UNITED STATES
SECURITY AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 873,062
------------ -----------------------
Class Shares Outstanding
as of November 15, 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 (Unaudited)
Consolidated Balance Sheets at September 30, 1999 and June 30,
1999. 1
Consolidated Statements of Operations for the three months ended
September 30, 1999 and 1998. 2
Consolidated Statements of Comprehensive Income for the three
months ended September 30, 1999 and 1998. 3
Consolidated Statements of Cash Flows for the three months ended
September 30, 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 13
Signatures 14
Index of Exhibits 15
Financial Data Schedule 16
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Balance Sheets
September 30, June 30,
Assets 1999 1999
- ------ ------------ ------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents .............................. $ 9,415,129 $ 7,917,020
Securities available-for-sale .......................... 14,017,593 17,096,985
Loans receivable, net .................................. 56,787,882 56,066,399
Real estate ............................................ 270,057 270,779
Stock in Federal Home Loan Bank, at cost ............... 1,202,500 1,202,500
Office property and equipment, net ..................... 1,058,841 1,089,053
Accrued interest receivable ............................ 512,333 522,121
Deferred tax asset ..................................... 207,933 254,000
Income tax receivable .................................. 522,699 522,699
Prepaid expenses and other assets ...................... 81,443 81,646
------------ ------------
Total assets ...................................... $ 84,076,410 $ 85,023,202
------------ ============
Liabilities and Stockholders' Equity
- ------------------------------------
Deposits ............................................... $ 58,856,858 $ 59,576,232
Advances from Federal Home Loan Bank ................... 16,583,679 16,606,176
Advance payments by borrowers for taxes and insurance .. 80,014 399,830
Accrued income taxes: .................................. 3,500 - - -
Accrued expenses and other liabilities ................. 423,553 380,617
------------ ------------
Total liabilities ................................. 75,947,604 76,962,855
------------ ------------
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 ............................. 5,005,961 4,996,761
Retained earnings, substantially restricted ............ 4,771,340 4,804,455
Treasury stock, at cost ................................ (1,229,571) (1,229,571)
Unearned employee stock ownership plan shares .......... (50,605) (65,503)
Unrealized losses on securities available for sale ..... (378,781) (456,257)
------------ ------------
Total stockholders' equity ........................ 8,128,806 8,060,347
------------ ------------
Total liabilities and stockholders' equity ............. $ 84,076,410 $ 85,023,202
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
-1-
<PAGE>
<TABLE>
<CAPTION>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Statements of Operations
Three Months
Ended September 30
1999 1998
----------- -----------
Interest income: (Unaudited)
<S> <C> <C>
Loans ............................................... $ 1,179,980 $ 1,191,002
Investment securities available-for-sale ............ 272,065 381,671
Other investment income ............................. 96,606 78,489
----------- -----------
Total interest income ................................. 1,548,651 1,651.162
----------- -----------
Interest expense:
Deposits ............................................ 647,095 690,853
Advance from Federal Home Loan Bank ................. 215,023 269,884
----------- -----------
Total interest expense ................................ 862,118 960,737
----------- -----------
Net interest income ................................... 686,533 690,425
Provision for losses on loans ......................... 24,000 24,000
----------- -----------
Net interest income after provision for losses on loans 662,533 666,425
----------- -----------
Noninterest income:
Fees, commissions and service charges ............... 118,624 119,789
Loss on securities, net ............................. (233,306) (1,307,650)
Other ............................................... --- 8,364
----------- -----------
Total noninterest income .............................. (114,682) (1,179,497)
----------- -----------
Noninterest expense:
Compensation, payroll taxes and employee benefits ... 289,648 304,861
Advertising ......................................... 27,778 14,583
Office property and equipment ....................... 79,406 76,225
Federal insurance premiums and special assessments .. 12,629 9,099
Data processing services ............................ 38,876 28,982
Other real estate expense, net ...................... 2,559 (537)
Other ............................................... 87,710 68,276
----------- -----------
Total noninterest expense ............................. 538,606 501,489
----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Earnings (loss) before taxes on income ................ 9,245 (1,014,561)
Taxes on income (benefit) ............................. 3,500 (373,075)
----------- -----------
Net earnings (loss) ................................... $ 5,745 $ (641,486)
=========== ===========
Earnings (loss) per common share -
Basic ............................................ $ 0.01 ($ 0.75)
Diluted .......................................... $ 0.01 ($ 0.75)
</TABLE>
See Notes to Consolidated Financial Statements
-2-
<PAGE>
<TABLE>
<CAPTION>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Three Months
Ended September 30
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Net income (loss) ............................................... $ 5,745 $(641,486)
Other Comprehensive Income:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising
during the period, net of tax ....................... (116,643) 35,216
Less: reclassification adjustment for net losses
