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2000 ANNUAL REPORT
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[LOGO]
HORIZON FINANCIAL SERVICES
CORPORATION
<PAGE>
TABLE OF CONTENTS
President's Letter to Shareholders................................. 1
Selected Consolidated Financial Information........................ 2
Management's Discussion and Analysis of Financial
Condition and Results of Operation............................... 4
Consolidated Financial Statements..................................16
Stockholder Information............................................40
Corporate Information..............................................41
Annual Report on Form 10-KSB
A copy of Horizon Financial Services Corporation's Annual Report on Form 10-KSB
for the year ended June 30, 2000, as filed with the Securities and Exchange
Commission, may be obtained without charge by contacting Robert W. DeCook,
President and Chief Executive Officer, Horizon Financial Services Corporation,
301 First Avenue East, Oskaloosa, Iowa, (515) 673-8328.
<PAGE>
[HORIZON FINANCIAL LETTERHEAD]
September 22, 2000
Dear Stockholder:
I am pleased to report to you that the Company's fiscal year ended June 30,
2000, was again one of profitability. Net earnings for the year were $486,000,
representing a return on average assets of .58%. Net interest income, the
Company's core earnings, for fiscal 2000, was $2.7 million. Net interest income
after provision for losses on loans in fiscal 2000 was $2.6 million, an increase
of $216,000 or 8.9% from fiscal 1999.
Total assets decreased by $1.9 million, a decrease of 2.3%. Loans receivable
increased by $6.35 million as residential real estate and commercial real estate
loans increased. The Company's average interest rate spread, the difference
between the yield earned on interest earning assets and the rates paid on
interest bearing liabilities, was 3.06%, and its net interest margin was 3.40%.
The Company repurchased 1.4% of its common stock, or 12,100 shares, during
fiscal 2000 and is currently engaged in the repurchase of an additional 4.9%, or
42,198 shares. To date, the Company has repurchased 17,600 shares under its
current repurchase program. The shares repurchased during fiscal 2000 were made
at an average price of $6.99, or 73.0% of book value at June 30, 2000.
Management believes this to be an excellent investment and a prudent use of the
Company's excess capital.
Your Board and management are committed to continue building value in Horizon
Financial. We will also continue to be an organization which builds family
financial relationships and demonstrates commitment to our customers and to the
communities we serve.
On behalf of all of us at Horizon Financial and Horizon Federal, we thank you
for your support of and your investment in Horizon Financial.
Yours very truly,
/s/Robert W. DeCook
-------------------
Robert W. DeCook
President and Chief Executive Officer
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------------------------
(In Thousands)
Selected Financial Condition Data:
---------------------------------
<S> <C> <C> <C> <C> <C>
Total assets..................................... $83,184 $85,023 $89,947 $85,969 $73,464
Cash and cash equivalents........................ 1,981 7,917 6,367 5,621 3,471
Securities available-for-sale.................... 15,670 17,097 23,922 24,942 18,049
Loans receivable, net............................ 62,417 56,066 55,996 52,193 49,104
Deposits......................................... 64,761 59,576 60,145 57,641 54,759
Advances from FHLB............................... 9,014 16,606 20,038 19,102 9,661
Stockholders' equity............................. 8,266 8,060 8,488 8,412 8,390
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------
2000 1999 1998(1) 1997(1) 1996(1)
--------------------------------------------------------------------
(In Thousands, Except Per Share Data)
Selected Operations Data:
------------------------
<S> <C> <C> <C> <C> <C>
Total interest income.............................. $6,171 $6,192 $6,744 $5,895 $5,454
Total interest expense............................. 3,448 3,642 4,021 3,402 3,144
------- ------- ------ ------ ------
Net interest income.............................. 2,723 2,550 2,723 2,493 2,310
Provision for losses on loans...................... 96 139 94 252 328
--------- -------- -------- ------- -------
Net interest income after
provision for losses on loans..................... 2,627 2,411 2,629 2,241 1,982
Noninterest income
Fees, commissions and service charges............ 470 497 448 338 345
Gain (loss) on sale of securities, net........... (234) (2,038) (167) 81 39
Other noninterest income......................... --- 8 27 19 94
---------- --------- ------- ------- -------
Total noninterest income........................... 236 (1,533) 308 438 478
Total noninterest expense.......................... 2,138 2,116 2,031 2,255(2) 1,886
-------- ------ ------ ------- -------
Earnings (loss) before taxes on income............. 725 (1,238) 906 424 573
Taxes on income (benefits)......................... 239 (466) 317 146 197
-------- ------- ------- ------ ------
Net earnings (loss)................................ $486 $(772) $589 $278 $376
==== ====== ==== ==== ====
Basic earnings (loss) per common share............. $0.56 ($0.90) $ 0.71 $ 0.34 $ 0.43
Diluted earnings (loss) per common share........... $0.56 ($0.90) $ 0.69 $ 0.33 $ 0.42
Dividends per share................................ $0.18 $0.18 $ 0.18 $ 0.16 $ 0.16
</TABLE>
(1) All per share information has been restated for the 2-for-1 stock split
paid by the Company on November 10, 1997 in the form of a 100% stock
dividend.
(2) Includes the special assessment of $331,000 paid by the Company to the
Federal Deposit Insurance Fund (the"FDIC") to recapitalize the Savings
Association Insurance Fund (the "SAIF").
2
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------------------
Selected Financial Ratios and Other Data:
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on assets (ratio of net earnings to average
total assets)......................................... .58% (.88%) .67% .35(1) .53%
Interest rate spread information:
Average during year..................................... 3.06 3.00 2.96 3.12 3.09
End of year............................................. 2.86 3.03 3.05 3.07 3.06
Net interest margin(2)................................... 3.40 3.17 3.23 3.41 3.44
Ratio of operating expense to average total
assets................................................. 2.54 2.42 2.31 2.83(1) 2.64
Return on stockholders' equity (ratio of net
earnings to average equity)............................ 5.95 (9.33) 6.97 3.31(1) 4.38
Efficiency ratio(3)....................................... 66.96 69.26 63.51 67.51 68.61
Asset Quality Ratios:
Non-performing assets to total assets at end of
year(4)................................................. 1.39 1.36 1.02 1.22 1.27
Allowance for losses on loans to non-performing
loans(4)............................................... 34.49 29.57 37.74 50.51 34.01
Allowance for losses on loans to total loans............. .61 .61 .61 .65 .63
Other Ratios:
Stockholders' equity to total assets at end of
year.................................................... 9.95 9.48 9.44 9.78 11.42
Average stockholders' equity to average assets............ 9.71 9.46 9.61 10.54 12.00
Average interest-earning assets to average
interest-bearing liabilities........................... 107.83% 103.79% 105.65% 106.13% 107.31%
Number of full-service offices............................. 3 3 3 3 3
</TABLE>
-----------------
(1) Includes one-time SAIF assessment paid in fiscal 1997 of $331,000
($207,000, net of taxes). Excluding the SAIF assessment, return on assets,
operating expenses to total assets and return on stockholders' equity was
.61%, 2.41% and 5.77%, respectively, for fiscal 1997.
(2) Net interest income divided by average interest-earning assets.
(3) Noninterest expense (not including one-time SAIF assessment paid in fiscal
1997) divided by net interest income and noninterest income (excluding gain
(loss) on sale of securities, net).
(4) Nonperforming assets consist of nonaccruing loans, accruing loans past-due
90 or more days and real estate owned. Nonperforming loans are
nonperforming assets less real estate owned.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Horizon Financial Services Corporation (the "Company") is a savings and
loan holding company whose primary asset 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"). All references to the Company prior to
June 28, 1994, except where otherwise indicated, are to the Bank and its
subsidiary on a consolidated basis.
The principal business of the Company 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 net interest rate spread, which is the
difference between the average yield on loans, mortgage-backed securities and
investments and the average rate paid on deposits and other borrowings. The
interest rate spread is affected by regulatory, economic and competitive factors
that influence interest rates, loan demand and deposit flows. In addition, 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, gain or loss on securities available-for-sale, the
establishment of provisions for losses on loans, 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 repayments, borrowings and funds provided from
operations.
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. In
addition, the Bank is experiencing difficulty, as are most business in the area,
in hiring and retaining experienced personnel as labor shortages in the area
continue to exist. 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.
Forward-Looking Statement
When used in this Annual Report 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
4
<PAGE>
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
obligations, to revise any forward- looking statements to reflect the occurrence
of anticipated or unanticipated events or circumstances after the date of such
statements.
Financial Condition
June 30, 2000 Compared to June 30, 1999. Total assets decreased $1.9
million, or 2.3%, to $83.1 million at June 30, 2000 from $85.0 million at June
30, 1999. The decrease was reflected primarily in a $5.9 million decrease in
cash and cash equivalents, a $1.4 million decrease in securities available for
sale, a $500,000 decrease in income tax receivable and a $500,000 decrease in
Federal Home Loan Bank stock. This decrease was partially offset by a $6.3
million increase in loans receivable. The decrease was used primarily to pay off
advances from the Federal Home Loan Bank (the "FHLB") of Des Moines.
Total liabilities decreased $2.1 million, or 2.8%, to $74.9 million at
June 30, 2000 from $77.0 million at June 30, 1999, primarily as a result of a
$7.6 million decrease in FHLB advances. The decrease was partially offset by a
$5.2 million increase in deposits.
Stockholders' equity increased $200,000, or 2.55%, during fiscal 2000,
primarily through the retention of net income and the amortization for the
allocated portion of shares held by the ESOP, offset by the payment of dividends
declared on common stock, a negative adjustment of net unrealized losses on
securities available-for-sale and the repurchase of the Company's common stock.
The Company paid cash dividends totaling approximately $154,000 or $.18 per
share. The Company repurchased 1.4% of its common stock, 12,100 shares, under a
stock repurchase program during fiscal 2000. Common stock was repurchased during
2000 at a cost of $84,625, or $6.99 per share.
Results of Operations
Comparison of Fiscal Years Ended June 30, 2000 and June 30, 1999
General. Net earnings for the year ended June 30, 2000 increased
$1,257,000 to $485,000 from a net loss of ($772,000) for the year ended June 30,
1999. This increase was primarily attributable to a significant decrease in
losses on sales of securities.
During fiscal 2000, the Company's return on average assets ("ROAA") and
return on average stockholders' equity ("ROAE") was .58% and 5.95%,
respectively, compared to (.88%) and (9.33%) for fiscal 1999. Average
stockholders' equity to average assets was 9.71% during fiscal year 2000
compared to 9.46% during fiscal 1999. The Company's dividend payout ratio was
32% during fiscal 2000.
