UNITED STATES
SECURITY AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission File Number: 0-24036
Horizon Financial Services Corporation
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(Exact name of registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation or organization)
42-1419757
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(I.R.S. Employer Identification No.)
301 First Avenue East, Oskaloosa, Iowa 52577
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(Address of principal executive offices) (Zip Code)
(515) 673-8328
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. [X] YES [ ] NO
<PAGE>
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock 863,962
------------------ ---------------------
Class Shares Outstanding
as of February 11, 2000
Transitional Small Business Disclosure Format (check one):
Yes [ ]: No [ X ]
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
INDEX
Part I. Financial Information Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at December 3l, 1999 and June 30,
1999. 1
Consolidated Statements of Operations for the three months and
six months ended December 31, 1999 and 1998 2
Consolidated Statements of Comprehensive Income for the three
months and six months ended December 31, 1999 and 1998. 3
Consolidated Statements of Cash Flows for the six months ended
December 31, 1999 and 1998. 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. Other Information 13
Signatures 14
Index of Exhibits 15
Financial Data Schedule 16
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Balance Sheets
December 31, June 30,
Assets 1999 1999
- ------ ------------ ------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents .............................. $ 3,886,785 $ 7,917,020
Securities available-for-sale .......................... 16,276,496 17,096,985
Loans receivable, net .................................. 58,110,864 56,066,399
Real estate ............................................ 269,097 270,779
Stock in Federal Home Loan Bank, at cost ............... 1,202,500 1,202,500
Office property and equipment, net ..................... 1,038,156 1,089,053
Accrued interest receivable ............................ 518,258 522,121
Deferred tax asset ..................................... 240,829 254,000
Income tax receivable .................................. 379,843 522,699
Prepaid expenses and other assets ...................... 115,568 81,646
------------ ------------
Total assets ...................................... $ 82,038,396 $ 85,023,202
------------ ============
Liabilities and Stockholders' Equity
Deposits ............................................... $ 60,906,393 $ 59,576,232
Advances from Federal Home Loan Bank ................... 12,560,854 16,606,176
Advance payments by borrowers for taxes and insurance .. 196,981 399,830
Accrued income taxes: .................................. 67,060 - - -
Accrued expenses and other liabilities ................. 172,166 380,617
------------ ------------
Total liabilities ................................. 73,903,454 76,962,855
------------ ------------
Stockholders' equity
Preferred stock, $.01 par value, authorized 250,000
shares, none issued ............................... -- --
Common stock, $.01 par value, 1,500,000 shares
authorized, issued and outstanding 1,046,198 shares 10,462 10,462
Additional paid-in capital ............................. 5,012,161 4,996,761
Retained earnings, substantially restricted ............ 4,879,972 4,804,455
Treasury stock, at cost ................................ (1,293,635) (1,229,571)
Unearned employee stock ownership plan shares .......... (36,070) (65,503)
Unrealized losses on securities available for sale ..... (437,948) (456,257)
------------ ------------
Total stockholders' equity ........................ 8,134,942 8,060,347
------------ ------------
Total liabilities and stockholders' equity ............. $ 82,038,396 $ 85,023,202
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
-1-
<PAGE>
<TABLE>
<CAPTION>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Statements of Operations
Three Months Six months
Ended December 31, Ended December 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Interest on loans ................................. $ 1,184,531 $ 1,147,157 $ 2,364,511 $ 2,338,159
Interest on securities available for sale ......... 262,828 370,677 534,893 752,348
Other investment income ........................... 80,234 40,620 176,840 119,109
----------- ----------- ----------- -----------
Total interest income ............................. 1,527,593 1,558,454 3,076,244 3,209,616
----------- ----------- ----------- -----------