included in net income, net of tax .................. 194,119 631,767
--------- ---------
Other comprehensive income, net of tax .......................... 77,476 666,983
--------- ---------
Comprehensive income ............................................ $ 83,221 $ 25,497
--------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
-3-
<PAGE>
<TABLE>
<CAPTION>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Statements of Cash Flows
Three months ended
September 30,
1999 1998
----------- -----------
Cash flows from operating activities: (Unaudited)
<S> <C> <C>
Net earnings .......................................................... $ 5,745 (641,486)
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation ........................................................ 30,923 26,503
Amortization of fees, premiums and accretion of discounts, net ...... (35,003) 1,118
Provision for losses on loans and real estate ....................... 24,000 24,000
Loans originated for sale ........................................... (735,220) (2,033,325)
Proceeds on sales of loans .......................................... 723,520 2,258,625
Loss on sale of securities .......................................... 233,306 36,650
Gain on sale of fixed assets ........................................ --- (8,364)
Decrease (increase) in accrued interest receivable .................. 9,788 (11,268)
Amortization of stock compensation plans ............................ 14,898 25,156
Other, net .......................................................... 56,561 (493,094)
----------- -----------
Net cash provided by (used in) operating activities ................... 328,518 (815,485)
----------- -----------
Cash flows from investing activities:
Principal collected on securities available for sale ................ 425,656 2,478,849
Proceeds from sale of securities available for sale ................. 3,920,325 454,463
Purchase of securities available for sale ........................... (1,341,349) (379,387)
Loans to customers, net ............................................. (733,783) 611,200
Proceeds from sale of fixed asset ................................... - - - 9,844
Purchase of office property and equipment, net ...................... (711) (81,586)
----------- -----------
Net cash provided by investing activities ............................. 2,270,138 3,093,383
----------- -----------
Cash flows from financing activities:
Decrease in customer deposit accounts, net .......................... (719,374) (3,034,610)
Decrease advance payments by borrowers for taxes and insurance ...... (319,816) (318,858)
Proceeds from advances from FHLB .................................... - - - 3,450,000
Principal payments on advances from FHLB ............................ (22,497) (3,016,431)
Payment of dividends ................................................ (38,860) (38,545)
----------- -----------
Net cash used in financing activities ................................ (1,100,547) (2,958,444)
----------- -----------
Net increase (decrease) in cash and cash equivalents .................. 1,498,109 (680,546)
Cash and cash equivalents at beginning of year ........................ 7,917,020 6,366,619
----------- -----------
Cash and cash equivalents at end of year .............................. $ 9,415,129 $ 5,686,073
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for interest .............................................. $ 770,305 $ 862,747
Cash paid for taxes ................................................. --- 204,347
=========== ===========
To mark assets available for sale to fair value:
Change in fair value ................................................ $ (123,543) $(1,057,549)
Less deferred taxes ................................................. 46,067 390,566
----------- -----------
Change in valuation allowance ....................................... $ 77,476 $ 666,983
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
-4-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HORIZON FINANCIAL SERVICES CORPORATION
1. BASIS OF PRESENTATION
The consolidated financial statements for the three months ended September 30,
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 September
30, 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, 1999. 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
month periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
3 Months 3 Months
Ended Ended
9/30/99 9/30/98
--------- ---------
<S> <C> <C>
Net Earnings (loss) ..................................... $ 5,745 ($641,486)
========= =========
Basic earnings per share:
Weighted average shares outstanding .............. 875,062 879,942
Less unearned employee stock ownership plan shares (11,470) (23,339)
--------- ---------
Weighted average number of common shares outstanding .... 863,592 856,603
========= =========
Earnings (loss) per common share - basic ................ $ 0.01 ($ 0.75)
========= =========
Diluted earnings per share:
Weighted average shares outstanding .............. 875,062 879,942
Less unearned employee stock ownership plan shares (11,470) (23,339)
Assumed incremental option shares
using the treasury stock method ............... 13,916 ---
---------
Common and common equivalent shares outstanding ......... 877,508 856,603
========= =========
Earnings (loss) per common share - diluted .............. $ 0.01 ($ 0.75)
========= =========
</TABLE>
-6-
<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 subsidiaries 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
their 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 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 September 30, 1999 of $84.1 million decreased
$950,000, or 1.11%, from $85.0 million at June 30, 1999. Securities available
for sale decreased $3.1 million, or 18.0% as the Company completed the sale of
its remaining high interest rate sensitive securities. Partially offsetting this
decrease was an increase in cash and cash equivalents of $1.5 million and a
$720,000 increase in loans receivable, net.
