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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the quarterly period ended December 31, 2004
-----------------
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the transition period from ______________ to __________________
Commission file number 0-27062
Horizon Financial Corp.
-----------------------
(Exact name of registrant as specified in its charter)
Chartered by the State of Washington
------------------------------------
(State or other jurisdiction of incorporation or organization)
91-1695422
----------
(IRS Employer Identification No.)
1500 Cornwall Avenue
Bellingham, Washington
----------------------
(Address of principal executive offices)
98225
-----
(Zip Code)
Registrant's telephone number including area code: (360) 733-3050
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO
----- -----
As of December 31, 2004, 10,121,148 common shares, $1.00 par value, were
outstanding.
HORIZON FINANCIAL CORP.
INDEX PAGE
- ----- ----
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Financial Position 2
Consolidated Statements of Income 3-4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-15
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 15
Item 4 Controls and Procedures 15
PART II OTHER INFORMATION
Item 1 Legal Proceedings 16
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 3 Defaults Upon Senior Securities 16
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 5 Other Information 16
Item 6 Exhibits 17
SIGNATURES 18
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
HORIZON FINANCIAL CORP.
Consolidated Statements of Financial Position
ASSETS
December 31, March 31,
2004 2004
(unaudited)
------------ ------------
Cash and cash equivalents $ 20,310,325 $ 18,431,964
Interest-bearing deposits 1,185,472 20,767,398
Investment securities
Available-for-sale 75,766,989 85,183,872
Held-to-maturity 369,557 369,444
Mortgage-backed securities
Available-for-sale 19,806,366 27,759,813
Held-to-maturity 957,204 1,544,034
Federal Home Loan Bank Stock 7,217,900 7,014,900
Loans receivable, net of allowance for loan
losses of $11,168,216 at December 31 and
$10,121,532 at March 31 742,355,144 658,226,144
Loans held for sale, at fair value 2,588,250 1,333,500
Investment in real estate for a joint venture 17,163,327 -
Accrued interest and dividends receivable 4,390,481 4,032,007
Bank premises and equipment, net 21,961,281 17,193,671
Net deferred income tax assets 1,186,433 831,123
Federal income tax receivable 381,362 -
Real estate owned - 63,432
Other assets 16,999,303 16,124,579
------------ ------------
TOTAL ASSETS $932,639,394 $858,875,881
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $693,834,906 $670,259,218
Accounts payable and other liabilities 7,767,124 8,301,761
Other borrowed funds 104,418,234 67,468,842
Borrowing related to investment in real estate
for a joint venture 16,462,238 -
Advances by borrowers for taxes and insurance 133,817 416,899
Income tax currently payable - 1,375,274
Deferred compensation 1,802,544 1,746,894
------------ ------------
Total liabilities 824,418,863 749,568,888
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Serial preferred stock, $1 par value,
10,000,000 shares, authorized; none
issued or outstanding - -
Common stock, $1 par value, 30,000,000 shares
authorized; 10,121,148 and 10,405,331
issued and outstanding, respectively 10,121,148 10,405,331
Additional paid-in capital 55,317,481 56,893,824
Retained earnings 38,508,801 36,925,836
Unearned ESOP shares (144,205) (144,205)
Accumulated other comprehensive income, net
of tax 4,417,306 5,226,207
------------ ------------
Total stockholders' equity 108,220,531 109,306,993
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $932,639,394 $858,875,881
============ ============
(See Notes to Consolidated Financial Statements)
2
HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended
December 31,
2004 2003
------------ ------------
INTEREST INCOME
Interest on loans $ 12,271,820 $ 10,686,806
Interest on investments and mortgage-
backed securities 1,022,340 1,292,028
------------ ------------
Total interest income 13,294,160 11,978,834
------------ ------------
INTEREST EXPENSE
Interest on deposits 3,314,915 3,197,492
Interest on other borrowings 770,825 565,420
------------ ------------
Total interest expense 4,085,740 3,762,912
------------ ------------
Net interest income 9,208,420 8,215,922
PROVISION FOR LOAN LOSSES 350,000 220,000
------------ ------------
Net interest income after provision for
loan losses 8,858,420 7,995,922
------------ ------------
NONINTEREST INCOME
Service fees 759,681 603,407
Other 584,020 441,592
Net gain on sales of loans - servicing released 221,385 192,487
Net gain on sales of loans - servicing retained 13,203 12,228
Net gain on sale of investment securities 1,312 191,254
------------ ------------
Total noninterest income 1,579,601 1,440,968
------------ ------------
NONINTEREST EXPENSE
Compensation and employee benefits 3,290,811 3,017,645
Building occupancy 778,933 664,027
Other expenses 1,236,158 1,065,267
Data processing 373,809 154,648
Advertising 134,993 223,777
------------ ------------
Total noninterest expense 5,814,704 5,125,364
------------ ------------
NET INCOME BEFORE PROVISION FOR INCOME TAX 4,623,317 4,311,526
PROVISION FOR INCOME TAX 1,399,403 1,409,485
------------ ------------
NET INCOME $ 3,223,914 $ 2,902,041
============ ============
BASIC EARNINGS PER SHARE $ 0.32 $ 0.28
====== ======
DILUTED EARNINGS PER SHARE $ 0.31 $ 0.27
====== ======
(See Notes to Consolidated Financial Statements)
3
HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Nine months ended
December 31,
2004 2003
------------ ------------
INTEREST INCOME
Interest on loans $ 35,170,503 $ 32,745,214
Investment and mortgage-backed securities 3,191,997 3,938,700
------------ ------------
Total interest income 38,362,500 36,683,914
------------ ------------
INTEREST EXPENSE
Interest on deposits 9,703,156 10,145,048
Interest on other borrowings 1,994,629 1,686,581
------------ ------------
Total interest expense 11,697,785 11,831,629
------------ ------------
Net interest income 26,664,715 24,852,285
PROVISION FOR LOAN LOSSES 975,000 1,245,000
------------ ------------
Net interest income after provision for
loan losses 25,689,715 23,607,285
------------ ------------
NONINTEREST INCOME
Service fees 2,420,911 2,148,542
Other 1,401,931 1,432,328
Net gain (loss) on sales of loans - servicing
released 761,096 2,018,905
Net gain (loss) on sales of loans - servicing
retained 68,627 95,009
Net gain on sale of investment securities 471,063 235,602
------------ ------------
Total noninterest income 5,123,628 5,930,386
------------ ------------
NONINTEREST EXPENSE
Compensation and employee benefits 9,470,826 8,712,800
Building occupancy 2,122,940 1,967,583
Other expenses 3,834,986 3,581,761
Data processing 801,642 395,080
Advertising 511,439 646,643
------------ ------------
Total noninterest expense 16,741,833 15,303,867
------------ ------------
NET INCOME BEFORE PROVISION FOR INCOME TAX 14,071,510 14,233,804
PROVISION FOR INCOME TAX 4,266,364 4,669,703
------------ ------------
NET INCOME $ 9,805,146 $ 9,564,101
============ ============
BASIC EARNINGS PER SHARE $ 0.96 $ 0.91
====== ======
DILUTED EARNINGS PER SHARE $ 0.94 $ 0.89
====== ======
(See Notes to Consolidated Financial Statements)
4
HORIZON FINANCIAL CORP.
