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, 2000
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 863,962
------------ ---------------------
Class Shares Outstanding
as of May 9, 2000
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 March 31, 2000 and June 30, 1999. 1
Consolidated Statements of Operations for the three months and 2
nine months ended March 31, 2000 and 1999
Consolidated Statements of Comprehensive Income for the three months 3
and nine months ended March 31, 2000 and 1999.
Consolidated Statements of Cash Flows for the nine months ended 4
March 31, 2000 and 1999.
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition 7
and Results of Operations
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
March 31, June 30,
Assets 2000 1999
- ------ ------------ ------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents .............................. $ 3,368,456 $ 7,917,020
Securities available-for-sale .......................... 15,954,338 17,096,985
Loans receivable, net .................................. 59,995,185 56,066,399
Real estate ............................................ 257,306 270,779
Stock in Federal Home Loan Bank, at cost ............... 702,500 1,202,500
Office property and equipment, net ..................... 1,041,723 1,089,053
Accrued interest receivable ............................ 534,818 522,121
Deferred tax asset ..................................... 247,399 254,000
Income tax receivable .................................. - - - 522,699
Prepaid expenses and other assets ...................... 118,723 81,646
------------ ------------
Total assets ...................................... $ 82,220,448 $ 85,023,202
------------ ============
Liabilities and Stockholders' Equity
Deposits ............................................... $ 61,730,401 $ 59,576,232
Advances from Federal Home Loan Bank ................... 11,537,695 16,606,176
Advance payments by borrowers for taxes and insurance .. 300,439 399,830
Accrued income taxes ................................... 116,950 - - -
Accrued expenses and other liabilities ................. 376,468 380,617
------------ ------------
Total liabilities ................................. 74,061,953 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 ............................. 5,016,961 4,996,761
Retained earnings, substantially restricted ............ 5,009,833 4,804,455
Treasury stock, at cost ................................ (1,307,635) (1,229,571)
Unearned employee stock ownership plan shares .......... (20,571) (65,503)
Unrealized losses on securities available for sale ..... (550,555) (456,257)
------------ ------------
Total stockholders' equity ........................ 8,158,495 8,060,347
------------ ------------
Total liabilities and stockholders' equity ............. $ 82,220,448 $ 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 Nine months
Ended March 31, Ended March 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Interest on loans ................................. $ 1,214,893 $ 1,119,010 $ 3,579,404 $ 3,457,169
Interest on securities available for sale ......... 271,522 315,754 806,415 1,068,102
Other investment income ........................... 48,153 47,855 224,993 166,964
----------- ----------- ----------- -----------
Total interest income ............................. 1,534,568 1,482,619 4,610,812 4,692,235
----------- ----------- ----------- -----------
Interest expense:
Interest on deposits .............................. 686,224 626,453 1,993,544 1,987,454
Interest on advances and other borrowing .......... 165,697 255,312 577,591 774,694
----------- ----------- ----------- -----------
Total interest expense ............................ 851,921 881,765 2,571,135 2,762,148
----------- ----------- ----------- -----------
Net interest income ............................... 682,647 600,854 2,039,677 1,930,087
Provision for losses on loans ..................... 24,000 24,000 72,000 72,000
----------- ----------- ----------- -----------
Net interest income after provision for
losses on loans ................................... 658,647 576,854 1,967,677 1,858,087
----------- ----------- ----------- -----------
Non-interest income:
Fees, commissions and service charges ............. 119,215 131,210 350,535 374,095
Profit (loss) on securities available for sale, net - - - 6,831 (225,101) (1,597,293)
Other ............................................. 250 - - - 250 8,573
----------- ----------- ----------- -----------
Total non-interest income (loss) .................. 119,465 138,041 125,684 (1,214,625)
----------- ----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Non-interest expense:
Compensation, payroll taxes and
employee benefits ............................... 289,706 308,923 866,947 924,313
Advertising ....................................... 23,287 20,151 78,491 46,104
Office property and equipment ..................... 73,168 91,963 230,926 238,397
Federal insurance premiums ........................ 7,561 13,114 33,698 31,062
Data processing services .......................... 44,390 40,227 125,084 112,503
Other real estate expense, net .................... 8,593 4,935 13,318 6,005
Other ............................................. 75,885 56,796 268,529 202,253
----------- ----------- ----------- -----------
Total non-interest expense ........................ 522,590 536,109 1,616,993 1,560,637
----------- ----------- ----------- -----------
Earnings (loss) before taxes on income ............ 255,522 178,786 476,368 (917,175)
Taxes on income (benefit) ......................... 87,300 62,342 155,000 (341,658)
----------- ----------- ----------- -----------
Net earnings (loss) ............................... $ 168,222 $ 116,444 $ 321,368 $ (575,517)
=========== =========== =========== ===========
Earnings (loss) per common share
Basic ...................................... $ 0.20 $ 0.14 $ 0.37 ($ 0.67)
Diluted .................................... $ 0.19 $ 0.13 $ 0.37 ($ 0.67)
</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 Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
--------- --------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net income (loss) ............................................ $ 168,222 $ 116,444 $ 321,368 ($575,517)
Other Comprehensive Income:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising
during the period, net of tax ....................... (112,607) 318,576 (296,442) (976,648)
Less: reclassification adjustment for net (gains) losses
included in net income, net of tax .................. - - - (23,324) 202,144 780,947
