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| HRZB > SEC Filings for HRZB > Form 10-Q on 5-Feb-2004 | All Recent SEC Filings |
5-Feb-2004
Quarterly Report
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 Horizon Financial to the protections of such safe harbor provisions of said Act with respect to all "forward looking statements." Horizon Financial has used "forward looking statements" to describe future plans and strategies, including expectations of Horizon Financial's 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, industry trends, general economic conditions, loan delinquency rates, and changes in 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 -
Horizon Financial Corp. was formed under Washington law on May 22, 1995, and became the holding company for Horizon 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 Horizon Bank. At December 31, 2003, the Corporation had total assets of $820.2 million, total deposits of $645.2 million and total equity of $108.0 million. 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 16 full-service office facilities and three loan centers, located in Whatcom, Skagit and Snohomish counties in Northwest Washington. The acquisition of Bellingham Bancorporation increased Horizon Financial's and Horizon Bank's presence in Whatcom County. During fiscal 2000, the Bank purchased a bank site in Marysville, which will provide potential additional growth opportunities. 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, Snohomish, and Everett and expanded its operations in Burlington during the first quarter of fiscal 2004.
Operating Strategy
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 the Bank's 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 Bank's profitability depends primarily on its net interest income, which is the difference between the income it receives on its loan and investment portfolio and its 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 Bank's profitability is also affected by the level of other income and expenses. Other non interest income includes income associated with the origination and sale of mortgage loans, loan servicing fees, net gains and losses on sales of interest-earning assets, and income earned on bank owned life insurance. Other non interest expenses include compensation and benefits, occupancy and equipment expenses, deposit insurance premiums, data servicing expenses, and other operating costs. The Bank'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.
Financial Condition -
Total consolidated assets for the Corporation as of December 31, 2003, were $820,229,085, a slight increase from the March 31, 2003, level of $819,871,874. This increase in assets was due primarily to the growth in Loans receivable to $616,660,844 at December 31, 2003 versus $582,269,145 at March 31, 2003. The following is an analysis of the loan portfolio by major type of loans:
December 31, March 31,
2003 2003
------------- -------------
First mortgage loans
1-4 Family $ 257,333,310 $ 350,487,597
1-4 Family construction 20,848,366 28,035,560
Less participations (76,708,407) (137,172,801)
------------- -------------
Net first mortgage loans 201,473,269 241,350,356
Construction and land development 42,617,526 66,111,738
Residential commercial real estate 53,301,547 56,929,901
Non-residential commercial real estate 250,018,585 182,157,758
Commercial loans 67,198,607 54,132,254
Home equity secured 24,427,611 22,729,371
Other consumer loans 6,412,744 6,886,950
------------- -------------
Subtotal 443,976,620 388,947,972
------------- -------------
Subtotal 645,449,889 630,298,328
------------- -------------
Less:
Undisbursed loan proceeds (15,176,373) (34,678,121)
Deferred loan fees (4,121,622) (4,844,929)
Allowance for loan losses (9,491,010) (8,506,133)
------------- -------------
$ 616,660,884 $ 582,269,145
============= =============
Net Residential loans $ 187,410,759 32% $ 221,722,330 38%
Net Commercial loans 65,840,782 11% 53,081,805 9%
Net Commercial RE loans 333,157,382 54% 278,402,605 48%
Net Consumer loans 30,251,961 3% 29,062,405 5%
------------- --- ------------- ---
$ 616,660,884 100% $ 582,269,145 100%
============= === ============= ===
Also contributing to the increase in assets was the change in investment securities, available for sale, which increased 11.35% to $83,026,087 from $74,560,801 at March 31, 2003.
