Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
Horizon Financial Corp.
(Name of Registrant as Specified in Its Charter)
Horizon Financial Corp.
(Name of Person(s) Filing Proxy Statement)
Payment of filing fee (Check the appropriate box):
[X] $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
N/A
(2) Aggregate number of securities to which transactions applies:
N/A
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
N/A
(4) Proposed maximum aggregate value of transaction:
N/A
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11 (a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing by
registration statement number, or the form or schedule and the date
of its filing.
(1) Amount previously paid:
N/A
(2) Form, schedule or registration statement no.:
N/A
(3) Filing party:
N/A
(4) Date filed:
N/A
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June 20, 1996
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
Horizon Financial Corp. to be held at the Best Western Lakeway Inn, 714
Lakeway Drive, Bellingham, Washington, on July 23, 1996 at 2:00 p.m., Pacific
Time. Effective October 13, 1995, Horizon Financial Corp. became the holding
company for Horizon Bank, a savings bank.
The attached Notice of Annual Meeting of Shareholders and Proxy Statement
describe the formal business to be transacted at the meeting. During the
meeting, we will also report on the operations of the Corporation. Directors
and officers of the Corporation, as well as a representative of Moss Adams
LLP, will be present to respond to any questions our shareholders may have.
The Corporation's consolidated financial statements, the report of the
independent accountants and management's discussion and analysis of financial
condition and results of operations are included in this proxy statement.
Please sign, date and return the enclosed proxy card. If you attend the
meeting, you may vote in person even if you voted by proxy previously.
Your continued interest and support of the Corporation and Horizon Bank,
a savings bank, are sincerely appreciated.
Sincerely,
/s/ George W. Gust
--------------------
GEORGE W. GUST
CHAIRMAN OF THE BOARD
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HORIZON FINANCIAL CORP.
1500 Cornwall Avenue
Bellingham, Washington 98225
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held on July 23, 1996
NOTICE IS HEREBY GIVEN THAT the 1996 Annual Meeting of Shareholders (the
"Meeting") of Horizon Financial Corp. ("Corporation") will be held at the Best
Western Lakeway Inn which is located at 714 Lakeway Drive, Bellingham,
Washington on July 23, 1996 at 2:00 p.m., Pacific Time.
A Proxy Card and Proxy Statement for the Meeting are enclosed herewith.
The Meeting is for the purpose of considering and acting upon:
(1) The election of eight directors of the Corporation, two to be elected
for a one year term, three to be elected for two year terms and three
to be elected for three year terms; and
(2) Such other matters as may properly come before the Meeting or any
adjournments thereof.
NOTE: The Board of Directors is not aware of any other business to come
before the Meeting.
Any action may be taken on the foregoing proposal at the Meeting on the
date specified above, or on any date or dates to which, by original or later
adjournment, the Meeting may be adjourned. Shareholders of record at the
close of business on June 3, 1996, are the shareholders entitled to notice of
and to vote at the Meeting and any adjournments thereof.
You are requested to fill in and sign the enclosed form of proxy, which is
solicited by the Board of Directors, and to mail it promptly in the enclosed
envelope. The proxy will not be used if you attend the Meeting and vote in
person.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Richard P. Jacobson
-----------------------
RICHARD P. JACOBSON
SECRETARY
Bellingham, Washington
June 20, 1996
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE YOUR CORPORATION THE
EXPENSE OF FURTHER REQUESTS FOR PROXIES IN ORDER TO INSURE A QUORUM. AN
ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED
IF MAILED IN THE UNITED STATES.
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PROXY STATEMENT
OF
HORIZON FINANCIAL CORP.