Consolidated Statements of Stockholders' Equity
Nine Months Ended December 31, 2004 and 2003
(unaudited)
Accumu-
lated
Other
Common Stock Compre-
--------------------- Additional Unearned hensive Treasury
Number of Paid-In Retained ESOP Income Stock
Shares At Par Capital Earnings Shares (Loss) at Cost
--------- ----------- ----------- ----------- --------- ---------- ----------
BALANCE, March 31,
2003 10,550,113 $10,550,113 $57,352,824 $32,527,963 $(216,309) $6,028,927 $ -
Comprehensive income
Net income - - - 9,564,101 - - -
Other comprehensive
income
Change in unrealized
gains on available-
for-sale securities,
net of tax (benefit)
of $(426,071) - - - - - (827,079) -
Total other compre-
hensive income - - - - - - -
Comprehensive income - - - - - - -
Cash dividends on
common stock at $.365/sh - - - (3,820,585) - - -
Stock options exercised 73,760 73,760 411,155 - - - -
Dividend reinvestment
plan 30,589 30,589 485,110 - - - -
Treasury stock purchased - - - - - - (4,163,987)
Retirement of treasury
stock (246,240) (246,240) (1,403,814) (2,513,933) - - 4,163,987
---------- ----------- ----------- ----------- --------- ---------- ----------
BALANCE, December
31, 2003 10,408,222 $10,408,222 $56,845,275 $35,757,546 $(216,309) $5,201,848 $ -
========== =========== =========== =========== ========= ========== ==========
BALANCE, March 31,
2004 10,405,331 $10,405,331 $56,893,824 $36,925,836 $(144,205) $5,226,207 $ -
Comprehensive income
Net income - - - 9,805,146 - - -
Other comprehensive
income
Change in unrealized
losses on available-
for-sale securities,
net tax (benefit)
of $(416,707) - - - - - (808,901) -
Total other compre-
hensive income - - - - - - -
Comprehensive income - - - - - - -
Cash dividends on
common stock at $.395/sh - - - (4,027,603) - - -
Stock options exercised 59,919 59,919 385,382 - - - -
Treasury stock purchased - - - - - - -
Retirement of treasury
stock (344,102) (344,102) (1,961,725) (4,194,578) - - 6,500,405
---------- ----------- ----------- ----------- --------- ---------- ----------
BALANCE, December
31, 2004 10,121,148 $10,121,148 $55,317,481 $38,508,801 $(144,205) $4,417,306 $ -
========== =========== =========== =========== ========= ========== ==========
Total
Stockholders' Comprehensive
Equity Income
------------ --------------
BALANCE, March 31, 2003 $106,243,518
Comprehensive income
Net income 9,564,101 $9,564,101
Other comprehensive income
Change in unrealized gains on
available-for-sale securities,
net of tax (benefit) of $(426,071) (827,079) (827,079)
----------
Total other comprehensive income - (827,079)
----------
Comprehensive income - $8,737,022
Cash dividends on ==========
common stock at $.365/sh (3,820,585)
Stock options exercised 484,915
Dividend reinvestment plan 515,699
Treasury stock purchased (4,163,987)
Retirement of treasury stock -
------------
BALANCE, December 31, 2003 $107,996,582
============
BALANCE, March 31, 2004 $109,306,993
Comprehensive income
Net income 9,805,146 $9,805,146
Other comprehensive income
Change in unrealized
losses on available-for-sale
securities, net tax (benefit)
of $(416,707) (808,901) (808,901)
----------
Total other comprehensive income - (808,901)
----------
Comprehensive income - $8,996,245
Cash dividends on ==========
common stock at $.395/sh (4,027,603)
Stock options exercised 445,301
Treasury stock purchased (6,500,405)
Retirement of treasury stock -
------------
BALANCE, December 31, 2004 $108,220,531
============
(See Notes to Consolidated Financial Statements)
5
HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
December 31,
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,805,146 $ 9,564,101
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 431,117 1,522,113
Stock dividends - Federal Home Loan Bank stock (203,000) (289,100)
Provision for loan losses 975,000 1,245,000
Changes in assets and liabilities
Accrued interest and dividends receivable (358,474) 740,323
Interest payable 191,961 (70,219)
Loans held for sale (1,254,750) 1,596,610
Federal income tax (receivable) payable (1,756,636) (1,466,297)
Other assets (874,724) 293,502
Other liabilities (1,019,719) (2,596,677)
------------ ------------
Net cash flows from operating activities 5,935,921 10,539,356
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in interest-bearing deposits, net 19,581,926 36,052,100
Purchases of investment securities - available
-for-sale (10,915,000) (19,175,000)
Proceeds from sales and maturities of
investment securities - available-for-sale 19,230,816 9,954,052
Purchases of mortgage-backed securities -
available-for-sale - (12,829,904)
Proceeds from maturities of mortgage-backed
securities - available-for-sale 7,957,727 20,593,691
Proceeds from maturities of mortgage-backed
securities - held-to-maturity 519,294 1,068,514
Net change in loans (84,645,745) (36,360,005)
Purchases of bank premises and equipment (5,656,982) (2,146,910)
Investment in real estate for a joint venture (17,163,327) -
Net change in other real estate owned 63,432 729,433
------------ ------------
Net cash flows from investing activities (71,027,859) (2,114,029)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 23,575,688 (1,486,016)
Advances from other borrowed funds 78,949,392 4,036,396
Repayments of other borrowed funds (42,000,000) -
Advances from other borrowed funds related
to investment in real estate for a
joint venture 16,462,238 -
Common stock issued, net 445,301 574,947
Cash dividends paid (3,961,915) (3,307,154)
Treasury stock purchased (6,500,405) (4,163,987)
------------ ------------
Net cash flows from financing activities 66,970,299 (4,345,814)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,878,361 4,079,513
CASH AND CASH EQUIVALENTS, beginning of period 18,431,964 15,083,505
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 20,310,325 $ 19,163,018
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for interest $ 11,505,824 $ 11,901,849
============ ============
Cash paid during the period for income tax $ 6,023,000 $ 6,136,000
============ ============
(See Notes to Consolidated Financial Statements)
6
HORIZON FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED DECEMBER 31, 2004
(unaudited)
NOTE 1
Basis of Presentation
- ---------------------
The consolidated financial statements as of and for the three months and
nine months ended December 31, 2004, include the accounts of Horizon Financial
Corp. (the Corporation), Horizon Bank (the Bank), and other subsidiaries of
the Bank. Significant intercompany balances and transactions have been
eliminated in consolidation. The Corporation has engaged in no significant
activity other than holding the stock of the Bank.