Interest Income. Interest income was $6.2 million for the year ended
June 30, 2000 and June 30, 1999. Interest income on loans increased $255,000 and
was offset with a $267,000 decrease on interest income on securities
available-for-sale for the year ended June 30, 2000 as compared to the year
ended June 30, 1999 reflecting the increase in the average outstanding balance
of loans receivable from $55.2 million for the year ended June 30, 1999 compared
to $58.4 million for the year ended June 30, 2000 which was funded through the
decrease in the average outstanding balance of securities available-for-sale to
$16.2 million for fiscal 2000 as compared to $21.0 million for fiscal 1999. The
yield on all average interest-earning assets was 7.70% during fiscal 2000 and
1999.
Interest Expense. Interest expense decreased $195,000 to $3.4 million
for the year ended June 30, 2000 compared to $3.6 million for the year ended
June 30, 1999. The decrease in interest expense was primarily attributable to a
decrease in the average outstanding balance of FHLB advances. The average rate
paid on advances increased by 20 basis points to 5.46% during fiscal 2000 from
5.26% during fiscal 1999.
5
<PAGE>
The average outstanding balance of savings deposits increased $2.3 million from
$58.4 for the year ended June 30, 1999 to $60.7 million for fiscal year ended
June 30, 2000. The average rate paid on deposits decreased by 5 basis points to
4.46% during fiscal 2000 from 4.51% during fiscal 1999. The average rate paid on
all interest-bearing liabilities decreased 6 basis points to 4.64% during fiscal
2000 from 4.70% during fiscal 1999.
Net Interest Income. Net interest income increased $173,000 to $2.7
million in fiscal 2000 from $2.5 in fiscal 1999. The ratio of the Company's
average interest-earning assets to average interest-bearing liabilities
increased to 107.83% during fiscal 2000 from 103.79% during fiscal 1999. The
Company's net interest margin, which is net interest income divided by average
interest-earning assets, increased 23 basis points to 3.40% for fiscal 2000 as
compared to 3.17% for fiscal 1999. During this same period the Company's
interest rate spread increased slightly to 3.06% in fiscal 2000 from 3.00% in
fiscal 1999.
Provision for Losses on Loans. The provision for losses on loans is a
result of management's periodic analysis of the adequacy of the Company's
allowance for losses on loans. During the year ended June 30, 2000, the Company
recorded a provision for losses on loans of $96,000 compared to a $139,000
provision in fiscal 1999. 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 to maintain the allowance for loan losses at a level 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. In addition,
federal regulators may require additional reserves as a result of their
examination of the Company. 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. As of June 30, 2000
and June 30, 1999 the Company's allowance for losses on loans was $379,000 and
$343,000, respectively.
As of June 30, 2000, the Company's non-performing assets, consisting of
nonaccruing loans, accruing loans 90 days or more delinquent, real estate owned
and repossessed consumer property, totaled $1,155,000 or 1.39% of total assets
compared to $1,160,000 or 1.36% of total assets as of June 30, 1999. The
decrease in non-performing assets related primarily to a $61,000 decrease in
non- accruing loans past-due 90 or more days and a $56,000 increase in
repossessed consumer property.
Noninterest Income. Noninterest income increased $1.8 million to
$236,000 for the year ended June 30, 2000 from ($1,533,000) for the year ended
June 30, 1999. The increase was primarily attributable to a decrease in losses
on assets available for sale from a loss of $2.0 million during fiscal 1999 as
compared to a loss of $234,000 for fiscal 2000. The loss recognized on
securities for fiscal 1999 of $1.5 million was the result of write-downs on
interest only mortgage-backed securities resulting from a decline in fair value
that was judged to be other than temporary. This decline in fair value resulted
from a sustained increase in the prepayment speeds, due to refinancings, of the
underlying mortgage loans as a result of the low interest rate environment. The
Bank cannot predict interest rates or prepayment speeds. This increase was
slightly offset by a $27,000 decrease in fees, service charges and commissions,
primarily due to decreased loan fees received on loans originated for sale in
the secondary market as a result of a reduction in loans originated for sale.
Noninterest Expense. Noninterest expense increased by $22,000 in fiscal
2000. Increases of $59,000 in other expense and $25,000 in advertising expense
were partially offset by decreases in compensation, payroll taxes and employee
benefits of $45,000 and office property and equipment expense of $16,000.
Income Tax Expense. Income taxes increased $706,000 to $239,000 for the
year ended June 30, 2000 from ($467,000) for the same period in 1999. The
increase was primarily due to an increase in earnings
6
<PAGE>
prior to taxes on income. Income tax expense was reduced by low income housing
credits of approximately $42,000, which will continue annually through 2005. The
Company's effective tax rate for fiscal 2000 was 33.0%.
Comparison of Years Ended June 30, 1999 and June 30, 1998
General. Net earnings for the year ended June 30, 1999 decreased
$1,361,000 to a net loss of ($772,000) from $589,000 for the year ended June 30,
1998. This decrease was primarily attributable to substantial write-downs on
interest only mortgage-backed securities, as further described below, and losses
on the sale of available-for-sale assets.
During fiscal 1999, the Company's ROAA and ROAE was (.88%) and (9.33%),
respectively, compared to .67% and 6.97% for fiscal 1998. Average stockholders'
equity to average assets was 9.46% during fiscal year 1999 compared to 9.61%
during fiscal 1998. The Company paid cash dividends of $0.18 per share for
fiscals 1999 and 1998.
Interest Income. Interest income decreased $552,000 to $6.2 million for
the year ended June 30, 1999 compared to $6.7 million for the year ended June
30, 1998. The decrease was attributable primarily to a decrease in interest
earned on securities available-for-sale as a result of a decrease in the average
outstanding balance of these assets and to a lesser degree due to a decrease in
interest rates. Also contributing to the decrease was the reduction of interest
earned on loans receivable as a result of reduced interest rates for the period.
The average outstanding balance of securities available-for-sale decreased $4.4
million to $21.0 million during fiscal 1999. The yield on all average
interest-earning assets decreased during fiscal 1999 to 7.70% from 8.00% during
fiscal 1998.
Interest Expense. Interest expense decreased $379,000 to $3.6 million
for the year ended June 30, 1999 compared to $4.0 million for the year ended
June 30, 1998. The decrease in interest expense was primarily attributable to a
decrease in the average outstanding balance of FHLB advances, combined with
decreased rates paid on FHLB advances. The average rate paid on advances
decreased by 43 basis points to 5.26% during fiscal 1999 from 5.69% during
fiscal 1998. The average rate paid on all interest-bearing liabilities decreased
34 basis points to 4.70% during fiscal 1999 from 5.04% during fiscal 1998.
Net Interest Income. Net interest income decreased $173,000 to $2.5
million in fiscal 1999 from $2.7 million in fiscal 1998. The ratio of the
Company's average interest-earning assets to average interest- bearing
liabilities decreased to 103.79% during fiscal 1999 from 105.65% during fiscal
1998. During this same period the Company's interest rate spread increased
slightly to 3.00% from 2.96%.
Provision for Losses on Loans. The provision for losses on loans is a
result of management's periodic analysis of the adequacy of the Company's
allowance for losses on loans. During the year ended June 30, 1999, the Company
had a $139,000 addition to its allowance for losses on loans compared to a
$94,000 provision in fiscal 1998. 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 loan to non-performing loans are dependent upon the
economy, changes in real estate values and interest rates. In addition, federal
regulators may require additional reserves as a result of their examination of
the Company. 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. As of June 30, 1999 and June
30, 1998 the Company's allowance for losses on loans was $343,000 and $348,000,
respectively.
7
<PAGE>
As of June 30, 1999, the Company's non-performing assets, consisting of
nonaccruing loans, accruing loans 90 days or more delinquent, real estate owned
and repossessed consumer property, totaled $1,160,000 or 1.36% of total assets
compared to $922,000 or 1.02% of total assets at June 30, 1998. The increase in
non-performing assets related primarily to a $238,000 increase in non-accruing
loans past-due 90 or more days.
Noninterest Income. Noninterest income decreased $1.8 million to
$(1,533,000) for the year ended June 30, 1999 from $308,000 for the year ended
June 30, 1998. The decrease was primarily attributable to a $2.0 million loss on
securities available-for-sale (including a $1.5 million loss recognized on
interest only mortgage-backed securities). The write-downs on interest-only
mortgage-backed securities resulted from a decline in fair value that was judged
to be other than temporary. This decline in fair value resulted from a sustained
increase in the prepayment speeds, due to refinancing, of the underlying
mortgage loans as a result of the low interest rate environment. The Bank cannot
predict interest rates or prepayment speeds.
This decrease was slightly offset by a $49,000 increase in fees,
service charges and commission, due to increased fees received on checking
accounts and increased loan fees, primarily attributable to loans originated for
sale in the secondary market.
Noninterest Expense. Noninterest expense increased $86,000 to $2.1
million for the year ended June 30, 1999 from $2.0 million for the year ended
June 30, 1998. The increase was primarily due to a $38,000 increase in data
processing services and a $55,000 increase in other noninterest expense
primarily due to costs associated with the conversion to a new data center. The
conversion has permitted us to offer new services to our customers including
telephone banking.
Income Tax Expense. Income taxes decreased $783,000 to ($467,000) for
the year ended June 30, 1999 from $317,000 for the same period in 1998. The
decrease was primarily due to a decrease in earnings before taxes on income.
8
<PAGE>
Average Balances, Interest Rates and Yields
The following table presents for the periods indicated the total dollar
amount of interest income earned on average interest-earning assets and total
dollar amount of interest expense paid on average interest-bearing liabilities,
as well as their resultant yields and rates, respectively. No tax equivalent
adjustments were made. All average balances are monthly average balances.
