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, 1999
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
<PAGE>
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 May 14, 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 March 31, 1999 and June 30,
1998. 1
Consolidated Statements of Operations for the three months
and nine months ended March 31, 1999 and 1998. 2
Consolidated Statements of Comprehensive Income for the three
months and nine months ended March 31, 1999 and 1998. 3
Consolidated Statements of Cash Flows for the nine months
ended March 31, 1999 and 1998. 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. Other Information 14
Signatures 15
Index of Exhibits 16
Exhibits 17
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
--------------------
<TABLE>
<CAPTION>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Balance Sheets
March 31, June 30,
Assets 1999 1998
- ------ ------------ ------------
<S> <C> <C>
Cash and cash equivalents .............................. $ 6,146,552 $ 6,366,619
Securities available for sale .......................... 20,876,819 23,921,718
Loans receivable, net .................................. 54,547,411 55,996,418
Real estate ............................................ 344,657 190,402
Stock in Federal Home Loan Bank, at cost ............... 1,202,500 1,202,500
Office property and equipment, net ..................... 1,112,401 1,126,516
Accrued interest receivable ............................ 604,443 683,120
Deferred tax asset ..................................... 1,093,460 405,541
Prepaid expenses and other assets ...................... 108,450 53,911
------------ ------------
Total assets ...................................... $ 86,036,693 $ 89,946,745
------------ ============
Liabilities and Stockholders' Equity
Deposits ............................................... $ 56,933,476 $ 60,144,866
Advances from Federal Home Loan Bank ................... 20,628,349 20,038,174
Advance payments by borrowers for taxes and insurance .. 294,071 407,050
Accrued taxes on income:
Current ........................................... 123,042 291,492
Deferred .......................................... - - - - - -
Accrued expenses and other liabilities ................. 317,209 577,343
------------ ------------
Total liabilities ................................. 78,296,147 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 ............................. 4,974,034 4,894,744
Retained earnings, substantially restricted ............ 5,039,036 5,730,257
Treasury stock, at cost ................................ (1,185,197) (1,185,924)
Unearned employee stock ownership plan shares .......... (81,013) (129,205)
Unearned recognition and retention plan shares ......... - - - (11,439)
Unrealized losses on securities available for sale ..... (1,016,776) (821,075)
------------ ------------
Total stockholders' equity ........................ 7,740,546 8,487,820
------------ ------------
Total liabilities and stockholders' equity ............. $ 86,036,693 $ 89,946,745
============ ============
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Statements of Operations
Three Months Nine Months
Ended March 31, Ended March 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans ................................. $ 1,119,010 $ 1,200,794 $ 3,457,169 $ 3,548,861
Interest on securities available for sale ......... 315,754 428,711 1,068,102 1,283,672
Other interest earning assets ..................... 47,855 80,858 166,964 194,575
----------- ----------- ----------- -----------
Total interest income ............................. 1,482,619 1,710,363 4,692,235 5,027,108
----------- ----------- ----------- -----------
Interest expense:
Interest on deposits .............................. 626,453 682,982 1,987,454 2,040,346
Interest on advances and other borrowing .......... 255,312 328,049 774,694 950,018
----------- ----------- ----------- -----------
Total interest expense ............................ 881,765 1,011,031 2,762,148 2,990,364
----------- ----------- ----------- -----------
Net interest income ............................... 600,854 699,332 1,930,087 2,036,744
Provision for losses on loans ..................... 24,000 33,808 72,000 79,808
----------- ----------- ----------- -----------
Net interest income after provision for
Losses on loans ................................... 576,854 665,524 1,858,087 1,956,936
----------- ----------- ----------- -----------
Non-interest income:
Fees, commissions and service charges ............. 131,210 105,438 374,095 328,484
Profit (loss) on securities available for sale, net 6,831 61,072 (1,597,293) 254,865
Other ............................................. - - - - - - 8,573 26,731
----------- ----------- ----------- -----------
Total non-interest income (loss) .................. 138,041 166,510 (1,214,625) 610,080
----------- ----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Statements of Operations
Three Months Nine Months
Ended March 31, Ended March 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Non-interest expense:
Compensation, payroll taxes and
employee benefits ............................... 308,923 291,774 924,313 886,449
Advertising ....................................... 20,151 24,229 46,104 48,938
Office property and equipment ..................... 91,963 84,182 238,397 259,774
Federal insurance premiums ........................ 13,114 8,904 31,062 26,949
Data processing services .......................... 40,227 31,295 112,503 87,667
