UNITED STATES
SECURITY AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission File Number: 0-24036
Horizon Financial Services Corporation
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(Exact name of registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation or organization)
42-1419757
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(I.R.S. Employer Identification No.)
301 First Avenue East, Oskaloosa, Iowa 52577
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(Address of principal executive offices) (Zip Code)
(515) 673-8328
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for 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. [X] YES [ ] NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock 879,942
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Class Shares Outstanding
as of November 12, 1998
Transitional Small Business Disclosure Format (check one):
Yes [ ]; No [ X ]
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HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
INDEX
Page
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1998 and June 30, 1998. 1
Consolidated Statements of Operations for the three months ended 2
September 30, 1998 and 1997.
Consolidated Statements of Comprehensive Income for the three months 3
ended September 30, 1998 and 1997.
Consolidated Statements of Cash Flows for the three months ended 4
September 30, 1998 and 1997.
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and 7
Results of Operations
Part II. Other Information 13
Signatures 14
Index of Exhibits 15
Exhibits 16
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PART I
ITEM 1. FINANCIAL STATEMENTS
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HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Balance Sheets
September 30, June 30,
1998 1998
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Assets
Cash and cash equivalents .............................. $ 5,686,073 $ 6,366,619
Securities available for sale .......................... 22,387,574 23,921,718
Loans receivable, net .................................. 55,135,918 55,996,418
Real estate ............................................ 188,885 190,402
Stock in Federal Home Loan Bank, at cost ............... 1,202,500 1,202,500
Office property and equipment, net ..................... 1,180,119 1,126,516
Accrued interest receivable ............................ 694,388 683,120
Deferred tax asset ..................................... 14,975 405,541
Prepaid expenses and other assets ...................... 67,679 53,911
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Total assets ...................................... $ 86,558,111 $ 89,946,745
============ ============
Liabilities and Stockholders' Equity
Deposits ............................................... $ 57,110,256 $ 60,144,866
Advances from Federal Home Loan Bank ................... 20,471,743 20,038,174
Advance payments by borrowers for taxes and insurance .. 88,192 407,050
Accrued taxes on income:
Current ........................................... (285,930) 291,492
Deferred .......................................... -- --
Accrued expenses and other liabilities ................. 641,122 577,343
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Total liabilities ................................. 78,025,383 81,458,925
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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 1,046,198 shares 10,462 10,462
Additional paid-in capital ............................. 4,927,544 4,894,744
Retained earnings, substantially restricted ............ 5,050,226 5,730,257
Treasury stock, at cost ................................ (1,185,924) (1,185,924)
Unearned employee stock ownership plan shares .......... (113,103) (129,205)
Unearned recognition and retention plan shares ......... (2,385) (11,439)
Unrealized losses on securities available for sale ..... (154,092) (821,075)
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Total stockholders' equity ........................ 8,532,728 8,487,820
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Total liabilities and stockholders' equity ............. $ 86,558,111 $ 89,946,745
============ ============
</TABLE>
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<TABLE>
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HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Statements of Operations
Three Months
Ended September 30
1998 1997
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Interest income:
Loans ............................................... $ 1,191,002 $ 1,154,315
Investment securities available for sale ............ 381,671 423,746
Other investment income ............................. 78,489 57,064
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Total interest income ................................. 1,651,162 1,635.125
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Interest expense:
Deposits ............................................ 690,853 667,490
Advance from Federal Home Loan Bank ................. 269,884 303,015
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Total interest expense ................................ 960,737 970,505
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Net interest income ................................... 690,425 664,620
Provision for losses on loans ......................... 24,000 28,000
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Net interest income after provision for losses on loans 666,425 636,620
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Noninterest income:
Fees, commissions and service charges ............... 119,789 104,254
(Loss) gain on securities, net ...................... (1,307,650) 107,726
Other ............................................... 8,364 28,646
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Total noninterest income .............................. (1,179,497) 240,626
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<CAPTION>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Statements of Operations
Three Months
Ended September 30
1998 1997
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Noninterest expense:
Compensation, payroll taxes and employee benefits ... 304,861 286,053
Advertising ......................................... 14,583 14,642
Office property and equipment ....................... 76,225 96,377
Federal insurance premiums and special assessments .. 9,099 8,632
Data processing services ............................ 28,982 28,102
Other real estate expense, net ...................... (537) 7,056
Other ............................................... 68,276 57,560
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Total noninterest expense ............................. 501,489 498,422
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Earnings (loss) before taxes on income ................ (1,014,561) 378,824
Taxes on income ....................................... (373,075) 132,000
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Net earnings (loss) ................................... $ (641,486) $ 246,824
=========== ===========
Earnings per common share - (1)
Basic ............................................ ($ 0.75) $ 0.30
Diluted .......................................... ($ 0.73) $ 0.29
</TABLE>
(1) Earnings per share restated to reflect a two-for-one stock split (effected
as a 100% stock dividend) issued to stockholders of record on October 20,
1997 and adoption of Statement of Financial Accounting Standard No. 128,
"Earnings Per Share", effective December 31, 1997.