Non-accruing loans have been included in the table as loans carrying a zero
yield.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest-Earning Assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable(1)................. $58,401 $4,852 8.31% $55,243 $4,597 8.32% $55,015 $4,745 8.63%
Securities available-for-sale....... 16,259 1,073 6.60 21,020 1,340 6.38 25,394 1,699 6.69
Other interest-earning assets....... 4,349 176 4.05 3,002 178 5.93 2,786 222 7.97
FHLB stock.......................... 1,087 70 6.44 1,203 77 6.40 1,143 78 6.82
-------- -------- -------- ------- -------- -------
Total interest-earning assets(1)... 80,096 6,171 7.70 80,468 6,192 7.70 84,338 6,744 8.00
-------- ------ ------- ------ ------- -----
Interest-Bearing Liabilities:
Savings deposits.................... 23,441 1,055 4.50 19,938 857 4.30 17,118 743 4.34
Money market deposits............... 433 10 2.31 540 13 2.41 747 18 2.41
Demand and NOW deposits............. 8,063 163 2.02 6,905 132 1.91 5,863 104 1.77
Certificates of deposit............. 28,822 1,482 5.14 31,031 1,635 5.27 33,989 1,899 5.59
FHLB Advances....................... 13,522 738 5.46 19,115 1,005 5.26 22,109 1,257 5.69
-------- -------- -------- ------ --------- --------
Total interest-bearing liabilities $74,281 3,448 4.64 $77,529 3,642 4.70 $ 79,826 4,021 5.04
------- -------- ------- ------ -------- -------
Net interest income.................. $2,723 $2,550 $2,723
====== ====== ======
Net interest rate spread............. 3.06% 3.00% 2.96%
====
Net interest-earning assets.......... $5,815 $2,939 $ 4,512
====== ====== ========
Net interest margin(2)............... 3.40% 3.17% 3.23%
==== ===== ====
Average interest-earning assets to
average interest-bearing liabilities 107.83% 103.79% 105.65%
====== ====== ======
</TABLE>
-------------------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
the allowance for losses on loans.
(2) Net interest income divided by average interest-earning assets.
9
<PAGE>
Rate/Volume Analysis of the Net Interest Income
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume which cannot be
segregated have been allocated proportionately to the change due to volume and
the change due to rate.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
-----------------------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
----------------------------- Increase --------------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-----------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable...................... $250 $ 5 $ 255 $ 4 $(152) $(148)
Securities available-for-sale......... (404) 137 (267) (275) (84) (359)
Other interest-earning assets......... (1) (1) (2) (64) 20 (44)
FHLB Stock............................ (9) 2 (7) --- (1) (1)
-------- ------- --------- -------- -------- ---------
Total interest-earning assets....... $(164) $143 $(21) $(335) $(217) $(552)
===== ==== ---- ====== ======
Interest-bearing liabilities:
Savings deposits...................... (5) 203 198 142 (28) 114
Money market deposits................. (3) --- (3) (5) --- (5)
Demand and NOW deposits............... 19 12 31 36 (8) 28
Certificates of deposits.............. (92) (61) (153) (184) (80) (264)
FHLB advances......................... (360) 93 (267) (212) (40) (252)
------ ------- --------- ------ ----- ---------
Total interest-bearing liabilities.. $(441) $247 $(194) $(223) $(156) $(379)
===== ==== ----- ====== ====== ------
Net interest income..................... $173 $(173)
==== ======
</TABLE>
10
<PAGE>
Interest Rate Spread
The following table sets forth the weighted average yields on
interest-earning assets, the weighted average rates on interest-bearing
liabilities and the interest rate spread between weighted average yields and
rates at the end of each of the years presented. Non-accruing loans have been
included in the table as carrying a zero yield.
At June 30,
---------------------------------
2000 1999 1998
---------------------------------
Weighted average yield on:
Loans receivable, net(1)...................... 8.16% 8.14% 8.54%
Securities available-for-sale................. 6.55 6.37 6.98
Other interest-earning assets(2).............. 1.85 4.85 5.54
FHLB stock.................................... 6.86 6.25 6.92
Combined weighted average yield on
interest-earning assets..................... 7.72 7.52 7.95
Weighted average rate paid on:
Savings deposits.............................. 4.60 4.17 4.42
Money market deposits......................... 2.41 2.37 2.37
Demand and NOW deposits....................... 1.98 1.81 1.87
Certificates of Deposit....................... 5.63 5.12 5.57
FHLB advances................................. 5.67 5.07 5.24
Combined weighted average rate paid
on interest-bearing liabilities............. 4.86 4.49 4.90
Spread........................................ 2.86% 3.03% 3.05%
------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
the allowance for losses on loans.
(2) FHLB demand account only other interest-earning assets on June 30, 2000.
Asset/Liability Management
The Company currently focuses lending efforts toward originating
competitively priced adjustable-rate loan products and fixed-rate loan products
with relatively short terms to maturity, generally fifteen years or less. The
Company also makes a small amount of longer term fixed rate mortgages for its
portfolio from time to time. This allows the Company to maintain a portfolio of
loans which will be sensitive to changes in the level of interest rates while
providing a reasonable spread to the cost of liabilities used to fund the loans.
The Company also makes long-term, fixed-rate mortgage loans which are sold in
the secondary market.
The Company's primary objective for its investment portfolio is to
provide the liquidity necessary to meet loan funding needs. This portfolio is
used in the ongoing management of changes to the Company's assets/liability mix,
while contributing to profitability through earnings flow. The investment policy
generally calls for funds to be invested among various categories of security
types and maturities based upon the Company's need for liquidity, desire to
achieve a proper balance between minimizing risk while maximizing yield, the
need to provide collateral for borrowings, and to fulfill the Company's
asset/liability management goals.
11
<PAGE>
The Company's cost of funds are typically responsive to changes in
interest rates due to the relatively short-term nature of its deposit portfolio.
Consequently, the results of operations are influenced by the levels of
short-term interest rates. The Company offers a range of maturities on its
deposit products at competitive rates and monitors the maturities on an ongoing
basis.
The Company emphasizes and promotes its savings, money market, demand
and NOW accounts and, subject to market conditions, certificates of deposit with
maturities of six months through five years, principally within its primary
market area. The savings and NOW accounts tend to be less susceptible to rapid
changes in interest rates.
In managing its asset/liability mix, the Company, at times, depending
on the relationship between long- and short-term interest rates, market
conditions and consumer preference, may place somewhat greater emphasis on
maximizing its net interest margin than on strictly matching the interest rate
sensitivity of its assets and liabilities. In this regard, the Company has
borrowed and may continue to borrow from the FHLB to purchase securities when
advantageous interest rate spreads can be obtained. Management believes that the
increased net income which may result from an acceptable mismatch in the actual
maturity or repricing of its asset and liability portfolios can, during periods
of declining or stable interest rates, provide sufficient returns to justify the
increased exposure to sudden and unexpected increases in interest rates which
may result from such a mismatch. The Company has established limits, which may
change from time to time, on the level of acceptable interest rate risk. There
can be no assurance, however, that in the event of an adverse change in interest
rates the Company's efforts to limit interest rate risk will be successful.
Net Portfolio Value. The OTS provides a Net Portfolio Value ("NPV")
approach to the quantification of interest rate risk. This approach calculates
the difference between the present value of expected cash flows from assets and
the present value of expected cash flows from liabilities, as well as cash flows
from off-balance sheet contracts. Management of the Bank's assets and
liabilities is done within the context of the marketplace, but also within
limits established by the Board of Directors on the amount of change in NPV
which is acceptable given certain interest rate changes.
The OTS issued a regulation which uses a net market value methodology
to measure the interest rate risk exposure of thrift institutions. Under OTS
regulations, an institution's "normal" level of interest rate risk in the event
of an assumed change in interest rates is a decrease in the institution's NPV in
an amount not exceeding 2% of the present value of its assets. Thrift
institutions with greater than "normal" interest rate exposure must take a
deduction from their total capital available to meet their risk based capital
requirement. The amount of that deduction is one-half of the difference between
(a) the institution's actual calculated exposure to a 200 basis point interest
rate increase or decrease (whichever results in the greater pro forma decrease
in NPV) and (b) its "normal" level of exposure which is 2% of the present value
of its assets. The regulation, however, 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. Notwithstanding the foregoing and the fact that the Bank, due to its
asset size and level of risk-based capital, is exempt from this requirement,
utilizing this measuring concept, a deduction to risk-based capital would have
been required as of June 30, 2000 if the regulation applied to the Bank.
However, even if such deduction was applied, the Bank would still meet their
risk-based capital requirement under current regulatory guidelines.
Presented below, as of June 30, 2000, is an analysis of the Bank's
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts in the yield curve, in 100 basis point increments, up and down
300 basis points and compared to Board policy limits and in accordance with OTS
regulations. Such limits have been established with consideration of the dollar
impact of various rate changes and the Bank's strong capital position.
12
<PAGE>
Change in Board Limit At June 30,
Interest Rate (min NPV ratios) 2000
(Basis Points) % Change %Change
--------------------------------------------------
+300 5.00% 7.73%
+200 6.00 8.67
+100 6.75 9.47
0 6.75 10.06
-100 6.75 10.13
-200 6.00 10.11
-300 5.00 10.63
Management reviews the OTS measurements on a quarterly basis. In a
declining interest rate environment, at June 30, 1998, the Bank's interest rate
risk was in excess of the Board's prescribed guidelines. The Bank, in an effort
to reduce its present interest rate risk exposure and in order to bring its NPV
within Board policy limits, has eliminated and is continuing to eliminate
certain investments which have proven to be more interest rate sensitive than is
currently acceptable to the Bank. At June 30, 2000, the Bank's interest rate
risk was within the Board's prescribed guidelines.
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of a change in
interest rates, prepayments and early withdrawal levels would likely deviate
significantly from those assumed in calculating the tables. Finally, the ability
of many borrowers to service their debt may decrease in the event of an interest
rate increase.
Liquidity and Capital Resources
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 or 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 ratios were 5.4%, 11.5% and 10.4% at June
30, 2000, 1999 and 1998, respectively.
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-bearing overnight deposits and other short-term
government and agency obligations. If the Bank requires additional funds beyond
its internal ability to generate such funds it has additional borrowing capacity
with the FHLB of Des Moines and collateral eligible for repurchase agreements.
The Company principally uses its liquidity resources to meet ongoing
commitments, to fund maturing certificates of deposit and deposit withdrawals,
to invest, to fund existing and future loan commitments, to
13
<PAGE>
maintain liquidity, and to meet other operating needs. At June 30, 2000, the
Company had $880,000 of loan commitments. The Company anticipates that it will
have sufficient funds available to meet outstanding loan commitments. Management
believes that loan repayments and other sources of funds will be adequate to
meet and exceed the Bank's foreseeable short- and long-term liquidity needs.
Certificates of deposit scheduled to mature in a year or less at June
30, 2000 totaled $20.7 million or 63.7% of the Company's total certificates of
deposit. Based on historical experience, management believes that a significant
portion of such deposits will remain with the Company. There can be no
assurance, however, that the Company can retain all such deposits. At June 30,
2000, the Company had outstanding borrowings of $9.0 million from the FHLB of
Des Moines and had the capacity to borrow up to approximately $19.3 million.