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect amounts reported in
the consolidated financial statements. Changes in these estimates and
assumptions are considered reasonably possible and may have a material impact
on the financial statements and thus actual results could differ from the
amounts reported and disclosed herein.
The unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to the
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation are reflected in
the interim financial statements. The results of operations for the periods
ended December 31, 2004 and 2003 are not necessarily indicative of the
operating results for the full year. For further information, refer to the
consolidated financial statements and footnotes thereto in the Corporation's
Annual Report on Form 10-K for the year ended March 31, 2004.
Significant Accounting Policies
- -------------------------------
In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities. FIN 46 explains the concept of a variable interest entity
and requires consolidation by the primary beneficiary where the variable
interest entity does not have sufficient equity at risk to finance its
activities without additional subordinated financial support from other
parties. This interpretation applies immediately to variable interest
entities in which an enterprise holds a variable interest. In October 2004,
the Bank's wholly owned subsidiary, Westward Financial Services, Inc
(Westward), entered into a real estate development joint venture in Greenbriar
Northwest LLC (GBNW), an established residential land development company
headquartered in Bellingham, Washington. The Corporation believes that GBNW
is a variable interest entity. Under FIN 46 GBNW is consolidated in our
consolidated balance sheet. The Corporation also accounts for the unowned
portion as a minority interest. The investment in real estate is recorded as
an asset and the related debt is recorded as our liability. The real estate
joint venture has a carrying amount of approximately $17 million, with a
related borrowing of approximately $16.5 million.
Reclassification
- ----------------
Certain reclassifications have been made to prior financial statements to
conform with current presentation. Such reclassifications have no effect on
net income.
Net Income Per Share
- --------------------
Basic earnings per share (EPS) for the three months ended December 31,
2004 and 2003 are calculated on the basis of 10,142,905 and 10,447,340
weighted average shares outstanding, respectively. Diluted EPS for the three
months ended December 31, 2004 and 2003 are calculated on the basis of
10,288,948 and 10,650,976 weighted average shares outstanding,
7
respectively. Basic earnings per share for the nine months ended December 31,
2004 and 2003 are calculated on the basis of 10,251,119 and 10,501,077
weighted average shares outstanding, respectively. Diluted earnings per share
for the nine months ended December 31, 2004 and 2003 are calculated on the
basis of 10,406,122 and 10,712,679 weighted average shares outstanding,
respectively. Diluted EPS figures are computed by determining the number of
additional shares that are deemed outstanding due to stock options and
warrants under the treasury stock method.
Stock Based Compensation
- ------------------------
In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123 (revised 2004) (SFAS 123R), Share-Based Payment, that addresses
the accounting for share-based payments to employees, including grants of
employee stock options. Statement 123R requires all share-based payments, to
be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. The Corporation is currently
evaluating SFAS 123R to determine which fair-value-based model and
transitional provision it will follow upon adoption. The options for
transition methods as prescribed in SFAS 123R include either the modified
prospective or the modified retrospective methods. The modified prospective
method requires that compensation expense be recorded for all unvested stock
options as the requisite service is rendered beginning with the first quarter
of adoption, while the modified retrospective method would record compensation
expense for stock options beginning with the first period restated. Under the
modified retrospective method, prior periods may be restated either as of the
beginning of the year of adoption or for all periods presented. This
statement is effective for public companies at the beginning of the first
interim or annual period beginning after June 15, 2005. Although the
Corporation will continue to evaluate the application of SFAS 123R, management
expects adoption to have an impact on its results of operations, although it
will have no impact on its overall financial position. The impact of adoption
of SFAS 123R cannot be predicted at this time because it will depend on levels
of share-based payments granted in the future. However, had we adopted SFAS
123R in prior periods, the impact of that standard would have approximated the
impact of SFAS 123 as described in the disclosure of pro forma net income and
earnings per share below.
The Corporation currently recognizes the financial effects of stock
options under the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25 Accounting for Stock Issued to Employees (APB
25). Generally, stock options are issued at a price equal to the fair value of
the Corporation's stock as of the grant date.
Under APB 25, options issued in this manner do not result in the
recognition of employee compensation in the Corporation's financial
statements. Disclosures required by Statement of Financial Accounting Standard
No. 123, Accounting for Stock-Based Compensation, as amended are as follows:
Pro forma disclosures:
For the Quarter Ended For the Nine Months Ended
December 31, December 31,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income as reported $3,323,914 $2,902,041 $9,805,146 $9,564,101
Additional compensation
for fair value of
stock options (3,063) (15,968) (16,145) (58,752)
---------- ---------- ---------- ----------
Pro forma net income $3,220,851 $2,886,073 $9,789,001 $9,505,349
========== ========== ========== ==========
Earnings per share
Basic
As reported $ 0.32 $ 0.28 $ 0.96 $0.91
====== ====== ====== =====
Pro forma $ 0.32 $ 0.28 $ 0.95 $0.91
====== ====== ====== =====
Diluted
As reported $ 0.31 $ 0.27 $ 0.94 $0.89
====== ====== ====== =====
Pro forma $ 0.31 $ 0.27 $ 0.94 $0.89
====== ====== ====== =====
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding the
financial condition and results of operations of the Corporation and its
subsidiary. The information contained in this section should be read in
conjunction with the Consolidated Financial Statements and the accompanying
Notes contained herein.
