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 December 31, 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 880,062
------------ -------
Class Shares Outstanding
as of February 11, 1999
Transitional Small Business Disclosure Format (check one):
Yes [ ] : No [ X ]
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
INDEX
Part I. Financial Information Page
- ------- --------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1998 and June 30, 1998. 1
Consolidated Statements of Operations for the three months and six 2
months ended December 31, 1998 and 1997.
Consolidated Statements of Comprehensive Income for the three months 3
and six months ended December 31, 1998 and 1997.
Consolidated Statements of Cash Flows for the six months ended 4
December 31, 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
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Balance Sheets
December 31, June 30,
Assets 1998 1998
- ------ ------------ ------------
<S> <C> <C>
Cash and cash equivalents .............................. $ 4,520,949 $ 6,366,619
Securities available for sale .......................... 21,475,866 23,921,718
Loans receivable, net .................................. 55,229,858 55,996,418
Real estate ............................................ 287,472 190,402
Stock in Federal Home Loan Bank, at cost ............... 1,202,500 1,202,500
Office property and equipment, net ..................... 1,160,468 1,126,516
Accrued interest receivable ............................ 623,559 683,120
Deferred tax asset ..................................... 1,254,278 405,541
Prepaid expenses and other assets ...................... 40,898 53,911
------------ ------------
Total assets ...................................... $ 85,795,848 $ 89,946,745
------------ ============
Liabilities and Stockholders' Equity
Deposits ............................................... $ 58,513,874 $ 60,144,866
Advances from Federal Home Loan Bank ................... 19,450,204 20,038,174
Advance payments by borrowers for taxes and insurance .. 203,975 407,050
Accrued taxes on income:
Current ........................................... 45,942 291,492
Deferred .......................................... - - - - - -
Accrued expenses and other liabilities ................. 250,346 577,343
------------ ------------
Total liabilities ................................. 78,464,341 81,458,925
------------ ------------
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 ............................. 4,953,659 4,894,744
Retained earnings, substantially restricted ............ 4,961,137 5,730,257
Treasury stock, at cost ................................ (1,185,197) (1,185,924)
Unearned employee stock ownership plan shares .......... (96,526) (129,205)
Unearned recognition and retention plan shares ......... - - - (11,439)
Unrealized losses on securities available for sale ..... (1,312,028) (821,075)
------------ ------------
Total stockholders' equity ........................ 7,331,507 8,487,820
------------ ------------
Total liabilities and stockholders' equity ............. $ 85,795,848 $ 89,946,745
============ ============
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Statements of Operations
Three Months Six Months
Ended December 31, Ended December 31,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans ................................. $ 1,147,157 $ 1,193,752 $ 2,338,159 $ 2,348,067
Interest on securities available for sale ......... 370,677 431,215 752,348 854,961
Other interest earning assets ..................... 40,620 56,653 119,109 113,717
----------- ----------- ----------- -----------
Total interest income ............................. 1,558,454 1,681,620 3,209,616 3,316,745
----------- ----------- ----------- -----------
Interest expense:
Interest on deposits .............................. 670,148 689,874 1,361,001 1,357,364
Interest on advances and other borrowing .......... 249,498 318,954 519,382 621,969
----------- ----------- ----------- -----------
Total interest expense ............................ 919,646 1,008,828 1,880,383 1,979,333
----------- ----------- ----------- -----------
Net interest income ............................... 638,808 672,792 1,329,233 1,337,412
Provision for losses on loans ..................... 24,000 18,000 48,000 46,000
----------- ----------- ----------- -----------
Net interest income after provision for
Losses on loans ................................... 614,808 654,792 1,281,233 1,291,412
----------- ----------- ----------- -----------
Non-interest income:
Fees, commissions and service charges ............. 123,096 118,792 242,885 223,046
Profit (loss) on securities available for sale, net (296,474) 86,067 (1,604,124) 193,793
Other ............................................. 209 (1,915) 8,573 26,731
----------- ----------- ----------- -----------
Total non-interest income (loss) .................. (173,169) 202,944 (1,352,666) 443,570
----------- ----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Statements of Operations
(continued)
Three Months Six Months
Ended December 31, Ended December 31,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Non-interest expense:
Compensation, payroll taxes and
employee benefits ............................... 310,529 308,622 615,390 594,675
Advertising ....................................... 11,370 10,067 25,953 24,709
Office property and equipment ..................... 70,209 79,215 146,434 175,592
Federal insurance premiums ........................ 8,849 9,413 17,948 18,045
Data processing services .......................... 43,294 28,270 72,276 56,372
Other real estate expense, net .................... 1,607 4,084 1,070 11,140
Other ............................................. 77,181 91,158 145,457 148,718