Other real estate expense, net .................... 4,935 3,636 6,005 14,776
Other ............................................. 56,796 37,204 202,253 185,922
----------- ----------- ----------- -----------
Total non-interest expense ........................ 536,109 481,224 1,560,637 1,510,475
----------- ----------- ----------- -----------
Earnings (loss) before taxes on income ............ 178,786 350,810 (917,175) 1,056,541
Taxes on income ................................... 62,342 121,037 (341,658) 365,726
----------- ----------- ----------- -----------
Net earnings (loss) ............................... $ 116,444 $ 229,773 $ (575,517) $ 690,815
=========== =========== =========== ===========
Earnings (loss) per common share
Basic ...................................... $ 0.14 $ 0.27 ($ 0.67) $ 0.84
Diluted .................................... $ 0.13 $ 0.27 ($ 0.67) $ 0.81
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) ............................................ $ 116,444 $ 229,773 ($575,517) $ 690,815
Other Comprehensive Income:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising
during the period, net of tax ....................... 318,576 (944,285) (976,648) (818,266)
Less: reclassification adjustment for net (gains) losses
included in net income, net of tax .................. (23,324) (25,430) 780,947 (32,520)
--------- --------- --------- ---------
Other comprehensive income, net of tax ....................... 295,252 (969,715) (195,701) (850,786)
--------- --------- --------- ---------
Comprehensive income ......................................... $ 411,696 ($739,942) ($771,218) ($159,971)
--------- --------- --------- ---------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine months ended
March 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (losses) ........................................... $ (575,517) 690,815
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation .................................................. 93,288 136,495
Amortization of fees, premiums and accretion of discounts, net (207,155) 120,963
Provision for losses on loans and real estate ................. 72,000 79,808
Loans originated for sale ..................................... (7,376,223) (3,495,915)
Proceeds on sales of loans .................................... 7,641,255 2,618,228
(Profit) loss on sale of securities ........................... 1,587,646 (254,865)
Gain on sale of fixed assets .................................. (8,364) - - -
(Increase) decrease in accrued interest receivable ............ 78,677 (61,516)
Deferred taxes on income ...................................... (571,481) - - -
Amortization of stock compensation plans ...................... 59,631 75,652
Other, net .................................................... (400,903) 484,012
------------ ------------
Net cash provided by (used in) operating activities ............. 392,854 393,677
------------ ------------
Cash flows from investing activities:
Principal collected on securities available for sale .......... 4,072,087 2,175,295
Proceeds from sale of securities available for sale ........... 3,301,821 14,836,333
Purchase of securities available for sale ..................... (6,021,639) (17,709,466)
Purchase of investment real estate ............................ (100,000) - - -
Purchase of Federal Home Loan Bank stock ...................... - - - (347,700)
Loans to customers, net ....................................... 1,054,790 (2,910,849)
Proceeds from sale of real estate ............................. - - - 350,000
Proceeds from sale of fixed asset ............................. 9,844 - - -
Purchase of office property and equipment, net ................ (80,653) (68,850)
------------ ------------
Net cash provided by (used in) investing activities ............. 2,236,250 (3,675,237)
------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Cash flows from financing activities:
Decrease in customer deposit accounts, net .................... (3,211,390) 1,447,720
Decrease advance payments by borrowers for taxes and insurance (112,979) (92,469)
Proceeds from advances from FHLB .............................. 6,650,000 14,500,000
Principal payments on advances from FHLB ...................... (6,059,825) (9,547,168)
Net proceeds from options exercised ........................... 659 159,584
Payment of dividends .......................................... (115,636) (107,007)
------------ ------------
Net cash provided by (used in) financing activities ............. (2,849,171) 6,360,660
------------ ------------
Net increase (decrease) in cash and cash equivalents ............ (220,067) 3,079,100
Cash and cash equivalents at beginning of year .................. 6,366,619 5,621,242
------------ ------------
Cash and cash equivalents at end of year ........................ $ 6,146,552 8,700,342
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest ........................................ $ 2,909,324 2,845,491
Cash paid for taxes ........................................... 369,685 53,681
Transfers of loans to real estate acquired through foreclosures 57,185 - - -
============ ============
To mark assets available for sale to fair value:
Change in fair value .......................................... $ 312,139 $ 1,356,940
Less deferred taxes ........................................... (116,438) (506,154)
------------ ------------
Change in valuation allowance ................................. $ (195,701) $ (850,786)
============ ============