Forward Looking Statements
- --------------------------
Management's Discussion and Analysis and other portions of this report
contain certain "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. This statement is for the express
purpose of availing the Corporation of the protections of such safe harbor
provisions of said Act with respect to all "forward looking statements." The
Corporation has used "forward looking statements" to describe future plans and
strategies, including expectations of its potential future financial results.
Management's ability to predict results or the effect of future plans and
strategies is inherently uncertain. Factors that could affect results
include, but are not limited to: the future level of interest rates, loan
demand, industry trends, general economic conditions, loan delinquency rates,
and changes in local, state and federal regulations. These factors should be
considered when evaluating the "forward looking statements" and undue reliance
should not be placed on such statements.
General
- -------
The Corporation was formed under Washington law on May 22, 1995, and
became the holding company for the Bank, effective October 13, 1995.
Effective June 19, 1999, the Corporation completed the acquisition of
Bellingham Bancorporation, whose wholly-owned subsidiary, Bank of Bellingham,
was merged with and into the Bank. At December 31, 2004, the Corporation had
total assets of $932,639,394, total deposits of $693,834,906, and total equity
of $108,220,531. The Corporation's business activities generally are limited
to passive investment activities and oversight of its investment in the Bank.
Accordingly, the information set forth herein, including the consolidated
financial statements and related data, relates primarily to the Bank and its
subsidiary.
The Bank was organized in 1922 as a Washington state chartered mutual
savings and loan association and converted to a federal mutual savings and
loan association in 1934. In 1979, the Bank converted to a Washington state
chartered mutual savings bank, the deposits of which are insured by the
Federal Deposit Insurance Corporation (FDIC). On August 12, 1986, the Bank
converted to a state chartered stock savings bank under the name "Horizon
Bank, a savings bank." The Bank became a member of the Federal Home Loan Bank
(FHLB) of Seattle in December 1998. Effective March 1, 2000, the Bank changed
its name to its current title, "Horizon Bank."
The Bank's operations are conducted through 17 full-service office
facilities, located in Whatcom, Skagit and Snohomish counties in Northwest
Washington. The acquisition of Bellingham Bancorporation increased the
Corporation's and the Bank's presence in Whatcom County. In fiscal 2002, the
Bank acquired a bank site in Lynnwood, Washington, which was remodeled and
opened for business in March 2003. The Bank opened commercial banking/loan
centers in Bellingham and Everett and expanded its operations in Burlington
during the first quarter of fiscal 2004. In November 2004, the Bank opened a
full service office in Marysville. Future plans for the Bank include the
opening of a full service office in Lakewood, located in Pierce County, just
south of Tacoma during the first quarter of 2005 and in Everett during fiscal
2006, which will replace the Bank's existing Everett office.
The Corporation's results of operations depend primarily on revenue
generated as a result of its net interest income and noninterest income. Net
interest income is the difference between the interest income the Corporation
earns on its interest-earning assets (consisting primarily of loans and
investment securities) and the interest the Corporation pays on its
interest-bearing liabilities (consisting primarily of customer savings and
money market accounts, time deposits and borrowings). Noninterest income
consists primarily of service charges on deposit and loan accounts, gains on
the sale of loans and investments, and loan servicing fees. The Corporation's
results of operations are also affected by its provisions for loan losses and
other expenses. Other expenses consist primarily of noninterest expense,
including compensation and benefits, occupancy, equipment, data processing,
marketing, automated teller machine costs and deposit insurance premiums. The
Corporation's results of operations may also be affected significantly by
general and local economic and competitive conditions, changes in market
interest rates, governmental policies and actions of regulatory authorities.
9
Operating Strategy
- ------------------
The Corporation does not presently engage in any activities outside of
serving as a shell parent company for the Bank. The operating strategy of the
Corporation has been to expand and diversify the consolidated operations of
the Corporation across a variety of companies and/or operating units that are
engaged in complementary, but different, businesses and/or operating
strategies. This diversification strategy is expected to continue as
opportunities arise, although there are no specific acquisitions or new
business formations planned at this time.
The primary business of the Bank is to acquire funds in the form of
deposits and wholesale funds, and to use the funds to make commercial,
consumer, and real estate loans in its primary market area. In addition, the
Bank invests in a variety of investment grade securities including, but not
necessarily limited to U.S. Government and federal agency obligations,
mortgage-backed securities, corporate debt, equity securities, and municipal
securities. The Bank intends to continue to fund its assets primarily with
retail and commercial deposits, although FHLB advances and other wholesale
borrowings may be used as a supplemental source of funds.
The Corporation's profitability depends primarily on its net interest
income, which is the difference between the income it receives on the Bank's
loan and investment portfolio and the Bank's cost of funds, which consists of
interest paid on deposits and borrowings.
Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities. When
interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. The
Corporation's profitability is also affected by the level of the Bank's other
income and expenses. Other noninterest income includes income associated with
the origination and sale of mortgage loans, loan servicing fees and net gains
and losses on sales of interest-earning assets. Other noninterest expenses
include compensation and benefits, occupancy and equipment expenses, deposit
insurance premiums, data servicing expenses and other operating costs. The
Corporation's results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government legislation, regulation, and monetary and fiscal policies.
The Bank's business strategy is to operate as a well-capitalized,
profitable and independent community bank, dedicated to commercial lending,
home mortgage lending, consumer lending, small business lending and providing
quality financial services to local personal and business customers. The Bank
has sought to implement this strategy by: (i) focusing on commercial banking
opportunities; (ii) continued efforts towards the origination of residential
mortgage loans, including one to four family residential construction loans;
(iii) providing high quality, personalized financial services to individuals
and business customers and communities served by its branch network; (iv)
selling many of its fixed rate mortgages to the secondary market; (v) focusing
on asset quality; (vi) containing operating expenses; and (vii) maintaining
capital in excess of regulatory requirements combined with prudent growth.