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HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Three Months
Ended September 30
1998 1997
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Net income ...................................................... $(641,486) $ 246,824
Other Comprehensive Income:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising
during the period, net of tax ....................... 35,216 72,532
Less: reclassification adjustment for net (gains) losses
included in net income, net of tax .................. 631,767 (3,065)
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Other comprehensive income, net of tax .......................... 666,983 69,467
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Comprehensive income ............................................ $ 25,497 $ 316,291
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HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Statements of Cash Flows
Three months ended
September 30,
1998 1997
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Cash flows from operating activities:
Net earnings ................................................... $ (641,486) 246,824
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation ................................................. 26,503 39,765
Amortization of fees, premiums and accretion of discounts, net 1,118 31,099
Provision for losses on loans and real estate ................ 24,000 28,000
Loans originated for sale .................................... (2,033,325) --
Proceeds on sales of loans ................................... 2,258,625 --
(Profit) loss on sale of securities .......................... 36,650 (107,726)
Gain on sale of fixed assets ................................. (8,364) --
Increase in accrued interest receivable ...................... (11,268) (5,198)
Amortization of stock compensation plans ..................... 25,156 25,520
Other, net ................................................... (493,094) 120,095
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Net cash provided by (used in) operating activities ............ (815,485) 378,379
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Cash flows from investing activities:
Principal collected on securities available for sale ......... 2,478,849 719,224
Proceeds from sale of securities available for sale .......... 454,463 7,278,901
Purchase of securities available for sale .................... (379,387) (5,108,798)
Purchase of Federal Home Loan Bank stock ..................... - - - (149,000)
Loans to customers, net ...................................... 611,200 (2,344,733)
Proceeds from sale of real estate ............................ - - - 225,000
Proceeds from sale of fixed asset ............................ 9,844 - - -
Purchase of office property and equipment, net ............... (81,586) (42,864)
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Net cash provided by investing activities ...................... 3,093,383 577,730
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HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Statements of Cash Flows
Three months ended
September 30,
1998 1997
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Cash flows from financing activities:
Decrease in customer deposit accounts, net ................... (3,034,610) (1,356,348)
Decrease advance payments by borrowers for taxes and insurance (318,858) (296,949)
Proceeds from advances from FHLB ............................. 3,450,000 8,500,000
Principal payments on advances from FHLB ..................... (3,016,431) (5,515,492)
Payment of dividends ......................................... (38,545) (32,601)
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Net cash provided by (used in) financing activities ............ (2,958,444) 1,298,610
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Net increase (decrease) in cash and cash equivalents ........... (680,546) 2,254,719
Cash and cash equivalents at beginning of year ................. 6,366,619 5,621,242
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Cash and cash equivalents at end of year ....................... $ 5,686,073 7,875,961
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest ....................................... $ 862,747 905,602
Cash paid for taxes .......................................... 204,347 --
=========== ===========
To mark assets available for sale to fair value:
Change in fair value ......................................... $(1,057,549) $ (110,624)
Less deferred taxes .......................................... 390,566 41,157
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Change in valuation allowance ................................ $ 666,983 $ 69,467
=========== ===========
</TABLE>
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HORIZON FINANCIAL SERVICES CORPORATION
1. BASIS OF PRESENTATION
The consolidated financial statements for the three months ended September 30,
1998 are unaudited. In the opinion of management of Horizon Financial Services
Corporation (the "Registrant" or "Company"), these financial statements reflect
all adjustments, consisting only of normal occurring accruals, necessary to
present fairly the consolidated financial position of the Company at September
30, 1998 and its results of operations and statements of cash flows for the
periods presented. These consolidated financial statements do not purport to
contain all the necessary disclosures required by generally accepted accounting
principles that might otherwise be necessary in the circumstances and should be
read in conjunction with the consolidated financial statements and notes therein
included in the annual report of Horizon Financial Services Corporation for the
year ended June 30, 1998. The results of the periods presented are not
necessarily representative of the results of operations and cash flows which may
be expected for the entire year.