Interest expense:
Interest on deposits .............................. 660,225 670,148 1,307,320 1,361,001
Interest on advances and other borrowing .......... 196,871 249,498 411,894 519,382
----------- ----------- ----------- -----------
Total interest expense ............................ 857,096 919,646 1,719,214 1,880,383
----------- ----------- ----------- -----------
Net interest income ............................... 670,497 638,808 1,357,030 1,329,233
Provision for losses on loans ..................... 24,000 24,000 48,000 48,000
----------- ----------- ----------- -----------
Net interest income after provision for
Losses on loans ................................... 646,497 614,808 1,309,030 1,281,233
----------- ----------- ----------- -----------
Non-interest income:
Fees, commissions and service charges ............. 112,696 123,096 231,320 242,885
Profit (loss) on securities available for sale, net 8,205 (296,474) (225,101) (1,604,124)
Other ............................................. - - - 209 - - - 8,573
----------- ----------- ----------- -----------
Total non-interest income (loss) .................. 120,901 (173,169) 6,219 (1,352,666)
----------- ----------- ----------- -----------
Non-interest expense:
Compensation, payroll taxes and
employee benefits ............................... 287,593 310,529 577,241 615,390
Advertising ....................................... 27,426 11,370 55,204 25,953
Office property and equipment ..................... 78,352 70,209 157,758 146,434
Federal insurance premiums ........................ 13,508 8,849 26,137 17,948
Data processing services .......................... 41,818 43,294 80,694 72,276
Other real estate expense, net .................... 2,166 1,607 4,725 1,070
Other ............................................. 104,934 77,181 192,644 145,457
----------- ----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Total non-interest expense ........................ 555,797 523,039 1,094,403 1,024,528
----------- ----------- ----------- -----------
Earnings (loss) before taxes on income ............ 211,601 (81,400) 220,846 (1,095,961)
Taxes on income (benefit) ......................... 64,200 (30,925) 67,700 (404,000)
----------- ----------- ----------- -----------
Net earnings (loss) ............................... $ 147,401 $ (50,475) $ 153,146 $ (691,961)
=========== =========== =========== ===========
Earnings (loss) per common share
Basic ...................................... $ 0.17 ($ 0.06) $ 0.18 ($ 0.81)
Diluted .................................... $ 0.17 ($ 0.06) $ 0.17 ($ 0.81)
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE>
<TABLE>
<CAPTION>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Three Months Ended Six Months Ended
December 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net income (loss) ............................................ $ 147,401 ($ 50,475) $ 153,146 ($ 691,961)
Other Comprehensive Income:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising
during the period, net of tax ....................... (67,192) (1,330,440) (183,835) (1,295,224)
Less: reclassification adjustment for net (gains) losses
included in net income, net of tax .................. 8,025 172,504 202,144 804,271
----------- ----------- ----------- -----------
Other comprehensive income, net of tax ....................... (59,167) (1,157,936) 18,309 (490,953)
----------- ----------- ----------- -----------
Comprehensive income ......................................... $ 88,234 ($1,208,411) $ 171,455 ($1,182,914)
----------- ----------- ----------- -----------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
Consolidated Statements of Cash Flows
Six months ended
December 31,
1999 1998
----------- -------- ------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ................................................ $ 153,146 (691,961)
Adjustments to reconcile net earnings (loss) to net cash provided
by operating activities:
Depreciation .................................................... 61,842 57,580
Amortization of fees, premiums and accretion of discounts, net .. (35,603) 5,027
Provision for losses on loans ................................... 48,000 48,000
Loans originated for sale ....................................... (1,647,520) (4,408,390)
Proceeds on sales of loans ...................................... 2,439,613 4,048,140
Loss on sale of securities ...................................... 225,101 1,604,124
Gain on sale of fixed assets .................................... - - - (8,364)
Decrease in accrued interest receivable ......................... 3,863 59,561
Increase (decrease) in accrued taxes payable and deferred taxes . 209,916 (556,723)