10
Financial Condition
- -------------------
Total consolidated assets for the Corporation as of December 31, 2004,
were $932,639,394, a 8.6% increase from the March 31, 2004, level of
$858,875,881. This increase in assets was primarily attributable to the
growth in loans receivable, which increased 12.8% to $742,355,144 at December
31, 2004 from $658,226,144 at March 31, 2004. The following is an analysis of
the loan portfolio by major type of loans:
December 31, March 31,
2004 2004
------------ ------------
First mortgage loans
1-4 family $168,776,916 $181,625,282
1-4 family construction 71,613,823 63,978,918
Less participations (65,211,495) (74,278,637)
------------ ------------
Net first mortgage loans 175,179,244 171,325,563
Construction and land development 86,502,623 78,273,205
Residential commercial real estate 71,003,481 53,135,324
Non-residential commercial real
estate 299,555,640 255,026,647
Commercial loans 80,640,835 77,960,168
Home equity secured 34,589,464 26,296,475
Other consumer loans 6,052,073 6,330,294
------------ ------------
Subtotal 578,344,116 497,022,113
------------ ------------
Subtotal 753,523,360 668,347,676
------------ ------------
Less:
Allowance for loan losses (11,168,216) (10,121,532)
------------ ------------
$742,355,144 $658,226,144
============ ============
Net residential loans $173,607,451 23% $169,751,995 26%
Net commercial loans 79,058,073 11% 76,393,834 12%
Net commercial real estate loans 449,770,582 61% 380,085,298 57%
Net consumer loans 39,919,038 5% 31,995,017 5%
------------ --- ------------ ---
$742,355,144 100% $658,226,144 100%
============ === ============ ===
Also contributing to the change in assets was the decline in available for
sale (AFS) investment and mortgage-backed securities, which, combined,
decreased to $95,573,355 at December 31, 2004 from $112,943,685 at March 31,
2004.
The tables below display the characteristics of the AFS and held to maturity
(HTM) portfolios as of December 31, 2004:
Estimated
Amortized Net Fair
Cost Gain/(Loss) Value
----------- ----------- -----------
AFS Securities
State and political subdivisions
and U.S. government agency
securities $53,559,624 $ 94,591 $53,654,215
Marketable equity securities 1,824,224 6,264,799 8,089,023
Mutual funds 5,000,000 (55,388) 4,944,612
Corporate debt securities 8,962,613 116,526 9,079,139
Mortage-backed securities and
CMOs 19,472,610 333,756 19,806,366
----------- ----------- -----------
Total available-for-sale
securities 88,819,071 6,754,284 95,573,355
----------- ----------- -----------
HTM Securities
State and political subdivisions
and U.S. government agency
securities 369,558 20,474 390,032
Mortgage-backed securities and
CMOs 957,204 66,707 1,023,911
----------- ----------- -----------
Total held-to-maturity
securities 1,326,762 87,181 1,413,943
----------- ----------- -----------
Total securities $90,145,833 $ 6,841,465 $96,987,298
=========== =========== ===========
11
Maturity Schedule of Securities
-------------------------------------------------
Available-For-Sale Held-To-Maturity
------------------------ ----------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
----------- ----------- ---------- ----------
Maturities:
Within one year $17,467,430 $17,603,488 $ 6 $ 6
Two to five years 40,471,718 40,612,171 1,207,755 1,268,837
Five to ten years 6,474,530 6,577,654 11,711 13,019
Over ten years 17,581,169 17,746,407 107,290 132,081
----------- ----------- ---------- ----------
81,994,847 82,539,720 1,326,762 1,413,943
----------- ----------- ---------- ----------
Mutual funds and market-
able equity securities
(liquid) 6,824,224 13,033,635 - -
----------- ----------- ---------- ----------
Total investment
securities $88,819,071 $95,573,355 $1,326,762 $1,413,943
=========== =========== ========== ==========
Total liabilities increased 10.0% to $824,418,863 at December 31, 2004,
from $749,568,888 at March 31, 2004. This increase in liabilities was in large
part a result of the growth in other borrowed funds, which increased 54.8% to
$104,418,234 from $67,468,842 at March 31, 2004. The Bank borrowed additional
funds from the FHLB to help fund the growth in net loans receivable to
$742,355,144 as well as the investment in real estate for a joint venture of
approximately $17 million. Also contributing to the net change in total
liabilities was the increase in deposits of 3.5%, to $693,834,906 at December
31, 2004 from $670,259,218 at March 31, 2004. The following is an analysis of
the deposit portfolio by major type of deposit at December 31, 2004 and March
31, 2004:
December 31 March 31
2004 2004
------------ ------------
Demand deposits
Savings $ 42,305,097 $ 40,526,619
Checking 79,298,758 78,697,106
Checking (noninterest-bearing) 55,426,927 44,773,672
Money market 135,668,741 131,310,670
------------ ------------
312,699,523 295,308,067
------------ ------------
Time certificates of deposit
Less than $100,000 237,817,593 245,608,118
Greater than or equal to $100,000 143,355,988 129,343,033
------------ ------------
381,173,581 374,951,151
------------ ------------
Total deposits $693,873,104 $670,259,218
============ ============
Also included in the December 31, 2004 balance sheet is an investment in
real estate for a joint and venture and the corresponding borrowing. During
the quarter ended December 31, 2004, the Bank's subsidiary (Westward Financial
Services), as a 50% partner in the Greenbriar NW LLP, purchased an 82 acre
parcel of land in Bellingham for future development. The partnership intends
to develop the property in future years, into a neighborhood community to be
known as Fairhaven Highlands. The $17.1 million shown on the Corporation's
Balance sheet as an asset at December 31, 2004 represents the current level of
the investment in real estate joint ventures, including the Fairhaven
Highlands joint venture. The $16.5 million shown in the liability section of
the balance sheet represents the corresponding wholesale borrowing used to
fund the investment in the Fairhaven Highlands joint venture. At this time,
the partnership is in the process of meeting with the appropriate public and
private entities, in its preliminary planning efforts relating to the future
development of the property.
Stockholders' equity at December 31, 2004 decreased 1.0% to $108,220,531
from $109,306,993 at March 31, 2004. This decrease was primarily attributable
to the decrease in accumulated other comprehensive income to $4,417,306 at
December 31, 2004 from $5,226,207 at March 31, 2004. The primary reason for
the decline was the decrease in fair market value of various securities in the
Bank's portfolio as a result of rising interest rates. The Corporation
remains strong in terms of its capital position, with a stockholder
equity-to-assets ratio of 11.6% at December 31, 2004, compared to 12.7% at
March 31, 2004.