The tables below display the characteristics of the AFS and HTM portfolios as of December 31, 2003:
Estimated
Amortized Net Fair
Cost Gain/(Loss) Value
------------- ----------- -------------
Available-For-Sale Securities ("AFS")
State and political subdivisions
and U.S. government agency
securities $ 52,112,012 $1,269,472 $ 53,381,484
Marketable equity securities 1,834,577 5,541,345 7,375,922
Mutual funds 5,000,000 (20,141) 4,979,859
Corporate debt securities 16,481,021 807,801 17,288,822
Mortage-backed securities and
CMO's 29,377,306 248,084 29,625,390
------------ ---------- ------------
Total available-for-sale
securities 104,804,916 7,846,561 112,651,477
------------ ---------- ------------
Held-To-Maturity Securities ("HTM")
State and political subdivisions
and U.S. government agency
securities 369,406 29,676 399,082
Mortgage-backed securities and
CMO's 1,723,961 143,975 1,867,936
------------ ---------- ------------
Total held-to-maturity
securities 2,093,367 173,651 2,267,018
------------ ---------- ------------
Total securities $106,898,283 $8,020,212 $114,918,495
============ ========== ============
Maturity Schedule of Securities
--------------------------------------------------------
Available-For-Sale Held-To-Maturity
--------------------------- ------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
------------ ------------ ---------- -----------
Maturities:
One year $ 12,549,941 $ 12,772,407 $ 1,534 $ 1,795
Two to five years 47,506,144 49,315,100 1,373,380 1,462,751
Five to ten years 9,404,344 9,622,199 461,456 492,527
Over ten years 28,509,910 28,585,990 256,997 309,945
------------ ------------ ---------- ----------
97,970,339 100,295,696 2,093,367 2,267,018
------------ ------------ ---------- ----------
Mutual funds and
Marketable equity
securities (liquid) 6,834,577 12,355,781 - -
------------ ------------ ---------- ----------
Total investment
securities $104,804,916 $112,651,477 $2,093,367 $2,267,018
============ ============ ========== ==========
Total liabilities also decreased slightly to $712,232,503 at December 31,
2003, from $713,628,356 at March 31, 2003. This decrease in liabilities was
due in large part to the decrease in deposits, to $645,236,144 from
$646,722,160 at March 31, 2003. The following is an analysis of the deposit
portfolio by major type of deposit at December 31, 2003 and March 31, 2003:
December 31 March 31
------------ ------------
Demand deposits
Savings $ 40,486,640 $ 38,455,124
Checking 72,237,682 66,169,430
Checking (noninterest-bearing) 41,976,096 28,052,250
Money Market 123,376,712 125,804,570
------------ ------------
278,077,130 258,481,374
------------ ------------
Time certificates of deposit
Less than $100,000 243,035,338 258,623,337
Greater than or equal to $100,000 124,123,676 129,617,449
------------ ------------
367,159,014 388,240,786
------------ ------------
Total deposits $645,236,144 $646,722,160
============ ============
Stockholders' equity at December 31, 2003 increased 1.65% to $107,996,582 from $106,243,518 at March 31, 2003. This increase was due primarily to the increase in net income of $9,564,101 less dividends paid and shares repurchased. The Corporation remains strong in terms of its capital position, with a stockholder equity-to-assets ratio of 13.17% at December 31, 2003, compared to 12.96% at March 31, 2003.
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, 2003, the Bank had liquid assets (cash and marketable securities with maturities of one year or less) with a book value of $76,043,698.
As of December 31, 2003, the total book value of investments and mortgage-backed securities was $106,898,283 compared to a market value of $114,918,495 with an unrealized gain of $8,020,212. As of March 31, 2003 the total book value of investments and mortgage-backed securities was $106,509,636, compared to a market value of $115,867,756 with an unrealized gain of $9,358,120. 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 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, 2003 was $107,996,582, or 13.17% of assets, compared to $106,243,518, or 12.96% of assets at March 31, 2003. 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, 2003 was 17.31%, compared to 18.70% as of March 31, 2003. These figures are well above the well-capitalized minimum of 10% set by the FDIC.
The Corporation has been in various buy-back programs since August 1996. At its October 24, 2000 meeting, the Board of Directors authorized the repurchase of up to 10% (approximately 1,121,250 shares, as restated) of the Corporation's outstanding Common Stock over a 24 month period. In total, the Corporation repurchased 769,059 shares under this plan at a weighted average price of $9.88.