1500 Cornwall Avenue
Bellingham, Washington 98225
(360) 733-3050
ANNUAL MEETING OF SHAREHOLDERS
July 23, 1996
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Horizon Financial Corp. ("Corporation"),
the holding company for Horizon Bank, a savings bank ("Bank"), to be used at
the 1996 Annual Meeting of Shareholders of the Corporation ("Meeting") which
will be held at the Best Western Lakeway Inn, 714 Lakeway Drive, Bellingham,
Washington, on Tuesday, July 23, 1996 at 2:00 p.m., Pacific Time. The
accompanying Notice of Annual Meeting of Shareholders and this Proxy Statement
are being first mailed to shareholders on or about June 20, 1996.
REVOCATION OF PROXIES
Shareholders who execute proxies retain the right to revoke them at any
time. Unless so revoked, the shares represented by such proxies will be voted
at the Meeting and all adjournments thereof. Proxies may be revoked by
written notice to the Secretary of the Corporation or the filing of a later
proxy prior to a vote being taken on a particular proposal at the Meeting. An
executed proxy will not be voted if a shareholder attends the Meeting and
votes in person. Proxies solicited by the Board of Directors of the
Corporation will be voted in accordance with the directions given therein
provided they are executed. Where no instructions are indicated, executed
proxies will be voted for the nominees for directors set forth below.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Shareholders of record as of the close of business on June 3, 1996 are
entitled to one vote for each share of common stock ("Common Stock") of the
Corporation then held. Shareholders are not permitted to cumulate their votes
for the election of directors. As of June 3, 1996, the Corporation had
6,591,743 shares of Common Stock issued and outstanding.
The presence, in person or by proxy, of at least one-third of the total
number of outstanding shares of Common Stock entitled to vote is necessary to
constitute a quorum at the Meeting. The nominees for director who receive a
plurality of the votes cast by the holders of the outstanding Common Stock
entitled to vote at the Meeting will be elected. Votes may be cast for or
withheld from each nominee. Votes that are withheld will have no effect on
the outcome of the election because directors will be elected by a plurality
of votes cast. Broker non-votes will be counted for purposes of determining
the existence of a quorum, but will not be counted for determining the number
of votes cast with respect to the election of directors and, accordingly, will
have no effect on the outcome of the election.
Persons and groups who beneficially own in excess of five percent of the
Corporation's Common Stock are required to file certain reports with the
Securities and Exchange Commission ("SEC"), and provide a copy to the
Corporation, disclosing such ownership pursuant to the Securities Exchange Act
of 1934, as amended ("Exchange Act"). Based on such reports, management knows
of no person who owned more than five percent of the outstanding shares of
Common Stock at June 3, 1996. The following table sets forth, as of June 3,
1996, information as to the shares of the Common Stock beneficially owned by
each director of the Corporation and by all executive officers and directors
of the Corporation as a group.
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Number of Shares Percent of Shares
Name Beneficially Owned (1)(2)(3) Outstanding
- --------------------- ------------------ -----------------
Directors and Named Executive Officer(4)
Robert C. Diehl 30,265 0.46%
Fred R. Miller 55,937 0.85%
Maurice (Dennis) Fox 43,889 0.67%
George W. Gust 133,349 2.02%
Frank G. Uhrig 70,353 1.07%
L. M. (Larry) Strengholt 94,867 1.44%
Richard R. Haggen 110 --
V. Lawrence Evans, President and 136,509 2.07%
Chief Executive Officer
All Executive Officers and
Directors as a Group (11 persons) 627,239 9.52%
_______________
(1) Includes all shares owned directly by the named individuals or by the
individuals indirectly through a trust or corporation, or by the
individuals' spouses and minor children, except as otherwise noted. The
named individuals effectively exercise sole or shared voting and
investment power over these shares.
(2) Includes shares of Common Stock subject to outstanding stock options
which are exercisable within 60 days after June 3, 1996.
(3) Includes 21,447 shares of Horizon Common Stock held by the Bank's
Employee Stock Ownership Plan ("ESOP").