Amortization of stock compensation plans ........................ 29,433 44,118
Other, net ...................................................... (225,291) (497,689)
----------- -----------
Net cash provided by (used in) operating activities ................ 1,262,500 (296,577)
----------- -----------
Cash flows from investing activities:
Principal collected on securities available for sale ............ 685,277 2,266,435
Proceeds from sale of securities available for sale ............. 4,040,868 751,162
Purchase of securities available for sale ....................... (4,063,674) (2,963,863)
Purchase of investment real estate .............................. - - - (100,000)
Loans to customers, net ......................................... (2,884,558) 1,078,810
Proceeds from sale of fixed asset ............................... - - - 9,844
Purchase of office property and equipment, net .................. (10,945) (93,012)
----------- -----------
Net cash (used in) provided by investing activities ................ (2,233,032) 949,376
----------- -----------
Cash flows from financing activities:
Increase (decrease) in customer deposit accounts, net ........... 1,330,161 (1,630,992)
Decrease in advance payments by borrowers for taxes and insurance (202,849) (203,075)
Proceeds from advances from FHLB ................................ - - - 5,450,000
Principal payments on advances from FHLB ........................ (4,045,322) (6,037,970)
Net proceeds from options exercised ............................. - - - 659
Treasury stock acquired ......................................... (64,064) - - -
Payment of dividends ............................................ (77,629) (77,091)
----------- -----------
Net cash used in financing activities .............................. (3,059,703) (2,498,469)
----------- -----------
Net decrease in cash and cash equivalents .......................... (4,030,235) (1,845,670)
Cash and cash equivalents at beginning of year ..................... 7,917,020 6,366,619
----------- -----------
Cash and cash equivalents at end of year ........................... $ 3,886,785 4,520,949
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for interest .......................................... $ 1,933,245 2,192,632
Cash paid for taxes ............................................. 2,985 369,685
=========== ===========
To mark assets available for sale to fair value:
Change in fair value ............................................ $ (31,480) $ 782,967
Less deferred taxes ............................................. 13,171 (292,014)
----------- -----------
Change in valuation allowance ................................... $ 18,309 $ (490,953)
=========== ===========
</TABLE>
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HORIZON FINANCIAL SERVICES CORPORATION
1. BASIS OF PRESENTATION
The consolidated financial statements for the three and six months ended
December 31, 1999 are unaudited. In the opinion of management of Horizon
Financial Services Corporation (the "Registrant" or "Company"), these financial
statements reflect all adjustments, consisting only of normal occurring
accruals, necessary to present fairly the consolidated financial position of the
Company at December 31, 1999 and its results of operations and statements of
cash flows for the periods presented. These consolidated financial statements do
not purport to contain all the necessary disclosures required by generally
accepted accounting principles that might otherwise be necessary in the
circumstances and should be read in conjunction with the consolidated financial
statements and notes therein included in the annual report of Horizon Financial
Services Corporation for the year ended June 30, 1999. The results of the
periods presented are not necessarily representative of the results of
operations and cash flows which may be expected for the entire year.
2. ORGANIZATION
The Company was organized as a Delaware corporation at the direction of Horizon
Federal Savings Bank (the "Bank") for the purpose of becoming a savings bank
holding company, as part of the conversion from a mutual to a stock institution.
The conversion was completed on June 28, 1994 with the sale of 506,017 shares of
the Company's common stock at a price of $10 per share.
3. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, the Bank and the Bank's wholly owned subsidiary,
Horizon Investment Services, Inc. The principal business activity of Horizon
Investment Services, Inc. is to sell credit life insurance to customers of the
Bank. All material intercompany accounts and transactions have been eliminated.