2. ORGANIZATION
The Company was organized as a Delaware corporation at the direction of Horizon
Federal Savings Bank (the "Bank") for the purpose of becoming a savings bank
holding company, as part of the conversion from a mutual to a stock institution.
The conversion was completed on June 28, 1994 with the sale of 506,017 shares of
the Company's common stock at a price of $10 per share. Total proceeds from the
conversion of $4,148,060 (net of issuance costs of $507,300 and a loan to the
ESOP of $404,810) have been recorded as common stock and paid-in capital. On
October 10, 1997 the Company declared a two-for-one stock split (effected as a
100% stock dividend) payable on or about November 10, 1997 to shareholders of
record on October 20, 1997. Earnings per share have been restated to reflect
this stock split and the adoption of Statement of Financial Accounting Standard
No.
128, "Earnings Per Share", effective December 31, 1997.
3. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, the Bank and the Bank's wholly owned subsidiary,
Horizon Investment Services, Inc. The principal business activity of Horizon
Investment Services, Inc. is to sell credit life insurance to customers of the
Bank. All material intercompany accounts and transactions have been eliminated.
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4. EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standard No. 128
"Earnings Per Share". The following provides a reconciliation of the amounts
used in the determination of basic and diluted earnings per share for the three
month periods ended September 30, 1998 and 1997:
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3 Months 3 Months
Ended Ended
9/30/98 9/30/97
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Net Earnings ............................................. ($641,486) $ 246,824
========= =========
Basic earnings per share:
Weighted average shares outstanding .............. 879,972 851,080
Less unearned employee stock ownership plan shares (23,339) (36,037)
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Weighted average number of common shares outstanding ..... 856,603 815,043
========= =========
Earnings per common share - basic ........................ ($ 0.75) $ 0.30
========= =========
Diluted earnings per share:
Weighted average shares outstanding .............. 879,942 851,080
Less unearned employee stock ownership plan shares (23,339) (36,037)
Assumed incremental option shares
using the treasury stock method ............... 26,492 29,449
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Common and common equivalent shares outstanding .......... 883,095 844,492
========= =========
Earnings per common share - diluted ...................... ($ 0.73) $ 0.29
========= =========
</TABLE>
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Horizon Financial Services corporation (the "Company"), and its wholly-owned
operating subsidiary Horizon Federal Savings Bank (the "Bank") may from time to
time make written or oral "forward- looking statements", including statements
contained in the Company's filings with the Securities and Exchange Commission
(including this Quarterly Report on form 10-QSB and the Exhibits hereto and
thereto), in its reports to stockholders and in other communications by the
company, which are made in good faith by the Company and the Bank pursuant to
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995.
