UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-24036
HORIZON FINANCIAL SERVICES CORPORATION
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(Name of small business issuer in its charter)
Delaware 42-1419757
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
301 First Avenue East, Oskaloosa, Iowa 52577-0008
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (515) 673-8328
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Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such 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. YES X . NO ___.
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
State the issuer's revenues for its most recent fiscal year: $6,406,736.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the average of the closing bid and
asked price of such stock as reported on the Nasdaq System as of September 12,
2000, was $4.7 million. (The exclusion from such amount of the market value of
the shares owned by any prson shall not be deemed an admission by the
Registrant that such person is an affiliate of the Registrant.)
As of September 12,2000, there were issued and outstanding 845,362
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Annual Report to Stockholders for the fiscal
year ended June 30, 2000. Part III of Form 10-KSB - Proxy Statement for the
Annual Meeting of Stockholders held in October 2000.
Transitional Small Business Disclosure Format: YES ; NO X .
PART I
Item 1. Description of Business
-----------------------
General
The Company. Horizon Financial Services Corporation (the "Company"), a
Delaware corporation, was formed in March 1994 to act as the holding company for
Horizon Federal Savings Bank ("Horizon Federal" or the "Bank") upon the Bank's
conversion from the mutual to the stock form (the "Conversion"), which occurred
on June 28, 1994. On that date, the Company issued 506,017 shares of common
stock at a price of $10.00 per share in the Conversion. All references to the
Company, unless otherwise indicated, at or before June 28, 1994 are to the Bank
and its subsidiary on a consolidated basis. The Company's common stock trades on
the Nasdaq SmallCap Market under the Symbol "HZFS".
At June 30, 2000, the Company had $83.2 million of assets and
stockholders' equity of $8.3 million (or 9.9% of total assets).
The executive offices of the Company are located at 301 First Avenue
East, Oskaloosa, Iowa 52577, and its telephone number at that address is (515)
673-8328.
Horizon Federal. Horizon Federal, a wholly owned subsidiary of the
Company, is a federally chartered stock savings bank headquartered in Oskaloosa,
Iowa. Its deposits are insured up to applicable limits, by the Federal Deposit
Insurance Corporation (the "FDIC"), which is backed by the full faith and credit
of the United States. Horizon Federal's primary market area covers Mahaska
County, that portion of Marion County in and around Knoxville, Iowa and to a
lesser extent, Wapello County, Iowa. The Bank services its market area through
its three full service offices, two of which are located in Oskaloosa, Iowa and
one which is located in Knoxville, Iowa.
The principal business of the Bank consists of attracting deposits from
the general public and using such deposits, together with borrowings and other
funds, primarily to originate one- to four-family residential mortgage loans. To
a lesser extent, the Bank also originates consumer loans, commercial business
loans, multi-family and commercial real estate loans and residential
construction loans. The Bank also invests in mortgage-backed and related
securities, as well as investment securities. See "-- Originations of Loans and
Mortgage-Backed Securities." At June 30, 2000, substantially all of the Bank's
real estate mortgage loans (excluding mortgage-backed securities) were secured
by properties located in Iowa.
The Bank's revenues are derived principally from interest on mortgage
loans and securities, service fee income and dividends on Federal Home Loan Bank
("FHLB") stock. The Bank does not originate loans to fund leveraged buyouts and
has no loans to non-United States corporations or foreign governments.
The Bank currently offers a variety of deposit accounts having a wide
range of interest rates and terms. The Bank's deposits include commercial
demand, savings, checking, money market and certificate accounts. The Bank only
solicits deposits in its primary market area and does not accept brokered
deposits.
1
<PAGE>
Horizon Federal's operations are materially affected by general economic
conditions, the monetary and fiscal policies of the federal government and the
policies of the various regulatory authorities, including the Office of Thrift
Supervision ("OTS") and the Board of Governors of the Federal Reserve System
("Federal Reserve Board").
During fiscal 1995, the Company entered into a joint venture low income
apartment housing project to take advantage of certain tax benefits available
under Section 42 of the Internal Revenue Code of 1986, as amended. The apartment
housing project is composed of 62 units and is located in Des Moines, Iowa. At
June 30, 2000, the apartment complex was 100% leased. At June 30, 2000, the
Company's equity investment in the project was $157,000, representing a 16.5%
limited partnership interest in the project. The Company will receive tax
credits of approximately $42,000 per year through 2005.
Forward-Looking Statements
When used in this Annual Report on Form 10-KSB or future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases or other public or shareholder communications, or in oral statements
made with the approval of an authorized executive officer, the words or phrases
"will likely result", "are expected to", "will continue", "is anticipated",
"estimate", "project", "believe" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made, and to advise readers that various factors--including regional
and national economic conditions, changes in levels of market interest rates,
credit risks of lending activities, and competitive and regulatory
factors--could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake--and specifically disclaims any
obligation--to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
Market Area
Horizon Federal primarily serves Mahaska County and that portion of
Marion County in and around Knoxville, Iowa. The Bank has three offices, two of
which are located in Oskaloosa, Iowa and one which is located in Knoxville,
Iowa, approximately 25 miles west of Oskaloosa. The Bank competes in loan
originations and in deposit gathering activities with the eleven financial
institutions and three credit unions serving its primary market area. See " --
Competition." The Bank estimates its share of the savings market in its primary
market area to be approximately 10%.
Oskaloosa, Iowa is located in Mahaska County, approximately 60 miles
southeast of Des Moines, Iowa. Mahaska County has a population of approximately
22,000 people. Oskaloosa, with a current population of approximately 10,500
persons, is the county seat and the largest city in Mahaska County. Oskaloosa
has primarily an agricultural economy and, to a lesser extent, light industrial
and retail economies. Its light industrial economy, however, is mainly
agricultural support. Major employers in the area include the Clow Valve
Company, the Pella Corporation, Cargill, Vermeer Manufacturing, the V.A. Medical
Center, 3-M Company, William Penn University and the Mahaska County Hospital.
2
<PAGE>
Local economic conditions in the Bank's market are stable. As a result
of an over-supply of grain, farm prices for grain, which are currently
depressed, may continue to remain depressed and possibly even drop further. A
decrease in the prices of grain tends to make local consumers in our market area
reduce spending, which might adversely affect the local economy. In addition,
the Bank is experiencing difficulty, as are most businesses in the area, in
hiring and retaining experienced personnel as labor shortages in the area
continue to exist. Management believes that many of these individuals are
seeking employment in major cities where economic conditions are stronger.
These economic conditions and strong competition may affect the
financial condition and results of operations of the Company and the Bank. 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 its loan portfolio, which could adversely
affect the financial condition and results of operations of the Company and the
Bank.
Lending Activities of the Bank
General. Historically, the Bank originated fixed-rate one- to
four-family mortgage loans. Since the early 1980s, however, the Bank has
emphasized, subject to market conditions, the origination and holding in
portfolio of short- and intermediate-term (one, three and five year) loans that
convert to annual adjustable-rate mortgage ("ARM") loans after their initial
period. Management's strategy has been to increase the percentage of assets in
its portfolio with more frequent repricing characteristics or shorter
maturities. During periods of low demand for one- to four-family loans, the Bank
may seek to invest in mortgage-backed and related securities. The Bank also
originates for its loan portfolio fixed-rate, first lien mortgages for certain
budgeted amounts. The Bank also originates and sells from time to time in the
secondary market 15 year and 30 year fixed-rate loans.
The Bank primarily focuses its lending activities on the origination of
loans secured by first mortgages on owner-occupied, one- to four-family
residences. To a lesser extent, the Bank also originates consumer loans,
commercial business loans, commercial and multi-family real estate loans and
residential construction loans. See "- Originations of Loans and Mortgage-Backed
Securities." At June 30, 2000, the Bank's net loan portfolio totaled $62.4
million.
Several loan officers of the Bank and all members of the Board of
Directors serve as Loan Committee members on a rotating basis. At any given
time, the approval of at least one outside director and two other members of the
Loan Committee is required to approve real estate loans over $240,000. Loan
Committee approval is currently required for unsecured and secured consumer
loans of more than $100,000 and $120,000, respectively, and unsecured and
secured commercial business loans of more than $50,000 and $100,000,
respectively. The Board of Directors must approve all commercial business loans
with a balance exceeding $240,000.
The aggregate amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower, including related entities,
or the aggregate amount that the Bank
3
<PAGE>
can invest in any one real estate project is, with certain exceptions, generally
the greater of 15% of unimpaired capital and surplus or $500,000. See
"Regulation -- Federal Regulation of Savings Banks." At June 30, 2000, the
maximum amount which the Bank could lend to any one borrower and the borrower's
related entities under the applicable federal regulations was approximately $1.0
million, however, at June 30, 2000 the Board of Directors of the Bank had a
self-imposed $800,000 general limitation.
The Bank reserves the right to change or discontinue lending programs to
respond to regulatory or competitive factors.