-5-
<PAGE>
4. EARNINGS PER SHARE
The following provides a reconciliation of the amounts used in the determination
of basic and diluted earnings per share for the three and six month periods
ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
12/31/99 12/31/98 12/31/99 12/31/98
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Earnings ........................................... $ 147,401 ($ 50,475) $ 153,146 ($691,961)
========= ========= ========= =========
Basic earnings per share:
Weighted average shares outstanding .............. 872,203 880,045 873,633 879,994
Less unearned employee stock ownership plan shares (8,784) (20,266) (10,127) (21,803)
--------- --------- --------- ---------
Weighted average number of common shares outstanding ... 863,419 859,779 863,506 858,191
========= ========= ========= =========
Earnings (loss) per common share - basic ............... $ 0.17 ($ 0.06) $ 0.18 ($ 0.81)
========= ========= ========= =========
Diluted earnings per share:
Weighted average shares outstanding .............. 872,203 880,045 873,633 879,994
Less unearned employee stock ownership plan shares (8,784) (20,266) (10,127) (21,803)
Assumed incremental option shares
using the treasury stock method ............... 10,276 - - - 12,096 - - -
--------- --------- ---------
Common and common equivalent shares outstanding ........ 873,695 859,779 875,602 858,191
========= ========= ========= =========
Earnings (loss) per common share - diluted ............. $ 0.17 ($ 0.06) $ 0.17 ($ 0.81)
========= ========= ========= =========
</TABLE>
-6-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Horizon Financial Services Corporation ("the Company") is a savings bank holding
company, the primary asset of which is Horizon Federal Savings Bank, ("the
Bank"). The Company was incorporated in March 1994 and sold 506,017 shares of
common stock on June 28, 1994 for the purpose of acquiring all of the capital
stock of the Bank in connection with the Bank's conversion from mutual to stock
form of ownership (the "Conversion").
The principal business of the Company (through its operating subsidiary, the
Bank), has historically consisted of attracting deposits from the general public
and making loans secured by residential and, to a lesser extent, other
properties. The Company's results of operations are primarily dependent on the
difference or spread ("interest rate spread") between the average yield on
loans, mortgage-backed and related securities and investments and the average
rate paid on deposits and other borrowings as well as the relative amounts of
such assets and liabilities. The interest rate spread is affected by regulatory,
economic and competitive factors that influence interest rates, loan demand and
deposit flows. The Company, like other non-diversified savings institution
holding companies, is subject to interest rate risk to the degree that its
interest-earning assets mature or reprice at different times, or on a different
basis, than its interest-bearing liabilities.
The Company's results of operations are also affected by, among other things,
fee income received, loss or profit on securities available for sale, the
establishment of provisions for possible loan losses, income derived from
subsidiary activities, the level of operating expenses and income taxes. The
Company's operating expenses principally consist of employee compensation and
benefits, occupancy expenses, federal deposit insurance premiums, data
processing expenses and other general and administrative expenses.
The Company is significantly affected by prevailing economic conditions
including federal monetary and fiscal policies and federal regulation of
financial institutions. Deposit balances are influenced by a number of factors
including interest rates paid on competing personal investments and the level of
personal income and savings within the institution's market area. Lending
activities are influenced by the demand for housing as well as competition from
other lending institutions. The primary sources of funds for lending activities
include deposits, loan payments, borrowings and funds provided from operations.
Some local economic conditions in the Bank's market have weakened. The farm
economy had been strong but has now softened. As a result of an over-supply of
grain, farm prices for grain and livestock, which are currently depressed, may
continue to remain depressed. In the event current economic and market
conditions persist or worsen, loan demand and existing loans may be affected. No
assurances can be given that the Bank will be able to maintain or increase the
balance or quality of its loan portfolio, which could adversely affect the
financial condition and results of operations of the Company and the Bank.
<PAGE>
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
The Company, and its subsidiaries may from time to time make written or oral
"forward-looking statements", including statements contained in the Company's
filings with the Securities and Exchange Commission (including this Quarterly
Report on Form 10-QSB and the exhibits hereto and thereto), in its reports to
stockholders and in other communications by the Company, which are made in good
faith by the Company and the Bank pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995.