(4) Under SEC regulations the term "named executive officer(s)" is defined to
include the chief executive officer, regardless of compensation level,
and the four most highly compensated executive officers, other than the
chief executive officer, whose total annual salary and bonus for the last
completed fiscal year exceeded $100,000. V. Lawrence Evans was the
corporation's only "named executive officer" during the fiscal year ended
March 31, 1996.
PROPOSAL I -- ELECTION OF DIRECTORS
The Corporation's Board of Directors consists of eight directors. In
connection with the mandatory retirement of Robert E. Ebright in September
1995, the Board of Directors amended the Corporation's Bylaws to decrease the
size of the Board from nine to eight members. The Corporation's Bylaws
provide that directors will be elected for three-year staggered terms with
approximately one-third of the directors elected each year. The nominees for
election this year are Robert C. Diehl, Fred R. Miller, Maurice (Dennis) Fox,
George W. Gust, Frank G. Uhrig, L.M. (Larry) Strengholt, Richard R. Haggen and
V. Lawrence Evans.
It is intended that the proxies solicited by the Board of Directors will
be voted for the election of the above named nominees for the terms specified
in the table below. If any nominee is unable to serve, the shares represented
by all valid proxies will be voted for the election of such substitute as the
Board of Directors may recommend or the Board may reduce the number of
directors to eliminate the vacancy. At this time the Board of Directors knows
of no reason why any nominee might be unavailable to serve.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ALL OF THE NOMINEES NAMED
BELOW FOR DIRECTORS OF THE CORPORATION.
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The following table sets forth certain information regarding the nominees
for election at the Meeting.
Year First Elected Term to
Name Age Trustee or Director Expire
--------------------- --- ------------------- -------
Robert C. Diehl 57 1976 1997(1)
Fred R. MilleR 60 1984 1997(1)
Maurice (Dennis) Fox 51 1994 1998(1)
George W. Gust 66 1976 1998(1)
Frank G. Uhrig 65 1978 1998(1)
L. M. (Larry) Strengholt 67 1985 1999(1)
Richard R. Haggen 51 1994 1999(1)
V. Lawrence Evans 50 1990 1999(1)
________
(1) Assuming the individual is re-elected.
The principal occupation of each director nominee of the Corporation for
the last five years is set forth below. Unless otherwise stated, each
director resides in the State of Washington.
ROBERT C. DIEHL is the President and General Manager of Diehl Ford, Inc.
FRED R. MILLER is the retired and former owner and President of the
Skagit Bonded Collectors, Inc., Mount Vernon, Washington.
MAURICE (DENNIS) FOX is the former Owner and President of HydroSwirl
Manufacturing Corp.
GEORGE W. GUST joined the Bank in 1975 and has served as the Bank's
Chairman of the Board of Directors since August 1984. Mr. Gust has served as
the Corporation's Chairman of the Board of Directors since October 1995.
FRANK G. UHRIG is the manager and the majority shareholder of Yeager's
Sporting Goods and Marina which sells sporting goods, boats, motors and
general merchandise.
L.M. (LARRY) STRENGHOLT is the President of Strengholt Construction Co.,
Inc., Lynden, Washington, a general building contractor.
RICHARD R. HAGGEN is owner, President and Chief Operating Officer of
Haggen, Inc.
V. LAWRENCE EVANS joined the Bank in 1972 and served as the Bank's
Executive Vice President from 1983 to 1990. Mr. Evans has served as President
of the Bank since May 14, 1990 and as Chief Executive Officer since March 26,
1991. Mr. Evans also serves as President and Chief Executive Officer of the
Corporation.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Boards of Directors of the Corporation and the Bank conduct their
business through meetings of the Boards and through their committees. During
fiscal 1996, the Corporation held one meeting in connection with its initial
organization and three subsequent meetings, and the Board of Directors of the
Bank held 10 meetings. No director of the Corporation or the Bank attended
fewer than 75% of the total number of meetings of the Board of Directors and
committees on which the director served.
The full Board of Directors of the Corporation acts as a Nominating
Committee for the annual selection of its nominees for election as directors.