Total liabilities decreased $1.0 million, or 1.32%, to $76.0 million at
September 30, 1999 from $77.0 million at June 30, 1999, primarily as a result of
a $720,000 decrease in deposits and a $320,000 decrease in advance payments by
borrowers for taxes and insurance. There were no other significant changes in
the components of the Company's balance sheet.
-8-
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
The Company's results of operations depend primarily on the level of its net
interest income and non-interest income and the level of its operating expenses.
Net interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and interest rates earned or paid on such assets or
liabilities, respectively. The Company's non-interest income consists primarily
of fees charged on transaction accounts which help to offset the costs
associated with establishing and maintaining these accounts.
Comparison of three month periods ended September 30, 1999 and September 30,
1998.
GENERAL
- -------
Net earnings increased $647,000 to $6,000 at September 30, 1999 from a loss of
$641,000 at September 30, 1998. This increase was primarily attributable to a
significant decrease in losses on sales of securities from $1.3 million at
September 30, 1998 to $233,000 at September 30, 1999.
INTEREST INCOME
- ---------------
Interest income decreased $102,000 to $1,549,000 for the three month period
ended September 30, 1999 compared to $1,651,000 for the three month period ended
September 30, 1998. The decrease was primarily the result of a 34 basis point
decrease in the weighted average yield on average interest-earning assets to
7.74% at September 30, 1999 as compared to 8.08% for the same period in 1998.
Contributing to the decrease was a reduction in the average outstanding balances
of interest-earning assets from $81.8 million at September 30, 1998 to $80.0
million at September 30, 1999.
INTEREST EXPENSE
- ----------------
Interest expense decreased $100,000 to $1.5 million for the three month period
ended September 30, 1999 compared to $1.6 million for the three month period
ended September 30, 1998. The decrease in interest expense was primarily due to
the weighted average yield on interest-bearing liabilities decreasing by 36
basis points to 4.55% at September 30, 1999 as compared to 4.91% for the same
period in 1998. The average outstanding balance of average interest-bearing
liabilities decreased $2.5 million from $78.3 million at September 30, 1998 to
$75.8 million at September 30, 1999.
NET INTEREST INCOME
- -------------------
Net interest income decreased $4,000 from $690,000 for the three month period
ended September 30, 1998 to $686,000 for the three month period ended September
30, 1999. The Company's net interest margin increased 3 basis points to 3.20%
for the three month period ended September 30, 1999 as compared to 3.17% for the
same period in 1998.
<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. The Company's
provision for losses on loans was $24,000 for the three month periods ended
September 30, 1999 and 1998. As of September 30, 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
$1,093,000 or 1.30% of total assets, compared to $1,160,000 or 1.36% of total
assets as of June 30, 1999. As of September 30, 1999, the Company's allowance
for losses on loans was $364,000, representing 33.3% of non-performing assets
and .64% 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 historically experienced low loan losses, management
also considers the loss experience of similar portfolios in comparable lending
markets. In addition, federal regulators may require additional reserves as a
result of their examination of the Company. Accordingly, the calculation of the
adequacy of the allowance for losses on loans is not based directly on the level
of non-performing assets. The allowance for losses on loans reflects what the
Company currently believes is an adequate level of reserves, although there can
be no assurance that future losses will not exceed the estimated amounts,
thereby adversely affecting future results of operations.
NONINTEREST INCOME
- ------------------
Noninterest income increased $1.1 million to ($115,000) for the three months
ended September 30, 1999 from ($1,179,000) for the same period ended September
30, 1998. The increase was attributable to a $1.3 million loss recognized on
securities at September 30, 1998 as compared to a $233,000 loss on the sale of
securities at September 30, 1999. The loss recognized on securities during the
three month period ended in 1998 was the result of a $1.3 million write down on
interest only mortgage-backed securities resulting from a decline in fair value
that was judged to be other than temporary. The Company completed the sale of
its remaining high interest rate sensitive, interest only mortgage-backed
securities during the period ended September 30, 1999.
NONINTEREST EXPENSE
- -------------------
Total noninterest expense increased $37,000 from $501,000 for the three months
ended September 30, 1998 to $538,000 for the three month period ended September
30, 1999. The increase was primarily attributable to an increase of $19,0000 in
other expense from $68,000 at September 30, 1998 to $87,000 at September 30,
1999 due to increased legal fees, office supplies and postage expense.