4
<PAGE>
Portfolio Composition. The following table presents the composition of
the Bank's loan portfolio in dollar amounts and in percentages (before
deductions for loans in process, deferred fees and discounts and allowances for
losses) as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
------------
One- to four-family............... $39,704 63.2% $35,397 62.6% $34,266 60.1%
Commercial real estate............ 6,636 10.6 5,428 9.6 4,472 7.8
Multi-family...................... 1,234 1.9 1,339 2.4 1,113 2.0
Residential construction ......... 1,245 2.0 152 .3 2,000 3.5
--------- --------- ---------- -------- -------- -------
Total real estate loans....... 48,819 77.7 42,316 74.9 41,851 73.4
-------- -------- -------- ------ ------- ------
Other Loans:
-----------
Consumer Loans:
Automobile....................... 3,906 6.2 3,990 7.1 3,841 6.7
Home improvement................. 778 1.3 1,047 1.8 3,150 5.5
Deposit account.................. 123 .2 149 .3 179 .3
Other............................ 2,646 4.2 2,099 3.7 2,320 4.1
--------- --------- --------- ------- -------- -------
Total consumer loans.......... 7,453 11.9 7,285 12.9 9,490 16.6
Commercial business loans......... 6,548 10.4 6,872 12.2 5,682 10.0
--------- -------- --------- ------ -------- ------
Total other loans............. 14,001 22.3 14,157 25.1 15,172 26.6
-------- -------- -------- ------ ------- ------
Total loans receivable, gross. 62,820 100.0% 56,473 100.0% 57,023 100.0%
===== ===== =====
Less:
----
Loans in process.................. --- --- 598
Deferred fees and discounts....... 24 64 81
Allowance for losses.............. 379 343 348
---------- ----------- -------
Total loans receivable, net....... $62,417 $ 56,066 $55,996
======= ======== =======
</TABLE>
5
<PAGE>
The following table shows the composition of the Bank's loan portfolio
by fixed and adjustable rate at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans:
----------------
Real estate:
One- to four-family.......................... $ 9,662 15.4% $ 6,875 12.1% $ 5,125 9.0%
Commercial real estate....................... 2,539 4.0 1,058 1.9 1,246 2.2
Multi-family................................. 653 1.0 680 1.2 573 1.0
Residential construction..................... 1,165 1.9 152 .3 189 .3
-------- ---- -------- ---- --------- ---
Total real estate loans................... 14,019 22.3 8,765 15.5 7,133 12.5
Consumer..................................... 7,389 11.8 7,201 12.7 9,264 16.3
Commercial business.......................... 6,406 10.2 6,536 11.6 5,550 9.7
-------- ---- -------- ---- --------- ---
Total fixed-rate loans.................... 27,814 44.3 22,502 39.8 21,947 38.5
-------- ---- -------- ---- --------- ---
Adjustable Rate Loans:
---------------------
Real estate:
One- to four-family.......................... 30,041 47.8 28,522 50.5 29,141 51.1
Commercial real estate....................... 4,097 6.6 4,370 7.7 3,226 5.7
Multi-family................................. 582 .9 659 1.2 540 .9
Residential construction..................... 80 .1 --- --- 1,811 3.2
-------- ---- -------- ---- --------- ---
Total adjustable rate real estate loans... 34,800 55.4 33,551 59.4 34,718 60.9
Consumer..................................... 65 .1 84 .2 226 .4
Commercial business.......................... 141 .2 336 .6 132 .2
-------- ---- -------- ---- --------- ---
Total adjustable rate loans............... 35,006 55.7 33,971 60.2 35,076 61.5
-------- ---- -------- ---- --------- ---
Total loans, receivable, gross............ 62,820 100.0% 56,473 100.0% 57,023 100.0%
===== ===== =====
Less:
----
Loans in process.............................. --- --- 598
Deferred fees and discounts................... 24 64 81
Allowance for loan losses..................... 379 343 348
------- ------- -------
Total loans receivable, net............... $62,417 $56,066 $55,996
======= ======= =======
</TABLE>
6
<PAGE>
The following table illustrates the interest rate sensitivity of the
Bank's loan portfolio at June 30, 2000. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The table does not reflect the effects of possible prepayments
or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
-------------------------------------------
Residential Commercial
Mortgage(1) Construction Consumer Business Total
--------------------- ------------------ ------------------- ------------------ -------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During
Years Ending
June 30,
------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2001(2) $14,142 7.98% $ 1,245 8.10% $ 1,449 9.31% $ 3,207 9.31% $20,043 8.30%
2002 to 2005 21,669 7.74 -- -- 4,614 9.26 2,619 8.77 28,902 8.08
2006 and following 11,763 8.17 -- -- 1,390 8.99 722 9.30 13,875 8.31
------- ------- ------- ------- -------
Total $47,574 7.92% $ 1,245 8.10% $ 7,453 9.21% $ 6,548 9.09% $62,820 8.20%
======= ======= ======= ======= =======
</TABLE>
(1) Includes one- to four-family, multi-family and commercial real estate
mortgage loans.
(2) Includes demand loans and loans having no stated maturity.
7
<PAGE>
The total amount of loans due after June 30, 2001 which have
predetermined interest rates is $20.9 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $21.9
million.
One- to Four-Family Residential Mortgage Lending. Residential loan
originations are generated by the Bank's marketing efforts (which include radio
ads, newspaper ads and direct mail), its present and walk-in customers, and
referrals from real estate brokers and builders. The Bank focuses its lending
efforts primarily on the origination of loans secured by first mortgages on
owner-occupied, single-family residences in its market area. See "--
Originations of Loan and Mortgage-Backed Securities."
The Bank currently originates ARM loans and, to a lesser extent,
fixed-rate loans for retention in the Bank's loan portfolio. During the year
ended June 30, 2000, the Bank originated $7.1 million of adjustable-rate, one-
to four-family real estate loans (including $300,000 of residential construction
loans) and $8.1 million of fixed-rate one- to four-family loans (including $2.1
million of residential construction loans). The Bank's one- to four-family
residential mortgage originations are primarily in its market area.
The Bank currently originates adjustable-rate, one- to four-family
residential mortgage loans with a maximum term of 30 years. Fixed-rate loans for
portfolio are generally originated up to a maximum term of 30 years. Fixed-rate
mortgage loans originated by the Bank in excess of 15 years are generally sold
in the secondary market. The Bank originated $2.6 million of fixed rate loans
for sale during fiscal 2000.
One- to four-family loan originations are generally made in amounts of
up to 95% of the appraised value or selling price of the security property,
whichever is less. For loans originated with loan-to-value ratios of greater
than 80%, the Bank typically requires private mortgage insurance to reduce the
Bank's exposure to 80% of the appraised value or selling price of the security
property.
The Bank currently offers one-year, three-year and five-year balloon
loans that convert into ARM loans with annual adjustment after the initial term.
Rates are determined in accordance with market and competitive factors. The
Bank's ARM products generally carry interest rates which, pursuant to the terms
of the note, may be reset to a stated margin over the index utilized by the
Bank, which is currently the National Average Contract Rate for Previously Owned
Homes. The adjustable-rate loans currently originated by the Bank provide for a
maximum 2% annual cap, and a maximum 6% lifetime cap on the interest rate over
the rate in effect on the date of origination. The annual and lifetime caps on
interest rate increases reduce the extent to which these loans can help protect
the Bank against interest rate risk and may cause these loans not to be as
sensitive as the Bank's cost of funds. The Bank's ARM loans are not convertible
into fixed-rate loans. All of the Bank's one- to four-family loans are not
assumable, do not contain prepayment penalties and do not produce negative
amortization. Approximately 53.2% of the loans secured by one- to four-family
real estate originated by the Bank during fiscal 2000 were originated with
adjustable rates of interest.
See "--Originations of Loans and Mortgage-Backed Securities."
At June 30, 2000, the Bank was not servicing any loans other than loans
it originated. As of June 30, 2000, the Bank's residential ARM loan portfolio
totaled $30.0 million, or 47.8% of the Bank's gross loan portfolio as compared
to the residential fixed-rate, mortgage loan portfolio which totaled $9.7
million, or 15.4% of the Bank's gross loan portfolio. ARM loans decrease the
risk
8
<PAGE>
associated with changes in interest rates but involve other risks, primarily
because as interest rates rise, the payment by the borrower may rise to the
extent permitted by the terms of the loan, thereby increasing the potential for
default. At the same time, the market value of the underlying property may be
adversely affected by higher interest rates.
In underwriting residential real estate loans, the Bank evaluates both
the borrower's ability to make monthly payments, employment history, credit
history and the value of the property securing the loan. Potential borrowers are
qualified for fixed-rate loans based upon the stated rate of the loan. Borrowers
on adjustable-rate loans are currently qualified at a rate then in effect for
five-year loans on one- to four-family residential property. Typically, the
spread between a one-year ARM and a five-year ARM has been 100 basis points or
more. The Bank generally requires that for mortgage loan applications an
appraisal of the security property be performed by an independent fee appraiser
approved by the Bank. In connection with origination of residential real estate
loans, the Bank generally requires an opinion from an attorney regarding the
title to the property, and fire and casualty insurance in an amount not less
than the amount of the loan.
To supplement loan demand in the Bank's primary market area the Bank
purchases mortgage- backed and related securities. The Bank purchased $4.0
million, $4.8 million and $20.0 million of mortgage-backed and related
securities during fiscal 2000, 1999 and 1998, respectively. See "-- Originations
of Loans and Mortgage-Backed Securities."