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<PAGE>
These forward-looking statements include statements with respect to the
Company's and the Bank's beliefs, plans, objectives, goals, expectations,
anticipations, estimates and intentions, that are subject to significant risks
and uncertainties, and are subject to change based on various factors (some of
which are beyond the Company's and the Bank's control). The words "may",
"could", "should", "would", "believe", "anticipate", "estimate", "expect",
"intend", "plan" and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause the
Company's and the Bank's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements:
o the strength of the United States economy in general and the strength
of the local economies in which the Company and the Bank conduct their
operations;
o the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Federal Reserve
Board, inflation, interest rate, market and monetary fluctuations;
o the timely development of and acceptance of new products and services
of the Bank and the perceived overall value of these products and
services by users, including the features, pricing and quality
compared to competitors' products and services;
o the willingness of users to substitute competitors' products and
services for the Bank's products and services;
o the success of the Bank in gaining regulatory approval of its products
and services, when required;
o the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities and insurance);
o technological changes;
o acquisitions;
o changes in consumer spending and saving habits;
o and the success of the Company and the Bank at managing the risks
involved in the foregoing.
The foregoing list of important factors is not exclusive. Additional discussion
of factors affecting the Company's business is contained in the Company's
periodic filings with the Securities and Exchange Commission. The Company does
not undertake and expressly disclaims any intent or obligation, to update any
forward-looking statements, whether written or oral, that may be made from time
to time by or on behalf of the Company or the Bank.
FINANCIAL CONDITION
The Company's total assets at December 31, 1999 of $82.0 million decreased $3.0
million, or 3.51%, from $85.0 million at June 30, 1999. Cash and cash
equivalents decreased $4.0 million , or 50.90%, due to repayments made on
Federal Home Loan Bank advances. Securities available for sale decreased
$820,000 primarily as a result of principal payments and prepayments on the
securities. Partially offsetting this decrease was an increase in loans
receivable, net of $2.0 million.
<PAGE>
Total liabilities decreased $3.1 million, or 3.97%, to $73.9 million at December
31, 1999 from $77.0 million at June 30, 1999, primarily as a result of advances
from the Federal Home Loan Bank decreasing $4.0 million, or 24.36%, from $16.6
million at June 30, 1999 to $12.6 million at December 31, 1999. Deposits
increased $1.3 million, or 2.23% to $60.9 million at December 31, 1999 from
$59.6 million at June 30, 1999. There were no other significant changes in the
components of the Company's balance sheet.
-8-
<PAGE>
RESULTS OF OPERATIONS
The Company's results of operations depend primarily on the level of its net
interest income and non- interest income and the level of its operating
expenses. Net interest income depends upon the volume of interest-earning assets
and interest-bearing liabilities and interest rates earned or paid on such
assets or liabilities, respectively. The Company's non-interest income consists
primarily of fees charged on transaction accounts which help to offset the costs
associated with establishing and maintaining these accounts.
Comparison of three month and six month periods ended December 31, 1999 and
December 31, 1998.
GENERAL
Net earnings for the three months ended December 31, 1999 increased $198,000 to
$147,000 from ($51,000) for the three month period ended December 31, 1998. For
the six months ended December 31, 1999, net earnings increased $845,000 to
$153,000 from ($692,000) for the comparable period in 1998. The increase for the
three and six month periods ended December 31, 1999 compared to the same periods
ended December 31, 1998 was primarily attributable to a significant decrease in
losses on sales of securities.
INTEREST INCOME
Interest income decreased $31,000 to $1,527,000 for the three month period ended
December 31, 1999 compared to $1,558,000 for the three month period ended
December 31, 1998 and $133,000 to $3,076,000 for the six month period ended
December 31, 1999 compared to $3,209,000 for the comparable period ended
December 31, 1998. The decrease was due to a decrease in average interest-
earning assets, consisting primarily of mortgage loans and securities available
for sale, of approximately $2.8 million and $3.6 million for the three and six
months ended December 31, 1999, respectively, over the comparable periods in
1998 and a decrease in the weighted average yield on average interest-earning
assets to 7.80% for the six months ended December 31, 1999 from 7.86% for the
same period in 1998. The decrease in average interest earning assets is due to
managements decision, at the current time, not to invest in lower-yielding
mortgage-backed securities with leveraged FHLB advances.