These forward-looking statements include statements with respect to the
Company's and the Bank's beliefs, plans, objectives, goals, expectations,
anticipations, estimates and intentions, that are subject to significant risks
and uncertainties, and are subject to change based on various factors (some of
which are beyond the Company's and the Bank's control). The words "may",
"could", "should", "would", "believe", "anticipate", "estimate", "expect",
"intend", "plan" and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause the
Company's and the Bank's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company and the Bank
conduct operations; the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the Federal Reserve
Board, inflation, interest rate, market and monetary fluctuations; the timely
development of and acceptance of new products and services of the Bank and the
perceived overall value of these products and services by users, including the
features, pricing and quality compared to competitors' products and services;
the willingness of users to substitute competitors' products and services for
the Bank's products and services; the success of the Bank in gaining regulatory
approval of its products and services, when required; the impact of changes in
financial services' laws and regulations (including laws concerning taxes,
banking, securities and insurance); technological changes; acquisitions; changes
in consumer spending and saving habits; and the success of the Company and the
Bank at managing the risks involved in the foregoing.
The foregoing list of important factors is not exclusive. Additional discussion
of factors affecting the Company's business and prospects is contained in the
Company's periodic filings with the Securities and Exchange Commission. The
Company does not undertake and expressly disclaims any intent or obligation, to
update any forward-looking statements, whether written or oral, that may be made
from time to time by or on behalf of the Company or the Bank.
The Company is a savings bank holding company the primary asset of which is
Horizon Federal Savings 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 (through its operating subsidiary, the
Bank), 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 and related securities and investments and the average
rate paid on deposits and other borrowing. The interest rate spread is affected
by regulatory, economic and competitive factors that influence interest rates,
loan demand and deposit flows. 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.
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<PAGE>
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 loan losses, 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 payments, borrowings and funds provided from operations.
Some local economic conditions in the Bank's market are weakening. The farm
economy has been strong for over five years but is now beginning to soften. As a
result of an over-supply of grain, farm prices for grain and livestock, which
are currently depressed, may continue to remain depressed and possibly even drop
further. In the event current economic and market conditions persist or worsen,
loan demand and existing loans may be affected. No assurances can be given that
the Bank will be able to maintain or increase its loan portfolio, which could
adversely affect the financial condition and results of operations of the
Company and the Bank.
FINANCIAL CONDITION
The Company's total assets at September 30, 1998 of $86.5 million decreased $3.4
million, or 3.78%, from $89.9 million at June 30, 1998. This decrease was
reflected in a $1.5 million decrease in securities available for sale, an
$860,000 decrease in net loans receivable and a $680,000 decrease in cash and
cash equivalents and a $390,000 decrease in deferred income tax. Total
liabilities decreased $3.5 million to $78.0 million on September 30, 1998 from
$81.5 million on June 30, 1998, primarily due to a $3.0 million decrease in
deposits from $60.1 million at June 30, 1998 to $57.1 million at September 30,
1998. Current taxes on income decreased $577,000 from $291,000 at June 30, 1998
to ($286,000) at September 30, 1998 and advance payments by borrowers for taxes
and insurance decreased $319,000 from $407,000 at June 30, 1998 to $88,000 at
September 30, 1998. The decrease was partially offset by a $433,000 increase in
Federal Home Loan Bank advances. Retained earnings decreased $680,000 from
$5,730,000 at June 30, 1998 to $5,050,00 at September 30, 1998 and unrealized
losses on securities available for sale increased $667,000 to ($154,000) at
September 30, 1998 from ($821,000) at June 30, 1998. There were no other
significant changes in the components of the Company's balance sheet.
RESULTS OF OPERATIONS
The Company's results of operations depend primarily on the level of its net
interest income and non-interest income and the level of its operating expenses.
Net interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and interest rates earned or paid on such assets or
liabilities, respectively. The Company's non-interest income consists primarily
of fees charged on transaction accounts which help to offset the costs
associated with establishing and maintaining these accounts.
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<PAGE>
Comparison of three month periods ended September 30, 1998 and September 30,
1997.