Liquidity and Capital Resources
- -------------------------------
The Bank maintains liquid assets in the form of cash and short-term
investments to provide a source to fund loans, savings withdrawals, and other
short-term cash requirements. At December 31, 2004, the Bank had liquid
assets (cash and marketable securities with maturities of one year or less)
with a book value of $63,047,360.
12
As of December 31, 2004, the total book value of investments and
mortgage-backed securities was $90,145,833 compared to a market value of
$96,987,298 with an unrealized gain of $6,841,465. As of March 31, 2004, the
total book value of investments and mortgage-backed securities was
$106,938,668, compared to a market value of $114,997,574 with an unrealized
gain of $8,058,906. The Bank foresees no factors that would impair its
ability to hold debt securities to maturity.
As indicated on the Corporation's Consolidated Statement of Cash Flows,
the Bank's primary sources of funds are cash flow from operations, which
consist primarily of mortgage loan repayments, deposit increases, loan sales,
borrowings and cash received from the maturity or sale of investment
securities. The Bank's liquidity fluctuates with the supply of funds and
management believes that the current level of liquidity is adequate at this
time. If additional liquidity is needed, the Bank's options include, but are
not necessarily limited to: 1) selling additional loans in the secondary
market; 2) entering into reverse repurchase agreements; 3) borrowing from the
FHLB of Seattle; 4) accepting additional brokered cd's, jumbo and/or public
funds deposits; or 5) accessing the discount window of the Federal Reserve
Bank of San Francisco.
Stockholders' equity as of December 31, 2004 was $108,220,531, or 11.60%
of assets, compared to $109,306,993, or 12.73% of assets at March 31, 2004.
The Bank continues to exceed the 5.0% minimum tier one capital required by the
FDIC in order to be considered well capitalized. The Bank's total
risk-adjusted capital ratio as of December 31, 2004 was 14.72%, compared to
16.6% as of March 31, 2004. These figures are well above the well-capitalized
minimum of 10% set by the FDIC.
The Corporation has had various stock buy-back programs since August
1996. In March 2004, the Board of Directors approved a new stock repurchase
plan that runs concurrent with the 2005 fiscal year, allowing the Corporation
to repurchase up to 10% of total shares outstanding, or approximately 1.04
million shares. This marked the Corporation's sixth stock repurchase plan.
During the quarter ended December 31, 2004, the Corporation repurchased 56,852
shares at an average price of $19.71. In total, the Corporation has
repurchased 344,102 shares at an average price of $18.84 under this plan.
Management intends to continue its stock buy-back programs from time to
time as long as repurchasing the stock contributes to the overall growth of
shareholder value. The number of shares of stock that will be repurchased
and the price that will be paid is the result of many factors, several of
which are outside of the Corporation's control. The primary factors, however,
are market and economic factors such as the price at which the stock is
trading in the market, the number of shares available in the market; the
attractiveness of other investment alternatives in terms of the rate of return
and risk involved in the investment; the ability to increase the value and/or
earnings per share of the remaining outstanding shares and the Bank's and the
Corporation's liquidity and capital needs and regulatory requirements.
Presently, it is management's belief that purchases made under the current
Board approved plan will not materially affect the Bank's capital or liquidity
position.
Net Interest Income
- -------------------
Net interest income for the three months ended December 31, 2004
increased 12.1% to $9,208,420 from $8,215,922 in the same time period of the
previous year. Interest on loans for the quarter ended December 31, 2004
increased 14.8% to $12,271,820, from $10,686,806 for the comparable quarter a
year ago. Interest and dividends on investments and mortgage-backed securities
for the three months ended December 31, 2004 decreased 20.9% to $1,022,340,
from $1,292,028 for the comparable quarter a year ago. This decrease was a
result of a lower level of investments and mortgage backed securities
outstanding during the respective periods, as total investments decreased
27.6% to $105,303,488 at December 31, 2004 as compared to $145,549,762 at
December 31, 2003. Total interest income increased 11.0% to $13,294,160 from
$11,978,834 in the comparable period one year ago.
Total interest paid on deposits increased 3.7% to $3,314,915 at December
31, 2004 from $3,197,492 at December 31, 2003 due to an increased level of
deposits outstanding along with a moderate increase in interest rates in the
current period. Interest on borrowings increased 36.3% to $770,825 during the
quarter ended December 31, 2004, compared to $565,420 for the comparable
period one year ago. The increased expense in the current year was a result
of a higher level of borrowings outstanding, as a portion of the Bank's loan
portfolio growth was funded with wholesale borrowings. The Bank continues to
carry wholesale borrowings in order to further leverage its balance sheet and
better manage its interest rate risk profile.
Total interest income for the nine months ended December 31, 2004
increased 4.6% to $38,362,500 from $36,683,914. Total interest expense for the
nine-month period ended December 31, 2004 decreased 1.1% to $11,697,785 from
$11,831,629 for the nine months ended December 31, 2003. Net interest income
for the nine-month period ended December 31, 2004 increased 7.3% to
$26,664,715 from $24,852,285 for the comparable period one year.
13
Provision for losses on loans
- -----------------------------
Provisions for loan losses are charges to earnings to bring the total
allowance for loan losses to a level considered by management as adequate to
provide for known and inherent risks in the loan portfolio, based on
management's continuing analysis of factors underlying the quality of the loan
portfolio. These factors include changes in portfolio size and composition,
actual loss experience, current economic conditions, detailed analysis of
individual loans for which full collectibility may not be assured, and
determination of the existence and realizable value of the collateral and
guarantees securing the loans.
The provision for loan losses was $350,000 for the quarter ended December
31, 2004 compared to $220,000 for the quarter ended December 31, 2003. This
increase resulted from management's ongoing analysis of changes in loan
portfolio composition by collateral categories, overall credit quality of the
portfolio, peer group analysis and current economic conditions. The reserve
for loan losses was $11,168,216, or 1.50% of net loans receivable at December
31, 2004, compared to $9,491,010, or 1.54% of net loans receivable at December
31, 2003. The increased reserve level at December 31, 2004 compared to the
December quarter one year ago was attributable to the continued loan portfolio
growth in the higher-risk lending categories of commercial and multi-family
construction/permanent loans and business loans during the period, which
comprised $528,828,655, or 71.2% of the loan portfolio at December 31, 2004,
versus $425,600,881, or 69.0% of the loan portfolio at December 31, 2003.
