capital requirements at June 30, 1997 and 1996.
35 (Continued)
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) Stockholders' Equity, Continued
Regulatory Capital Requirements, Continued
The Bank met all regulatory capital requirements at June 30, 1997 and
1996.
The Bank's actual and required capital amounts and ratios as of June
30, 1997, were as follows:
<TABLE>
<CAPTION>
For capital To be well capitalized
adequacy under prompt corrective
Actual purposes action provisions
----------------------- ------------------------ --------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Tangible capital (to tangible assets $ 6,238,000 7.4 % $ 1,264,000 1.5 % $ - - %
Tier I leverage (core) capital
(to adjusted tangible assets) 6,238,000 7.4 2,528,000 3.0 4,213,300 5.0
Risk-based capital
(to risk-weighted assets) 6,494,000 14.4 3,600,000 8.0 4,499,900 10.0
Tier I leverage risk-based capital
(to risk-weighted assets) 6,238,000 13.9 - - 2,699,940 6.0
========== ==== =========== === =========== ====
</TABLE>
At June 30, 1997 and 1996, the Bank had federal income tax bad debt
reserves of approximately $1,572,000, which constitute allocations
to bad debt reserves for federal income tax purposes for which no
provision for taxes on income had been made. If such allocations
are charged for other than bad debt losses, taxable income is
created to the extent of the charges. The Bank's retained earnings
at June 30, 1997 and 1996, were substantially restricted because of
the effect of these income tax bad debt reserves.
Dividend Restrictions
Federal regulations impose certain limitations on the payment of
dividends and other capital distributions by the Bank. Under the
regulations, a savings institution, such as the Bank, that will
meet the fully phased-in capital requirements (as defined by the
OTS regulations) subsequent to a capital distribution is generally
permitted to make such capital distribution without OTS approval,
subject to certain limitations and restrictions as described in the
regulations. A savings institution with total capital in excess of
current minimum capital requirements but not in excess of the fully
phased-in requirements is permitted by the new regulations to make,
without OTS approval, capital distributions of between 25 and 75
percent of its net earnings for the previous four quarters less
dividends already paid for such period. A savings institution that
fails to meet current minimum capital requirements is prohibited
from making any capital distributions without prior approval from
the OTS.
36 (Continued)
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) Special Deposit Insurance Assessment
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the
Act) was signed into law. The Act imposed a one-time special
assessment of 65.7 basis points on deposits held as of March 31,
1995, to capitalize the Savings Association Insurance Fund (SAIF).
All of the deposits of the Bank are SAIF insured. The special
assessment of $330,875 was paid by the Bank on November 27, 1996.
Subsequent to the special assessment, the premium for SAIF-insured
deposits was reduced from 23 basis points to 6.4 basis points, thus
reducing deposit insurance expense for the Bank.
(14) Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments as of
June 30, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
---------------------------------- -------------------------------
Recorded Fair Recorded Fair
amount value amount value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 5,621,242 5,621,242 3,470,538 3,470,538
Securities available for sale 24,942,234 24,942,234 18,049,483 18,049,483
Loans 52,193,285 51,465,206 49,104,188 48,777,337
FHLB stock 955,600 955,600 558,800 558,800
Accrued interest receivable 554,240 554,240 513,629 513,629
Financial liabilities:
Deposits 57,641,372 57,884,295 54,758,967 55,030,644
FHLB advances 19,101,534 19,101,534 9,661,271 9,661,271
Advance payments by borrowers
for taxes and insurance 400,663 400,663 386,272 386,272
Accrued interest payable 131,917 131,917 50,371 50,371
============= =========== ========== ==========
Unrealized Unrealized
Notional gains Notional gains
value (losses) value (losses)
----- -------- ----- --------
Off balance sheet assets:
Commitments to extend credit $ 238,000 - 863,000 -
Unused lines of credit 422,000 - 415,000 -
============== ========= ======= =========
</TABLE>
(15) Contingency
The Bank is involved in various legal actions and proceedings arising
from the normal course of operations. Management believes that
liability, if any, arising from such legal actions and proceedings
will not have a material adverse effect upon the consolidated
financial statements of the Company.