----------- ----------- ----------- -----------
Total non-interest expense ........................ 523,039 530,829 1,024,528 1,029,251
----------- ----------- ----------- -----------
Earnings (loss) before taxes on income ............ (81,400) 326,907 (1,095,961) 705,731
Taxes on income ................................... (30,925) 112,689 (404,000) 244,689
----------- ----------- ----------- -----------
Net earnings (loss) ............................... $ (50,475) $ 214,218 $ (691,961) $ 461,042
=========== =========== =========== ===========
Earnings (loss) per common share
Basic ...................................... ($ 0.06) $ 0.26 ($ 0.81) $ 0.56
Diluted .................................... ($ 0.06) $ 0.25 ($ 0.78) $ 0.54
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) ............................................ ($ 50,475) $ 214,218 ($ 691,961) $ 461,042
Other Comprehensive Income:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising
during the period, net of tax ....................... (1,330,440) 53,487 (1,295,224) 126,019
Less: reclassification adjustment for net (gains) losses
included in net income, net of tax .................. 172,504 (4,025) 804,271 (7,090)
----------- ----------- ----------- -----------
Other comprehensive income, net of tax ....................... (1,157,936) 49,462 (490,953) 118,929
----------- ----------- ----------- -----------
Comprehensive income ......................................... ($1,208,411) $ 263,680 ($1,182,914) $ 579,971
----------- ----------- ----------- -----------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Statements of Cash Flows
Six months ended
December 31,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (losses) .......................................... $ (691,961) 461,042
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation ................................................. 57,580 88,130
Amortization of fees, premiums and accretion of discounts, net 5,027 81,117
Provision for losses on loans and real estate ................ 48,000 46,000
Loans originated for sale .................................... (4,408,390) ---
Proceeds on sales of loans ................................... 4,048,140 ---
(Profit) loss on sale of securities .......................... 1,604,124 (193,792)
Gain on sale of fixed assets ................................. (8,364) - - -
(Increase) decrease in accrued interest receivable ........... 59,561 (16,982)
Deferred taxes on income ..................................... (556,723) ---
Amortization of stock compensation plans ..................... 44,118 50,497
Other, net ................................................... (497,689) 159,133
------------ ------------
Net cash provided by (used in) operating activities ............ (296,577) 675,145
------------ ------------
Cash flows from investing activities:
Principal collected on securities available for sale ......... 2,266,435 1,432,143
Proceeds from sale of securities available for sale .......... 751,162 9,814,349
Purchase of securities available for sale .................... (2,963,863) (10,713,346)
Purchase of investment real estate ........................... (100,000) ---
Purchase of Federal Home Loan Bank stock ..................... --- (149,000)
Loans to customers, net ...................................... 1,078,810 (3,766,681)
Proceeds from sale of real estate ............................ --- 225,000
Proceeds from sale of fixed asset ............................ 9,844 ---
Purchase of office property and equipment, net ............... (93,012) (48,080)
------------ ------------
Net cash provided by (used in) investing activities ............ 949,376 (3,205,615)
------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Statements of Cash Flows
(continued
Six months ended
December 31,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Decrease in customer deposit accounts, net ................... (1,630,992) (781,077)
Decrease advance payments by borrowers for taxes and insurance (203,075) (200,032)
Proceeds from advances from FHLB ............................. 5,450,000 8,500,000
Principal payments on advances from FHLB ..................... (6,037,970) (5,531,214)
Net proceeds from options exercised .......................... 659 11,734
Payment of dividends ......................................... (77,091) (69,354)
------------ ------------
Net cash provided by (used in) financing activities ............ (2,498,469) 1,930,057
------------ ------------
Net increase (decrease) in cash and cash equivalents ........... (1,845,670) (600,413)
Cash and cash equivalents at beginning of year ................. 6,366,619 5,621,242
------------ ------------
Cash and cash equivalents at end of year ....................... $ 4,520,949 5,020,829
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest ....................................... $ 2,192,632 2,040,032
Cash paid for taxes .......................................... 369,685 20,521
============ ============
To mark assets available for sale to fair value:
Change in fair value ......................................... $ 782,967 $ (189,689)
Less deferred taxes .......................................... (292,014) 70,760
------------ ------------
Change in valuation allowance ................................ $ (490,953) $ 118,929
============ ============
</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 six months ended
December 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 occurring
accruals, necessary to present fairly the consolidated financial position of the
Company at December 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, 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.
