<PAGE>
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 March 31, 1998
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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
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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
Class Shares Outstanding
as of May 11, 1998
Transitional Small Business Disclosure Format (check one):
Yes : No X
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<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1998 and June 30, 1997 1
Consolidated Statements of Operations for the three months and 2
nine months ended March 31, 1998 and 1997
Consolidated Statements of Cash Flows for the nine months ended 3
March 31, 1998 and 1997
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Part II. Other Information 11
Signatures 12
Index of Exhibits 13
Exhibits 14
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
------------ ------------
Assets (Unaudited)
- ------
<S> <C> <C>
Cash and cash equivalents .............................. $ 8,700,342 $ 5,621,242
Securities available for sale .......................... 24,417,034 24,942,234
Loans held for sale .................................... 1,014,487 136,800
Loans receivable, net .................................. 54,907,334 52,056,485
Real estate ............................................ 204,103 550,690
Stock in Federal Home Loan Bank, at cost ............... 1,303,300 955,600
Office property and equipment, net ..................... 1,014,368 1,082,013
Accrued interest receivable ............................ 615,756 554,239
Deferred income tax .................................... 455,651 --
Prepaid expenses and other assets ...................... 77,592 70,160
------------ ------------
Total assets ...................................... $ 92,709,967 $ 85,969,463
------------ ============
Liabilities and Stockholders' Equity
Deposits ............................................... $ 59,089,092 $ 57,641,372
Advances from Federal Home Loan Bank ................... 24,054,366 19,101,533
Advance payments by borrowers for taxes and insurance .. 308,194 400,663
Accrued taxes on income:
Current ........................................... 352,465 39,923
Deferred .......................................... -- 51,000
Accrued expenses and other liabilities ................. 459,781 322,311
------------ ------------
Total liabilities ................................. 84,263,898 77,556,802
------------ ------------
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
and 523,099 shares, respectively .................. 10,462 5,231
Additional paid-in capital ............................. 4,860,644 4,795,400
Retained earnings, substantially restricted ............ 5,869,663 5,305,946
Treasury stock, at cost ................................ (1,185,925) (1,360,275)
Unearned employee stock ownership plan shares .......... (145,308) (193,798)
Unearned recognition and retention plan shares ......... (20,493) (47,655)
Unrealized losses on securities available for sale ..... (942,974) (92,188)
------------ ------------
Total stockholders' equity ........................ 8,446,069 8,412,661
------------ ------------
Total liabilities and stockholders' equity ............. $ 92,709,967 $ 85,969,463
============ ============
</TABLE>
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<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Statements of Operations (unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31, Ended March 31,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $1,200,794 $1,114,363 $3,548,861 $3,279,259
Interest on securities available for sale 428,711 309,806 1,283,672 955,309
Other interest earning assets 80,858 40,896 194,575 91,445
---------- ---------- ---------- ----------
Total interest income 1,710,363 1,465,065 5,027,108 4,326,013
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits 682,982 660,042 2,040,346 1,985,075
Interest on advances and other borrowing 328,049 170,505 950,018 487,633
---------- ---------- ---------- ----------
Total interest expense 1,011,031 830,547 2,990,364 2,472,708
---------- ---------- ---------- ----------
Net interest income 699,332 634,518 2,036,744 1,853,305
Provision for losses on loans 33,808 12,000 79,808 119,073
---------- ---------- ---------- ----------
Net interest income after provision for
Losses on loans 665,524 622,518 1,956,936 1,734,232
---------- ---------- ---------- ----------
Non-interest income:
Fees, commissions and service charges 105,438 79,489 328,484 254,582
Gain on sale of securities, net 61,072 7,619 254,865 65,378
Other -- 8,432 26,731 15,517
---------- ---------- ---------- ----------
Total non-interest income 166,510 95,540 610,080 335,477
---------- ---------- ---------- ----------
Non-interest expense:
Compensation, payroll taxes and
employee benefits 291,774 264,785 886,449 782,472
Advertising 24,229 19,055 48,938 49,938
Office property and equipment 84,182 85,870 259,774 235,951
Federal insurance premiums 8,904 2,339 26,949 395,439
Data processing services 31,295 26,977 87,667 79,156
Other real estate expense, net 3,636 27,683 14,776 54,439
Other 37,204 52,178 185,922 185,166
---------- ---------- ---------- ----------
Total non-interest expense 481,224 478,887 1,510,475 1,782,561