37 (Continued)
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(16) Horizon Financial Services Corporation (Parent Company Only) Financial
Information
The Parent Company's principal asset is its 100 percent ownership of the
Bank and the Bank's subsidiary. The following are the condensed
financial statements for the Parent Company:
<TABLE>
<CAPTION>
Condensed Balance Sheets
------------------------
1997 1996
---- ----
<S> <C> <C>
Cash and cash equivalents $ 189,692 7,762
Securities available for sale 1,561,950 1,168,341
Loans receivable, net 92,165 86,165
Loans receivable from subsidiary 193,798 260,303
Investment in subsidiary 6,150,951 6,531,803
Real estate 207,874 298,949
Interest receivable 20,834 36,903
------------- ------------
Total assets $ 8,417,264 8,390,226
============= ============
Accrued expenses and other liabilities $ 4,603 -
Common stock 5,231 5,231
Additional paid-in capital 4,795,400 4,752,930
Retained earnings 5,305,946 5,157,486
Treasury stock, at cost (1,360,275) (1,022,921)
Unearned ESOP shares (193,798) (260,303)
Unearned RRP shares (47,655) (83,871)
Unrealized losses on securities available for sale (92,188) (158,326)
------------- ------------
Total liabilities and equity $ 8,417,264 8,390,226
============= ============
Condensed Statements of Operations
----------------------------------
1997 1996 1995
---- ---- ----
Interest income $ 177,996 178,035 142,546
Equity in earnings of subsidiaries 230,579 301,785 398,975
Other income 27,053 29,598 32
Other expenses (150,136) (118,957) (117,168)
----------- ----------- ----------
Net earnings before income tax 285,492 390,461 424,385
Income tax expense 7,000 14,000 5,000
----------- ----------- ----------
Net earnings $ 278,492 376,461 419,385
=========== =========== ==========
</TABLE>
38 (Continued)
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(16) Horizon Financial Services Corporation (Parent
Company Only) Financial Information, Continued
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
----------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net earnings $ 278,492 376,461 419,385
Equity in earnings of subsidiary (230,579) (301,785) (398,975)
Other, net 29,809 (8,380) (41,074)
-------------- ------------ -----------
Net cash provided by (used in) operating activities 77,722 66,296 (20,664)
-------------- ------------ -----------
Investing activities:
Proceeds from sale of securities available for sale 272,962 1,071,422 -
Purchase of securities available for sale (577,106) (1,221,867) (1,035,221)
Purchase of real estate - (65,000) (250,000)
Proceeds from the sale of real estate 65,233 - -
Loans receivable, net 60,505 738,030 (694,145)
-------------- ------------ -----------
Net cash (used in) provided by investing activities (178,406) 522,585 (1,979,366)
-------------- ------------ -----------
Financing activities:
Dividends from subsidiary 750,000 204,440 532,784
Treasury stock acquired (337,354) (699,431) (315,504)
Dividends paid (130,032) (148,580) (81,507)
-------------- ------------ -----------
Net cash provided by (used in) financing activities 282,614 (643,571) 135,773
-------------- ------------ -----------
Net increase (decrease) in cash and cash equivalents 181,930 (54,690) (1,864,257)
Cash and cash equivalents at beginning of year 7,762 62,452 1,926,709
-------------- ------------ -----------
Cash and cash equivalents at end of year $ 189,692 7,762 62,452
============== ============ ===========
</TABLE>
39
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION
STOCKHOLDER INFORMATION
- ------------------------------------------------------------------------------
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 3:00 p.m. local time, on
October 23, 1997, at the main office of Horizon Federal Savings Bank, 301
First Avenue East, Oskaloosa, Iowa.
STOCK LISTING
Horizon Financial Services Corporation common stock is traded on The Nasdaq
SmallCap Market under the symbol "HZFS."
PRICE RANGE OF COMMON STOCK
The high and low bid quotations for the common stock as reported on the
Nasdaq, as well as dividends declared per share, is reflected in the table
below. The information set forth in the table below was provided by the
Nasdaq. Such information reflects interdealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
---------------------------------- ----------------------------
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
First Quarter $15.00 $14.00 $.08 First Quarter $13.50 $12.00 $.08
Second Quarter 15.25 14.50 .08 Second Quarter 15.50 12.75 .08
Third Quarter 18.25 15.00 .08 Third Quarter 16.25 14.50 .08
Fourth Quarter 19.75 17.00 .08 Fourth Quarter 16.75 15.00 .08
</TABLE>
The average of the closing bid and asked prices of Horizon Financial Services
Corporation's common stock on September 12, 1997 was $18.875 per share.
At September 12, 1997, there were 425,540 shares of Horizon Financial Services
Corporation common stock issued and outstanding and approximately 320
stockholders of record.
SHAREHOLDERS AND GENERAL INQUIRIES TRANSFER AGENT
Robert W. DeCook, President and CEO First Bankers Trust Company, N.A.
Horizon Financial Services Corporation 1201 Broadway
301 First Avenue East Quincy, IL 62301
Oskaloosa, Iowa 52577 (217) 228-8000
ANNUAL AND OTHER REPORTS
A copy of Horizon Financial Services Corporation's Annual Report on Form
10-KSB for the year ended June 30, 1997, as filed with the Securities and
Exchange Commission, may be obtained without charge by contacting Robert W.