GENERAL
Net earnings decreased $888,000 from $247,000 at September 30, 1997 to a loss of
$641,000 at September 30, 1998. This decrease was primarily attributable to a
decrease in noninterest income from $241,000 at September 30, 1997 to a
$1,179,000 loss at September 30, 1998 as a result of a $1.3 million write-down
on interest only mortgage-backed securities as further described below.
INTEREST INCOME
Interest income increased $16,000 to $1,651,000 for the three month period ended
September 30, 1998 compared to $1,635,000 for the three month period ended
September 30, 1997. The increase was primarily the result of a 9 basis points
increase in the weighted average yield on average interest-earning assets to
8.08% at September 30, 1998 as compared to 7.99% for the same period in 1997.
The average outstanding balance of interest-earning assets decreased slightly
from $81.9 million at September 30, 1997 to $81.8 million at September 30, 1998.
INTEREST EXPENSE
Interest expense decreased $10,000 to $961,000 for the three month period ended
September 30, 1998 compared to $971,000 for the three month period ended
September 30, 1997. The decrease in interest expense was primarily due to the
weighted average yield on interest-bearing liabilities decreasing by 13 basis
points to 4.91% at September 30, 1998 as compared to 5.04% for the same period
in 1997. The average outstanding balance of average interest-bearing liabilities
increased $1.3 million from $77.0 million at September 30, 1997 to $78.3 million
at September 30, 1998.
NET INTEREST INCOME
Net interest income increased $26,000 from $664,000 for the three month period
ended September 30, 1997 to $690,000 for the three month period ended September
30, 1998. The increase in net interest income was a result of increased interest
income and decreased interest expense as described above. The Company's net
interest margin increased 22 basis points to 3.17% for the three month period
ended September 30, 1998 as compared to 2.95% for the same period in 1997.
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 three
month period ended September 30, 1998 the Company's provision for losses on
loans was $24,000 compared to $28,000 for the three month period ended September
30, 1997. The decrease in the provision for losses on loans was predominantly
attributable to a $10,000 provision for loss on a single family residential loan
for the period ended September 30, 1997 with no such loss for the period ended
September 30, 1998. As of September 30, 1998 the Company's non-performing
assets, consisting of nonaccrual loans, accruing loans 90 days or more
delinquent, real estate owned and repossessed consumer property, totaled $1.2
million or 1.33% of total assets, compared to $922,000 or 1.02% of total assets
as of June 30, 1998. As of September 30, 1998 the Company's allowance for losses
on loans was $384,000, representing 33.3% of non-performing assets and .70% of
net loans receivable.
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<PAGE>
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 loans to non-performing loans are
dependent upon the economy, changes in real estate values and interest rates.
Because the Company has had extremely low loan losses during its history,
management also considers the loss experience of similar portfolios in
comparable lending markets. In addition, federal regulators may require
additional reserves as a result of their examination of the Company.
Accordingly, the calculation of the adequacy of the allowance for losses on
loans is not based directly on the level of non-performing assets. 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.
NONINTEREST INCOME
Noninterest income decreased $1.4 million to ($1,179,000) for the three months
ended September 30, 1998 from $241,000 for the same period ended September 30,
1997. The decrease was attributable to a $1.3 million loss recognized on
securities at September 30, 1998 compared to a $108,000 gain on the sale of
securities at September 30, 1997. The loss recognized on securities during the
three month period ended in 1998 was the result of a $1.3 million write down on
interest only mortgage-backed securities resulting from a decline in fair value
that was judged to be other than temporary. This decline in fair value resulted
from a sustained increase in the prepayment speeds, due to refinancings, of the
underlying mortgage loans as a result of the low interest rate environment.
Further declines in the fair value of these securities are possible if
prepayment speeds continue to increase. The Bank cannot anticipate interest
rates or prepayment speeds.