The primary investing activities of the Company include the origination
of loans and the purchase of mortgage-backed securities. At June 30, 2000, these
assets accounted for over 89.5% of the Company's total assets. Such origination
and purchases are funded primarily from loan repayments, repayments of
mortgage-backed and investment securities, deposit growth, FHLB advances, and
net income.
At June 30, 2000, the Bank had tangible and core capital of $6.3
million, or 7.8% of adjusted total assets, which was approximately $5.1 million
and $3.1 million above the minimum requirements of 1.5% and 4.0%, respectively.
At June 30, 2000, the Bank had total risk-based capital of $6.7 million
(including $6.3 million in core capital), or 13.3% of risk-weighted assets of
$50.3 million. This amount was $2.6 million above the 8.0% requirement in effect
on that date.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial position and results of
operations in terms of historical dollars without considering changes in the
relative purchasing power of money over time because of inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
most industrial companies, virtually all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services.
Effect 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 No. 137 and SFAS No. 138 to have a significant impact
on the Company's financial statements.
14
<PAGE>
Independent Auditors' Report
The Board of Directors
Horizon Financial Services Corporation
Oskaloosa, Iowa:
We have audited the accompanying consolidated balance sheets of Horizon
Financial Services Corporation and subsidiaries as of June 30, 2000 and 1999 and
the related consolidated statements of operations, changes in stockholders'
equity and comprehensive income and cash flows for each of the years in the
three-year period ended June 30, 2000. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Horizon Financial
Services Corporation and subsidiaries as of June 30, 2000 and 1999 and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/KPMG LLP
-----------
KPMG LLP
July 24, 2000
15
<PAGE>
<TABLE>
<CAPTION>
HORIZON FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2000 and 1999
Assets 2000 1999
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 1,981,511 7,917,020
Securities available-for-sale (note 2) 15,670,119 17,096,985
Loans receivable, net (notes 3 and 4) 62,417,395 56,066,399
Real estate (note 5) 248,951 270,779
Stock in Federal Home Loan Bank, at cost 702,500 1,202,500
Office property and equipment, net (note 6) 1,049,821 1,089,053
Accrued interest receivable (note 7) 602,765 522,121
Deferred tax asset (note 10) 380,300 254,000
Income tax receivable -- 522,699
Prepaid expenses and other assets 130,718 81,646
------------ ------------
Total assets $ 83,184,080 85,023,202
============ ============
Liabilities and Stockholders' Equity
Deposits (note 8) $ 64,761,224 59,576,232
Advances from Federal Home Loan Bank (note 9) 9,014,199 16,606,176
Advance payments by borrowers for taxes and insurance 410,555 399,830
Accrued income taxes 201,950 --
Accrued expenses and other liabilities 530,145 380,617
------------ ------------
Total liabilities 74,918,073 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 5,020,361 4,996,761
Retained earnings, substantially restricted (note 12) 5,135,636 4,804,455
Treasury stock, at cost (183,236 and 171,136 shares in 2000
and 1999, respectively) (1,314,197) (1,229,571)
Unearned employee stock ownership plan shares (note 11) (5,593) (65,503)
Accumulated other comprehensive income (loss) - net
loss unrealized on securities available for sale (580,662) (456,257)
------------ ------------
Total stockholders' equity 8,266,007 8,060,347
Commitments and contingencies (notes 3 and 15) -- --
------------ ------------
Total liabilities and stockholders' equity $ 83,184,080 85,023,202
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
<TABLE>
<CAPTION>
HORIZON FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended June 30, 2000, 1999, and 1998
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Loans $ 4,851,413 4,597,470 4,744,988
Investment securities available-for-sale 1,072,849 1,339,629 1,699,038
Other investment income 246,441 255,272 300,494
----------- ----------- -----------
Total interest income 6,170,703 6,192,371 6,744,520
----------- ----------- -----------
Interest expense:
Deposits (note 8) 2,709,550 2,636,943 2,763,850
Advance from Federal Home Loan Bank 738,089 1,005,569 1,257,447
----------- ----------- -----------
Total interest expense 3,447,639 3,642,512 4,021,297
----------- ----------- -----------
Net interest income 2,723,064 2,549,859 2,723,223
Provision for losses on loans (note 4) 96,000 138,540 94,000
----------- ----------- -----------
Net interest income after allowance for losses on loans 2,627,064 2,411,319 2,629,223
----------- ----------- -----------
Noninterest income:
Fees, service charges and commissions 470,009 497,012 447,871
Loss on sale of securities, net (233,976) (2,038,667) (166,959)
Other -- 8,573 26,731
----------- ----------- -----------
Total noninterest income (loss) 236,033 (1,533,082) 307,643
----------- ----------- -----------
Noninterest expense:
Compensation, payroll taxes and employee benefits (note 11) 1,165,315 1,210,041 1,237,633
Advertising 97,440 71,750 66,850
Office property and equipment 317,303 333,336 317,385
Federal insurance premiums and special assessments (note 13) 41,431 44,197 35,816
Data processing services 169,557 155,169 117,090
Other real estate expense 21,232 35,317 44,777
Accumulated other comprehensive income (loss) - net 326,187 266,798 211,231
----------- ----------- -----------
loss unrealized on securities available for sale
Total noninterest expense 2,138,465 2,116,608 2,030,782
----------- ----------- -----------
Earnings (loss) before taxes on income (benefit) 724,632 (1,238,371) 906,084
Taxes on income (benefit) (note 10) 239,100 (466,600) 316,700
----------- ----------- -----------
Net earnings (loss) $ 485,532 (771,771) 589,384
=========== =========== ===========
Basic earnings (loss) per common share $ 0.56 (0.90) 0.71
=========== =========== ===========
Diluted earnings (loss) per common share $ 0.56 (0.90) 0.69
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
HORIZON FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income
Years ended June 30, 2000, 1999, and 1998
Additional
Preferred Common paid-in Retained Treasury
stock stock capital earnings stock
----- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 $ -- 5,231 4,795,400 5,305,946 (1,360,275)
Comprehensive income:
Net earnings -- -- -- 589,384 --
Unrealized losses on securities
available-for-sale -- -- -- -- --
Less: reclassification adjustment for net
realized (gains) losses included in net
income, net of tax -- -- -- -- --
Total comprehensive income -- -- -- 589,384 --
Dividends declared ($.18 per share) -- -- -- (144,982) --
Two-for-one stock dividend -- 5,231 -- (5,231) --
Stock options exercised -- -- 94 (14,860) 174,351
ESOP shares allocated -- -- -- -- --
Stock appreciation of allocated ESOP shares -- -- 99,250 -- --
Amortization of recognition and retention plan -- -- -- -- --
Balance at June 30, 1998 -- 10,462 4,894,744 5,730,257 (1,185,924)
Comprehensive income:
Net loss -- -- -- (771,771) --
Unrealized losses on securities
available-for-sale -- -- -- -- --
Less: reclassification adjustment for net
realized (gains) losses included in net
income, net of tax -- -- -- -- --
Total comprehensive income -- -- -- (771,771) --
Accumulated other comprehensive income (loss) - net
Dividloss unrealized$on8securities)available for sale -- -- -- (153,963) --
Treasury stock acquired -- -- -- -- (44,375)
Stock options exercised -- -- -- (68) 728
ESOP shares allocated -- -- -- -- --
Stock appreciation of allocated ESOP shares -- -- 89,450 -- --
Tax benefit related
to non-qualified recognition and
retention plan -- -- 12,567 -- --
Amortization of recognition and retention plan -- -- -- -- --
Balance at June 30, 1999 -- 10,462 4,996,761 4,804,455 (1,229,571)
Comprehensive income:
Net earnings -- -- -- 485,532 --
Unrealized gains (losses) on securities
available-for-sale -- -- -- -- --
Less: reclassification adjustment for net
realized (gains) losses included in net
income, net of tax -- -- -- -- --
Total comprehensive income -- -- -- 485,532 --
Dividends declared ($.18 per share) -- -- -- (154,351) --
Treasury stock acquired -- -- -- -- (84,626)
ESOP shares allocated -- -- -- -- --
Stock appreciation of allocated ESOP shares -- -- 23,600 -- --
Balance at June 30, 2000 $ -- 10,462 5,020,361 5,135,636 (1,314,197)
<CAPTION>
Recognition Net unrealized
Unearned and loss on
ESOP retention securities
shares plan available for sale Total
------ ---- ------------------ -----
<S> <C> <C> <C> <C>
Balance at June 30, 1997 (193,798) (47,655) (92,188) 8,412,661
Comprehensive income:
Net earnings -- -- -- 589,384
Unrealized losses on securities
available-for-sale -- -- (969,183) (969,183)
Less: reclassification adjustment for net
realized (gains) losses included in net
income, net of tax -- -- 240,296 240,296
Total comprehensive income -- -- (728,887) (139,503)
Dividends declared ($.18 per share) -- -- -- (144,982)
Two-for-one stock dividend -- -- -- --
Stock options exercised -- -- -- 159,585
ESOP shares allocated 64,593 -- -- 64,593
Stock appreciation of allocated ESOP shares -- -- -- 99,250
Amortization of recognition and retention plan -- 36,216 -- 36,216
Balance at June 30, 1998 (129,205) (11,439) (821,075) 8,487,820
Comprehensive income:
Net loss -- -- -- (771,771)
Unrealized losses on securities
available-for-sale -- -- (1,061,478) (1,061,478)
Less: reclassification adjustment for net
realized (gains) losses included in net
income, net of tax -- -- 1,426,296 1,426,296
Total comprehensive income -- -- 364,818 (406,953)
Accumulated other comprehensive income (loss) - net
Dividloss unrealized$on8securities)available for sale -- -- -- 153,963)
Treasury stock acquired -- -- -- (44,375)
Stock options exercised -- -- -- 660
ESOP shares allocated 63,702 -- -- 63,702
Stock appreciation of allocated ESOP shares -- -- -- 89,450
Tax benefit related
to non-qualified recognition and
retention plan -- -- -- 12,567
Amortization of recognition and retention plan -- 11,439 -- 11,439
Balance at June 30, 1999 (65,503) -- (456,257) 8,060,347
Comprehensive income:
Net earnings -- -- -- 485,532
Unrealized gains (losses) on securities
available-for-sale -- -- (331,269) (331,269)
Less: reclassification adjustment for net
realized (gains) losses included in net
income, net of tax -- -- 206,864 206,864
Total comprehensive income -- -- (124,405) 361,127
Dividends declared ($.18 per share) -- -- -- (154,351)
Treasury stock acquired -- -- -- (84,626)
ESOP shares allocated 59,910 -- -- 59,910
Stock appreciation of allocated ESOP shares -- -- -- 23,600
Balance at June 30, 2000 (5,593) -- (580,662) 8,266,007
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
HORIZON FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 2000, 1999, and 1998
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 485,532 (771,771) 589,384
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation 140,247 147,461 147,585
Amortization of fees, premiums, and accretion of discounts, net (36,793) (7,636) (179,225)
Provision for losses on loans 96,000 138,540 94,000
Loans originated for sale (2,558,620) (9,047,665) (6,478,320)
Proceeds on sales of loans 3,527,863 8,616,722 6,076,820
Amortization of stock compensation plans 83,510 177,158 200,059
Loss (gain) on sale of securities 233,976 547,667 (308,041)
Impairment losses on securities -- 1,491,000 475,000
Gain on sale of fixed assets -- (8,573) --
Decrease (increase) in accrued interest receivable (80,644) 160,999 (128,881)
(Decrease) increase in accrued taxes payable and deferred taxes 669,877 (877,419) 178,216
Other, net 122,283 (209,838) 271,281
----------- ----------- -----------
Net cash provided by operating activities 2,683,231 356,645 937,878
----------- ----------- -----------
Cash flows from investing activities:
Securities available-for-sale:
Purchases (4,215,094) (6,338,703) (23,698,089)