As of December 31, 2004, there were 14 loans in the Bank's portfolio over
90 days delinquent and one loan on nonaccrual status. At December 31, 2004
total non-performing loans were $1,115,040 and the Bank had no real estate
owned at December 31, 2004. Total non-performing assets represented 0.12%, or
$1,115,040, of total assets at December 31, 2004 compared to 0.07%, or
$581,076 of total assets at December 31, 2003.
As of December 31,
Non-Performing Assets 2004 2003
---------- ----------
Accruing loans - 90 days past due $ 150,938 $ 238,168
Non-accrual loans 964,102 -
---------- ----------
Total non-performing loans 1,115,040 238,168
Total non-performing loans/net loans 0.15% 0.04%
Real estate owned - 342,908
---------- ----------
Total non-performing assets 1,115,040 581,076
---------- ----------
Total non-performing assets/total assets 0.12% 0.07%
Noninterest Income
- ------------------
Noninterest income for the three months ended December 31, 2004 increased
9.6% to $1,579,601 from $1,440,968 for the same time period a year ago.
Service fee income increased 25.9% to $759,681 from $603,407 for the
comparable quarter one year ago. The current quarter was positively impacted
by revisions made to the Bank's fee schedule earlier in the year. The net gain
on the sale of loans servicing released increased 15.0% to $221,385 during the
current quarter from $192,487 in the comparable period one year ago. The net
gain on sales of investment securities decreased to $1,312 in the quarter
ended December 31, 2004 from $191,254 in the quarter ended December 31, 2003.
The gains in the prior period were primarily a result of the sale of selected
securities from the Bank's investment portfolio. Other noninterest income for
the quarter increased 32.3% to $584,020 from $441,592 from the three months
ended December 31, 2003. The primary reason for the increase is a result of
increased profits recognized on a real estate development project from a joint
venture of the Bank's wholly owned subsidiary, Westward Financial Services
Corporation.
Noninterest income for the nine months ended December 31, 2004 decreased
13.6% to $5,123,628 from $5,930,386 for the nine months ended December 31,
2003. Service fee income increased 12.7% to $2,420,911 during the current
nine month period from $2,148,542 for the comparable period one year ago,
primarily as a result of the revised fee schedule discussed above in the
quarterly comparison. The net gain on the sale of loans servicing released
declined 62.3% to $761,096 for the nine months ended December 31, 2004 from
$2,018,905 in the comparable period one year ago. The primary reason for the
decline was due to a lower amount of loans sold in the current quarter of $68
million versus $162 million in the prior period's active mortgage refinance
market. The net gain/loss on sales of investment securities increased to
$471,063 during the current nine month period from $235,602 for the comparable
period one year ago. The gains in these periods were primarily attributable to
the sale of selected securities from the Bank's investment portfolio. Other
noninterest income decreased slightly to $1,401,931 for the nine months ended
December 31, 2004 from $1,432,328 for the comparable period one year ago.
14
Noninterest Expense
- -------------------
Noninterest expense for the three months ended December 31, 2004
increased 13.4% to $5,814,704 from $5,125,364 for the comparable quarter one
year ago. Compensation and employee benefits increased 9.1% for the quarter
ended December 31, 2004 to $3,290,811 from $3,017,645 for the comparable
quarter one year ago. The increase in compensation and employee benefits was
primarily a result of the overall growth in employment at the Bank, including
key additions to staff as the Bank continues its efforts to enhance its
commercial banking expertise and staffing for the Bank's recently opened
Marysville office. Building occupancy for the quarter ended December 31, 2004
increased 17.3% to $778,933 from $664,027 for the three months ended December
31, 2003. The primary reason for the increase in the current period was the
opening of a full service retail office in Marysville, Washington. Other
noninterest expense increased 16.0% to $1,236,158 for the current quarter from
$1,065,267 for the comparable quarter one year ago. The primary reasons for
the increase in the current period relates to expenses related to increased
accounting services expenses for Sarbanes-Oxley 404 compliance work, and
expenses related to opening the Marysville office in November 2004. Data
processing expenses increased 141.7% to $373,809 for the three months ended
December 31, 2004 from $154,648 for the comparable quarter one year ago,
primarily as a result of increased expenses in the current period related to
the Bank's core processor conversion effective November 4, 2004. Advertising
and marketing expenses for the quarter ended December 31, 2004 decreased 39.7%
to $134,993 from $223,777 from the comparable quarter one year ago. The
increased expenses in the prior period were related to research and brand
positioning of the Bank in its various markets.
Noninterest expense for the nine months ended December 31, 2004 increased
9.4% to $16,741,833 from $15,303,867 for the nine months ended December 31,
2003. Compensation and employee benefits increased 8.7% to $9,470,826 for the
current quarter from $8,712,800 for similar reasons discussed above in the
quarterly comparison. Building occupancy expenses for the current nine months
increased 7.9% to $2,122,940 from $1,967,583 for the comparable nine month
period one year ago. Other expenses increased 7.1% to $3,834,986 for the nine
months ended December 31, 2004 compared to $3,581,761 for the prior period one
year ago. Data processing expenses increased 102.9% to $801,642 for the nine
months ended December 31, 2004 from $395,080 in the prior year period. The
current year period increase is primarily attributable to expenses related to
the core data processor conversion, as shown above in the discussion on the
quarterly results. The other significant contributing factor to this
difference relates to an abnormally low level of expenses in the prior year
period, as a result of a renegotiation of the Bank's contract with its core
data processor at that time, which included substantial concessions in the
first quarter of fiscal 2004, and a reduced monthly expense thereafter.
Advertising and marketing expenses decreased 20.9% to $511,439 for the current
nine month period from $646,643 for the nine months ended December 31, 2003.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Corporation continues to be exposed to interest rate risk.
Currently, the Corporation's assets and liabilities are not materially exposed
to foreign currency or commodity price risk. At December 31, 2004, the
Corporation had no off-balance sheet derivative financial instruments, nor did
it have a trading portfolio of investments. At December 31, 2004, there were
no material changes in the Corporation's market risk from the information
provided in the Form 10-K for the fiscal year ended March 31, 2004.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
An evaluation of the Corporation's disclosure controls and procedures (as
defined in Section 13(a)-14(c) of the Securities Exchange Act of 1934 (the
"Act")) was carried out under the supervision and with the participation of
the Corporation's Chief Executive Officer, Chief Financial Officer, and
several other members of the Corporation's senior management as of the end of
the period preceding the filing date of this quarterly report. The
Corporation's Chief Executive Officer and Chief Financial Officer concluded
that the Corporation's disclosure controls and procedures as currently in
effect are effective in ensuring that the information required to be disclosed
by the Corporation in the reports it files or submits under the Act is (i)
accumulated and communicated to the Corporation's management (including the
Chief Executive Officer and Chief Financial Officer) in a timely manner, and
(ii) recorded, processed, summarized, and reported within the time periods
specified in the SEC's rules and forms.