Residential Construction Lending. The Bank makes construction loans to
individuals for the construction of their residences and, from time to time, to
established builders and developers, for the construction of residential homes
without an underlying sales contract. At June 30, 2000, the Bank's construction
loan portfolio totaled $1.2 million, or 2.0% of its gross loan portfolio. As of
that date substantially all of these loans were in the Company's primary market
area.
Construction loans to individuals for their residences are structured
to be converted to permanent loans at the end of the construction phase which
typically runs from six months to one year. These construction loans have rates
and terms which match one- to four-family loans then offered by the Bank, except
that during the construction phase the borrower pays interest only. The maximum
loan-to-value ratio of owner occupied single family construction loans is 95%.
Residential construction loans are generally underwritten pursuant to the same
guidelines used for originating permanent one- to four-family residential loans.
The application process for construction loans includes a submission to the Bank
of the plans and costs of the project to be constructed. These items are used as
a basis to determine the appraised value of the subject property. Loans are
based on the lesser of current appraised value or the cost of construction (land
plus building).
The uncertainties inherent in estimating construction costs and the
market for a project upon completion makes it relatively difficult to evaluate
accurately the total loan funds required to complete a project, the related
loan-to-value ratios and the likelihood of ultimate success of the project.
Construction loans to borrowers other than owner-occupants also involve many of
the same risks discussed below regarding commercial real estate loans and tend
to be more sensitive to general economic conditions than many other types of
loans.
Multi-Family/Commercial Real Estate Lending. Horizon Federal also makes
real estate loans secured by multi-family and non-residential properties.
Horizon Federal's multi-family residential loans are primarily secured by
apartment buildings located within the Bank's market area.
9
<PAGE>
The commercial real estate loans originated by the Bank are primarily secured by
office buildings, churches, storage facilities, and other income-producing
properties. At June 30, 2000, $1.2 million, or 1.9%, of the Bank's gross loan
portfolio consisted of multi-family loans and $6.6 million, or 10.6%, of the
Bank's gross loan portfolio consisted of commercial real estate loans.
Commercial real estate lending entails significant additional risks as
compared with residential property lending. Commercial real estate loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The payment experience on such loans is typically dependent on the
successful operation of the real estate project and as such may be subject to a
greater extent than residential loans to adverse conditions in the economy
generally. In dealing with these risk factors, the Bank generally limits itself
to a real estate market and/or borrowers with which it has knowledge and
experience.
Appraisals on properties securing multi-family and commercial real
estate property loans originated by the Bank are performed by an independent fee
appraiser approved by the Bank at the time the loan is made. All appraisals on
multi-family and commercial real estate loans are reviewed by the Bank's
management. In addition, the Bank's underwriting procedures generally require
verification of the borrower's credit history, income and financial statements,
banking relationships and income projections for the property. In recent years,
personal guarantees have been obtained for all or most of the Bank's
multi-family and commercial real estate loans. While the Bank continues to
monitor multi-family and commercial real estate loans on a regular basis after
origination, updated appraisals are not normally obtained after closing unless
the Bank believes that there are questions regarding the status of the loan or
the value of the collateral.
At June 30, 2000, the Bank had no multi-family or commercial real
estate loans to one borrower, or group of borrowers, which had an existing
carrying value in excess of $600,000. At such date the Bank had only three
commercial and multi-family real estate loans which exceeded $300,000 at June
30, 2000, all of which were performing in accordance with their repayment terms.
Multi-family and commercial real estate lending affords the Bank an
opportunity to receive interest at rates higher than those generally available
to one- to four-family residential lending. Nevertheless, loans secured by such
properties are generally larger and involve a greater degree of risk than one-
to four-family residential mortgage loans. Because payments on loans secured by
multi-family and commercial real estate properties are often dependent on the
successful operation or management of the properties, repayment of such loans
may be subject to adverse conditions in the real estate market or the economy.
If the cash flow from the project is reduced (for example, if leases are not
obtained or renewed), the borrower's ability to repay the loan may be impaired.
Horizon Federal's current lending guidelines generally require, in the case of
loans secured by multi- family or commercial income-producing property, that the
property securing such loans generate net cash flow of 125% of debt service
after payment of all operating expenses, excluding depreciation, and a
loan-to-value ratio of no more than 75%.
Consumer Lending. Management believes that offering consumer loan
products helps reinforce and expand the Bank's customer base. In addition,
because consumer loans generally have shorter terms to maturity and/or
adjustable rates and carry higher rates of interest than do residential mortgage
loans, they can be useful asset/liability management tools. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Asset/Liability Management" in the Annual Report to Stockholders attached hereto
as Exhibit 13 (the "Annual Report"). The Bank
10
<PAGE>
currently originates substantially all of its consumer loans in its primary
market area. At June 30, 2000, the Bank's consumer loans totaled $7.5 million,
or 11.9% of the Bank's gross loan portfolio.
Horizon Federal offers a variety of consumer loans for various purposes
with terms up to 15 years. The majority of lending is for automobiles, home
improvement and other personal purposes. The Bank originates consumer loans on
both a direct and an indirect basis. Direct loans are made when the Bank extends
credit directly to the borrower. Indirect loans are obtained when the Bank
purchases loan contracts from retailers of goods or services which have extended
credit to their customers. Horizon Federal began its indirect lending program in
January 1993 with selected automobile dealers located in the Bank's lending
area. At June 30, 2000, the outstanding balances on automobile loans and home
improvement totaled $3.9 million and $800,000, or 6.2% and 1.3% of the Bank's
gross consumer loan portfolio, respectively.
In addition, Horizon Federal commenced offering Visa and MasterCard
credit cards in April 1994. Both types of lending generally present more credit
risk to the Bank than one- to four-family residential lending. At June 30, 2000,
the Bank had $28,500 of credit card loans outstanding and $234,600 of unused
credit available under its credit card program.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of the ability to meet existing obligations and payments on the
proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured, or are
secured by rapidly depreciable assets such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. At June 30, 2000, non-performing consumer loans totaled $266,000, or
3.6% of total consumer loans and .4% of the Bank's gross loan portfolio. See
"Asset Quality - Non-Performing Assets."
Commercial Business Lending. The Bank also originates commercial
business loans. The Bank offers commercial business loans to service existing
customers, to consolidate its banking relationships with these customers, and to
further its asset/liability management goals. Most of the Bank's commercial
business loans have been extended to finance local businesses and include short-
term loans to finance machinery and equipment purchases, inventory and accounts
receivable. Commercial loans also involve the extension of revolving credit for
a combination of equipment acquisitions and working capital in expanding
companies.
The maximum term for loans extended on machinery and equipment is based
on the projected useful life of such machinery and equipment. Generally, the
maximum term on non- mortgage lines of credit is one year. The loan-to-value
ratio on such loans may not exceed 75% of the value of the collateral securing
the loan.
11
<PAGE>
The two largest commercial business loans outstanding at June 30, 2000
were a $767,000 business line of credit to a builder of one- to four-family
residential properties and a $437,000 secured commercial loan to an excavation
company. At June 30, 2000, these lines of credit were performing in accordance
with their repayment terms. The Bank had only three other commercial business
loans in excess of $225,000 at June 30, 2000, all of which were performing in
accordance with their repayment terms at such date.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income, and which are secured by real property whose value tends to be
more easily ascertainable, commercial business loans are of higher risk and
typically are made on the basis of the borrower's ability to make repayment from
the cash flow of the borrower's business. As a result, the availability of funds
for the repayment of commercial business loans may be dependent upon the success
of the business itself. The Bank's commercial business loans almost always
include personal guarantees and are usually, but not always, secured by business
assets, such as accounts receivable, equipment and inventory, as well as real
estate. However, the collateral securing the loans may depreciate over time, may
be difficult to appraise and may fluctuate in value based on the success of the
business.
The Bank recognizes the generally increased credit risks associated
with commercial business lending. Horizon Federal's commercial business lending
policy emphasizes credit file documentation and analysis of the borrower's
character, management capabilities, capacity to repay the loan, the adequacy of
the borrower's capital and collateral. Analysis of the borrower's past, present
and future cash flows is also an important aspect of Horizon Federal's credit
analysis.
Originations of Loans and Mortgage-Backed Securities
The Bank originates real estate loans through marketing efforts, the
Bank's customer base, walk-in customers and referrals from real estate brokers.
The Bank originates both adjustable-rate and fixed-rate loans. Its ability to
originate loans is dependent upon the relative demand for fixed-rate or ARM
loans in the origination market, which is affected by the term structure
(short-term compared to long-term) of interest rates, as well as the current and
expected future level of interest rates and competition. The Bank originates
real estate loans through marketing efforts, the Bank's customer base, walk-in
customers and referrals from real estate brokers. The Bank originates both
adjustable-rate and fixed rate loans. Its ability to originate loans is
dependent upon the relative demand for fixed-rate or ARM loans in the
origination market, which is affected by the term structure (short-term compared
to long-term) of interest rates, as well as the current and expected future
level of interest rates and competition. During the year ended June 30, 2000 the
Bank's dollar volume of fixed rate real estate loan originations exceeded the
same type of adjustable- rate loan originations and for the years ended June 30,
1999 and 1998 the Bank's dollar volume of adjustable-rate real estate loan
originations and fixed-rate loan originations were approximately the same.