Proceeds from sale 1,232,520 6,739,179 18,838,215
Proceeds from maturity and principal collected 4,081,993 5,047,962 4,780,581
Reinvested dividends from FHLB stock (65,668) (75,149) --
Loans to customers, net (7,416,239) 222,422 (3,495,633)
Proceeds from sale of real estate -- 5,000 360,288
Purchase of investment real estate -- (100,000) --
Purchase of Federal Home Loan Bank stock -- -- (246,900)
Proceeds from sale of Federal Home Loan Bank stock 500,000 -- --
Proceeds from sale of office property and equipment -- 13,582 --
Purchase of office property and equipment, net (101,015) (115,007) (192,088)
----------- ----------- -----------
Accumulated Net cash (used in) provided by investing activities
loss unrealized on securities available for sale (5,983,503) 5,399,286 (3,653,626)
----------- ----------- -----------
Cash flows from financing activities:
(Decrease) increase in customer deposit accounts, net 5,184,992 (568,634) 2,503,494
(Decrease) increase in advance payments by borrowers for taxes and insurance 10,725 (7,220) 6,387
Proceeds from advances from Federal Home Loan Bank 1,000,000 6,650,000 27,000,000
Principal payments on advances from Federal Home Loan Bank (8,591,977) (10,081,998)
Payment of dividends (154,351) (153,963) (144,982)
Exercise of stock options -- 660 159,585
Treasury stock acquired (84,626) (44,375) --
----------- ----------- -----------
Net cash (used in) provided by financing activities (2,635,237) (4,205,530) 3,461,125
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (5,935,509) 1,550,401 745,377
Cash and cash equivalents at beginning of year 7,917,020 6,366,619 5,621,242
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,981,511 7,917,020 6,366,619
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 3,344,069 3,752,446 3,794,411
Cash paid for taxes 185,082 415,750 91,102
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
HORIZON FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(1) Summary of Significant Accounting Policies
Description of the Business and Concentration of Credit
Horizon Financial Services Corporation and subsidiaries (the Company or the
Parent Company) is a thrift holding company headquartered in Oskaloosa,
Iowa. The Company was organized for the purpose of owning the outstanding
stock of Horizon Federal Savings Bank, FSB, (the Bank).
The Bank serves Mahaska County, Marion County, and to a lesser extent
Wapello County through its three retail offices, two of which are located
in Oskaloosa, Iowa, and one located in Knoxville, Iowa. The Bank is
primarily engaged in attracting retail deposits from the general public and
investing those funds in residential and commercial real estate loans and
other consumer and commercial loans in its central Iowa market area.
Although the Bank has a diversified loan portfolio, a substantial portion
of its borrowers ability to repay their loans is dependent upon the
economic conditions in the Company's market area.
Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Horizon
Financial Services Corporation and its wholly owned subsidiary, the Bank
and its wholly owned subsidiary, Horizon Investment Services, Inc. Horizon
Investment Services, Inc. provides investment products and sells credit
life insurance to customers of the Bank. All material intercompany accounts
and transactions have been eliminated.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates. Material estimates that are particularly
susceptible to significant changes relate to the determination of the
allowance for losses on loans.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
short-term investments with a maturity of three months or less at date of
purchase to be cash equivalents. Cash and cash equivalents include
interest-earning deposits of $1,406,000 and $5,000,000 at June 30, 2000 and
1999, respectively.
(Continued)
20
<PAGE>
HORIZON FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
Earnings Per Share
Basic earnings per share is determined using net income and weighted
average common shares outstanding, decreased by unearned employee stock
ownership plan (ESOP) shares. Diluted earnings per share, is computed by
dividing net income by the weighted average common shares, decreased by
unearned ESOP shares and increased by assumed incremental common shares
issued. Amounts used in the determination of basic and diluted earnings per
share for the years ended June 30, 2000, 1999, and 1998 are shown in table
below.
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net earnings (loss) $ 485,532 (771,771) 589,384
============= ============= =============
Weighted average common shares outstanding 868,899 879,151 862,720
Less - unearned ESOP shares (7,487) (18,768) (31,279)
------------- ------------- -------------
Weighted average common
shares - basic 861,412 860,383 831,441
Assumed incremental common shares issued
upon exercise of stock options 9,045 -- 29,425
------------- ------------- -------------
Weighted average common
shares - diluted 870,457 860,383 860,866
============= ============= =============
</TABLE>
Securities Available-for-sale
The Company classifies investment securities based on the Company's
intended holding period. Securities which may be sold prior to maturity to
meet liquidity needs, to respond to market changes or to adjust the
Company's asset-liability position are classified as available-for-sale.
Securities which the Company intends to hold to maturity are classified as
held-to-maturity.
Securities available-for-sale are recorded at fair value. The aggregate
unrealized gains or losses, net of the effect of taxes on income, are
recorded as a separate component of other comprehensive income until
realized. Discounts and premiums are accreted and amortized, respectively,
over the term of the security except for mortgage-backed and related
securities and interest and principal only stripped mortgage-backed
securities which are accreted and amortized over the period of estimated
cash flows using the interest method. Actual prepayment experience on
mortgage-backed and related securities and stripped mortgage-backed
securities is periodically reviewed, and the timing of accretion or
amortization is adjusted accordingly. Other than temporary unrealized
losses are recorded in the consolidated statement of operations.
Gain or loss on sale is recognized in the statements of operations using
the specific identification method.
(Continued)
21
<PAGE>
HORIZON FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
Allowance for Losses on Loans
The allowance for losses on loans and real estate are maintained at amounts
considered adequate to provide for such losses. The allowance for losses on
loans is based on management's periodic evaluation of the loan portfolio
and reflects an amount that, in management's opinion, is adequate to absorb
losses in the existing portfolio. In evaluating the portfolio, management
takes into consideration numerous factors, including current economic
conditions, prior loan loss experience, the composition of the loan
portfolio and management's estimates of anticipated credit losses.
Accrued interest receivable on loans which become more than ninety days in
arrears is charged to income. Subsequently, interest income is not
recognized on such loans until collected or until determined by management
to be collectable.
Loans Receivable
Under the Company's credit policies, all loans with interest more than
ninety days in arrears and restructured loans are considered to meet the
definition of impaired loans. Loan impairment is measured based on the
present value of expected future cash flows discounted at the loan's
effective interest rate except, where more practical, at the observable
market price of the loan or the fair value of the collateral if the loan is
collateral dependent.
Loans held for sale are stated at the lower of individual cost or estimated
fair value. Loans are sold on a nonrecourse basis with servicing released
and gains and losses are recognized based on the difference between sales
proceeds and the carrying value of the loan.
Loan Origination Fees and Related Costs
Mortgage loan origination fees and certain direct loan origination costs,
if material, are deferred and the net fee or cost is recognized in
operations using the interest method. Direct loan origination costs for
other loans are expensed, as such costs are not material.
Real Estate
Investment in real estate represents a limited partnership interest in a
low income housing apartment complex, and a 50% partnership interest in a
retail mall. The investments are carried at cost, adjusted for earnings and
losses of the limited partnerships.
Real estate acquired in settlement of loans is carried at the lower of cost
or fair value. When property is acquired through foreclosure or a loan is
considered impaired, any excess of the related loan balance over fair value
is charged to the allowance for losses on loans. An allowance for real
estate is provided as circumstances indicate additional loss on the
property and is charged to noninterest expense.
(Continued)
22
<PAGE>
HORIZON FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
Financial Instruments with Off Balance Sheet Risk
In the normal course of business to meet the financing needs of its
customers, the Bank is a party to financial instruments with off balance
sheet risk, which include commitments to extend credit. The Bank's exposure
to credit loss in the event of nonperformance by the other party to the
commitments to extend credit is represented by the contractual amount of
those instruments. The Bank uses the same credit policies in making
commitments as it does for on balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer, as long
as there is no violation of any conditions established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. Each customer's
creditworthiness is evaluated on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank, upon extension of
credit is based on management's credit evaluation of the counterparty.
Office Property and Equipment
Office property and equipment are recorded at cost, and depreciation is
accumulated on a straight-line basis over the estimated useful lives of the
related assets. Estimated lives are forty years for office buildings and
five to ten years for furniture, fixtures, and equipment.
Maintenance and repairs are charged against income. Improvements are
capitalized and subsequently depreciated. The cost and accumulated
depreciation of properties retired or otherwise disposed of are eliminated
from the asset and accumulated depreciation accounts. Related profit or
loss from such transactions is credited or charged to income.
Treasury Stock
Treasury stock is accounted for by the cost method, whereby shares of
common stock reacquired are recorded at their purchase price.
Taxes on Income
The Company files a consolidated federal income tax return. For financial
statement purposes, taxes on income are also presented on a consolidated
basis. For state purposes, the Company and Horizon Investment Services,
Inc. file income tax returns and the Bank files a franchise tax return.
Auditing principles generally accepted in the United States of America
require use of the asset and liability method of accounting for income
taxes, and deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
(Continued)
23
<PAGE>
HORIZON FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
Stock Option Plan
The Company has adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, which
permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS
No. 123 also allows entities to continue to apply the provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations and provide pro forma net
earnings and pro forma net earnings per common share disclosures for
employee stock option grants made subsequent to the adoption date as if the
fair-value-based method defined in SFAS No. 123 had been applied. APB
Opinion No. 25 requires compensation expense to be recorded only if on the
date of grant the current market price of the underlying stock exceeded the
exercise price. The Company has made no option grants since the adoption of
SFAS No. 123.