At its October 22, 2002 meeting, the Board of Directors authorized its fourth repurchase plan, allowing the repurchase of up to 10% (approximately 1,065,000 shares) of the Corporation's outstanding Common Stock over a 12 month period. In total, the Corporation repurchased 358,100 under this plan, at a weighted average price of $15.28.
At its September 23, 2003 meeting, the Board of Directors authorized its fifth repurchase plan, allowing the repurchase of up to 10% (approximately 1,050,000 shares) of the Corporation's outstanding Common Stock over a 12 month period. In total, the Corporation repurchased 83,840 under this plan at a weighted average price of $17.48 as of December 31, 2003.
Management intends to continue its stock buy-back programs from time to time as long as repurchasing the stock is perceived to contribute 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 control of the Corporation. 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, 2003, increased slightly to $8,215,922 from $8,206,669 in the same time period of the previous year. Interest on loans for the quarter ended December 31, 2003, decreased 6.32% to $10,686,806, from $11,407,412. Included in these numbers are $383,227 and $638,998, respectively of deferred fee income recognition as a result of loan paydowns, payoffs, and loans sold from the mortgage portfolio. This decrease in total interest on loans was due primarily to the overall decline in interest rates. Interest and dividends on investments and mortgage-backed securities decreased 17.82% to $1,292,028, from $1,572,205 for the comparable quarter a year ago due to principal paydowns in the CMO and mortgage backed securities portion of the Bank's investment portfolio and an overall decline in interest rates. Total interest income decreased 7.71% to $11,978,834 from $12,979,617.
Total interest paid on deposits decreased 25.46% to $3,197,492 from $4,289,760. This decrease in interest expense is due to an overall decline in interest rates. Interest on borrowings increased to $565,420 during the quarter, compared to $483,188 for the comparable period one year ago. The increased expense in the current year was due to a higher level of borrowings outstanding of $57,799,136 at December 31, 2003 versus $43,765,515 at December 31, 2002. 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-month period decreased 3.88% to $36,683,914 from $38,162,732. Total interest expense for the nine-month period decreased 21.66% to $11,831,629 from $15,102,480. Net interest income for the nine-month period ended December 31, 2003 increased 7.77% to $24,852,285 from $23,060,252 for the comparable period one year ago due to the reasons stated above regarding the quarterly results.
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 $220,000 for the quarter ended December 31, 2003 compared to $1,050,000 for the quarter ended December 31, 2002. This decrease was a result of 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 $9,491,010, or 1.54% of loans receivable at December 31, 2003, compared to $7,481,630, or 1.30% of loans receivable at December 31, 2002. The increased level of reserves is due primarily to 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 $398.9 million, or 64.7% of the portfolio at December 31, 2003, versus $316.5 million, or 55.1% at December 31, 2002.
In addition, commercial and multi-family loans have larger individual loan amounts, which have a greater single impact on the total portfolio quality in the event of delinquency or default. The Bank considers these increased provisions to be appropriate, due to the changing portfolio mix and the uncertain regional economic environment. Northwest Washington's economy has been adversely affected by a number of factors, including but not limited to slowdowns in the aerospace, technology, and telecommunications industries.
As of December 31, 2003, there were 19 loans in the Bank's portfolio over 90 days delinquent. At December 31, 2003 total non-performing loans were $238,168. Real estate owned at December 31, 2003 totaled $342,908. Total non-performing assets represented .07% of total assets at December 31, 2003 compared to $2,117,982 or .26% of total assets at December 31, 2002.