The Bank does not generally purchase loans or loan participations. In
times of low levels of loan demand, the Bank has invested its excess funds in
mortgage-backed and related securities. During fiscal 2000, 1999 and 1998 the
Bank purchased $4.0, $4.8 and $20.2 million, respectively, of mortgage-backed
and related securities. The Bank funded its purchases of mortgage-backed and
related securities, during fiscal 2000, primarily with sales and repayments of
mortgage loans and
12
<PAGE>
mortgage-backed and related securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Asset/Liability
Management" in the Annual Report. The Bank decreased its holdings of
collaterized mortgage obligations ("CMOs") during the fiscal year by primarily
selling CMOs that would increase the Bank's interest rate risk. This decrease of
the CMO portfolio resulted in placing interest rate risk within the Board's
policy guidelines by June 30, 2000. Pursuant to an agreement with the OTS, the
Bank intends to maintain a moderate interest rate risk position for its total
portfolio. See "Regulation -- Supervisory Agreement."
The following table shows the loan origination, purchase and repayment
activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------
2000 1999 1998
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate
- one- to four-family $ 6,847 $ 6,637 $ 11,089
- multi-family -- 140 49
- commercial real estate 240 1,415 719
- residential construction 315 -- 1,686
Non-real estate
- consumer -- 35 21
- commercial business -- 125 --
-------- -------- --------
Total adjustable-rate 7,402 8,352 13,564
-------- -------- --------
Fixed rate:
Real estate
- one- to four-family 6,025 7,148 7,362
- multi-family 2 596 --
- commercial real estate 459 265 5,081
- residential construction 2,114 220 951
Non-real estate
- consumer 5,079 6,099 10,698
- commercial business 2,378 2,714 1,942
-------- -------- --------
Total fixed-rate 16,057 17,042 26,034
-------- -------- --------
Total loans originated 23,459 25,394 39,598
Total loan purchases 1,300 60 --
Total loan sales (2,775) (8,613) (6,077)
Total loan repayments (19,119) (21,118) (29,526)
Increase (decrease) in other items, net 3,486 4,347 (192)
-------- -------- --------
Net increase $ 6,351 $ 70 $ 3,803
======== ======== ========
</TABLE>
13
<PAGE>
The following table shows the purchase, sale and repayment activities
of the Bank's mortgage-backed and related securities for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------
2000 1999 1998
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Purchases:
Mortgage-backed and related securities $ 4,004 $ 1,213 $ --
CMOs -- 3,565 20,236
-------- -------- --------
Total $ 4,004 4,778 20,236
-------- -------- --------
Sales:
Mortgage-backed and related securities -- -- (2,209)
CMOs (3,885) (4,894) (15,617)
-------- -------- --------
Total (3,885) (4,894) (17,826)
-------- -------- --------
Repayments:
Mortgage-backed and related securities (618) (110) (126)
CMOs (731) (5,262) (3,806)
Net Amortization MBS and CMOs 42 18 421
Decrease in other items, net (129) (795) (1,676)
-------- -------- --------
Net increase (decrease) $ (1,317) $ (6,265) $ (2,777)
======== ======== ========
</TABLE>
Asset Quality
General. When a borrower fails to make a required payment on a loan,
the Bank attempts to cause the delinquency to be cured by contacting the
borrower. In the case of loans secured by real estate, a late notice is sent by
the 11th of the month if payment for the prior month is not received. If the
delinquency is not cured by the 15th of the month, an attempt to contact the
borrower is made by telephone. Additional written and verbal contacts are made
with the borrower to the extent necessary, and if required a personal visit by a
loan officer of the Bank is arranged. If the delinquency is not cured or a
payment plan arranged by the 61st day of delinquency or shortly thereafter, the
matter is generally referred to the Bank's collection manager and action to
foreclose on the property is initiated. After 90 days of delinquency, interest
income on loans is reduced by the full amount of accrued and uncollected
interest. If foreclosed, the property is sold at a sheriff's sale and may be
purchased by the Bank. Delinquent consumer loans are handled in a similar
manner. The Bank's procedures for repossession and sale of consumer collateral
are subject to various requirements under Iowa consumer protection laws.
Real estate acquired by Horizon Federal as a result of foreclosure or
by deed in lieu of foreclosure is classified as real estate owned until it is
sold. When property is acquired, it is recorded at the lower of cost or
estimated fair value at the date of acquisition, and any write-down resulting
therefrom is charged to the allowance for losses on loans. After acquisition,
all costs incurred in maintaining the property are expensed. However, costs
relating to the development and improvement of the property are capitalized to
the extent of net realizable value.
14
<PAGE>
The following table sets forth the Bank's loan delinquencies by type,
by amount and by percentage of category at June 30, 2000. The amounts presented
represent the total remaining principal balances of the loans, rather than the
actual payment amounts which are overdue.
<TABLE>
<CAPTION>
Loans Delinquent For:
----------------------------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and Over Total
--------------------- -------------------------- -------------------------- ------------------------
Percent of Percent of Percent of Percent of
Loan Loan Loan Loan
Number Amount Category Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family 17 $ 461 1.1% 7 $ 296 .7% 21 $ 622 1.5% 45 $1,379 3.3%
Multi-family -- -- -- -- -- -- -- -- -- -- -- --
Commercial real estate 1 12 .2 -- -- -- 2 137 2.1 3 149 2.3
Consumer 23 192 2.6 10 41 .5 27 266 3.6 60 499 6.7
Commercial business 2 450 6.9 1 46 .7 3 74 1.1 6 570 8.7
-- ------ -- ------ -- ------ --- ------
Total 43 $1,115 1.8% 18 $ 383 .6% 53 $1,099 1.8% 114 $2,597 4.2%
== ====== == ====== == ====== === ======
</TABLE>
15
<PAGE>
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in the Bank's loan portfolio. Loans are
placed on non-accrual status when the collection of principal and/or interest
becomes doubtful. As a matter of policy, the Bank does not generally accrue
interest on loans past due 90 days or more. For all periods presented, the Bank
has had no troubled debt restructurings (which involve forgiving a portion of
interest or principal on any loans or making loans at a rate materially less
than that of market rates). Foreclosed assets include assets acquired in
settlement of loans. There were no loans deemed to be in-substance foreclosed at
June 30, 2000.
<TABLE>
<CAPTION>
At June 30,
--------------------------------
2000 1999 1998
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
One- to four-family $ 622 $ 755 $ 691
Commercial real estate 137 116 --
Consumer 266 186 180
Commercial business 74 103 51
------ ------ ------
Total 1,099 1,160 922
------ ------ ------
Accruing loans 90 days or more:
One- to four-family -- -- --
Commercial -- -- --
------ ------ ------
Total -- -- --
------ ------ ------
Foreclosed assets:
One- to four-family -- -- --
Commercial real estate -- -- --
Consumer 56 -- --
------ ------ ------
Total 56 -- --
------ ------ ------
Total non-performing assets $1,155 $1,160 $ 922
====== ====== ======
Total as a percentage of total assets 1.39% 1.36% 1.02%
====== ====== ======
</TABLE>
For the fiscal year ended June 30, 2000, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to $144,000, of which $78,000 was included in
interest income at such date.
At June 30, 2000, there were no non-performing loans to a single
borrower or group of related borrowers in excess of $118,000. At June 30, 2000,
there were approximately $92,000 of non-accruing loans contained in the
foregoing table which are not described in "Other Loans of Concern" or
"Classified Assets" below. These loans are not required to be classified by the
OTS and are adequately capitalized such that management does not anticipate any
losses relating to these loans.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of June 30, 2000, there was also an aggregate of
$421,000 in net book value of loans ($249,000 secured by single family
residences, $148,000 secured by other commercial business and $24,000 in secured
consumer loans) with respect to which known information about the possible
credit problems of the borrowers have caused management to have doubts as to the
ability of the
16
<PAGE>
borrowers to comply with present loan repayment terms and which may result in
the future inclusion of such items in the non-performing asset categories.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full" on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge-off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the regulatory authorities, who may order the establishment
of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Bank regularly
reviews problem loans and real estate acquired through foreclosure to determine
whether such assets require classification in accordance with applicable
regulations. On the basis of management's review of its assets, at June 30,
2000, the Bank had classified a total of $1,261,000 of its assets as
substandard, $140,000 as doubtful and $17,000 as loss. All portions of a loan
which are classified as loss are reserved for at a rate of 100%.
At June 30, 2000, total classified assets comprised $1,418,000, or
17.15% of the Bank's capital, or 1.70% of the Bank's total assets.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation, which includes a review of all loans for which full
collectibility may not be reasonably assured, considers among other matters, the
estimated fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan loss allowance. Although management believes it
uses the best information available to make such determinations, future
adjustments to the allowance may be necessary, and net income could be
significantly affected, if circumstances differ substantially from the
assumptions used in making the initial determinations. At June 30, 2000, the
Bank had an allowance for loan losses of $379,000, or approximately .61% of
total loans. See "Management's Discussion and Analysis of Financial
17
<PAGE>
Condition and Results of Operations -- Results of Operations -- Provision for
Losses on Loans" in the Annual Report.