--------- --------- --------- ---------
Other comprehensive income, net of tax ....................... (112,607) 295,252 (94,298) (195,701)
--------- --------- --------- ---------
Comprehensive income ......................................... $ 55,615 $ 411,696 $ 227,070 ($771,218)
--------- --------- --------- ---------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine months ended
March 31,
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ................................................ $ 321,368 (575,517)
Adjustments to reconcile net earnings (loss) to net cash provided
by operating activities:
Depreciation .................................................... 92,761 93,288
Amortization of fees, premiums and accretion of discounts, net .. (37,719) (207,155)
Provision for losses on loans ................................... 72,000 72,000
Loans originated for sale ....................................... (2,384,620) (7,376,223)
Proceeds on sales of loans ...................................... 3,193,213 7,641,255
Loss on sale of securities ...................................... 225,101 1,587,646
Gain on sale of fixed assets .................................... - - - (8,364)
(Increase) decrease in accrued interest receivable .............. (12,697) 78,677
Increase (decrease) in accrued taxes payable and deferred taxes . 699,979 (571,481)
Amortization of stock compensation plans ........................ 44,932 59,631
Other, net ...................................................... (7,553) (400,903)
----------- -----------
Net cash provided by operating activities .......................... 2,206,765 392,854
----------- -----------
Cash flows from investing activities:
Principal collected on securities available for sale ............ 890,742 4,072,087
Proceeds from sale of securities available for sale ............. 4,040,867 3,301,821
Purchase of securities available for sale ....................... (4,124,371) (6,021,639)
Purchase of investment real estate .............................. - - - (100,000)
Loans to customers, net ......................................... (4,809,379) 1,054,790
Proceeds from sale of Federal Home Loan Bank stock .............. 500,000 - - -
Proceeds from sale of fixed asset ............................... - - - 9,844
Purchase of office property and equipment, net .................. (45,431) (80,653)
----------- -----------
Net cash (used in) provided by investing activities ................ (3,547,572) 2,236,250
----------- -----------
Cash flows from financing activities:
Increase (decrease) in customer deposit accounts, net ........... 2,154,169 (3,211,390)
Decrease in advance payments by borrowers for taxes and insurance (99,391) (112,979)
Proceeds from advances from FHLB ................................ - - - 6,650,000
Principal payments on advances from FHLB ........................ (5,068,481) (6,059,825)
Net proceeds from options exercised ............................. - - - 659
Treasury stock acquired ......................................... (78,064) - - -
Payment of dividends ............................................ (115,990) (115,636)
----------- -----------
Net cash used in financing activities .............................. (3,207,757) (2,849,171)
----------- -----------
Net decrease in cash and cash equivalents .......................... (4,548,564) (220,067)
Cash and cash equivalents at beginning of year ..................... 7,917,020 6,366,619
----------- -----------
Cash and cash equivalents at end of year ........................... $ 3,368,456 6,146,552
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for interest .......................................... $ 2,615,893 2,909,324
Cash paid for taxes ............................................. 70,885 369,685
=========== ===========
To mark assets available for sale to fair value:
Change in fair value ............................................ $ 148,027 $ 312,139
Less deferred taxes ............................................. (53,729) (116,438)
----------- -----------
Change in valuation allowance ................................... $ (94,298) $ (195,701)
=========== ===========
</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, 2000 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, 2000 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 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, 2000 and 1999:
<TABLE>
<CAPTION>
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
3/31/00 3/31/99 3/31/00 3/31/99
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Earnings ........................................... $ 168,222 $ 116,444 $ 321,368 ($575,517)
========= ========= ========= =========
Basic earnings per share:
Weighted average shares outstanding .............. 864,379 880,062 870,548 880,016
Less unearned employee stock ownership plan shares (6,215) (17,240) (8,823) (20,282)
--------- --------- --------- ---------
Weighted average number of common shares outstanding ... 858,164 862,822 861,725 859,734
========= ========= ========= =========
Earnings (loss) per common share - basic ............... $ 0.20 $ 0.14 $ 0.37 ($ 0.67)
========= ========= ========= =========
Diluted earnings per share:
Weighted average shares outstanding .............. 864,379 880,062 870,548 880,016
Less unearned employee stock ownership plan shares (6,215) (17,240) (8,823) (20,282)
Assumed incremental option shares
using the treasury stock method ............... 7,861 21,746 10,684 - - -
--------- --------- --------- ---------
Common and common equivalent shares outstanding ........ 866,025 884,568 872,409 859,734
========= ========= ========= =========
Earnings (loss) per common share - diluted ............. $ 0.19 $ 0.13 $ 0.37 ($ 0.67)
========= ========= ========= =========
</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 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
-7-
<PAGE>
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:
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 March 31, 2000 of $82.2 million decreased $2.8
million, or 3.30%, from $85.0 million at June 30, 1999. Cash and cash
equivalents decreased $4.5 million , or 57.45%, due to repayments made on
Federal Home Loan Bank advances. Securities available for sale decreased $1.1
million primarily as a result of principal payments and prepayments on the
securities. Income tax receivable and stock in the Federal Home Loan Bank
decreased $523,000 and $500,000, respectively. Partially offsetting this
decrease was an increase in loans receivable of $3.9 million.