INTEREST EXPENSE
Interest expense decreased $63,000 to $857,000 from $920,000 for the three month
period and decreased $161,000 to $1,719,000 from $1,880,000 for the six month
period ended December 31, 1999 as compared to the same periods in 1998. The
decrease in interest expense was primarily due to the weighted average yield on
interest-bearing liabilities decreasing by 28 basis points to 4.57% at December
31, 1999 as compared to 4.85% for the same period in 1998. The average
outstanding balance of average interest-bearing liabilities decreased $2.5
million from $77.7 million at December 31, 1998 to $75.2 million at December 31,
1999.
NET INTEREST INCOME
Net interest income was $670,000 and $1.3 million for the three months and six
months ended December 31, 1999, respectively, compared to $639,000 and $1.3
million for the comparable periods in 1998. The Company's net interest margin
increased 22 basis points to 3.23% for the six month period ended December 31,
1999 as compared to 3.01% for the same period in 1998.
-9-
<PAGE>
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans is a result of management's periodic analysis
of the adequacy of the Company's allowance for losses on loans. The Company's
provision for losses on loans was $48,000 for the six month periods ended
December 31, 1999 and 1998. As of December 31, 1999, the Company's
non-performing assets, consisting of nonaccrual loans, accruing loans 90 days or
more delinquent, real estate owned and repossessed consumer property, totaled
$774,000 or .94% of total assets, compared to $1,160,000 or 1.36% of total
assets as of June 30, 1999. As of December 31, 1999, the Company's allowance for
losses on loans was $381,000, representing 49.2% of non-performing assets and
.66% of net loans receivable.
The Company continues to monitor and adjust its allowance for losses on loans as
management's analysis of its loan portfolio and economic conditions dictate. The
Company believes it has taken an appropriate approach toward reserve levels,
consistent with the Company's loss experiences and considering, among other
factors, the composition of the Company's loan portfolio, the level of the
Company's classified and non-performing assets and their estimated value. Future
additions to the Company's allowance for losses on loans and any change in the
related ratio of the allowance for losses on loans to non-performing loans are
dependent upon the economy, changes in real estate values and interest rates.
Because the Company has historically experienced low loan losses, management
also considers the loss experience of similar portfolios in comparable lending
markets. In addition, federal regulators may require additional reserves as a
result of their examination of the Company. Accordingly, the calculation of the
adequacy of the allowance for losses on loans is not based directly on the level
of non-performing assets. The allowance for losses on loans reflects what the
Company currently believes is an adequate level of reserves, although there can
be no assurance that future losses will not exceed the estimated amounts,
thereby adversely affecting future results of operations.
NONINTEREST INCOME
Noninterest income increased to $121,000 and $6,000 for the three and six months
ended December 31,1999, respectively, compared to ($173,000) and ($1,353,000)
for the same periods ended December 31, 1998. The increase for the three month
period ended December 31, 1999 was primarily attributable to a $8,000 profit on
assets available for sale compared to a $296,000 loss on assets available for
sale at December 31, 1998. For the six month period the increase was
attributable to a $225,000 loss on assets available for sale at December 31,
1999 as compared to a $1.6 million loss on assets available for sale at December
31, 1998. The loss recognized on securities during the six month period ended in
1998 was the result of a $1.5 million write down on interest only
mortgage-backed securities resulting from a decline in fair value that was
judged to be other than temporary. The Company completed the sale of its
remaining high interest rate sensitive, interest only mortgage-backed securities
during the period ended September 30, 1999.
NONINTEREST EXPENSE
Total noninterest expense was $556,000 and $1.1 million for the three and six
months ended December 31, 1999, respectively, compared to $523,000 and $1.0
million for the same periods in 1998, reflecting increases of $33,000 and
$70,000, respectively. Other expense increased $28,000 and $47,000 for the three
and six month periods ended December 31, 1999, respectively, compared to the
same period during 1998 due to increased postage, legal fees and office
supplies. Advertising expense increased $16,000 and $29,000 and office property
and equipment increased $8,000 and $11,000 for the three and six month periods
ended December 31, 1999, respectively, compared to the same period during 1998.