The following table sets forth an analysis of the Bank's allowance for
losses on loans.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------
2000 1999 1998
----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period $ 343 $ 348 $ 348
Charge-offs:
One- to four-family -- (84) (16)
Commercial real estate -- -- --
Commercial business (21) (24) (51)
Consumer (41) (60) (30)
----- ----- -----
Total charge-offs (62) (168) (97)
----- ----- -----
Recoveries:
Commercial business -- 19 --
Consumer 2 5 3
----- ----- -----
Total recoveries 2 24 3
----- ----- -----
Net charge-offs (60) (144) (94)
Additions charged to operations 96 139 94
----- ----- -----
Balance at end of period $ 379 $ 343 $ 348
===== ===== =====
Ratio of net charge-offs during the period to average
loans outstanding during the period .10% .26% .17%
===== ===== =====
</TABLE>
During the fiscal years ended June 30, 2000, 1999 and 1998, management
recorded provisions for loan losses of $96,000, $139,000 and $94,000,
respectively. These provisions were primarily the result of charge-offs on loans
and foreclosed assets incurred during the periods, as well as a result of
management's assessment of additional credit risk associated with the increased
level of the Bank's consumer and commercial business portfolios during such
periods.
18
<PAGE>
The distribution of the Bank's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------
2000 1999 1998
--------------------- -------------------- ------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family............. $110 63.2% $ 69 62.6% $111 60.1%
Multi-family.................... 2 1.9 3 2.4 3 2.0
Commercial real estate.......... 46 10.6 27 9.6 13 7.8
Residential construction........ 4 2.0 1 .3 3 3.5
Consumer........................ 109 11.9 91 12.9 111 16.6
Commercial business............. 101 10.4 138 12.2 81 10.0
Unallocated..................... 7 --- 14 --- 26 ---
------- ----- ---- ----- ---- -----
Total...................... $379 100.0% $343 100.0% $348 100.0%
==== ===== ==== ===== ==== =====
</TABLE>
Investment Activities
Horizon Federal must maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, the Bank has
maintained liquid assets at levels above the minimum requirements imposed by OTS
regulations and at levels believed adequate to meet the requirements of normal
operations, including repayments of maturing debt and potential deposit
outflows. Cash flow projections are regularly reviewed and updated to assure
that adequate liquidity is maintained. At June 30, 2000, the Bank's liquidity
ratio (liquid assets as a percentage of net withdrawable savings deposits and
current borrowings) was 5.4%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Annual Report and
"Regulation -- Liquidity."
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including U.S. treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Bank, as established by the
Board of Directors, is to invest funds among various categories of investments
and maturities based upon the Bank's liquidity needs, asset/liability management
policies, investment quality, marketability and performance objectives. Subject
to the Board's direction, the Investment Committee meets monthly to review the
Bank's investments and objectives for its investment portfolio. The Bank's
investment policy has established methods and strategies for each type of
security. It is the Bank's general policy to
19
<PAGE>
purchase investment securities which are U.S. government securities or federal
agency obligations or other issues that are rated investment grade.
The Bank has a portfolio of mortgage-backed and related securities and
has utilized such investments to complement its mortgage lending activities. At
June 30, 2000, the Bank's mortgage-backed and related securities totaled $12.1
million, or 14.5% of total assets. For information regarding market values of
the Bank's mortgage-backed and related securities portfolio, see Note 2 of the
Notes to Consolidated Financial Statements in the Annual Report.
Historically, most of the Bank's mortgage-backed securities were
long-term, fixed-rate securities. In more recent years, the Bank has begun to
purchase other types of mortgage-backed and related securities consistent with
its asset/liability management objectives. In this regard, the Bank emphasizes
the purchase of adjustable-rate, mortgage-backed and related securities for
asset/liability management purposes and in order to supplement the Bank's
origination of ARM loans. At June 30, 2000 primarily all of the Bank's
mortgage-backed and related securities carried adjustable rates of interest.
The Bank's portfolio of Government National Mortgage Association
("GNMA"), FNMA and Federal Home Loan Mortgage Corporation ("FHLMC") certificates
are modified pass-through mortgage-backed securities that generally represent
undivided interests in underlying pools of fixed- rate, or certain types of
adjustable rate, single-family residential mortgages issued by these
government-sponsored entities. GNMA's guarantee to the holder of timely payments
of principal and interest is backed by the full faith and credit of the U.S.
government. FNMA and FHLMC provide the certificate holder a guarantee of timely
payments of interest and scheduled principal payments, whether or not they have
been collected. Under the OTS risk-based capital requirements, GNMA
mortgage-backed securities have a zero percent risk weighting and FNMA, FHLMC
and "AA" or higher-rated mortgage-backed securities have a 20% risk weighting,
in contrast to the 50% risk weighting carried by one- to four-family performing
residential mortgage loans.
At June 30, 2000 the Bank held $7.1 million of collateralized mortgage
obligations ("CMOs") having estimated lives which ranged from less than three
years up to twenty years. CMOs are special types of pass-through debt in which
the stream of principal and interest payments on the underlying mortgages or
mortgage-backed securities is used to create classes with different maturities
and, in some cases, amortization schedules, as well as a residual interest, with
each such class possessing different risk characteristics. Management believes
these securities may represent attractive alternatives relative to other
investments due to the wide variety of maturity and repayment options available
through such investments. Management has opted to invest in CMO's, including
interest only and principal only CMOs, as opposed to straight mortgage-backed
securities, in an effort to improve or maintain spreads. The Bank has leveraged
its capital by using FHLB advances to purchase many of these securities.
Management believes that the increased net income which can result from this
type of investing can, at times, provide high enough returns to justify the
increased vulnerability of sudden and unexpected interest rate changes. See
"Management's Discussion and Analysis and Results of Operations" in the Annual
Report.
OTS guidelines regarding investment portfolio policy and accounting
require insured institutions to categorize securities and certain other assets
as held for "investment," "sale," or "trading." The portion of the investment
securities portfolio which is held with the intent to hold to
20
<PAGE>
maturity is accounted for on an amortized cost basis. Securities which are
categorized as available for sale are carried at fair value. At June 30, 2000,
all of the Bank's investment, mortgage-backed and related securities were
classified as available for sale.
The following table sets forth the composition of the Bank's portfolio
of investment and mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------------------------------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
-----------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. government securities.......................... $ --- ---% $ --- ---% $ --- ---%
Federal agency obligations.......................... 867 15.2 844 8.5 869 9.6
Small business administration loans................. 692 12.1 739 7.4 973 10.7
Equity securities(1)................................ 2,041 35.8 2,127 21.5 2,428 26.8
------ ----- ------ ----- --------- -----
Subtotal......................................... 3,600 63.1 3,710 37.4 4,270 47.1
FHLB stock............................................ 703 12.3 1,203 12.2 1,203 13.3
------ ----- ------ ----- --------- -----
Total investment securities and FHLB stock....... 4,303 75.4 4,913 49.6 5,473 60.4
Other Interest-Earning Assets:
Interest-bearing deposits with banks................ 1,406 24.6 5,000 50.4 3,581 39.6
------- ----- ------- ------ -------- ------
Total............................................ $5,709 100.0% $9,913 100.0% $ 9,054 100.0%
====== ===== ====== ===== ========= =====
Average remaining life or term to repricing of
investment securities and other interest-earning
assets excluding FNMA stock and FHLB stock........... 3.86 years 2.46 years 3.83 years
Mortgage-Backed and Related Securities:
CMOs................................................ $ 7,132 59.1% $10,701 80.0% $11,723 59.7%
FHLMC............................................... 494 4.1 606 4.5 667 3.4
FNMA................................................ 1,601 13.2 --- --- --- ---
GNMA................................................ 2,840 23.5 1,126 8.4 --- ---
Other(2)............................................ 3 .1 954 7.1 7,262 36.9
------ ----- ------ ----- --------- -----
Total mortgage-backed and related securities...... $12,070 100.0% $13,387 100.0% $19,652 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
-----------------
(1) Consists primarily of FNMA Stock, stocks of publicly traded thrift
institutions and thrift holding companies, and mutual funds.
(2) Consists of interest only and principal only stripped mortgage-backed
securities. See Footnote 2 of Notes to Consolidated Financial Statements
contained in the Annual Report.
21
<PAGE>
The composition and maturities of the debt investment securities
portfolio, excluding equity securities and FHLB stock, are indicated in the
following table.
<TABLE>
<CAPTION>
At June 30, 2000
--------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over 10 Total Debt Investment
1 Year Years Years Years Securities
--------------------------------------------------------------------------------
Carrying Carrying Carrying Carrying Book Market
Value Value Value Value Value Value
-------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government securities....... $ --- $ --- $ --- $ --- $ --- $ ---
Federal agency obligations....... --- 442 425 --- 867 867
Small business administration
loans......................... --- --- --- 692 692 692
------ ------ ------ ----- -------- --------
Total..................... $ --- $442 $425 $692 $1,559 $1,559
===== ==== ==== ==== ====== ======
Weighted average yield........... ---% 4.52% 4.30% 7.88% 5.95% 5.95%
</TABLE>
The following table sets forth the contractual maturities of the Bank's
mortgage-backed and related securities at June 30, 2000; however, the expected
average life to maturity of this portfolio is generally two to 10 years.