Fair Value of Financial Instruments
The Company's fair value estimates, methods and assumptions for its
financial instruments are set forth below:
Cash and Cash Equivalents and Accrued Interest Receivable and Payable
- The carrying amount approximates the estimated fair value due
to the short-term nature of those instruments.
Securities Available-for-sale - The fair value of securities
available-for-sale is estimated based on bid prices published in
financial newspapers, bid quotations received from securities
dealers or quoted market prices of similar instruments, adjusted
for differences between the quoted instruments and the
instruments being valued.
Loans- Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type, such as
commercial, real estate and installment.
The fair value of loans is calculated by discounting scheduled cash
flows through the estimated maturity using the current rates at which
similar loans would be made to borrowers with similar credit ratings.
The estimate of maturity is based on the historical experience, with
repayments for each loan classification, modified as required by an
estimate of the effect of current economic and lending conditions. The
effect of nonperforming loans is considered in assessing the credit
risk inherent in the fair value estimate.
Federal Home Loan Bank (FHLB) Stock - The value of the FHLB stock is
equivalent to its carrying value because the stock is redeemable
at par value.
Deposits - The fair value of deposits with no stated maturity, such as
checking, savings and money market accounts, is equal to the
amount payable on demand. The fair value of certificates of
deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently
offered for deposits of similar remaining maturities. The fair
value estimates do not include the benefit that results from the
low-cost funding provided by the deposit liabilities compared to
the cost of borrowing funds in the market.
(Continued)
24
<PAGE>
HORIZON FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
Advances from the FHLB - The fair value of advances from the FHLB is
calculated by discounting the scheduled payments through
maturity. The discount rate is estimated using the rates
currently offered for similar instruments.
Off Balance Sheet Instruments - The fair value of commitments to
extend credit and unused lines of credit is estimated using the
difference between current levels of interest rates and committed
rates.
Limitations - Fair value estimates are made at a specific point in
time, based on relevant market information and information about
the financial instrument. Because no market exists for a
significant portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected
loss experience, current economic conditions, risk
characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore,
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Effect of New Accounting Standards
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
and SFAS No. 137, and SFAS No. 138, amendments to SFAS No. 133, will be
effective for the Company beginning July 1, 2000. Management expects to
adopt SFAS No. 133, SFAS No. 137, and SFAS No. 138 when required and does
not expect adoption to have a material effect on its financial statements.
(Continued)
25
<PAGE>
HORIZON FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(2) Securities Available-for-sale
Securities available-for-sale at June 30, 2000 and 1999 were as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Fair
Description cost gains losses value
---------------------------------------------------- --------------- -------------- -------------- ---------------
2000:
<S> <C> <C> <C> <C>
FHLB bonds - due beyond one year,
but within five years $ 500,000 -- 57,906 442,094
FHLB bonds - due beyond five years,
but within ten years 500,000 -- 74,754 425,246
Small Business Administration guaranteed
loan participation certificates 710,377 -- 18,351 692,026
Mortgage-backed and related securities:
Mortgage-backed securities 5,068,970 -- 133,937 4,935,033
Collateralized mortgage obligations 7,475,355 -- 342,981 7,132,374
Mutual funds 1,209,417 -- 18,600 1,190,817
Equity securities 1,144,550 7,250 301,925 849,875
--------------- -------------- -------------- ---------------
16,608,669 7,250 948,454 15,667,465
Stripped mortgage-backed securities:
Principal only 6,011 -- 3,357 2,654
--------------- -------------- -------------- ---------------
$ 16,614,680 7,250 951,811 15,670,119
=============== ============== ============== ===============
1999:
FHLB bonds - due beyond one year,
but within five years $ 500,000 -- 56,250 443,750
FHLB bonds - due beyond five years,
but within ten years 500,000 -- 100,000 400,000
Small Business Administration guaranteed
loan participation certificates 731,356 7,336 -- 738,692
Mortgage-backed and related securities:
Mortgage-backed securities 1,774,515 -- 42,370 1,732,145
Collateralized mortgage obligations 10,807,364 87,223 193,564 10,701,023
Mutual funds 1,127,365 -- 2,216 1,125,149
Equity securities 1,133,606 6,550 138,103 1,002,053
--------------- -------------- -------------- ---------------
16,574,206 101,109 532,503 16,142,812
Stripped mortgage-backed securities:
Principal only 8,478 -- 4,041 4,437
Interest only 1,246,544 -- 296,808 949,736
--------------- -------------- -------------- ---------------
$ 17,829,228 101,109 833,352 17,096,985
=============== ============== ============== ===============
</TABLE>
(Continued)
26
<PAGE>
HORIZON FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
Sales of securities available-for-sale resulted in the following for the
three years ended June 30:
2000 1999 1998
-------------- -------------- --------------
Proceeds $ 4,081,993 6,739,179 18,838,215
Gross realized gains 84,857 166,347 330,031
Gross realized losses 318,832 714,014 21,990
============== ============== ==============
In 1999, the Company recognized a write down of $1,491,000, on interest
only strip mortgage-backed securities resulting from a decline in fair
value that was judged to be other than temporary. Those deemed impaired
securities were sold in fiscal year 2000.
(3) Loans Receivable
At June 30, 2000 and 1999, loans receivable consisted of the following:
2000 1999
-------------- --------------
Residential real estate loans:
One-to-four-family $ 39,703,500 34,428,507
One-to four-family held for sale -- 969,243
Multifamily 1,234,436 1,338,804
Construction 1,245,413 151,809
-------------- --------------
42,183,349 36,888,363
Commercial real estate loans 6,635,612 5,427,615
-------------- --------------
Total real estate 48,818,961 42,315,978
-------------- --------------
Consumer loans:
Automobile 3,906,348 3,990,454
Home improvement 778,223 1,047,558
Deposit accounts 123,208 148,990
Other 2,645,555 2,098,553
-------------- --------------
Total consumer 7,453,334 7,285,555
-------------- --------------
Commercial business loans 6,547,696 6,871,944
-------------- --------------
62,819,991 56,473,477
Less:
Deferred fees and discounts 23,581 64,088
Allowance for losses on loans 379,015 342,990
-------------- --------------
$ 62,417,395 56,066,399
============== ==============
(Continued)
27
<PAGE>
HORIZON FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
At June 30, 2000, the Bank had committed to originate $880,050 of fixed and
variable rate loans. In addition, the Bank had customers with unused lines
of credit totaling $1,859,443 at June 30, 2000.
At June 30, 2000 and 1999, the Bank had nonaccrual loans of $1,099,000 and
$1,161,000, respectively. The allowance for losses on loans related to
these impaired loans was approximately $159,900 and $97,000, respectively.
The average balances of such loans for the years ended June 30, 2000, 1999,
and 1998, were $979,750, $1,192,000, and $745,000, respectively. For the
years ended June 30, 2000, 1999, and 1998, interest income which would have
been recorded under the original terms of such loans was approximately
$144,152, $133,853, and $96,000, respectively, and interest income actually
recorded amounted to approximately $78,300, $72,000, and $48,000,
respectively.
Loan customers of the Bank include certain executive officers and directors
and their related interests and associates. All loans to this group were
made in the ordinary course of business at prevailing terms and conditions.
Changes in loans outstanding to executive officers and directors for the
years ended June 30, 2000 and 1999 were as follows:
2000 1999
------------- -------------
Balance at beginning of year $ 73,898 285,074
Repayments (4,273) (211,176)
------------- -------------
Balance at end of year $ 69,625 73,898
============= =============
(4) Allowance for Losses on Loans
Following is a summary of the allowance for losses on loans for the three
years ended June 30, 2000:
2000 1999 1998
------------- ----------- -----------
Balance at beginning of year $ 342,990 348,474 348,028
Provision for losses on loans 96,000 138,540 94,000
Charge-offs (62,296) (168,549) (96,388)
Recoveries 2,321 24,525 2,834
------------- ----------- -----------
Balance at end of year $ 379,015 342,990 348,474
============= =========== ===========
(5) Real Estate
Following is a summary of real estate as of June 30, 2000 and 1999:
2000 1999
------------- -------------
Real estate acquired through foreclosure $ -- --
Real estate acquired for investment 248,951 270,779
------------- -------------
$ 248,951 270,779
============= =============
There were no allowances for losses on real estate for the years ended June
30, 2000, 1999, and 1998, respectively.
(Continued)
28
<PAGE>
HORIZON FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(6) Office Property and Equipment
At June 30, 2000 and 1999, the cost and accumulated depreciation of office
property and equipment were as follows:
2000 1999
-------------- ---------------
Land $ 216,595 216,595
Office buildings 1,175,525 1,092,164
Furniture, fixtures and equipment 1,008,462 1,154,698
Automobile 18,883 18,883
-------------- ---------------
2,419,465 2,482,340
Less accumulated depreciation 1,369,644 1,393,287
-------------- ---------------
$ 1,049,821 1,089,053
============== ===============
(7) Accrued Interest Receivable
At June 30, 2000 and 1999, accrued interest receivable consisted of the
following:
2000 1999
-------------- ---------------
Loans receivable $ 500,796 433,651
Securities available-for-sale 101,969 88,470
-------------- ---------------
$ 602,765 522,121
============== ===============
(8) Deposits
Deposit account balances at June 30, 2000 and 1999 are summarized as
follows:
2000 1999
-------------- ---------------
Balance by account type:
Savings $ 23,380,371 23,442,674
Money market 342,875 462,859
Demand and NOW 8,535,229 7,366,239
Certificates of deposit 32,502,749 28,304,460
-------------- ---------------
$ 64,761,224 59,576,232
============== ===============
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $4,939,832 and $2,188,000 at June 30, 2000
and 1999, respectively.
(Continued)
29
<PAGE>
HORIZON FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
At June 30, 2000, scheduled maturities of certificates of deposit were as
follows:
2001 $ 20,698,951
2002 6,949,816
2003 3,271,896
2004 1,171,351
2005 and thereafter 410,735
--------------
$ 32,502,749
==============
Interest expense on deposits is summarized as follows:
Years ended June 30
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
Savings $ 1,055,175 950,097 742,894
Money market 10,359 12,745 17,843
Demand and NOW 162,401 131,810 104,480
Certificates of deposit 1,481,615 1,542,291 1,898,633
------------- ------------- -------------
$ 2,709,550 2,636,943 2,763,850
============= ============= =============
At June 30, 2000 and 1999, accrued interest payable on deposits totaled
$352,438 and $248,686, respectively.