---------- ---------- ----------
Earnings before taxes on income 350,810 239,171 1,056,541 287,148
Taxes on income 121,037 89,100 365,726 107,000
---------- ---------- ---------- ----------
Net earnings $ 229,773 $ 150,071 $ 690,815 $ 180,148
========== ========== ========== ==========
Earnings per common share - (1)
Basic $ 0.27 $ 0.19 $ 0.84 $ 0.22
Diluted $ 0.27 $ 0.18 $ 0.81 $ 0.21
</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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<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
<TABLE>
<CAPTION>
Nine months ended
March 31,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 690,815 $ 180,148
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation 136,495 123,261
Mortgage loans originated for resale (3,495,915) --
Proceeds from sale of mortgage loans originated for sale 2,618,228 --
Amortization of fees, premiums and accretion of discounts, net 120,963 32,366
Provision for losses on loans 79,808 119,073
Realized profit on assets available for sale (254,865) (65,278)
Increase in accrued interest receivable (61,516) (28,262)
Amortization of stock compensation plans 75,652 77,190
Other, net 484,012 181,907
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Net cash provided by operating activities 393,677 620,405
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Cash flows from investing activities:
Principal collected on assets available for sale 2,175,295 1,313,726
Proceeds from sale of assets available for sale 14,836,333 4,262,539
Purchase of assets available for sale (17,709,466) (6,244,200)
Purchase Federal Home Loan Bank Stock (347,700) (97,800)
Loans to customers, net (2,910,849) (3,052,193)
Proceeds from sale of real estate 350,000 --
Purchase of office property and equipment, net (68,850) (87,527)
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Net cash used in investing activities (3,675,237) (3,905,455)
------------ ------------
Cash flows from financing activities:
Increase in customer deposit accounts, net 1,447,720 1,674,909
Decrease advance payments by borrowers for taxes and insurance (92,469) (101,702)
Proceeds from advances from FHLB 14,500,000 11,000,000
Principal payments on advances from FHLB (9,547,168) (7,544,472)
Payment of dividends (107,007) (97,971)
Net proceeds from options exercised 159,584 --
Treasury stock acquired -- (337,354)
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Net cash provided by financing activities 6,360,660 4,593,410
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Net increase in cash and cash equivalents 3,079,100 1,308,360
Cash and cash equivalents at beginning of year 5,621,242 3,470,538
------------ ------------
Cash and cash equivalents at end of year $ 8,700,342 $ 4,778,898
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 2,845,491 $ 2,518,359
Cash paid for taxes 53,681 86,917
Transfers of loans to real estate acquired through foreclosures -- 114,430
============ ============
To mark assets available for sale to fair value:
Change in fair value $ 1,356,940 $ 25,746
Less deferred taxes (506,154) (9,596)
------------ ------------
Change in valuation allowance $ (850,786) $ (16,150)
============ ============
</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 and nine months ended March
31, 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 recurring accruals, necessary
to present fairly the consolidated financial position of the Company at March
31, 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, 1997. 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 subsidiaries, 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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<PAGE>
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
and nine month periods ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
3/31/98 3/31/97 3/31/98 3/31/97
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Earnings $ 229,773 $ 150,071 $ 690,815 $ 180,148
========= ========= ========= =========
Basic earnings per share:
Weighted average shares outstanding 866,797 851,080 856,979 867,562
Less unearned employee stock ownership plan shares (29,675) (42,735) (32,848) (46,213)
--------- --------- --------- ---------
Weighted average number of common shares outstanding 837,122 808,345 824,131 821,349
========= ========= ========= =========
Earnings per common share - basic $ 0.27 $ 0.19 $ 0.84 $ 0.22
========= ========= ========= =========
Diluted earnings per share:
Weighted average shares outstanding 866,797 851,080 856,979 867,562
Less unearned employee stock ownership plan shares (29,675) (42,735) (32,848) (46,213)
Assumed incremental option shares
using the treasury stock method 24,901 24,683 30,264 19,502
--------- --------- --------- ---------
Common and common equivalent shares outstanding 862,023 833,028 854,395 840,851
========= ========= ========= =========
Earnings per common share - diluted $ 0.27 $ 0.18 $ 0.81 $ 0.21
========= ========= ========= =========
</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") is a savings bank 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 (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 earned
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.