Compensation and employee benefits expenses, the largest component of
noninterest expense, decreased $23,000 and $38,000 for the three and six month
periods ended December 31, 1999, respectively, compared to the same period
during 1998.
-10-
<PAGE>
TAXES ON INCOME
Income taxes increased $95,000 and $472,000 for the three and six month periods
ended December 31, 1999, respectively, primarily as a result of the increases in
net earnings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are deposits and principal and interest
payments collected on mortgage loans, investments and related securities. While
scheduled loan repayments and maturing investments are relatively predictable,
deposit flows and early loan prepayments are more influenced by interest rates,
general economic conditions and competition. Additionally, the Company may
borrow funds from the Federal Home Loan Bank ("FHLB") of Des Moines or utilize
other borrowings of funds based on need, comparative costs and availability at
the time.
The Office of Thrift Supervision (the "OTS") requires minimum levels of liquid
assets. OTS regulations presently require the Bank to maintain an average daily
balance of liquid assets (United States Treasury and federal agency securities
and other investments having maturities of five years of less) equal to at least
4.0% of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. Such requirements may be
changed from time to time by the OTS to reflect changing economic conditions.
Such investments are intended to provide a source of relatively liquid funds
upon which the Bank may rely, if necessary, to fund deposit withdrawals and
other short-term funding needs. The Bank has historically maintained its
liquidity ratio in excess of that requirement. The Bank's liquidity ratio was
8.86% on December 31, 1999 and 11.49% on June 30, 1999.
At December 31, 1999, the Company had advances of $12.6 million from the FHLB of
Des Moines outstanding. The Company uses its liquidity resources principally to
meet ongoing commitments, to fund maturing certificates of deposit and deposit
withdrawals, and to meet operating expenses. The Company anticipates that it
will have sufficient funds available to meet current loan commitments. At
December 31, 1999, the Company had outstanding commitments to extend credit
which amounted to $2,788,000 (including $961,000 in available revolving
commercial lines of credit). At December 31, 1999, certificates of deposit
scheduled to mature in one year or less totaled $18.7 million. Management
believes, based on its experience to date, that a significant portion of these
funds will remain with the Company. Management believes that loan repayments and
other sources of funds will be adequate to meet the Company's foreseeable
liquidity needs.
Liquidity management is both a daily and long-term responsibility of management.
The Bank adjusts its investments in liquid assets based upon management's
assessment of (i) expected loan demand, (ii) expected deposit flows, (iii)
yields available on interest-bearing investments and (iv) the objectives of its
asset/liability management program. Excess liquidity generally is invested in
interest-earning overnight deposits and other short-term government and agency
obligations.
At December 31, 1999, the Bank had tangible and core capital of $6.0 million, or
7.4% of adjusted total assets, which was approximately $4.8 million and $2.8
million above the minimum requirements of 1.5% and 4.0%, respectively, of the
adjusted total assets in effect on that date. At December 31, 1999, the Bank had
risk-based capital of $6.3 million (including $6.0 million in core capital), or
13.2% of risk- weighted assets of $48.0 million. This amount was $2.5 million
above the 8.0% requirement in effect on that date.
-11-
<PAGE>
YEAR 2000
Management and the Board of Directors were committed to achieving the goal of
Y2K readiness. The Bank incurred no problems when the staff tested all systems
on January 1, 2000 and has experienced no Y2K problems with our mission critical
systems or our non-information system providers. The company will continue to
monitor Y2K continuity progress and will address any problems should they occur.
The Company has expended all costs associated with year 2000 required system
changes as those costs are incurred, and such costs are being funded through
operating cash flows. The total out-of-pocket costs associated withY2K
compliance is estimated to be $10,000. As of December 31, 1999, a total of
$1,100 had been expended on the Y2K issue. The Company does not expect
significant increases in future data processing costs or other expenses related
to its Y2K compliance.