</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, 1999 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 March
31, 1999 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 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, 1999 and 1998:
<TABLE>
<CAPTION>
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
3/31/99 3/31/98 3/31/99 3/31/98
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Net Earnings ............................................. $ 116.444 $ 229,773 ($575,517) $ 690,815
========= ========= ========= ===========
Basic earnings per share:
Weighted average shares outstanding .............. 880,062 866,797 880,016 856,979
Less unearned employee stock ownership plan shares (17,240) (29,675) (20,282) (32,848)
--------- --------- --------- -----------
Weighted average number of common shares outstanding ..... 862,822 837,122 859,734 824,131
========= ========= ========= ===========
Earnings (loss) per common share - basic ................. $ 0.14 $ 0.27 ($ 0.67) $ 0.84
========= ========= ========= ===========
Diluted earnings per share:
Weighted average shares outstanding .............. 880,062 866,797 880,016 856,979
Less unearned employee stock ownership plan shares (17,240) (29,675) (20,282) (32,848)
Assumed incremental option shares
using the treasury stock method ............... 21,746 24,901 24,158 30,264
--------- --------- --------- -----------
Common and common equivalent shares outstanding .......... 884,568 862,023 883,892 854,395
========= ========= ========= ===========
Earnings (loss) per common share - diluted ............... $ 0.13 $ 0.27 ($ 0.67) $ 0.81
========= ========= ========= ===========
</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").
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 the
difference or spread ("interest rate spread) between the average yield on loans,
mortgage-backed and related securities and investments and the average rate paid
on deposits and other borrowings as well as the relative amounts of such assets
and liabilities. 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.
Some local economic conditions in the Bank's market have weakened. The farm
economy had been strong for over five years but has now softened. 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.
<PAGE>
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
- -----------------------------------------------
The Company, and its wholly-owned operating subsidiary Horizon Federal Savings
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.
-7-
<PAGE>
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:
o 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;
o 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;
o 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;
o the willingness of users to substitute competitors' products and
services for the Bank's products and services;
o the success of the Bank in gaining regulatory approval of its
products and services, when required;
o the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities and
insurance);
o technological changes;
o acquisitions;
o changes in consumer spending and saving habits;
o 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.
FINANCIAL CONDITION
- -------------------
The Company's total assets at March 31, 1999 of $86.0 million decreased $3.9
million, or 4.35%, from $89.9 million at June 30, 1998. Securities available for
sale decreased $3.0 million, or 12.7%, due to write-downs primarily in the first
quarter on certain interest only mortgage-backed securities of $1.5 million,
$1.1 million in principal payments, prepayments and sales, net of purchases, and
a $312,000 downward adjustment in the fair value of the available for sale
portfolio. Total loans receivable, net, decreased $1.4 million, or 2.6%, from
June 30, 1998 as a result of increased prepayments due to the refinancings of
loans moving into the secondary market. These decreases were used to fund the
$3.2 million decrease in deposits.
<PAGE>
Total liabilities decreased $3.2 million, or 3.9%, to $78.3 million at March 31,
1999 from $81.5 million at June 30, 1998, primarily due to a $3.2 million, or
5.3%, decrease in deposits from $60.1 million at June 30, 1998 to $56.9 million
at March 31, 1999. 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 increased $590,000, or
2.9%, to $20.6 million at March 31, 1999 from $20.0 million at June 30, 1998.
Total stockholders' equity decreased $747,000, or 8.8%, from $8.5 million at
June 30, 1998 to $7.7 million at March 31, 1999 due to loss of earnings and an
increase in unrealized losses on securities available for sale.
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<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.
Comparison of three month and nine month periods ended March 31, 1999 and March
31, 1998
GENERAL
- -------
Net earnings for the three months ended March 31, 1999 decreased $113,000 to
$117,000 from $230,000 for the three month period ended March 31, 1998. For the
nine months ended March 31, 1999, net earnings decreased $1.3 million to
($575,000) from $691,000 for the comparable period in 1998. The decrease for the
three month period was primarily attributable to a $98,000 decrease in net
interest income to $601,000 at March 31, 1999 compared to $699,000 for the same
period ended March 31, 1998. For the nine month period ended March 31, 1999
compared to the same period ended March 31, 1998 the decrease was primarily
attributable to substantial write-downs on interest only mortgage-backed
securities as further described below.