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.
Certain statements in this report that relate to the 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 ("PSLRA"). Words or phrases
"will likely result", "are expected to", "will continue", "is anticipated",
"estimate", "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the PSLRA. 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
Company's business and prospects is contained in the Company's periodic filings
with the Securities and Exchange Commission. The Company disclaims any intent or
obligation to update these forward-looking statements.
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<PAGE>
YEAR 2000
The Company is currently in the process of conducting a comprehensive review of
its computer systems to identify the systems that could be affected by the "Year
2000" problem. The Year 2000 problem is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's programs that have time sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
major system failure or miscalculations. Management anticipates that the
enhancements necessary to prepare its systems for the year 2000 will be
completed in a timely manner.
The Company is also aware of the risks to third parties, including vendors (and
to the extent appropriate, depositors and borrowers) and the potential adverse
impact on the Company resulting from failures by these parties to adequately
address the Year 2000 problem. The Company has been communicating with its
outside data processing service bureau, as well as other third party service
providers (and to the extent appropriate, depositors and borrowers), to assess
their progress in evaluating their systems and implementing any corrective
measures required by them to be prepared for the year 2000. To date, the Company
has been advised by its primary vendors that they do 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 anticipates that it will incur internal staff costs as well as
consulting and other expenses related to the enhancements necessary to prepare
the systems for the year 2000. Based on the Company's current knowledge and
investigations, the expenses of the year 2000 project as well as the related
potential effect on the Company's earnings is not expected to have a material
effect on the Company's financial position or results of operations.
FINANCIAL CONDITION
The Company's total assets at March 31, 1998 of $92.7 million increased $6.7
million, or 7.84%, from $86.0 million at June 30, 1997. This increase was
reflected in a $3.1 million increase in cash and cash equivalents, a $2.8
million increase in net loans receivable, a $878,000 increase in loans held for
sale, a $456,000 increase in deferred income tax and a $348,000 increase in
Federal Home Loan Bank Stock. This increase was partially offset by a $525,000
decrease in securities available for sale and a $347,000 decrease in real
estate. Total liabilities increased $6.7 million to $84.3 million at March 31,
1998 from $77.6 million at June 30, 1997, primarily due to a $4.9 million
increase in advances from the Federal Home Loan Bank (the "FHLB") of Des Moines
to $24.0 million from $19.1 million at June 30, 1997. Advances from the Federal
Home Loan Bank were used to fund growth in the Company's loan portfolio and for
operations. Deposits increased $1.5 million to $59.1 at March 31, 1998 from
$57.6 at June 30, 1997. Current accrued taxes on income increased $312,000 from
$40,000 at June 30, 1997 to $352,000 at March 31, 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 and from time to
time gains on the sale of securities available for sale.
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<PAGE>
Comparison of three month and nine month periods ended March 31, 1998 and March
31, 1997
GENERAL
Net earnings for the three months ended March 31, 1998 increased $80,000 to
$230,000 from $150,000 for the three months ended March 31, 1997. For the nine
months ended March 31, 1998, net earnings increased $511,000 to $691,000 for the
comparable period in 1997. The increase for the three month period ended March
31, 1998 compared to the three month period ended March 31, 1997 was
attributable to increases in net interest income and non-interest income,
primarily gains on securities available for sale and fees, commissions and
service charges, offset in part by increases in loan loss provisions and taxes
on income. The increase for the nine month period was primarily due to increases
in net interest income, non-interest income, and the absence of the one time
special assessment of $207,000, net of taxes, charged to the Company by the FDIC
to recapitalize the SAIF during the nine month period ended March 31, 1997. Net
earnings, without the SAIF assessment, for the nine months ended March 31, 1997
was $387,000 as compared to $691,000 for the same nine month period in 1998,
resulting in an increase of $304,000 or 78.6%.