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.
-5-
<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 six month periods ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
12/31/98 12/31/97 12/31/98 12/31/97
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Net Earnings ($50.475) $214,218 ($691,961) $461,042
========= ========= ========== ========
Basic earnings per share:
Weighted average shares outstanding 880,045 853,060 879,994 852,070
Less unearned employee stock ownership plan shares (20,266) (32,834) (21,803) (34,435)
---------- --------- --------- --------
Weighted average number of common shares outstanding 859,779 820,226 858,191 817,635
========= ======= ========== =======
Earnings (loss) per common share - basic ($ 0.06) $ 0.26 ($ 0.81) $ 0.56
========== =========== ============ ===========
Diluted earnings per share:
Weighted average shares outstanding 880,045 853,060 879,994 852,070
Less unearned employee stock ownership plan shares (20,266) (32,834) (21,803) (34,435)
Assumed incremental option shares
using the treasury stock method 24,237 36,440 25,364 32,945
---------- -------- ---------- ---------
Common and common equivalent shares outstanding 884,016 856,666 883,555 850,580
========== ======= ========= ========
Earnings (loss) per common share - diluted ($ 0.06) $ 0.25 ($ 0.78) $ 0.54
============ =========== ========== ==========
</TABLE>
-6-
<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").
<PAGE>
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.
-7-
<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. 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 the balance or quality of 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 December 31, 1998 of $85.8 million decreased $4.1
million, or 4.56%, from $89.9 million at June 30, 1998. Securities available for
sale decreased $2.4 million, or 10.2%, due to write-downs on certain interest
only mortgage-backed securities of $1.5 million and a $783,000 downward
adjustment in the fair value of the available for sale portfolio. Cash and cash
equivalents decreased $1.8 million, or 28.9%, due to a $1.6 million decrease in
deposits. Total loans receivable, net, decreased $766,000, or 1.4%, from June
30, 1998 as a result of increased prepayments due to the refinancings of loans
moving into the secondary market.
Total liabilities decreased $3.0 million, or 3.7%, to $78.5 million at December
31, 1998 from $81.5 million at June 30, 1998, primarily due to a $1.6 million,
or 2.7%, decrease in deposits from $60.1 million at June 30, 1998 to $58.5
million at December 31, 1998. Management believes the decrease in certificates
of deposit was the result of depositors seeking higher returns in mutual funds
and other investments. Advances from the Federal Home Loan Bank decreased
$588,000, or 2.9%, due to repayments made on the advances as a result of the
corresponding decrease in loans receivable. Total stockholders' equity decreased
$1.2 million, or 13.6%, from $8.5 million at June 30, 1998 to $7.3 million at
December 31, 1998 due to loss of earnings and an increase in unrealized losses
on securities available for sale.
<PAGE>
RESULTS OF OPERATIONS
The Company's results of operations depend primarily on the levels of its net
interest income, non-interest income and 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 more recently includes
significant write-downs on "interest only" mortgage-backed securities.
-8-
<PAGE>
Comparison of three month and six month periods ended December 31, 1998 and
December 31, 1997
GENERAL
Net earnings for the three months ended December 31, 1998 decreased $265,000 to
($51,000) from $214,000 for the three month period ended December 31, 1997. For
the six months ended December 31, 1998, net earnings decreased ($1,153,000) to
($692,000) from $461,000 for the comparable period in 1997. The decrease for the
three and six month periods ended December 31, 1998 compared to the same periods
ended December 31, 1997 was primarily attributable to substantial write-downs on
interest only mortgage-backed securities as further described below.