(9) Advances from FHLB
Advances from FHLB at June 30, 2000 and 1999, were as follows:
<TABLE>
<CAPTION>
2000 1999
------------------------------- -------------------------------
Weighted- Weighted-
average average
Amount rates Amount rates
-------------- -------------- -------------- ---------------
Advance maturity:
<S> <C> <C> <C> <C>
Within one year:
Variable $ 1,500,000 6.79 $ -- --
Fixed 899,701 5.89 870,712 5.50
Beyond one year, but within
five years - Fixed 3,000,000 5.44 1,100,263 4.93
Beyond five years, but within
ten years - Fixed 3,200,000 5.14 14,200,000 5.02
Beyond ten years, but within
fifteen years - Fixed 414,498 5.50 435,201 5.50
-------------- ============== -------------- ===============
$ 9,014,199 $ 16,606,176
============== ==============
</TABLE>
(Continued)
30
<PAGE>
HORIZON FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
Advances from FHLB are secured by stock in FHLB. In addition, the Bank has
agreed to maintain unencumbered additional security in the form of certain
residential mortgage loans aggregating no less than 130% of outstanding
advances. Certain advances are callable on various dates. Variable rate
advances are based on LIBOR.
(10) Taxes on Income
Taxes on income for the years ended June 30, 2000, 1999, and 1998, were as
follows:
<TABLE>
<CAPTION>
2000 1999
------------------------------------------ ------------------------------------------
Federal State Total Federal State Total
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Current $ 250,100 44,000 294,100 (437,600) (92,000) (529,600)
Deferred (48,000) (7,000) (55,000) 49,000 14,000 63,000
------------- ------------- ------------- ------------- ------------- -------------
$ 202,100 37,000 239,100 (388,600) (78,000) (466,600)
============= ============= ============= ============= ============= =============
<CAPTION>
1998
------------------------------------------
Federal State Total
------------- ------------- -------------
<S> <C> <C> <C>
Current $ 229,700 65,000 294,700
Deferred 19,000 3,000 22,000
------------- ------------- -------------
$ 248,700 68,000 316,700
============= ============= =============
</TABLE>
Taxes on income differ from the amounts computed by applying the federal
income tax rate of 34% to earnings before taxes on income for the following
reasons, expressed in percentages:
Years ended June 30,
------------------------------------
2000 1999 1998
---------- ---------- ----------
Federal income tax rate 34.0 % (34.0) 34.0
Items affecting federal income tax rate:
State tax, net of federal benefit 3.4 (4.2) 4.9
Low income housing tax credits (5.8) (3.4) (4.6)
Other, net 1.4 3.9 0.7
---------- ---------- ----------
33.0 % (37.7) 35.0
========== ========== ==========
(Continued)
31
<PAGE>
HORIZON FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June
30, 2000 and 1999 are presented below:
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
Deferred tax assets:
Accrued expenses not deducted $ 50,000 30,000
Unrealized losses on securities
available-for-sale 345,300 274,000
State net operating loss 13,000 13,000
Loan loss allowance 100,000 66,000
----------- ----------
Total gross deferred tax assets 508,300 383,000
----------- ----------
Deferred tax liabilities:
FHLB stock dividends 34,000 57,000
Accrued interest receivable not taxed 3,000 3,000
Deferred loan fees 91,000 69,000
----------- ----------
Total gross deferred tax liabilities 128,000 129,000
----------- ----------
Net deferred tax assets $ 380,300 254,000
=========== ==========
</TABLE>
At June 30, 2000 and 1999, the Bank had federal income tax bad debt
reserves of approximately $1,263,000 which constitute allocations to bad
debt reserves for federal income tax purposes for which no provision for
taxes on income had been made. If such allocations are charged for other
than bad debt losses, taxable income is created to the extent of the
charges. The Bank's retained earnings at June 30, 2000 and 1999 were
substantially restricted because of the effect of these income tax bad debt
reserves.
Based upon the Company's level of historical taxable income and anticipated
future taxable income over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not the Bank will
realize the benefits of these deductible differences.
(11) Employee Benefits
Pension Plan
The Bank has a noncontributory, nontrusteed pension plan for all eligible
employees. The plan's assets include bonds, stocks, commercial and
residential mortgages and cash. The Bank's policy is to fund the benefit
cost accrued.
(Continued)
32
<PAGE>
HORIZON FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
The following table sets forth the plan's funded status and amounts
recognized in the consolidated financial statements at June 30, 2000 and
1999:
<TABLE>
<CAPTION>
2000 1999
-------------- --------------
Change in benefit obligation:
<S> <C> <C>
Benefit obligation at beginning of year $ 1,388,500 1,044,684
Service cost 86,255 67,394
Interest cost 79,839 65,293
Actuarial (gain)/loss (514,755) 211,129
Benefits paid (23,353) --
-------------- --------------
Benefit obligation at end of year $ 1,016,486 1,388,500
============== ==============
Change in plan assets:
Fair value of plan assets at beginning of year $ 1,189,278 1,048,560
Actual return on plan assets 106,095 49,309
Employer contributions -- 91,409
Benefits paid (23,353) --
-------------- --------------
Fair value of plan assets and end of year $ 1,272,020 1,189,278
============== ==============
Reconciliation of funded status:
Funded status (underfunded)/overfunded $ 255,534 (199,222)
Unrecognized net actuarial (gain)/loss (359,165) 161,153
Unrecognized transition asset (13,064) (14,825)
-------------- --------------
Accrued benefit cost $ (116,695) (52,894)
============== ==============
</TABLE>
(Continued)
33
<PAGE>
HORIZON FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
The net periodic benefit cost for the years ended June 30, 2000, 1999, and
1998 includes the following components:
<TABLE>
<CAPTION>
Years ended June 30,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Service cost $ 86,255 67,394 61,554
Interest cost 79,839 65,293 59,256
Expected return on plan assets (101,910) (84,169) (63,749)
Recognized net actuarial gain 1,378 -- --
Amortization of transition (asset)/obligation (1,761) (1,761) (1,761)
------------- ------------- -------------
Net periodic benefit cost $ 63,801 46,757 55,300
============= ============= =============
</TABLE>
2000 1999
-------------- ---------------
Discount rate 7.00% 5.75%
Expected long-term rate of return 8.25 8.25
Weighted-average rate of compensation
increase 5.09 5.09
Amortization method Straight-line Straight-line
============== ===============
ESOP Plan
All employees meeting age and service requirements are eligible to
participate in an ESOP established in June 1994. Contributions made by the
Bank to the ESOP are allocated to participants by a formula based on
compensation. Participant benefits become 100% vested after five years of
service. The ESOP purchased 80,962 shares (restated for two-for-one stock
dividend) in the Bank's conversion and is accounted for under Employers'
Accounting for Employee Stock Ownership Plans (SOP 93-6). At June 30, 2000
and 1999, 76,712 and 66,168 shares, respectively, were committed to be
released, and the fair value of the 954 and 11,498 unearned shares was
approximately $6,917 and $96,000. ESOP expense was $83,513, $153,154, and
$163,843 for the years ended June 30, 2000, 1999, and 1998, respectively.
Employment Agreements
The Company has entered into employment agreements, which expire in July
2003, with two of its executive officers. The agreements provide, among
other things, for payment to the officers of up to 299% of the officers'
then current annual compensation in the event there is a change of control
of the Company where employment terminates involuntarily in connection with
such change of control.
Stock Options
Certain officers and directors of the Company have been granted options to
purchase up to 89,222 shares of the Company's $.01 par common stock. The
exercise price is equal to the fair market value of the shares at the date
the options are granted. The options are subject to certain vesting
requirements and, if unused, the options will expire October 2004.
(Continued)
34
<PAGE>
HORIZON FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
Changes in options outstanding and exercisable during 2000 and 1999, were
as follows:
Exercisable Outstanding Option price
options options per share
----------------- ----------------- -----------------
June 30, 1998 30,372 45,180 $ 5.50 - 6.06
Vested 14,808 -- 5.50 - 6.06
Exercised (120) (120) 5.50
----------------- -----------------
June 30, 1999 45,060 45,060 5.50 - 6.06
Vested -- --
Exercised -- --
----------------- -----------------
June 30, 2000 45,060 45,060 5.50 - 6.06
================= =================
Recognition and Retention Plan
In 1995, the Company established a recognition and retention plan (RRP) for
certain executive officers and directors. The Company authorized the RRP to
award shares equal to approximately 4% of the shares of common stock of the
Company. The employees become vested in the shares of stock over a
five-year period. RRP expense for the years ended June 30, 1999, and 1998,
was $11,439, and $36,216, respectively, and all costs have been fully
amortized in fiscal year 2000.
(12) Stockholders' Equity
Stock Conversion
In order to grant priority to eligible account holders in the event of
future liquidation, the Bank, at the time of conversion to a stock savings
bank, established a liquidation account in the amount equal to the
regulatory capital as of March 31, 1993. In the event of the future
liquidation of the Bank, eligible account holders who continue to maintain
their deposit accounts shall be entitled to receive a distribution from the
liquidation account. The total amount of the liquidation account will be
decreased as the balance of the eligible account holders is reduced
subsequent to the conversion, based on an annual determination of such
balances.
Regulatory Capital Requirements
The Financial Institution Reform, Recovery and Enforcement Act of 1989
(FIRREA) and the capital regulations of the OTS promulgated thereunder
require institutions to have a minimum regulatory tangible capital equal to
1.5% of total assets, a minimum 3% leverage capital ratio and a minimum 8%
risk-based capital ratio. These capital standards set forth in the capital
regulations must generally be no less stringent than the capital standards
applicable to national banks. FIRREA also specifies the required ratio of
housing-related assets in order to qualify as a savings institution.
(Continued)
35
<PAGE>
HORIZON FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established additional capital requirements which require regulatory action
against depository institutions in one of the undercapitalized categories
defined in implementing regulations. FDICIA requires depository
institutions to maintain a tangible equity ratio of 2%. Institutions such
as the Bank, which are defined as well capitalized, must generally have a
leverage capital (core) ratio of at least 5%, a tier I risk-based capital
ratio of at least 6% and a total risk-based capital ratio of at least 10%.
FDICIA also provides for increased supervision by federal regulatory
agencies, increased reporting requirements for insured depository
institutions and other changes in the legal and regulatory environment for
such institutions. The Bank met all regulatory capital requirements at June
30, 2000 and 1999.