INTEREST INCOME
Interest income increased $245,000 to $1.7 million for the three month period
ended March 31, 1998 compared to $1.5 million for the three month period ended
March 31, 1997, and $701,000 to $5.0 million for the nine month period ended
March 31, 1998 compared to $4.3 million for the comparable period ended March
31, 1997. The increase was due to an increase in average interest-earning
assets, consisting primarily of mortgage loans and securities available for
sale, of approximately $12.6 million and $12.5 million for the three and nine
months ended March 31, 1998, respectively, over the comparable periods in 1997,
and, to a lesser extent, the upward adjustment of the rates on the Bank's
adjustable-rate mortgage loans which repriced during 1998. The weighted average
yield on average interest-earning assets decreased slightly to 8.01% for the
nine months ended March 31, 1998 from 8.10% for the same period in 1997.
INTEREST EXPENSE
Interest expense increased $180,000 to $1.0 million from $830,000 for the three
month period and increased $518,000 to $3.0 million from $2.5 million for the
nine month period ended March 31, 1998 as compared to the same periods in 1997.
The increase in interest expense was attributable to increased advances from the
Federal Home Loan Bank which primarily were used to fund mortgage loan growth
and the interest rate on advances increasing to 5.70% for the nine months ended
March 31, 1998 from 5.54% for the same period in 1997. The weighted average
interest rates paid on average interest bearing liabilities increased to 5.04%
for the nine months ended March 31, 1998 from 4.91% for the same period in 1997.
NET INTEREST INCOME
Net interest income was $699,000 and $2.0 million for the three months and nine
months ended March 31, 1998, respectively, compared to $634 000 and $1.8 million
for the comparable periods in 1997. The increase in net interest income was
primarily a result of the increase in interest income as discussed above. The
Company's net interest margin was 2.97% for the nine month period ended March
31, 1998 compared to 3.19% for the same period in 1997.
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<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 nine
month period ended March 31, 1998 the Company's provision for losses on loans
was $80,000 compared to $119,000 for the nine month period ended March 31, 1997.
The provision for losses on loans was increased during 1997 predominantly as a
result of a $75,000 commercial business operating loan which was classified as a
loss in 1996 and subsequently written off during the first quarter of the 1997
fiscal year. During the three month period ended March 31, 1998, the Company's
provision for loan losses was $34,000 compared to $12,000 for the three month
period ended March 31, 1997. The increase in the provision was primarily
attributable to the growth in the Company's loan portfolio as a result of
increased loan originations. As of March 31, 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
$853,800 or .93% of total assets, compared to $1,045,000 or 1.22% of total
assets as of June 30, 1997. As of March 31, 1998 the Company's allowance for
losses on loans was $386,000, representing 45.2% of non-performing assets and
.69% of net loans receivable.
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.
NON-INTEREST INCOME
Non-interest income was $166,000 and $610,000 for the three and nine months
ended March 31, 1998 respectively, compared to $95,000 and $335,000 for the same
periods ended March 31, 1997. The increase in non-interest income was primarily
attributable to profit on sale of securities which increased $53,000 for the
three month period and $189,000 for the nine month period ended March 31, 1998
from the corresponding periods in 1997. Non-interest income from fees,
commissions and service charges increased $26,000 and $74,000 for the three and
nine month periods ended March 31, 1998, respectively, over the comparable
periods in 1997 due to increased fees charged on checking accounts, increased
loan fees, primarily attributable to loans originated for sale in the secondary
market and increased commission income on sales of alternative financial
products sold through the wholly-owned financial services subsidiary of the
Bank.