<PAGE>
Total liabilities decreased $2.9 million, or 3.77%, to $74.1 million at March
31, 2000 from $77.0 million at June 30, 1999, primarily as a result of advances
from the Federal Home Loan Bank decreasing $5.1 million, or 30.52%, from $16.6
million at June 30, 1999 to $11.5 million at March 31, 2000. Deposits increased
$2.1 million, or 3.62% to $61.7 million at March 31, 2000 from $59.6 million at
June 30, 1999. There were no other significant changes in the components of the
Company's balance sheet.
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<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 and nine month periods ended March 31, 2000 and March
31, 1999
GENERAL
- -------
Net earnings for the three months ended March 31, 2000 increased $52,000 to
$168,000 from $116,000 for the three month period ended March 31, 1999. For the
nine months ended March 31, 2000, net earnings increased $897,000 to $321,000
from ($576,000) for the comparable period in 1999. The increase for the three
month period ended March 31, 2000 compared to the same period ended March 31,
1999 was due primarily to increased net interest income. The increase for the
nine month period ended March 31, 2000 compared to the same period ended March
31, 1999 was primarily attributable to a significant decrease in losses on sales
of securities.
INTEREST INCOME
- ---------------
Interest income increased $52,000 to $1,535,000 for the three month period ended
March 31, 2000 compared to $1,483,000 for the three month period ended March 31,
1999 and decreased $81,000 to $4,611,000 for the nine month period ended March
31, 2000 compared to $4,692,000 for the comparable period ended March 31, 1999.
The increase for the three month period ended March 31, 2000 was due to an
increase in the weighted average yield on average interest-earning assets to
7.75% from 7.48% for the same period in 1999. The decrease for the nine month
period was primarily due to a decrease in the weighted average yield on average
interest-earning assets to 7.66% for the nine months ended March 31, 2000 from
7.75% for the same period in 1999. Also contributing, to a lesser degree, was a
reduction in the average interest-earning assets of approximately $460,000. The
decrease in average interest earning assets is due to managements decision, at
the current time, not to invest in lower-yielding mortgage-backed securities
with leveraged FHLB advances.
INTEREST EXPENSE
- ----------------
Interest expense decreased $30,000 to $852,000 from $882,000 for the three month
period and $191,000 to $2,571,000 from $2,762,000 for the nine month period
ended March 31, 2000 as compared to the same periods in 1999. The decrease in
interest expense for the nine month period was primarily due to the decrease in
the average outstanding balance of interest-bearing liabilities of $3.0 million
to $74.5 million at March 31, 2000 from $77.5 million at March 31, 1999. A
decrease in the weighted average interest rate paid on average interest-bearing
liabilities of 15 basis points to 4.60% at March 31, 2000 as compared to 4.75%
for the same nine month period in 1999, also contributed to the interest expense
reduction.
-9-
<PAGE>
NET INTEREST INCOME
- -------------------
Net interest income was $683,000 and $2.0 million for the three months and nine
months ended March 31, 2000, respectively, compared to $601,000 and $1.9 million
for the comparable periods in 1999. The Company's net interest margin increased
6 basis points to 3.06% for the nine month period ended March 31, 2000 as
compared to 3.00% for the same period in 1999.
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 $72,000 for the nine month periods ended March
31, 2000 and 1999. As of March 31, 2000, 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 $1,007,000 or 1.23% of
total assets, compared to $1,160,000 or 1.36% of total assets as of June 30,
1999. As of March 31, 2000, the Company's allowance for losses on loans was
$373,000, representing 37.0% of non-performing assets and .62% 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 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 decreased to $119,000 and increased to $126,000 for the three
and nine months ended March 31,2000, respectively, compared to $138,000 and
($1,215,000) for the same periods ended March 31, 1999. The decrease for the
three month period ended March 31, 2000 was primarily attributable to a $12,000
decrease in fees, commissions and service charges as a result of the reduction
in fees collected on loans originated for sale in the secondary market. The
increase in noninterest income for the nine month period ended March 31, 2000
was attributable to a $225,000 loss on assets available for sale at March 31,
2000 as compared to a $1.6 million loss on assets available for sale at March
31, 1999. The loss recognized on securities during the nine month period ended
in 1999 was the result of a $1.5 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.