INTEREST INCOME
Interest income decreased $123,000 to $1.6 million for the three month period
ended December 31, 1998 compared to $1.7 million for the three month period
ended December 31, 1997 and $107,000 to $3.2 million for the six month period
ended December 31, 1998 compared to $3.3 million for the comparable period ended
December 31, 1997. The decrease was due to a decrease in average
interest-earning assets, consisting primarily of mortgage loans and securities
available for sale, of approximately $1.9 million and $1.0 million for the three
and six months ended December 31, 1998, respectively, over the comparable
periods in 1997 and a decrease in the weighted average yield on average
interest-earning assets to 7.86% for the six months ended December 31, 1998 from
8.02% for the same period in 1997. The decrease in average interest earning
assets is the result of borrowers prepaying loans in order to obtain new loans
that are subsequently sold to the secondary market. Also contributing to the
decrease in interest earning assets is managements decision, at the current
time, not to invest in lower-yielding mortgage-backed securities with leveraged
FHLB advances.
INTEREST EXPENSE
Interest expense decreased $89,000 to $920,000 from $1,009,000 for the three
month period and decreased $99,000 to $1,880,000 from $1,979,000 for the six
month period ended December 31, 1998 as compared to the same periods in 1997.
The decrease in interest expense was attributable to the interest rate on FHLB
advances decreasing to 5.35% for the six months ended December 31, 1998 from
5.80% for the same period in 1997. The weighted average interest rates paid on
average interest bearing liabilities decreased to 4.85% for the six months ended
December 31, 1998 from 5.08% for the same period in 1997.
NET INTEREST INCOME
Net interest income was $639,000 and $1.3 million for the three months and six
months ended December 31, 1998, respectively, compared to $673,000 and $1.3
million for the comparable periods in 1997. The decline in net interest income
for the three month period was primarily due to the lower loan and security
balances as described above. The Company's net interest margin was 3.01% for the
six month period ended December 31, 1998 compared to 2.94% for the same period
in 1997.
<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 six
month period ended December 31, 1998 the Company's provision for losses on loans
was $48,000 compared to $46,000 for the six month period ended December 31,
1997. During the three month period ended December 31, 1998, the Company's
provision for loan losses was $24,000 compared to $18,000 for the three month
period ended December 31, 1997. As of December 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
$1.2 million or 1.44% of total assets, compared to $922,000 or 1.02% of total
assets as of June 30, 1998. As of December 31, 1998 the Company's allowance for
losses on loans was $401,000, representing 32.5% of non-performing assets and
.73% of net loans receivable.
-9-
<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 (LOSS)
Noninterest income decreased to ($173,000) and ($1,352,000) for the three and
six months ended December 31, 1998 respectively, compared to $203,000 and
$444,000 for the same periods ended December 31, 1997. The decrease for the
three month period was attributable to a $296,000 loss on assets available for
sale (including a $220,000 loss recognized on securities) at December 31, 1998
compared to a $86,000 gain at December 31, 1997 and a $1.6 million loss on
assets available for sale (including a $1.5 million loss recognized on
securities) for the six month period ended December 31, 1998 as compared to a
$194,000 gain for the same period in 1997. The loss recognized on securities for
the three and six month periods ended in 1998 of $220,000 and $1.5 million,
respectively, was the result of write-downs 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 predict interest rates or prepayment speeds.
NONINTEREST EXPENSE
Total noninterest expense was $523,000 and $1.0 million for the three and six
months ended December 31, 1998, respectively, compared to $531,000 and $1.0
million for the same periods in 1997, reflecting decreases of $8,000 and $5,000,
respectively. Compensation, payroll taxes and employee benefits, the largest
component of non-interest expense, increased $2,000 and $21,000 for the three
and six month periods ended December 31, 1998, respectively, compared to the
same period during 1997. The increase in compensation expense for the six months
ended December 31, 1998 was primarily the 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 during the first quarter. Office property and
equipment decreased $9,000 and $29,000 for the three and six month periods ended
December 31, 1998, respectively, compared to the same period during 1997 and
data processing services increased $15,000 for the three and six month periods
ended December 31, 1998 due to expenses involved in the conversion to a new data
processing service bureau. There were no other significant changes in the
components of non-interest expense.
<PAGE>
TAXES ON INCOME
The Company received a tax benefit of $31,000 and $404,000 for the three and six
month periods ended December 31, 1998, respectively, as a result of the net loss
for the periods due to the $220,000 and $1.5 million write-downs on its
interest-only mortgage-backed securities as discussed above.