NONINTEREST EXPENSE
Total noninterest expense increased $3,000 from $498,000 for the three months
ended September 30, 1997 to $501,000 for the three month period ended September
30, 1998. Compensation and employee benefits expenses, the largest component of
noninterest expense, increased $19,000 for the three months ended September 30,
1998 compared to the same period in 1997, primarily as a result of costs
generally associated with the Company's stock-based compensation plans as a
result of an increase in the Company's stock price. Other noninterest expenses
also increased as a result of audit expense paid in the three months ended
September 30, 1998 and none paid in the same period in 1997. These increases
were primarily offset by a $20,000 decline in office property and equipment
expense resulting from real estate taxes paid at September 30, 1997 and similar
taxes not paid for the comparabe period in 1998 and a $7,000 decline in expenses
associated with real estate owned as a result of a decrease in real estate owned
from $333,500 at September 30, 1997 to $189,000 at September 30, 1998.
<PAGE>
TAXES ON INCOME
The Company received a tax benefit of $373,000 for the three months ended
September 30, 1998, as a result of the net loss for the quarter due to the $1.3
million write-down on its interest-only mortgage-backed securities as discussed
above.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are deposits and principal and interest
payments collected on mortgage loans, investments and related securities. While
scheduled loan repayments and maturing investments are relatively predictable,
deposit flows and early loan prepayments are more influenced by interest rates,
general economic conditions and competition. Additionally, the Company may
borrow funds from the Federal Home Loan Bank ("FHLB") of Des Moines or utilize
other borrowings of funds based on need, comparative costs and availability at
the time.
The Office of Thrift Supervision (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 of 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 ratio was 9.21%
on September 30, 1998 and 10.41% on June 30, 1998.
At September 30, 1998, the Company had advances of $20.5 million from the FHLB
of Des Moines outstanding. The Company uses its liquidity resources principally
to meet ongoing commitments, to fund maturing certificates of deposit and
deposit withdrawals, and to meet operating expenses. The Company anticipates
that it will have sufficient funds available to meet current loan commitments.
At September 30, 1998, the Company had outstanding commitments to extend credit
which amounted to $1,916,000 (including $1,178,000 in available revolving
commercial lines of credit). At September 30, 1998, certificates of deposit
scheduled to mature in one year or less totaled $22.8 million. Management
believes, based on its experience to date, that a significant portion of these
funds will remain with the Company. Management believes that loan repayments and
other sources of funds will be adequate to meet the Company's foreseeable
liquidity needs.
Liquidity management is both a daily and long-term responsibility of management.
The Bank adjusts its investments in liquid assets based upon 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-earning overnight deposits and other short-term government and agency
obligations.
At September 30, 1998 the Bank had tangible and core capital of $6.6 million, or
7.6% of adjusted total assets, which was approximately $5.3 million and $3.1
million above the minimum requirements of 1.5% and 4.0%, respectively, of the
adjusted total assets in effect on that date. At September 30, 1998 the Bank had
risk-based capital of $6.8 million (including $6.6 million in core capital), or
13.4% of risk-weighted assets of $50.7 million. This amount was $2.8 million
above the 8.0% requirement in effect on that date.
<PAGE>
YEAR 2000
A great deal of information has been disseminated about the widespread computer
problems that may arise in the year 2000. Computer programs that can only
distinguish the final two digits of the year interest (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date,
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to the operation of the Company and
the Bank. Data processing is also essential to most other financial institutions
and many other companies. An internal committee of the Company, comprised of six
officers and one outside director, has been formed to address the potential risk
that year 2000 poses for the Company and the Bank.