INTEREST INCOME
- ---------------
Interest income decreased $228,000 to $1.5 million for the three month period
ended March 31, 1999 compared to $1.7 million for the three month period ended
March 1998 and $335,000 to $4.7 million for the nine month period ended March
31, 1999 compared to $5.0 million for the comparable period ended March 31,
1998. The decreases were due to a decrease in average interest-earning assets,
primarily mortgage loans and securities available for sale, of approximately
$6.1 million and $3.0 million for the three and nine months ended March 31,
1999, respectively, over the comparable periods in 1998 and a decrease in the
weighted average yield on average interest-earning assets to 7.75% for the nine
months ended March 31, 1999 from 8.01% for the same period in 1998. The decrease
in average interest-earning assets is primarily due to managements decision, at
the current time, not to invest in lower-yielding mortgage-backed securities
with leveraged FHLB advances. Also contributing, to a lesser degree, was the
reduction of loans receivable, net, as a result of borrowers prepaying loans in
order to obtain new loans that are subsequently sold to the secondary market.
INTEREST EXPENSE
- ----------------
Interest expense decreased $129,000 to $882,000 from $1.0 million for the three
month period and decreased $228,000 to $2.8 million from $3.0 million for the
nine month period ended March 31, 1999 as compared to the same periods in 1998.
The decrease in interest expense was primarily attributable to the interest rate
<PAGE>
on FHLB advances decreasing to 5.23% for the nine months ended March 31, 1999
from 5.70% for the same period in 1998. The weighted average interest rates paid
on average interest bearing liabilities decreased to 4.75% for the nine months
ended March 31, 1999 from 5.04% for the same period in 1998. A decrease in the
average outstanding balance of advances from the Federal Home Loan Bank of
approximately $3.5 million and $2.5 million for the three and nine months ended
March 31, 1999, respectively, over the comparable periods in 1998, also
contributed to the interest expense reduction.
-9-
<PAGE>
NET INTEREST INCOME
- -------------------
Net interest income was $601,000 and $1.9 million for the three months and nine
months ended March 31, 1999, respectively, compared to $699,000 and $2.0 million
for the comparable periods in 1998. 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 3.00% for the nine month
period ended March 31, 1999 compared to 2.96% for the same period in 1998.
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, 1999, the Company's provision for losses on loans
was $72,000 compared to $79,800 for the nine month period ended March 31, 1998.
During the three month period ended March 31, 1999, the Company's provision for
losses on loans was $24,000 compared to $33,800 for the three month period ended
March 31, 1998. As of March 31, 1999, 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 $1.3 million or 1.49% of
total assets, compared to $922,000 or 1.02% of total assets as of June 30, 1998.
As of March 31, 1999 the Company's allowance for losses on loans was $365,000,
representing 28.4% of non-performing assets and .67% 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.
NONINTEREST INCOME (LOSS)
- ------------------------
Noninterest income decreased to $138,000 and ($1.2 million) for the three and
nine months ended March 31, 1999 respectively, compared to $166,000 and $610,000
for the same periods ended March 31, 1998. The decrease in noninterest income
for the three month period was attributable to a $54,000 decrease in profit on
sale of securities from the corresponding period in 1998. Partially offsetting
this decrease was an increase in fees, commissions, and service charges of
$26,000 to $131,000 at March 31, 1999 as compared to $105,000 at March 31, 1998
due to increased fees received on checking accounts and increased loan fees,
<PAGE>
primarily attributable to loans originated for sale in the secondary market. The
decrease for the nine month period ended March 31, 1999 was primarily
attributable to a $1.6 million loss on assets available for sale (including a
$1.5 million loss recognized on securities) for the nine month period ended
March 31, 1999 as compared to a $255,000 gain for the same period in 1998. The
loss recognized on securities for the nine month period ended in 1999 of $1.5
million 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 increase. The Bank
cannot predict interest rates or prepayment speeds.