<TABLE>
<CAPTION>
Due in At
------------------------------------------------------------- June 30,
One to 5 to 10 and 2000
Less than Less than 5 Less than 10 Over Balance
One Year Years Years Years Outstanding
------------------------------------------------------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
FHLMC............................... $--- $--- $--- $ 494 $ 494
FNMA................................ --- --- --- 1,601 1,601
GNMA................................ --- --- --- 2,840 2,840
CMOs................................ --- --- 966 6,166 7,132
Other............................... --- --- --- 3 3
---- ---- ----- ------- -------
Total.............................. $--- $--- $966 $11,104 $12,070
==== ==== ==== ======= =======
</TABLE>
At June 30, 2000, the Bank's portfolio of investment and
mortgage-backed securities contained no securities of any issuer with an
aggregate book value in excess of 10% of the Bank's stockholders' equity,
excluding those issued by the U.S. government or its agencies.
For additional information on the Bank's investment and mortgage-backed
securities, see Note 2 of the Notes to Consolidated Financial Statements in the
Annual Report.
22
<PAGE>
Sources of Funds
General. The Bank's primary sources of funds are deposits, amortization
and repayment of loan principal (including mortgage-backed securities), sales or
maturities of investment securities, mortgage-backed securities and short-term
investments, FHLB advances and funds provided from operations.
Borrowings, primarily FHLB advances, are used to compensate for
seasonal reductions in deposits or deposit inflows at less than projected
levels, and may be used on a longer-term basis to support lending activities
including purchases of mortgage-backed securities. At June 30, 2000, the Bank
had total FHLB advances of $9.0 million.
Deposits. Horizon Federal offers a variety of deposit accounts having a
wide range of interest rates and terms. The Bank's deposits consist of
commercial demand, savings, checking, money market and certificate accounts. The
certificate accounts currently range in terms from 6 months to five years. The
Bank relies primarily on advertising (including radio, newspaper and direct
mail), competitive pricing policies and customer service to attract and retain
these deposits. Horizon Federal solicits deposits from its market area only and
does not use brokers to obtain deposits. The flow of deposits is influenced
significantly by general economic conditions, changes in money market and
prevailing interest rates and competition. The composition of the Bank's
deposits is set forth in Note 8 of the Notes to Consolidated Financial Statement
in the Annual Report.
The deposit accounts marketed by the Bank have allowed it to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. The Bank has become more susceptible to short-term fluctuations
in deposit flows as customers have become more interest rate conscious. The Bank
endeavors to manage the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. The ability of the Bank
to attract and maintain savings accounts and certificates of deposit, and the
rates paid on these deposits, has been and will continue to be significantly
affected by market conditions.
23
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Bank for the periods
indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------
2000 1999 1998
----------------------- ------------------- --------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
---------------------------------
Commercial Demand............................ $ 811 1.3% $ 1,061 1.8% $ 873 1.4%
Checking Accounts (0.0% to 4.8%)............. 7,724 11.9 6,305 10.6 5,580 9.3
Savings Accounts (2.3% to 4.9%).............. 23,380 36.1 23,443 39.3 18,276 30.4
Money Market Accounts (2.0% to 2.5%)......... 343 .5 463 .8 599 1.0
------- ----- ------- ----- ------- -----
Total Non-Certificates....................... 32,258 49.8 31,272 52.5 25,328 42.1%
------- ----- ------- ----- ------- -----
Certificates:
------------
0.00 - 3.99%............................... 38 .1 11 .1 --- ---
4.00 - 4.99%............................... 8,703 13.4 10,251 17.1 3,016 5.0
5.00 - 5.99%............................... 9,933 15.3 13,505 22.7 24,248 40.3
6.00 - 6.99%............................... 10,610 16.4 4,360 7.2 6,891 11.5
7.00 - 7.99%............................... 3,213 4.9 163 .2 553 .9
8.00 - 8.99%............................... 6 .1 6 .1 94 .1
9.00% and above............................. --- --- 8 .1 15 .1
------- ----- ------- ----- ------- -----
Total Certificates........................... 32,503 50.2 28,304 47.5 34,817 57.9
------- ------ -------- ------ ------- ------
Total Deposits............................... $64,761 100.0% $59,576 100.0% $60,145 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
24
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of June 30, 2000.
<TABLE>
<CAPTION>
0.00- 4.00- 5.00- 6.00- 7.00% Percent
3.99% 4.99% 5.99% 6.99% or more Total of Total
--------------------------------------------------------------------------------------
(Dollars in Thousands)
Certificate accounts maturing
in quarter ending :
-------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
September 30, 2000.................. --- 2,491 2,837 2,884 6 8,218 25.28%
December 31, 2000................... --- 2,118 1,043 951 614 4,726 14.54
March 31, 2001...................... --- 673 1,326 1,826 15 3,840 11.81
June 30, 2001....................... --- 784 997 1,222 912 3,915 12.05
September 30, 2001.................. 25 369 738 151 1,653 2,936 9.03
December 31, 2001................... --- 205 434 507 --- 1,146 3.53
March 31, 2002...................... --- 419 828 462 --- 1,709 5.26
June 30, 2002...................... --- 240 743 176 --- 1,159 3.57
Thereafter.......................... 13 1,404 987 2,431 19 4,854 14.93
--- ------ ------ ------- ------ ------- -----
Total............................... $38 $8,703 $9,933 $10,610 $3,219 $32,503 100.0%
==== ====== ====== ======= ====== ======= =====
Percent of total................. .12% 26.78% 30.56% 32.64% 9.90% 100.0%
=== ===== ===== ===== ==== =====
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of June 30, 2000.
<TABLE>
<CAPTION>
Maturity
---------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
------- ------ ------ --------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit of less
than $100,000 $ 5,218 $ 4,012 $ 7,178 $11,155 $27,563
Certificates of deposit of
$100,000 or more 200 564 577 649 1,990
Public funds(1) 2,800 150 -- -- 2,950
------- ------- ------- ------- -------
Total certificates of
deposit $ 8,218 $ 4,726 $ 7,755 $11,804 $32,503
======= ======= ======= ======= =======
</TABLE>
---------------------
(1) Deposits from governmental and other public entities.
Borrowings. Although deposits are the Bank's primary source of funds,
the Bank's policy has been to utilize borrowings, primarily FHLB advances, when
they are a less costly source of funds or can be invested at a positive rate of
return. In addition, the Bank may rely upon borrowings for short-term liquidity
needs.
25
<PAGE>
Horizon Federal may obtain advances from the FHLB of Des Moines upon
the security of its capital stock in the FHLB of Des Moines and certain of its
mortgage loans. Such advances may be made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. At
June 30, 2000, the Bank had $9.0 million in FHLB advances.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------
2000 1999 1998
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum Balance:
----------------
FHLB advances $16,599 $20,636 $25,060
Average Balance:
----------------
FHLB advances $13,265 $19,038 $22,276
</TABLE>
26
<PAGE>
The following table sets forth certain information as to the Bank's
FHLB advances at the dates indicated. For additional information on the Bank's
advances, see Note 9 of the Notes to Consolidated Financial Statements in the
Annual Report.
<TABLE>
<CAPTION>
At June 30,
----------------------------------
2000 1999 1998
------ ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances...................... $9,014 $16,606 $20,038
====== ======= =======
Weighted average interest
rate of FHLB advances............. 5.67% 5.07% 5.24%
</TABLE>
Subsidiary Activities
As a federally chartered savings bank, Horizon Federal is permitted by
OTS regulations to invest up to 2% of its assets, or $1.7 million at June 30,
2000, in the stock of, or loans to, service corporation subsidiaries. As of such
date, the net book value of Horizon Federal's investment in its service
corporation was approximately $56,000. Horizon Federal may invest an additional
1% of its assets in service corporations where such additional funds are used
for inner-city or community development purposes and up to 50% of its total
capital in conforming loans to service corporations in which it owns more than
10% of the capital stock. In addition to investments in service corporations,
federal associations are permitted to invest an unlimited amount in operating
subsidiaries engaged solely in activities in which a federal association may
engage.
Horizon Federal has one service corporation, Horizon Investment
Services, Inc. ("HISI"), an Iowa corporation, located in Oskaloosa, Iowa. HISI,
which changed its corporate name in August 1995 from SEI Service Corporation,
was organized by the Bank in 1983 in order to offer a variety of products to
customers of Horizon Federal. For the fiscal year ended June 30, 2000, HISI had
a net gain of $7,300.
Regulation
General. Horizon Federal is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full faith and credit
of the U.S. government. Accordingly, the Bank is subject to broad federal
regulation and oversight extending to all of its operations. Horizon Federal is
a member of the FHLB of Des Moines and is subject to certain limited regulation
by the Board of Governors of the Federal Reserve System ("Federal Reserve
Board"). As the savings and loan holding company of the Bank, the Company also
is subject to federal regulation and oversight. The purpose of the regulation of
the Company and other holding companies is to protect subsidiary savings
associations. The Bank is a member of the Savings Association Insurance Fund
("SAIF"), which together with the Bank Insurance Fund (the "BIF") are the two
deposit insurance funds administered by the FDIC, and the deposits of the Bank
are insured by the FDIC. As a result, the FDIC has certain regulatory and
examination authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
27
<PAGE>
Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, the Bank is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. The last regular OTS
and FDIC examinations of the Bank were as of May 22, 2000 and December 31, 1989,
respectively. Under agency scheduling guidelines, it is likely that another
examination will be initiated in the near future. When these examinations are
conducted by the OTS and the FDIC, the examiners may require the Bank to provide
for higher general or specific loan loss reserves. All savings associations are
subject to a semi-annual assessment, based upon the savings association's total
assets, to fund the operations of the OTS. The Bank's OTS assessment for the
fiscal year ended June 30, 2000 was $33,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Bank is prescribed by federal law, and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by non-
residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. The Bank is in compliance with the noted restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
June 30, 2000, the Bank's lending limit under this restriction was approximately
$1.0 million.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action.