The Bank's actual and required capital amounts and ratios as of June 30,
2000 were as follows:
<TABLE>
<CAPTION>
To be well
For capital capitalized under
adequacy prompt corrective
Actual purposes action provisions
----------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------- -------- ------------- --------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital (to tangible assets) $ 6,316,000 7.8% $ 1,627,580 2.0% $ -- --%
Leverage/equity (core) capital
(to adjusted tangible assets) 6,316,000 7.8 3,255,160 4.0 4,068,950 5.0
Tier I risk-based capital
(to risk-weighted assets) 6,316,000 12.6 2,010,920 4.0 3,016,380 6.0
Risk-based (total) capital
(to risk-weighted assets) 6,669,000 13.3 4,021,840 8.0 5,027,300 10.0
============= ======== ============= ========= ============= ========
</TABLE>
Dividend Restrictions
Federal regulations impose certain limitations on the payment of dividends
and other capital distributions by the Bank. Under the regulations, a
savings institution, such as the Bank, that will meet the fully phased-in
capital requirements (as defined by the OTS regulations) subsequent to a
capital distribution is generally permitted to make such capital
distribution without OTS approval, subject to certain limitations and
restrictions as described in the regulations. A savings institution with
total capital in excess of current minimum capital requirements but not in
excess of the fully phased-in requirements is permitted by the new
regulations to make, without OTS approval, capital distributions of between
25% and 75% of its net earnings for the previous four quarters less
dividends already paid for such period. A savings institution that fails to
meet current minimum capital requirements is prohibited from making any
capital distributions without prior approval from the OTS.
(13) Supervisory Agreement
On August 23, 1999, the Bank entered into a supervisory agreement with the
Office of Thrift Supervision (OTS) which requires certain actions by the
Bank including:
o Implementing procedures to improve credit administration and
documentation;
o Disposal of the Bank's investments classified by the OTS as high
risk and reducing the level of the Bank's interest rate risk; and
o Obtaining prior approval of the OTS for payment of dividends.
(Continued)
36
<PAGE>
HORIZON FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
Management is proceeding with the required actions and does not believe
these actions will have a material effect on the financial position or
results of operations of the Company.
(14) Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments as of June
30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
Carrying Fair Carrying Fair
value value value value
-------------- --------------- -------------- ---------------
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,981,511 1,981,511 7,917,020 7,917,020
Securities available-for-sale 15,670,119 15,670,119 17,096,985 17,096,985
Loans 62,417,395 59,883,278 56,066,399 56,361,401
FHLB stock 702,500 702,500 1,202,500 1,202,500
Accrued interest receivable 602,765 602,765 522,121 522,121
Financial liabilities:
Deposits 64,761,224 65,067,366 59,576,232 59,673,754
FHLB advances 9,014,199 8,167,397 16,606,176 15,350,823
Advance payments by borrowers
for taxes and insurance 410,555 410,555 399,830 399,830
Accrued interest payable 352,438 352,438 248,868 248,868
============== =============== ============== ===============
Unrealized Unrealized
Notional gains Notional gains
value (losses) value (losses)
-------------- --------------- -------------- ---------------
Off balance sheet assets:
Commitments to extend credit $ 880,050 -- 1,440,460 --
Unused lines of credit 1,859,443 -- 1,510,000 --
============== =============== ============== ===============
</TABLE>
(Continued)
37
<PAGE>
HORIZON FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(15) Contingency
The Bank is involved in various legal actions and proceedings arising from
the normal course of operations. Management believes that liability, if
any, arising from such legal actions and proceedings will not have a
material adverse effect upon the consolidated financial statements of the
Company.
(16) Horizon Financial Services Corporation (Parent Company Only) Financial
Information
The Parent Company's principal asset is its 100% ownership of the Bank and
the Bank's subsidiary. The following are the condensed financial statements
for the Parent Company:
Condensed Balance Sheets
2000 1999
-------------- --------------
Cash and cash equivalents $ 253,648 409,472
Securities available-for-sale 608,935 745,803
Loans receivable, net 1,097,524 1,052,717
Loans receivable from subsidiary 5,593 65,503
Investment in subsidiary 5,908,105 5,417,889
Real estate 248,951 270,779
Interest receivable 35,412 19,623
Deferred taxes 119,200 64,100
Income tax receivable -- 14,461
-------------- --------------
Total assets $ 8,277,368 8,060,347
============== ==============
Total liabilities - accrued income taxes $ 11,361 --
Common stock 10,462 10,462
Additional paid-in capital 5,020,361 4,996,761
Retained earnings 5,135,636 4,804,455
Treasury stock, at cost (1,314,197) (1,229,571)
Unearned ESOP shares (5,593) (65,503)
Accumulated other comprehensive
income - net unrealized loss
on securities available-for-sale (580,662) (456,257)
-------------- --------------
Total equities 8,266,007 8,060,347
-------------- --------------
Total liabilities and equity $ 8,277,368 8,060,347
============== ==============
(Continued)
38
<PAGE>
HORIZON FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
Condensed Statement of Operations
<TABLE>
<CAPTION>
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Interest income $ 123,502 79,472 123,091
Equity in (losses) earnings of subsidiaries 461,998 (634,347) 814,876
Other expenses (139,968) (311,196) (522,272)
-------------- -------------- --------------
Net earnings before tax 445,532 (866,071) 415,695
Income tax benefit (40,000) (94,300) (173,689)
-------------- -------------- --------------
Net (loss) earnings $ 485,532 (771,771) 589,384
============== ============== ==============
</TABLE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
2000 1999 1998
-------------- -------------- --------------
Operating activities:
<S> <C> <C> <C>
Net (loss) earnings $ 485,532 (771,771) 589,384
Equity in losses (earnings) of subsidiary (461,998) 634,347 (814,876)
Other, net 58,574 370,614 288,588
-------------- -------------- --------------
Net cash provided by operating activities 82,108 233,190 63,096
-------------- -------------- --------------
Investing activities:
Proceeds from sale of securities available-for-sale 197,262 1,844,763 2,647,147
Purchase of securities available-for-sale (211,319) (1,510,444) (3,445,162)
Principal collected on securities available-for-sale -- 88,340 599,306
Purchase of real estate -- (100,000) --
Loans receivable, net 15,102 (549,808) (282,449)
-------------- -------------- --------------
Net cash provided by (used in) investing activities 1,045 (227,149) (481,158)
-------------- -------------- --------------
Financing activities:
Dividends from subsidiary -- 226,109 588,767
Treasury stock acquired (84,626) (44,375) --
Exercise of stock options -- 660 159,585
Dividends paid (154,351) (153,963) (144,982)
-------------- -------------- --------------
Net cash provided by
(used in) financing activities (238,977) 28,431 603,370
-------------- -------------- --------------
Net (decrease) increase in
cash and cash equivalents (155,824) 34,472 185,308
Cash and cash equivalents at beginning of year 409,472 375,000 189,692
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 253,648 409,472 375,000
============== ============== ==============
</TABLE>
39
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION
STOCKHOLDER INFORMATION
--------------------------------------------------------------------------------
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 3:00 p.m. local time, on
October 26, 2000, at the main office of Horizon Federal Savings Bank, 301 First
Avenue East, Oskaloosa, Iowa.
STOCK LISTING
Horizon Financial Services Corporation common stock is traded on the Nasdaq
SmallCap Market under the symbol "HZFS."
PRICE RANGE OF COMMON STOCK
The high and low bid quotations for the common stock as reported on the Nasdaq
Stock Market, as well as dividends declared per share, is reflected in the table
below. The information set forth in the table below was provided by the Nasdaq
Stock Market. Such information reflects inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
<TABLE>
<CAPTION>
FISCAL 2000 FISCAL 1999
-------------------------------- ------------------------------------
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
-------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
First Quarter $9.000 $7.000 $.045 First Quarter $16.750 $14.875 $.045
Second Quarter 8.125 6.500 .045 Second Quarter 15.750 12.500 .045
Third Quarter 7.000 6.500 .045 Third Quarter 12.750 10.000 .045
Fourth Quarter 7.313 5.125 .045 Fourth Quarter 10.250 7.000 .045
</TABLE>
Cash dividend payout is continually reviewed by management and the Board of
Directors. The Company intends to continue its policy of paying quarterly
dividends; however, the payment will depend upon a number of factors, including
capital requirements, regulatory limitations, the Company's financial condition,
results of operations and the Bank's ability to pay dividends to the Company.
The Company relies significantly upon such dividends originating from the Bank
to accumulate earnings for payment of cash dividends to its stockholders. See
Notes 12 and 13 to the Notes to Consolidated Financial Statements for a
discussion of restrictions on the Bank's ability to pay dividends.
At September 8, 2000, there were 845,362 shares of Horizon Financial Services
Corporation common stock issued and outstanding and approximately 144
stockholders of record.
STOCKHOLDERS AND GENERAL INQUIRIES TRANSFER AGENT
Robert W. DeCook, President and CEO First Bankers Trust Company, N.A.
Horizon Financial Services Corporation 1201 Broadway
301 First Avenue East Quincy, IL 62301
Oskaloosa, Iowa 52577 (217) 228-8000
40
<PAGE>
HORIZON FINANCIAL SERVICES CORPORATION
CORPORATE INFORMATION
--------------------------------------------------------------------------------
COMPANY AND BANK ADDRESS
301 First Avenue East Telephone:(515) 673-8328
Oskaloosa, IA 52577 Fax: (515) 673-0074
DIRECTORS OF THE BOARD
Robert W. DeCook
Chairman of the Board, President and
Chief Executive Officer of Horizon
Financial Services Corporation and
Horizon Federal Savings Bank
Gary L. Rozenboom
Self-Employed Flooring Business
Oskaloosa, Iowa
Dwight L. Groves
Property Manager and Retired Restaurateur
Oskaloosa, Iowa
Thomas L. Gillespie
Vice President of Horizon Financial
Services Corporation and Horizon
Federal Savings Bank
Norman P. Zimmerman
Retired Dentist and Former Mayor of the City of
Oskaloosa
Oskaloosa, Iowa
HORIZON FINANCIAL SERVICES CORPORATION EXECUTIVE OFFICERS
Robert W. DeCook
President and Chief Executive Officer
Thomas L. Gillespie
Vice President
Sharon K. McCrea
Treasurer and Chief Financial Officer
INDEPENDENT AUDITORS CORPORATE COUNSEL
KPMG LLP McCoy, Faulkner & Broerman
2500 Ruan Center 216 South First Street
Des Moines, Iowa 50309 Oskaloosa, Iowa 52577
SPECIAL COUNSEL
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Seventh Floor
Washington, D.C. 20005
41