-11-
<PAGE>
Accurate data processing is essential to the operations of the Company and the
Bank, and a lack of accurate processing by its vendors (or by the Company or the
Bank) could have a significant adverse impact on the Company's financial
condition and results of operations. The Bank has undergone a recent data
processing service bureau conversion. The Bank has been assured by its newly
selected data processing service bureau that their computer services will
function properly on and after January l, 2000. The Bank's newly selected data
processing service bureau has advised Management that it, in fact, is currently
year 2000 compliant with no programming corrections needed, and will commence
testing in December 1998. If by the end of this year it appears that the Bank's
primary data processing service bureau is not year 2000 compliant or will be
unable to resolve this problem in a timely manner, then the Bank will identify a
secondary data processing service provider to complete the task. If the Bank is
unable to do this, it will identify those steps necessary to minimize the
negative impact the computer problems could have on the Bank. Notwithstanding
the foregoing, if the Company and the Bank are unable to resolve this potential
problem in time, the Bank will likely experience significant data processing
delays, mistakes or failures. These delays, mistakes or failures could have a
significant adverse impact on the financial condition and results of operations
of the Company.
The Company has also received year 2000 updates from most of its material
non-information system providers, including but not limited to security cameras,
credit card and ATM card processors, the vault alarm, check printers, telephone
systems, participation loan servicers, and institutions the Company or Bank
invests through or with, and based on these updates do not anticipate any
significant year 2000 issues.
In addition to expenses related to our own systems, the Company could incur
losses if loan payments are delayed due to year 2000 problems affecting any of
our significant borrowers or impairing the payroll systems of large employers in
the Company's market area. We have been communicating with the Bank's vendors to
assess their progress in evaluating their systems and implementing any
corrective measures required by them to be prepared for the year 2000. Year 2000
readiness request letters have also been sent to certain borrowers of the Bank.
These borrowers were selected based on the aggregate amounts owed to the Bank,
the type of loans outstanding, and the perceived Year 2000 risk based on
management's knowledge of the loan customers and their operations. To date, the
Bank has not been advised by such parties that they do not have plans in place
to address and correct the issues associated with the year 2000 problem;
however, no assurance can be given as to the adequacy of such plans or to the
timeliness of their implementation.
The Company is expensing all costs associated with year 2000 required system
changes as those costs are incurred, and such costs are being funded through
operating cash flows. The total out-of-pocket costs associated with year 2000
compliance is estimated to be approximately $10,000. The cost of internal
resources for year 2000 compliance has not been estimated. The Company does not
expect significant increases in future data processing costs or other expenses
related to its year 2000 compliance.
-12-
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K:
None
-13-
<PAGE>
SIGNATURES
Pursuant to the requirement 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
Registrant
Date: November 13,1998 /s/ Robert W. DeCook
-------------------- -------------------------------------------
Robert W. DeCook
President and Chief Executive Officer
Date: November 13, 1998 /s/ Sharon McCrea
-------------------- -------------------------------------------
Sharon McCrea
Vice President and Chief Financial Officer
-14-
<PAGE>
INDEX OF EXHIBITS
Exhibit
- -------
27. Financial Data Schedule
<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 QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 5,686
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,388
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 55,136
<ALLOWANCE> 384
<TOTAL-ASSETS> 86,558
<DEPOSITS> 57,110
<SHORT-TERM> 20,472
<LIABILITIES-OTHER> 443
<LONG-TERM> 0
<COMMON> 10
0
0
<OTHER-SE> 8,523
<TOTAL-LIABILITIES-AND-EQUITY> 86,558
<INTEREST-LOAN> 1,191
<INTEREST-INVEST> 382
<INTEREST-OTHER> 78
<INTEREST-TOTAL> 1,651
<INTEREST-DEPOSIT> 691
<INTEREST-EXPENSE> 961
<INTEREST-INCOME-NET> 690
<LOAN-LOSSES> 24
<SECURITIES-GAINS> (1,308)
<EXPENSE-OTHER> 501
<INCOME-PRETAX> (1,014)
<INCOME-PRE-EXTRAORDINARY> (1,014)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (641)
<EPS-PRIMARY> (.75)
<EPS-DILUTED> (.73)
<YIELD-ACTUAL> 8.08
<LOANS-NON> 1,151
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 105
<ALLOWANCE-OPEN> 348
<CHARGE-OFFS> 10
<RECOVERIES> 22
<ALLOWANCE-CLOSE> 384
<ALLOWANCE-DOMESTIC> 384
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 23
</TABLE>