Insurance of Accounts and Regulation by the FDIC. Horizon Federal is a
member of the SAIF, which is administered by the FDIC. Deposits are insured up
to applicable limits by the FDIC and such insurance is backed by the full faith
and credit of the U.S. government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to
28
<PAGE>
the SAIF of the BIF. The FDIC also has the authority to initiate enforcement
actions against savings associations, after giving the OTS an opportunity to
take such action, and may terminate the deposit insurance if it determines that
the institution has engaged in unsafe or unsound practices, or is in an unsafe
or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the U.S. Treasury or for any other reason deemed necessary
by the FDIC.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provided for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate was
established at .657% of deposits by the FDIC and the resulting assessment of
$331,000 was paid in November 1996. This special assessment significantly
increased noninterest expense and adversely affected the Company's and the
Bank's results of operations for the year ended June 30, 1997. As a result of
the special assessment, the Bank's deposit insurance premiums was reduced to
zero based upon its current risk classification and the new assessment schedule
for SAIF insured institutions. These premiums are subject to change in future
periods.
Regulatory Capital Requirements. Federally insured savings
associations, such as the Bank, are required to maintain a minimum level of
regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In
29
<PAGE>
addition, all intangible assets, other than a limited amount of purchased
mortgage servicing rights, must be deducted from tangible capital for
calculating compliance with the requirement. At June 30, 2000, the Bank did not
have any intangible assets or purchased mortgage servicing rights.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. All subsidiaries of the Bank are includable
subsidiaries.
At June 30, 2000, the Bank had tangible capital of $6.3 million, or
7.8% of adjusted total assets, which is approximately $5.1 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At June 30, 2000, the Bank
had no intangibles which were subject to these tests.
At June 30, 2000, the Bank had core capital equal to $6.3 million, or
7.8% of adjusted total assets, which is $3.1 million above the minimum leverage
ratio requirement of 4% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At June 30, 2000, the Bank had no
capital instruments that qualify as supplementary capital, and $362,000 of
general loss reserves, which was less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to- value ratio and
reciprocal holdings of qualifying capital instruments. Horizon Federal had a
$9,000 exclusion from capital and assets at June 30, 2000.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently
30
<PAGE>
underwritten permanent one- to four-family first lien mortgage loans not more
than 90 days delinquent and having a loan-to-value ratio of not more than 80% at
origination unless insured to such ratio by an insurer approved by the FNMA or
FHLMC.
OTS regulations also require that every savings association with more
than normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings association with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement unless the
OTS determines otherwise.
On June 30, 2000, the Bank had total capital of $6.7 million (including
$6.3 million in core capital and $362,000 in qualifying supplementary capital)
and risk-weighted assets of $50.3 million (including $167,000 in converted
off-balance sheet assets); or total capital of 13.3% of risk-weighted assets.
This amount was $2.6 million above the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions, which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
31
<PAGE>
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
Supervisory Agreement. The Bank was required to enter into a
Supervisory Agreement with the OTS on August 27, 1999. The Supervisory Agreement
generally required the Bank to (i) comply with specified federal laws and
regulations regarding management and financial policies, the establishment and
maintenance of records and interest-risk management policies and procedures and
to (ii) take certain corrective actions regarding the disposal of certain of the
Bank's securities classified as high-risk, the maintenance of at least a
moderate level of interest rate risk, the prior receipt of a "no objection" from
the OTS before the Bank buys, exchanges or otherwise changes positions with any
security it owns, and the development of loan underwriting policies and
procedures. In addition, the Bank is required to obtain prior written approval
of the OTS before it may pay any dividends to the holding company.
The imposition by the OTS or the FDIC of any of these measures on the
Company or the Bank may have a substantial adverse effect on the Company's
operations and profitability. Company shareholders do not have preemptive
rights, and therefore, if the Company is directed by the OTS or the FDIC to
issue additional shares of Common Stock, such issuance may result in the
dilution in the percentage of ownership of the Company.
Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions on savings associations with respect to
their ability to make distributions of capital, which include dividends, stock
redemptions or repurchases, cash-out mergers and other transactions charged to
the capital account. OTS regulations also prohibit a savings association from
declaring or paying any dividends or from repurchasing any of its stock if, as a
result, the regulatory capital of the association would be reduced below the
amount required to be maintained for the liquidation account established in
connection with its mutual to stock conversion.
Generally, savings associations, such as the Bank, that before and
after the proposed distribution remain well-capitalized, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus retained net income for the two preceding
years. However, an institution deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
The Bank may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period based on safety and soundness concerns.
See "Regulation -- Supervisory Agreement."
Liquidity. All savings associations, including the Bank, are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of their average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. For a discussion of what
the Bank includes in liquid assets, see "Management's Discussion and Analysis of
Financial
32
<PAGE>
Condition and Results of Operations - Liquidity and Capital Resources" in the
Annual Report. This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 4%.
Penalties may be imposed upon associations for violations of the liquid asset
ratio requirement. At June 30, 2000, the Bank was in compliance with this
requirement, with an overall liquid asset ratio of 5.4%.
Qualified Thrift Lender Test. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code of 1986, as amended (the "Code"). Such assets
primarily consist of residential housing related loans and investments. At June
30, 2000, the Bank met the test and has always met the test since its
effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities
impermissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with the examination of the Bank, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications, such as a
merger or the establishment of a branch, by the Bank. An unsatisfactory rating
may be used as the basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in March 1998 and received a rating of "satisfactory."
33
<PAGE>
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the Bank
include the Company and any company which is under common control with the Bank.
In addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The Bank's subsidiaries are not deemed affiliates; however,
the OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to such restrictions unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of
the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure, the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See
"--Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law. The stock of the Company is registered with the
SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
34
<PAGE>
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At June 30, 2000, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "--Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Des
Moines, which is one of 12 regional FHLBs that administer the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. Each is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures, established by the board of directors of the FHLB,
which are subject to the oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Des Moines. At June 30, 2000, the Bank had $702,500 in FHLB stock, which
was in compliance with this requirement. In past years, the Bank has received
substantial dividends on its FHLB stock. For the years ended June 30, 2000 and
1999, dividends paid by the FHLB of Des Moines to Horizon Federal totaled
$70,000 and $77,000 respectively. The $12,000 dividend received for the quarter
ended June 30, 2000 reflects an annualized rate of 6.86%, .56% above the rate
for calendar 1999. Over the past five fiscal years such dividends have averaged
6.81%.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
For the year ended June 30, 2000, dividends paid by the FHLB of Des
Moines to the Bank totaled $70,000, which constitutes a $7,000 decrease over the
amount of dividends received in fiscal
35
<PAGE>
year 1999. The $12,000 dividend for the quarter ended June 30, 2000 reflects an
annualized rate of 6.86% or .42% above the rate for fiscal 1999.
Federal and State Taxation
Federal Taxation. For years prior to 1997, savings associations such as
the Bank that meet certain definitional tests relating to the composition of
assets and other conditions prescribed by the Code, were permitted to establish
reserves for bad debts and to make annual additions thereto which may, within
specified formula limits, be taken as a deduction in computing taxable income
for federal income tax purposes. The amount of the bad debt reserve deduction
for "non-qualifying loans" was computed under the experience method. The amount
of the bad debt reserve deduction for "qualifying real property loans"
(generally loans secured by improved real estate) was computed under either the
experience method or the percentage of taxable income method (based on an annual
election). Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
In August 1996, legislation was enacted that repealed the reserve
method of accounting (including the percentage of taxable income method which
was used in prior years) used by many thrifts to calculate their bad debt
reserve for federal income tax purposes. Thrift institutions with $500 million
or less in assets may, however, continue to use the experience method. As a
result, the Bank must recapture that portion of the reserve that exceeds the
amount that could have been taken under the experience method for post-1987 tax
years. At June 30, 2000, the Bank's post-1987 excess reserves amounted to
approximately $111,000. The recapture will be approximately $56,000 per year and
will occur over a six-year period which began in fiscal 1997. The legislation
also requires thrift institutions to account for bad debts for federal income
tax purposes on the same basis as commercial banks for tax years beginning after
December 31, 1995. As a result, the Company computes its bad debt deduction on
the experience method.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, were also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except
36
<PAGE>
to absorb bad debt losses). As of June 30, 2000, the Bank's Excess for tax
purposes totaled approximately $1.3 million.
The Company, the Bank and its subsidiary file consolidated federal
income tax returns on a fiscal year basis using the accrual method of
accounting.