Advertising expense increased $13,000 and data processing expense increased
$10,000 for the period ending September 30, 1999 as compared to the same period
ended September 30, 1998. Compensation and employee benefits expenses, the
largest component of noninterest expense, decreased $15,000 for the three months
ended September 30, 1999 as compared to the same period in 1998.
TAXES ON INCOME
- ---------------
The Company had a $376,000 increase in taxes on income for the three month
period ended September 30, 1999 as a result of increased net earnings.
<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.
-10-
<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 requirement. The Bank's liquidity ratio was
14.12% on September 30, 1999 and 11.49% on June 30, 1999.
At September 30, 1999, the Company had advances of $16.6 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 September 30, 1999, the Company had outstanding commitments to extend credit
which amounted to $3,217,000 (including $1,137,000 in available revolving
commercial lines of credit). At September 30, 1999, certificates of deposit
scheduled to mature in one year or less totaled $18.2 million. Management
believes, based on its experience to date, that a significant portion of these
funds will remain with the Company. Management believes that loan repayments and
other sources of funds will be adequate to meet the Company's foreseeable
liquidity needs.
Liquidity management is both a daily and long-term responsibility of management.
The Bank adjusts its investments in liquid assets based upon management's
assessment of (i) expected loan demand, (ii) expected deposit flows, (iii)
yields available on interest-bearing investments and (iv) the objectives of its
asset/liability management program. Excess liquidity generally is invested in
interest-earning overnight deposits and other short-term government and agency
obligations.
At September 30, 1999, the Bank had tangible and core capital of $5.8 million,
or 7.1% 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 September 30, 1999, the Bank
had risk-based capital of $6.2 million (including $5.8 million in core capital),
or 13.0% of risk- weighted assets of $47.3 million. This amount was $2.4 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 ("Y2K"). 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
<PAGE>
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 the Y2K poses for the Company and the Bank. Like other financial
institutions, the Company is heavily dependent on their computer systems. Many
of the information technology and non-information technology systems of the
Company are already Y2K ready, or have been scheduled for replacement in
on-going system plans. Attaining Y2K readiness is an on-going process for the
Company and the Bank. Management and the Board of Directors are committed to
achieving the goal of Y2K readiness.
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 been assured by its current
data processing service bureaus that their computer services will function
properly on and after January l, 2000. The Bank's data processing service bureau
has advised management that it is currently Y2K compliant. The Company and the
Bank believe that they are taking reasonable steps to address and remediate Y2K
issues, especially with respect to mission critical systems. The Company
-11-
<PAGE>
has received Y2K updates from most of its material non-information system
providers, including but not limited to security cameras, credit/debit 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.
While the Company and the Bank have undertaken significant efforts to assess,
remediate and test their technical systems to address Y2K processing issues,
they are also developing contingency plans. These contingency plans are intended
to provide alternative processes and actions in the event of systems malfunction
or failures. The Bank is required to follow Federal Financial Institutions
Examination Council guidance advising two levels of contingency
planning-remediation and business-resumption. Remediation contingency plans
address the actions to be taken if remediation efforts fall behind schedule or
appear in jeopardy of not delivering a Y2K ready system when required. Business-
resumption contingency plans address the actions that would be taken if key
business processes could not be performed in the normal manner upon entering the
Y2K due to system or third party failures. 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 Y2K
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 theY2K problem.
However, if the Bank is later informed that such parties do have plans to
address and correct the problems associated with the Y2K, there can be no
assurance as to the adequacy of such plans or to the timeliness of their
implementation. The Company will continue to monitor the Y2K continuity progress
of such customers and third parties and work appropriately to address any
problems which may arise.
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 withY2K
compliance is estimated to be $10,000. As of September 30, 1999, we have
expended $1,000 on the Y2K issue. The Company does not expect significant
increases in future data processing costs or other expenses related to its Y2K
compliance.
-12-
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
None
ITEM 2. Changes in Securities
---------------------
None
ITEM 3. Defaults Upon Senior Securities
-------------------------------
None
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
ITEM 5. Other Information
-----------------
None
ITEM 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits:
See Index to Exhibits
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
-13-
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HORIZON FINANCIAL SERVICES CORPORATION
Registrant
Date: November 15,1999 /s/ Robert W. DeCook
--------------------
Robert W. DeCook
President and Chief Executive Officer
Date: November 15, 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 QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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