Changes in Internal Controls
- ----------------------------
In the quarter ended December 31, 2004, the Corporation did not make any
significant changes in, nor take any corrective actions regarding, its
internal controls or other factors that could significantly affect these
controls.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Horizon Financial Corporation has certain litigation and/or
negotiations in progress resulting from activities arising from
normal operations. In the opinion of management, none of these
matters are likely to have a materially adverse effect on the
Corporation's financial position or results of operation.
Item 2. Unregistered Sales of Securities and Use of Proceeds
The Corporation's common stock is traded on the NASDAQ National Market under
the symbol "HRZB". As of December 31, 2004, there were 10,121,148 shares of
common stock outstanding.
Stock Repurchases
Bank holding companies, except for certain "well-capitalized" and highly
rated bank holding companies, are required to give the Federal Reserve prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth. The Federal Reserve may disapprove such a purchase or redemption
if it determines that the proposal would constitute an unsafe or unsound
practice or would violate any law, regulation, Federal Reserve order, or any
condition imposed by, or written agreement with, the Federal Reserve.
The Corporation is "well-capitalized" in accordance with regulatory
standards. The Corporation has had various stock buy-back programs since
August 1996. In March 2004, the Board of Directors approved a new stock
repurchase plan that runs concurrent with the 2005 fiscal year, allowing the
Corporation to repurchase up to 10% of total shares outstanding, or
approximately 1.04 million shares. This marked the Corporation's sixth stock
repurchase plan. During the quarter ended December 31, 2004, the Corporation
repurchased 56,852 shares at an average price of $19.71. In total, the
Corporation has repurchased 344,102 shares at an average price of $18.84 under
this plan.
The following table sets forth information about the Corporation's
purchases of its outstanding Common Stock during the quarter ended December
31, 2004.
(d) Maximum
(c) Total Number (or
Number of approximate
Shares Dollar Value)
(or Units) of shares (or
Purchased Units) that
(a) Total as Part of May Yet Be
Number of (b) Average Publicly Purchased
Shares (or Price Paid Announced Under the
Units) Per Share Plans or Plans or
Period Purchased (1) (or Unit) Programs Programs (2)
- ---------------- ---------- ----------- ---------- --------------
October 1, 2004 -
October 31, 2004 15,800 $19.66 303,050 736,950
November 1, 2004 -
November 30, 2004 37,387 19.64 340,437 699,563
December 1, 2004 -
December 31, 2004 3,665 20.60 344,102 695,898
Total 56,852 19.71 344,102 695,898
- ----------
(1) Of these shares, no shares were purchased other than through a publicly
announced program.
(2) In March 2004, the Board of Directors approved a new stock repurchase
plan that runs concurrent with the 2005 fiscal year, allowing the
Corporation to repurchase up to 10% of total shares outstanding, or
approximately 1.04 million shares. This program expires when all
shares under the plan have been repurchased, or March 31, 2005,
whichever occurs first.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
16
Item 6. Exhibits
(a) Exhibits
(3.1) Articles of Incorporation of Horizon Financial, Corp.
(incorporated by reference to Exhibit 3.1 to the Registrant's
Current Report on Form 8-K dated October 13, 1995)
(3.2) Bylaws of Horizon Financial Corp. (incorporated by reference
to Exhibit 3.2 to the Registrant's Current Report on Form 8-K
dated October 13, 1995)
(10.1) Amended and Restated Employment Agreement with V. Lawrence
Evans (incorporated by reference to the Registrant's Annual
Report on Form 10-K for the year ended March 31, 1996)
(10.2) Deferred Compensation Plan (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year ended
March 31, 1996)
(10.3) 1986 Stock Option and Incentive Plan (incorporated by
reference to Exhibit 99.1 to the Registrant's Registration
Statement on Form S-8 (File No. 33-99780))
(10.4) 1995 Stock Option Plan (incorporated by reference to Exhibit
99.2 to the Registrant's Registration Statement on Form S-8
(File No. 33-99780))
(10.5) Bank of Bellingham 1993 Employee Stock Option Plan
(incorporated by reference to Exhibit 99 to the Registrant's
Registration Statement on Form S-8 (File No. 33-88571))
(10.6) Severance Agreement with Dennis C. Joines (incorporated by
reference to the Registrant's Annual Report on Form 10-K for
the year ended March 31, 2004)
(10.7) Severance Agreement with Richard P. Jacobson (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002)
(10.8) Severance Agreement with Steven L. Hoekstra (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002)
(31.1) Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act
(31.2) Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act
(32) Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HORIZON FINANCIAL CORP.
By: /s/ V. Lawrence Evans
--------------------------------
V. Lawrence Evans
Chairman, President, and
Chief Executive Officer
By: /s/ Richard P. Jacobson
---------------------------------
Richard P. Jacobson
Chief Financial Officer
Dated: February 9, 2005
--------------------
18
Exhibit 31.1
Certification
I, V. Lawrence Evans, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Horizon Financial
Corp;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: February 9, 2005
/s/ V. Lawrence Evans
---------------------------------
V. Lawrence Evans
Chairman, President, and
Chief Executive Officer
19
Exhibit 31.2
Certification
I, Richard P. Jacobson, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Horizon Financial
Corp;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: February 9, 2005
/s/Richard P. Jacobson
-----------------------------
Richard P. Jacobson
Chief Financial Officer
20
Exhibit 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER OF
HORIZON FINANCIAL CORP.
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and in connection with this Quarterly Report of
Form 10-Q, that:
1. the report fully complies with the requirements of Sections 13(a)
and 15(d) of the Securities Exchange Act of 1934, as amended, and
2. the information contained in the report fairly presents, in all
material respects, the company's financial condition and results
of operations.
/s/ V. Lawrence Evans /s/ Richard P. Jacobson
- -------------------------------- --------------------------------
V. Lawrence Evans Richard P. Jacobson
Chairman, President, and Chief Financial Officer
Chief Executive Officer
Dated: February 9, 2005
21