-10-
<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
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 Bank's liquidity ratio was 7.31%
on December 31, 1998 and 10.41% on June 30, 1998.
At December 31, 1998, the Company had advances of $19.5 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
December 31, 1998, the Company had outstanding commitments to extend credit
which amounted to $2,061,000 (including $1,235,000 in available revolving
commercial lines of credit). At December 31, 1998, certificates of deposit
scheduled to mature in one year or less totaled $23.4 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 December 31, 1998 the Bank had tangible and core capital of $5.9 million, or
6.9% of adjusted total assets, which was approximately $4.6 million and $2.5
million above the minimum requirements of 1.5% and 4.0%, respectively, of the
adjusted total assets in effect on that date. At December 31, 1998 the Bank had
risk-based capital of $6.2 million (including $5.9 million in core capital), or
12.3% of risk-weighted assets of $50.1 million. This amount was $2.1 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 commenced
testing in December 1998. If 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. However, the failure of any of these material
non-information systems to operate properly on and after January 1, 2000 may
disrupt the Bank's business and have a material adverse affect on its financial
condition and results of operations.
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. At the present time,
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
---------------------------------------------------
(a) Annual meeting date: October 22, 1998
(b) Not required
(c) The matters approved by stockholders at the Meeting and
number of votes cast for, against or withheld (as well as
the number of abstentions and broker non-votes, if any) as
to each matter are set forth below:
Proposal Number of Votes
-------- ---------------
For Withheld
--- --------
Election of the following director for a three year term:
1) Dwight L. Groves 797,378 6,000
2) Gary L. Rozenboom 797,328 6,050
For Against Abstain
Ratification of the appointment of KPMG Peat ------- ------- -------
Marwick LLP as the Company's auditors for the 803,328 None 400
fiscal year ending June 30, 1999
ITEM 5. Other Information
-----------------
None
ITEM 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits:
See Index to Exhibits
(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: February 12,1999 /s/ Robert W. DeCook
---------------- --------------------
Robert W. DeCook
President and Chief Executive Officer
Date: February 12, 1999 /s/ Sharon McCrea
-------------------- ------------------
Sharon McCrea
Vice President and Chief Financial Officer
-14-
<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 Registrants
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 to Registrant's Registration Statement on form S-1
(File No. 33-76674), is incorporated herein by reference.
10.1 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.
10.2 1994 Stock Option and Incentive Plan, filed as Exhibit 10.3 in
Registrant's Report on Form 10-KSB for the fiscal year ended June
30, 1994 (File No. 0-24036), is incorporated herein by reference.
10.3 Recognition and Retention Plan, filed as Exhibit 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.
11 Statement re computation of earnings per share (See Footnote 4 of
the Registrant's Notes to Consolidated Financial Statements
contained herein)
27 Financial Data Schedule (electronic filing only)
-15-
<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 SIX MONTH PERIOD ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 4,521
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,476
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 55,230
<ALLOWANCE> 401
<TOTAL-ASSETS> 85,796
<DEPOSITS> 58,514
<SHORT-TERM> 19,450
<LIABILITIES-OTHER> 500
<LONG-TERM> 0
<COMMON> 10
0
0
<OTHER-SE> 7,322
<TOTAL-LIABILITIES-AND-EQUITY> 85,796
<INTEREST-LOAN> 2,338
<INTEREST-INVEST> 752
<INTEREST-OTHER> 119
<INTEREST-TOTAL> 3,209
<INTEREST-DEPOSIT> 1,361
<INTEREST-EXPENSE> 1,880
<INTEREST-INCOME-NET> 1,329
<LOAN-LOSSES> 48
<SECURITIES-GAINS> (1,604)
<EXPENSE-OTHER> 1,024
<INCOME-PRETAX> (1,096)
<INCOME-PRE-EXTRAORDINARY> (1,096)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (692)
<EPS-PRIMARY> (.81)
<EPS-DILUTED> (.78)
<YIELD-ACTUAL> 7.86
<LOANS-NON> 1,236
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 110
<ALLOWANCE-OPEN> 348
<CHARGE-OFFS> 18
<RECOVERIES> 23
<ALLOWANCE-CLOSE> 401
<ALLOWANCE-DOMESTIC> 401
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 45
</TABLE>