-12-
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) Annual meeting date: October 28, 1999
(b) Not required
(c) The matters approved by stockholders at the Meeting and
number of votes cast for, against or withheld (as well
as the number of abstentions and broker non-votes, if
any) as to each matter are set forth below:
Proposal Number of Votes
-------- ---------------
For Withheld
--- --------
Election of the following director for a three year term:
1) Robert W. DeCook 650,751 97,400
For Against Abstain
--- ------- -------
Ratification of the appointment of KPMG Peat
Marwick LLP as the Company's auditors for the 661,651 None 86,500
fiscal year ending June 30, 2000
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
See Index to Exhibits
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
December 31, 1999.
-13-
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HORIZON FINANCIAL SERVICES CORPORATION
Registrant
Date: February 15, 2000 /s/ Robert W. DeCook
--------------------
Robert W. DeCook
President and Chief Executive Officer
Date: February 15, 2000 /s/ Sharon McCrea
----------------- ------------------
Sharon McCrea
Vice President and Chief Financial Officer
-14-
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Document
3 The Articles of Incorporation and Bylaws, filed on March 18, 1994
as exhibits 3.1 and 3.2, respectively, to Registrants
Registration Statement on Form S-1 (File No. 33-76674), are
incorporated herein by reference.
4 Registrant's Specimen Stock Certificate, filed on March 18, 1994
as Exhibit to Registrant's Registration Statement on Form S-1
(File No. 33-76674), is incorporated herein by reference.
10.1 Employment Agreements between the Bank and Messrs. DeCook and
Gillespie, filed as Exhibits 10.1 and 10.2, respectively, to
Registrant's Report on Form 10-KSB for the fiscal year ended June
30, 1994 (File No. 0-24036), are incorporated herein by
reference.
10.2 1994 Stock Option and Incentive Plan, filed as Exhibit 10.3 in
Registrant's Report on Form 10-KSB for the fiscal year ended June
30, 1994 (File No. 0- 24036), is incorporated herein by
reference.
10.3 Recognition and Retention Plan, filed as Exhibit 10.4 to
Registrant's Report on Form 10-KSB for the fiscal year ended June
30, 1994 (File No. 0-24036), is incorporated herein by reference.
11 Statement re computation of earnings per share (See Footnote 4 of
the Registrant's Notes to Consolidated Financial Statements
contained herein)
27 Financial Data Schedule (electronic filing only)
-15-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF HORIZON FINANCIAL SERVICES CORPORATION FOR
THE SIX MONTH PERIOD ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 3,887
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,276
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 58,111
<ALLOWANCE> 381
<TOTAL-ASSETS> 82,038
<DEPOSITS> 60,906
<SHORT-TERM> 12,561
<LIABILITIES-OTHER> 436
<LONG-TERM> 0
<COMMON> 10
0
0
<OTHER-SE> 8,125
<TOTAL-LIABILITIES-AND-EQUITY> 82,038
<INTEREST-LOAN> 2,364
<INTEREST-INVEST> 535
<INTEREST-OTHER> 177
<INTEREST-TOTAL> 3,076
<INTEREST-DEPOSIT> 1,307
<INTEREST-EXPENSE> 1,719
<INTEREST-INCOME-NET> 1,357
<LOAN-LOSSES> 48
<SECURITIES-GAINS> (225)
<EXPENSE-OTHER> 1,094
<INCOME-PRETAX> 221
<INCOME-PRE-EXTRAORDINARY> 221
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 153
<EPS-BASIC> .18
<EPS-DILUTED> .17
<YIELD-ACTUAL> 7.80
<LOANS-NON> 774
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 595
<ALLOWANCE-OPEN> 343
<CHARGE-OFFS> 12
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<ALLOWANCE-CLOSE> 381
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</TABLE>