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<PAGE>
NONINTEREST EXPENSE
- -------------------
Total noninterest expense was $522,000 and $1,617,000 for the three and nine
months ended March 31, 2000, respectively, compared to $536,000 and $1,561,000
for the same periods in 1999, reflecting a $14,000 decrease and a $56,000
increase, respectively. Other expense increased $19,000 and $66,000 for the
three and nine month periods ended March 31, 2000, respectively, compared to the
same period during 1999. The increase for the nine month period was due to
increased audit and accounting expense, legal fees and other operating expense.
Included in other operating expense was a $4,500 sinking fund assessment to the
State of Iowa for losses incurred by an Iowa bank for public funds. Advertising
expense increased $3,000 and $32,000 and office property and equipment decreased
$19,000 and $7,000 for the three and nine month periods ended March 31, 2000,
respectively, compared to the same period during 1999. Compensation and employee
benefits expense, the largest component of noninterest expense, decreased
$19,000 and $57,000 for the three and nine month periods ended March 31, 2000,
respectively, compared to the same period during 1999.
TAXES ON INCOME
- ---------------
Income taxes increased $25,000 and $497,000 for the three and nine month periods
ended March 31, 2000, respectively, primarily as a result of the increases in
net earnings.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's principal sources of funds are deposits and principal and interest
payments collected on mortgage loans, investments and related securities. While
scheduled loan repayments and maturing investments are relatively predictable,
deposit flows and early loan prepayments are more influenced by interest rates,
general economic conditions and competition. Additionally, the Company may
borrow funds from the 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 requirement. The Bank's liquidity ratio was
7.01% on March 31, 2000 and 11.49% on June 30, 1999.
At March 31, 2000, the Company had advances of $11.5 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 from loan
repayments, loan sales, and from its ability to borrow additional funds from the
<PAGE>
FHLB of Des Moines. At March 31, 2000, the Company had outstanding commitments
to extend credit which amounted to $4,118,000 (including $1.2 million in
available revolving commercial lines of credit). At March 31, 2000, certificates
of deposit scheduled to mature in one year or less totaled $19.0 million.
Management believes, based on its experience to date, that a significant portion
of these funds will remain with the Company.
-11-
<PAGE>
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, 2000, the Bank had tangible and core capital of $6.1 million, or
7.6% of adjusted total assets, which was approximately $4.9 million and $2.9
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, 2000, the Bank had
risk-based capital of $6.5 million (including $6.1 million in core capital), or
13.2% of risk- weighted assets of $49.1 million. This amount was $2.6 million
above the 8.0% requirement in effect on that date.
YEAR 2000
- ---------
Management and the Board of Directors were committed to achieving the goal of
Y2K readiness. The Bank incurred no problems when the staff tested all systems
on January 1, 2000 and has experienced no Y2K problems with our mission critical
systems or our non-information system providers.
-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
March 31, 2000.
-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: May 9,2000 /s/ Robert W. DeCook
----------------
Robert W. DeCook
President and Chief Executive Officer
Date: May 9, 2000 /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 NINE MONTH PERIOD ENDED MARCH 31, 2000 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-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,368
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,954
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 59,995
<ALLOWANCE> 373
<TOTAL-ASSETS> 82,220
<DEPOSITS> 61,730
<SHORT-TERM> 11,538
<LIABILITIES-OTHER> 794
<LONG-TERM> 0
<COMMON> 10
0
0
<OTHER-SE> 8,158
<TOTAL-LIABILITIES-AND-EQUITY> 82,220
<INTEREST-LOAN> 3,579
<INTEREST-INVEST> 807
<INTEREST-OTHER> 225
<INTEREST-TOTAL> 4,611
<INTEREST-DEPOSIT> 1,993
<INTEREST-EXPENSE> 2,571
<INTEREST-INCOME-NET> 2,040
<LOAN-LOSSES> 72
<SECURITIES-GAINS> (225)
<EXPENSE-OTHER> 1,617
<INCOME-PRETAX> 476
<INCOME-PRE-EXTRAORDINARY> 476
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 321
<EPS-BASIC> .20
<EPS-DILUTED> .19
<YIELD-ACTUAL> 7.66
<LOANS-NON> 953
<LOANS-PAST> 1
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 762
<ALLOWANCE-OPEN> 343
<CHARGE-OFFS> 44
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<ALLOWANCE-CLOSE> 373
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<ALLOWANCE-FOREIGN> 0
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