DeCook, President and Chief Executive Officer, Horizon Financial Services
Corporation, 301 First Avenue East, Oskaloosa, Iowa, (515) 673-8328
40
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION
CORPORATE INFORMATION
- -------------------------------------------------------------------------------
COMPANY AND BANK ADDRESS
301 First Avenue East Telephone:(515) 673-8328
Oskaloosa, IA 52577 Fax:(515) 673-0074
DIRECTORS OF THE BOARD
<TABLE>
<S> <C>
Robert W. DeCook Thomas L. Gillespie
Chairman of the Board, President and Vice President of Horizon Financial
Chief Executive Officer of Horizon Services Corporation and Horizon
Financial Services Corporation and Federal Savings Bank
Horizon Federal Savings Bank
Gary L. Rozenboom Norman P. Zimmerman
Owner of Rozenboom's Decorating Center Mayor of the City of Oskaloosa
Oskaloosa, Iowa Oskaloosa, Iowa
Dwight L. Groves
Property Manager and Retired Restaurateur
Oskaloosa, Iowa
</TABLE>
HORIZON FINANCIAL SERVICES CORPORATION EXECUTIVE OFFICERS
<TABLE>
<S> <C>
Robert W. DeCook Sharon K. McCrea
President and Chief Executive Officer Treasurer and Chief Financial Officer
Thomas L. Gillespie
Vice President
</TABLE>
<TABLE>
<CAPTION>
INDEPENDENT AUDITORS CORPORATE COUNSEL SPECIAL COUNSEL
<S> <C> <C>
KPMG Peat Marwick LLP McCoy, Faulkner & Broerman Silver, Freedman & Taff, L.L.P.
2500 Ruan Center 216 South First Street 1100 New York Avenue, N.W.
Des Moines, Iowa 50309 Oskaloosa, Iowa 52577 Seventh Floor
Washington, D.C. 20005
</TABLE>
41
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percentage State of
of Incorporation
Parent Subsidiary Ownership or Organization
------ ---------- ---------- ---------------
<S> <C> <C> <C>
Horizon Financial Horizon Federal Savings 100% Federal
Services Corporation Bank
Horizon Federal Savings Horizon Investment 100% Iowa
Bank Services, Inc.
</TABLE>
The financial statements of Horizon Financial Services Corporation
are consolidated with those of its subsidiaries.
<PAGE>
Exhibit 23
Consent of KPMG Peat Marwick LLP
The Board of Directors and Stockholders
Horizon Financial Services Corporation:
We consent to incorporation by reference in the Registration
Statements (No. 33-87030 and 33-94324) on Form S-8 of Horizon Financial
Services Corporation of our report dated July 30, 1997, relating to the
consolidated balance sheets of Horizon Financial Services Corporation and
subsidiaries as of June 30, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year ended June 30, 1997, which report appears in the June
30, 1997 annual report on Form 10-KSB of Horizon Financial Services
Corporation and subsidiaries.
KPMG Peat Marwick LLP
Des Moines, Iowa
September 25, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF HORIZON FINANCIAL SERVICES CORPORATION FOR
THE THREE AND TWELVE MONTH PERIODS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 5,621 5,621
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 24,942 24,942
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 52,193 52,193
<ALLOWANCE> 348 348
<TOTAL-ASSETS> 85,969 85,969
<DEPOSITS> 57,641 57,641
<SHORT-TERM> 19,102 19,102
<LIABILITIES-OTHER> 814 814
<LONG-TERM> 0 0
5 5
0 0
<COMMON> 0 0
<OTHER-SE> 8,407 8,407
<TOTAL-LIABILITIES-AND-EQUITY> 85,969 85,969
<INTEREST-LOAN> 1,129 4,408
<INTEREST-INVEST> 377 1,332
<INTEREST-OTHER> 63 155
<INTEREST-TOTAL> 1,569 5,895
<INTEREST-DEPOSIT> 697 2,682
<INTEREST-EXPENSE> 929 3,402
<INTEREST-INCOME-NET> 640 2,493
<LOAN-LOSSES> 133 252
<SECURITIES-GAINS> 16 81
<EXPENSE-OTHER> 473 2,255
<INCOME-PRETAX> 137 424
<INCOME-PRE-EXTRAORDINARY> 137 424
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 98 278
<EPS-PRIMARY> 0.23 0.66
<EPS-DILUTED> 0.23 0.66
<YIELD-ACTUAL> 8.06 8.06
<LOANS-NON> 469 469
<LOANS-PAST> 220 220
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 402 402
<ALLOWANCE-OPEN> 293 318
<CHARGE-OFFS> 81 227
<RECOVERIES> 3 5
<ALLOWANCE-CLOSE> 348 348
<ALLOWANCE-DOMESTIC> 330 330
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 18 18
</TABLE>