NON-INTEREST EXPENSE
Total non-interest expense was $481,000 and $1.5 million for the three and nine
months ended March 31, 1998, respectively, compared to $479,000 and $1.8 million
for the same periods in 1997, reflecting an increase of $2,000 for the three
month period and a decrease of $272,000 for the nine month period.
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<PAGE>
The decrease for the nine month period was primarily attributable to the result
of the one-time special assessment of $ 331,000 by the FDIC to recapitalize the
SAIF during September 1997 and to a lessor extent a decrease in real estate
owned expense of $29,000 from $54,000 to $15,000. Compensation, payroll taxes
and employee benefits, the largest component of non-interest expense, increased
$27,000 and $104,000 for the three and nine month periods ended March 31, 1998,
respectively, compared to the same periods during 1997. Significant factors
causing the increase in compensation were costs generally associated with the
Company's stock-based compensation plans as a result of an increase in the
Company's stock price, normal salary increases and costs of benefits provided.
There were no other significant changes in the components of non-interest
expense. See "Year 2000".
TAXES ON INCOME
Income taxes increased $32,000 and $259,000 for the three and nine month periods
ended March 31, 1998, respectively, primarily as a result of the increases in
net earnings.
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 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
4.0% 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 Banks liquidity ratio was 9.8%
at March 31, 1998 and 7.12% on June 30, 1997.
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. At March 31, 1998, the Company had outstanding
commitments to extend credit which amounted to $1,940,000 (including $623,000 in
available revolving commercial lines of credit). At March 31, 1998, certificates
of deposit scheduled to mature in one year or less totaled $21.4 million.
Management believes based on its experience to date, that a significant portion
of these funds will remain with the Company. At March 31 1998, the Company had
$24.0 million of advances from the FHLB of Des Moines outstanding. 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 March 31, 1998 the Bank had tangible and core capital of $6.5 million, or
7.1% of adjusted total assets, which was approximately $5.1 million and $3.8
million above the minimum requirements of 1.5% and 3.0%, respectively, of the
adjusted total assets in effect on that date. At March 31, 1998 the Bank had
risk-based capital of $6.8 million (including $6.5 million in core capital), or
13.3% of risk-weighted assets of $51.1 million. This amount was $2.7 million
above the 8.0% requirement in effect on that date.
-10-
<PAGE>
OTHER INFORMATION
PART II
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
-11-
<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: May 14, 1998 /s/ Robert W. DeCook
------------- ------------------------------------
Robert W. DeCook
President and Chief Executive Officer
Date: May 14, 1998 /s/ Sharon McCrea
------------- ------------------------------------
Sharon McCrea
Vice President and Chief Financial Officer
-12-
<PAGE>
INDEX OF EXHIBITS
Exhibit Page
- ------- ----
27. Financial Data Schedule 14
-13-
<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 MONTH PERIOD ENDED MARCH 31, 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-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 8,700
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,417
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 55,922
<ALLOWANCE> 386
<TOTAL-ASSETS> 92,710
<DEPOSITS> 59,089
<SHORT-TERM> 24,054
<LIABILITIES-OTHER> 1,121
<LONG-TERM> 0
10
0
<COMMON> 0
<OTHER-SE> 8,436
<TOTAL-LIABILITIES-AND-EQUITY> 92,710
<INTEREST-LOAN> 1,201
<INTEREST-INVEST> 428
<INTEREST-OTHER> 81
<INTEREST-TOTAL> 1,710
<INTEREST-DEPOSIT> 683
<INTEREST-EXPENSE> 1,011
<INTEREST-INCOME-NET> 699
<LOAN-LOSSES> 34
<SECURITIES-GAINS> 61
<EXPENSE-OTHER> 481
<INCOME-PRETAX> 351
<INCOME-PRE-EXTRAORDINARY> 351
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 230
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
<YIELD-ACTUAL> 8.02
<LOANS-NON> 838
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 119
<ALLOWANCE-OPEN> 380
<CHARGE-OFFS> 28
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 386
<ALLOWANCE-DOMESTIC> 386
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 21
</TABLE>