The federal income tax returns of the Company for the last three years
are open to possible audit by the Internal Revenue Service (the "IRS"). No
returns are being audited by the IRS at the current time. In the opinion of
management, any examination of still open returns (including returns of
subsidiary and predecessors of, or entities merged into, the Bank) would not
result in a deficiency which could have a material adverse effect on the
financial condition of the Bank and its subsidiary.
Iowa Taxation. Iowa imposes a franchise tax on the taxable income of
both mutual and stock savings banks. The tax rate is 5%, which may effectively
be increased, in individual cases, by application of a minimum tax provision.
Taxable income under the franchise tax is generally similar to taxable income
under the federal corporate income tax, except that, under the Iowa franchise
tax, no deduction is allowed for Iowa franchise tax payments and taxable income
includes interest on state and municipal obligations. Interest on U.S.
obligations is taxable under the Iowa franchise tax and under the federal
corporate income tax. For Iowa state tax purposes, the Company and SEI file
income tax returns and the Bank files a franchise tax return.
Delaware Taxation. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.
Impact of New Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities" - SFAS 133 requires companies
to record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. SFAS 133 does not
allow hedging of a security which is classified as held to maturity.
Accordingly, upon adoption of SFAS 133, companies may reclassify any security
from held to maturity to available for sale if they wish to be able to hedge the
security in the future. SFAS 133, as amended by SFAS 137 and SFAS 138, will be
effective for the Company beginning July 1, 2000. Management does not expect the
adoption of SFAS 133, SFAS 137 and SFAS 138 to have a significant impact on the
Company's financial statements.
Competition
Horizon Federal faces strong competition, both in originating real
estate loans and in attracting deposits. Competition in originating real estate
loans comes primarily from commercial and savings banks, and to a lesser extent,
credit unions located in the Bank's market area. Commercial banks, savings
banks, credit unions and finance companies provide vigorous
37
<PAGE>
competition in consumer lending. The Bank competes for real estate and other
loans principally on the basis of the quality of services it provides to
borrowers, the interest rates it charges, loan fees it charges, and the types of
loans it originates. See "-- Lending Activities."
The Bank attracts all of its deposits through its retail banking
offices, primarily from the communities in which those retail banking offices
are located. Therefore, competition for those deposits is principally from
commercial banks, savings banks, credit unions and investment banking firms
located in these communities. The Bank competes for these deposits by offering a
variety of account alternatives at competitive rates and by providing convenient
business hours, branch locations and interbranch deposit and withdrawal
privileges at each.
The Bank serves Mahaska County and that portion of Marion County in and
around Knoxville, Iowa. There are nine commercial banks, one savings bank, other
than Horizon Federal, and three credit unions which compete for deposits and
loans in Horizon Federal's primary market area. The Bank estimates its share of
the savings market in its primary market area to be approximately 10%.
Employees
At June 30, 2000, the Bank had a total of 25 full-time and five
part-time employees. The Bank's employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
The following information as to the business experience during the past
five years is supplied with respect to executive officers of the Company and the
Bank who do not serve on the Company's Board of Directors. There are no
arrangements or understandings between the persons named and any other person
pursuant to which such officers were selected.
Sharon K. McCrea - Ms. McCrea, age 58, joined Horizon Federal in 1959,
as a teller, was appointed Assistant Treasurer in 1974 and promoted to Treasurer
and Comptroller of the Bank in 1979. Ms. McCrea is in charge of the accounting
department of the Bank.
Kent R. Frankenfeld - Mr. Frankenfeld, age 44, joined the Bank in
October 1994, as Vice President in charge of Marketing and Product Development.
Mr. Frankenfeld was the Vice President of a savings bank located in Des Moines,
Iowa prior to joining the Bank.
Item 2. Description of Property
The Bank conducts its business through its three offices, two of which
are located in Oskaloosa, Iowa and one in Knoxville, Iowa. The following table
sets forth information relating to each of the Bank's offices as of June 30,
2000. The total net book value of the Bank's premises and equipment (including
land, buildings and leasehold improvements and furniture, fixtures and
equipment) at June 30, 2000 was approximately $1.1 million. See Note 6 of Notes
to Consolidated Financial Statements in the Annual Report.
38
<PAGE>
<TABLE>
<CAPTION>
Total
Approximate
Date Square Net Book Value at
Location Acquired Footage June 30, 2000
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Main Office:
301 First Avenue East 1964 4,230 $222,000
Oskaloosa, Iowa
Branch Offices:
509 A Avenue, West 1992 3,277 544,000
Oskaloosa, Iowa
1022 West Pleasant Street 1979 1,598 284,000
Knoxville, Iowa
</TABLE>
Horizon Federal believes that its current facilities are adequate to
meet the present and foreseeable needs of the Bank and the Company in Oskaloosa
and Knoxville, Iowa with the completion of our expansion in Knoxville in
September of 2000.
The Bank maintains an on-line data base with a service bureau servicing
financial institutions. The net book value of the data processing and computer
equipment utilized by the Bank at June 30, 2000 was approximately $93,000.
39
<PAGE>
Item 3. Legal Proceedings
-----------------
Horizon Federal is involved, from time to time, as plaintiff or
defendant in various legal actions arising in the normal course of their
businesses. While the ultimate outcome of these proceedings cannot be predicted
with certainty, it is the opinion of management, after consultation with counsel
representing Horizon Federal in the proceedings, that the resolution of these
proceedings should not have a material effect on Horizon Federal's results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year ended June 30, 2000.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
--------------------------------------------------------
Page 40 of the attached 2000 Annual Report to Stockholders is
incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
---------------------------------------------------------
Pages 4 through 14 of the attached 2000 Annual Report to Stockholders
are incorporated herein by reference.
Item 7. Financial Statements
--------------------
The following information appearing in the Company's 2000 Annual Report
to Stockholders for the year ended June 30, 2000, is incorporated herein by
reference.
Annual Report Section Pages in Annual Report
--------------------- ----------------------
Independent Auditors' Report 15
Consolidated Balance Sheets as of June 30, 2000 and 1999 16
Consolidated Statements of Operations for the Years Ended
June 30, 2000, 1999 and 1998 17
Consolidated Statements of Changes in Stockholders' Equity
and Comprehensive Income for Years Ended
June 30, 2000, 1999 and 1998 18
Consolidated Statements of Cash Flows for Years Ended
June 30, 2000, 1999 and 1998 19
Notes to Consolidated Financial Statements 20-39
40
<PAGE>
With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended June 30, 2000, is not deemed
filed as part of this Annual Report on Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
---------------------------------------------------------------
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------------------
Directors
---------
Information concerning Directors of the Company is incorporated herein
by reference from the definitive proxy statement for the Annual Meeting of
Stockholders to be held in October 2000, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
Executive Officers
------------------
Information regarding the business experience of the executive officers
of the Company and the Bank contained in Part I of this Form 10-KSB is
incorporated herein by reference.
Compliance with Section 16(a)
-----------------------------
Information concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934 is incorporated herein by reference from the definitive
Proxy Statement for the Annual Meeting of Stockholders to be held in October
2000, a copy of which will be filed not later than 120 days after the close of
the fiscal year.
Item 10. Executive Compensation
----------------------
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in October 2000, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in October 2000, a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
41
<PAGE>
Item 12. Certain Relationships and Related Transactions
----------------------------------------------
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in October 2000, a copy of which will
be filed not later than 120 days after the close of the fiscal year.
Item 13. 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 three- month period ended June 30, 2000.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: By: /s/Robert W. DeCook
---------------------- --------------------------
Robert W. DeCook, President and
Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/Robert W. DeCook /s/Thomas L. Gillespie
------------------- ----------------------
Robert W. DeCook, Director, President and Thomas L. Gillespie, Director and
Chief Executive Officer (Principal Vice President
Executive Officer)
Date: Date:
----------------------- -----------------------
/s/Gary L. Rozenboom /s/Dwight L. Groves
-------------------- -------------------
Gary L. Rozenboom, Director Dwight L. Groves, Director
Date: Date:
----------------------- -----------------------
/s/Norman P. Zimmerman /s/Sharon K. McCrea
---------------------- -------------------
Norman P. Zimmerman, Director Sharon K. McCrea, Treasurer and
Comptroller, (Principal Financial
and Accounting Officer)
Date: Date:
----------------------- -----------------------
43
<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 Registrant's
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 4 to Registrant's Registration Statement on
Form S-1 (File No. 33-76674), is incorporated herein by
reference.
10.1 Registrant's Employee Stock Ownership Plan, filed on March 18,
1994 as Exhibit 10.3 to Registrant's Registration Statement on
Form S-1 (File No. 33-76674), is incorporated herein by
reference.
10.2 Employment Agreements between the Bank and Messrs. DeCook and
Gillespie, filed as Exhibits 10.1 and 10.2, respectively, to
Registrant's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1994 (File No. 0-24036), are incorporated
herein by reference.
10.3 1994 Stock Option and Incentive Plan, filed as Exhibit 10.3 to
Registrant's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1994 (File No. 0-24036), is incorporated herein
by reference.
10.4 Recognition and Retention Plan, filed as Exhibits 10.4 to
Registrant's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1994 (File No. 0-24036), is incorporated herein
by reference.
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
27 Financial Data Schedule (electronic filing only)
44