As of December 31,
Non-Performing Assets 2003 2002
-------- ----------
Accruing loans - 90 days past due $238,168 $ 929,085
Non-accrual loans - 242,637
-------- ----------
Total non-performing loans 238,168 1,171,722
Total non-performing loans/net loans 0.04% 0.20%
Real estate owned 342,908 946,260
-------- ----------
Total non-performing assets 581,076 2,117,982
-------- ----------
Total non-performing assets/total assets 0.07% 0.26%
Non Interest Income -
Non interest income for the three months ended December 31, 2003, decreased 30.03% to $1,440,968 from $2,059,342 for the same time period a year ago. Service fee income increased 1.92% to $603,407 from $592,013. The primary reason for the increase over the prior year was increased escrow fee income due to the higher volume of loan originations, both in the mortgage and commercial loan divisions. The net gain/loss on the sale of loans servicing released decreased to $192,487 from $913,997 in the comparable period one year ago. The low mortgage rate environment in the prior year was the primary reason for the increase in fiscal 2003. The net gain/loss on the sale of loans on a servicing retained basis (loans sold from the Bank's portfolio) showed a gain of $12,228 during the three months ended December 31, 2003, compared to $4,470 in the prior period. The net gain/loss on sales of available-for-sale investment securities increased to $191,254 from $0 for the comparable period one year ago. The gains in the period ended December 31, 2003 were due to the sale of securities from the Bank's investment portfolio. Other non-interest income for the quarter decreased 19.54% to $441,592 from $548,862. The primary reason for the decrease in fiscal 2004 was a decreasing yield on Bank Owned Life Insurance and approximately $34,000 less in profits for the quarter on a real estate development project from a joint venture of the Bank's wholly owned subsidiary, Westward Financial Services Corporation.
Non interest income for the nine months ended December 31, 2003 increased 19.28% to $5,930,386 from $4,971,700. The net gain/loss on the sale of loans servicing released increased to $2,018,905 from $1,841,420 in the comparable period one year ago. The net gain/loss on the sale of loans on a servicing retained basis (loans sold from the Bank's portfolio) showed a gain of $95,009 during the nine months ended December 31, 2003, compared to $99,766 in the prior period. The net gain/loss on sales of investment securities increased 278.43% to $235,602 from $62,258 for the comparable period one year ago. The gains in these periods were due primarily to the sale of securities from the Bank's available-for-sale investment portfolio. Other non interest income for the nine-month period increased 6.25% to $1,432,328 from $1,348,018, due primarily to the recognition of approximately $261,000 in profits through December 2003 compared to approximately $157,000 in profit in the prior period from a real estate development joint venture of the Bank's wholly owned subsidiary, Westward Financial Services Corporation.
Non Interest Expense
Non interest expense for the three months ended December 31, 2003, increased 19.70% to $5,125,364 from $4,281,989. Compensation and employee benefits increased 30.81% for the quarter ended December 31, 2003, to $3,017,645 from $2,306,854. The increase in compensation and employee benefits during the quarter ended December 31, 2003 was primarily due to 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, along with additional staff for the Lynnwood office and the new commercial banking loan centers. Building occupancy for the quarter ended December 31, 2003 increased 14.34% to $664,027 from $580,736. This increase over the prior year was due to the opening of our Lynnwood office, three new commercial banking/loan centers in Bellingham, Snohomish, and Everett, and the expansion of the Burlington office/commercial center. Data processing expenses decreased 38.33% to $154,648 from $250,764. The primary reason for this decline relates to a renegotiation of the Bank's contract with its core data processor which included substantial concessions in the first quarter of fiscal 2004, and a reduced monthly expense thereafter. Advertising and marketing expenses for the quarter ended December 31, 2003 increased 21.79% to $223,777 from $183,740. Other non-interest expense increased 10.98% to $1,065,267 from $959,895 due to the overall growth of the Bank and a decreasing mortgage servicing portfolio. The increased refinance activity in the low rate environment resulted in an increased amortization of the associated mortgage servicing asset. Also contributing to the increase in fiscal 2004 was an increase in Business and Occupation (B&O) tax expense due to the shift in the loan portfolio from 1-4 family mortgages, which are exempt from B&O tax, to B&O taxable commercial loans.
Non interest expense for the nine months ended December 31, 2003 increased 19.47% to $15,303,867 from $12,809,729. Compensation and employee benefits increased 25.95% to $8,712,800 from $6,917,653. Building occupancy expenses for the nine months increased 11.40% to $1,967,583 from $1,766,199. Other expenses increased 27.73% to $3,581,761 at December 31, 2003 compared to $2,804,183 for the prior period due primarily to the reasons stated in the discussion above regarding the quarterly results. Also contributing to this increase in fiscal 2004 was the recognition of approximately $70,000 in Other Real Estate Owned expenses/losses.
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