-10-
<PAGE>
NONINTEREST EXPENSE
- -------------------
Total noninterest expense was $536,000 and $1.6 million for the three and nine
months ended March 31, 1999, respectively, compared to $481,000 and $1.5 million
for the same periods in 1998, reflecting increases of $55,000 and $50,000,
respectively. Compensation, payroll taxes and employee benefits, the largest
component of non-interest expense, increased $17,000 and $38,000 for the three
and nine month periods ended March 31, 1999, respectively, compared to the same
period during 1998. The increase in compensation expense for the three and nine
months ended March 31, 1999 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, normal salary
increases and costs of benefits provided. Data processing services increased
$9,000 and $25,000 for the three and nine month periods ended March 31, 1999 due
to increased data processing charges. Other noninterest expense increased
$19,000 and $16,000 for the three and nine month periods ended March 31, 1999
primarily due to costs associated with the conversion to a new data center. This
conversion has permitted us to offer new services to our customers including
telephone banking. Office property and equipment increased $8,000 and decreased
$21,000 for the three and nine month periods ended March 31, 1999, respectively,
compared to the same period during 1998. There were no other significant changes
in the components of noninterest expense.
TAXES ON INCOME
- ---------------
Taxes on income decreased $59,000 for the three month period ended March 31,
1999, compared to the same period ended March 31, 1998, as a result of decreased
net earnings for the period and received a tax benefit of $342,000 for the nine
month period ended March 31, 1999 primarily as a result of the net loss for the
period due to the $1.5 million write-down on its interest-only mortgage-backed
securities as discussed above.
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.
<PAGE>
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 8.63%
on March 31, 1999 and 10.41% on June 30, 1998.
At March 31, 1999, the Company had advances of $20.6 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 March
31, 1999, the Company had outstanding commitments to extend credit which
amounted to $1.3 million (including $834,000 in available revolving commercial
lines of credit). At March 31, 1999, certificates of deposit scheduled to mature
in one year or less totaled $20.0 million. Management
-11-
<PAGE>
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 March 31, 1999 the Bank had tangible and core capital of $6.0 million, or
7.1% of adjusted total assets, which was approximately $4.7 million and $2.6
million above the minimum requirements of 1.5% and 4.0%, respectively, of the
adjusted total assets in effect on that date. At March 31, 1999 the Bank had
risk-based capital of $6.3 million (including $6.0 million in core capital), or
12.5% of risk- weighted assets of $50.4 million. This amount was $2.3 million
above the 8.0% requirement in effect on that date.
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 entered (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.
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. Testing is done after each update is received from the data center.
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. The Bank is presently working on a contingency
plan in the event that one or more of its non- information system providers is
not operating properly on January 1, 2000. 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.
<PAGE>
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
-12-
<PAGE>
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 $12,000. Approximately $8,500 has been expended
for the nine months ended March 31, 1999. 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.
-13-
<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:
See Index to Exhibits
(b) Reports on Form 8-K:
None
-14-
<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, 1999 /s/ Robert W. DeCook
------------ ---------------------
Robert W. DeCook
President and Chief Executive Officer
Date: May 14, 1999 /s/ Sharon McCrea
------------ ------------------
Sharon McCrea
Vice President and Chief Financial Officer
-15-
<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)
-16-
<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 NINE MONTH PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 6,147
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20,877
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 54,547
<ALLOWANCE> 365
<TOTAL-ASSETS> 86,037
<DEPOSITS> 56,934
<SHORT-TERM> 20,628
<LIABILITIES-OTHER> 734
<LONG-TERM> 0
<COMMON> 10
0
0
<OTHER-SE> 7,731
<TOTAL-LIABILITIES-AND-EQUITY> 86,037
<INTEREST-LOAN> 3,457
<INTEREST-INVEST> 1,068
<INTEREST-OTHER> 167
<INTEREST-TOTAL> 4,692
<INTEREST-DEPOSIT> 1,987
<INTEREST-EXPENSE> 2,762
<INTEREST-INCOME-NET> 1,930
<LOAN-LOSSES> 72
<SECURITIES-GAINS> (1,597)
<EXPENSE-OTHER> 1,561
<INCOME-PRETAX> (917)
<INCOME-PRE-EXTRAORDINARY> (917)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (575)
<EPS-PRIMARY> (.67)
<EPS-DILUTED> (.67)
<YIELD-ACTUAL> 7.75
<LOANS-NON> 1,221
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 108
<ALLOWANCE-OPEN> 348
<CHARGE-OFFS> 81
<RECOVERIES> 26
<ALLOWANCE-CLOSE> 365
<ALLOWANCE-DOMESTIC> 365
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 52
</TABLE>