The Corporation's Bylaws provide that any nomination to the Board of
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Directors (except one proposed by the existing Board of Directors of the
Corporation) must be in writing and delivered or mailed to the Chairman of
the Board of the Corporation at least 20 days prior to the meeting of
shareholders called for the election of directors. The Board of Directors met
one time during the 1996 fiscal year in its capacity as the Nominating
Committee.
The Executive Committee of the Corporation is composed of Directors
Evans, Gust and Miller. This Committee meets at least monthly to advise
management of the Corporation between monthly meetings of the Board of
Directors. This Committee also makes recommendations to the Board concerning
Corporation compensation packages. The Executive Committee, including the
Bank's Executive Committee prior to completion of the holding company
reorganization, met 12 times during the fiscal year ended March 31, 1996.
The Audit Committee of the Corporation is composed of Directors Diehl,
Fox and Uhrig. The Audit Committee is responsible for examining and
evaluating the activities of the Corporation and reporting its findings to the
Board. This examination determines the reliability of information produced on
behalf of the Corporation and the effectiveness of internal practices and
procedures and the efficiency of operations. The Audit Committee also assists
the Board in the selection of independent accountants. The Audit Committee,
including the Bank's Audit Committee prior to completion of the holding
company reorganization, met five times during the fiscal year ended March 31,
1996.
DIRECTORS' COMPENSATION
Each director of the Corporation is also a director of the Bank.
Directors of the Corporation received no additional compensation for
attendance at any meeting of the Corporation's Board of Directors or
committees thereof during the fiscal year ended March 31, 1996. Members of
the Bank's Board of Directors receive an annual retainer of $7,500 and $250
for attendance at each Board meeting. The Chairman of the Board receives an
additional $400 for attendance at each Board meeting. Directors also receive
$175 for each committee meeting attended held on the day of a regular meeting
or a special board meeting held by telephone conference call, and $175 for
attendance at a special board meeting or a committee meeting held on a day
other than the day of a regular board meeting. Members of the Executive
Committee receive $375 for each monthly meeting attended. Employees of the
Bank who are also directors do not receive compensation for their attendance
at any board committee meetings.
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<TABLE>
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the compensation received by the named
executive officer for each of the three fiscal years ended March 31, 1996. All compensation is paid by the
Bank.
Long-Term
Compensation
Annual Compensation Awards
_____________________________________ ______________________
Name and Other Restricted
Principal Annual Stock All Other
Position Year Salary Bonus Compensation Awards Options Compensation
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
V. Lawrence Evans 1996 $128,592 $25,973 -- -- 15,000 $11,726(2)
President and 1995 125,000 46,483 -- -- 5,000 12,048
Chief Executive 1994 114,100 41,614 -- -- 2,240 13,680
Officer
(1) Does not include perquisites which did not exceed the lesser of $50,000 or 10% of salary and bonus.
(2) Includes contributions to the Bank's ESOP of $2,024 and to the Bank's Retirement Savings and Investment
Plan ("401(k) Plan") of $7,715.
</TABLE>
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<TABLE>
Option Grants Table. The following information is provided for the named executive officer.
OPTIONS GRANTS IN LAST FISCAL YEAR
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term
_____________________________________________________________________ _______________________
% of Total
Options
Granted to Exercise
Options Employees or Base
Name Granted in Price Expiration
(#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
__________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
V. Lawrence Evans 15,000 9.0% $12.56 9/21/05 $118,485 $300,255
</TABLE>
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Option Exercise/Value Table. The following information is provided for
the named executive officer.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION
Number of Value of
Unexercised Unexercised
Shares Options at In-the-Money
Acquired FY-End(#) Options at
on Value FY-End ($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
______________________________________________________________________________
V. Lawrence Evans -- -- 57,631/15,000 $190,856/$0
Employment Agreements. The Bank entered into an employment contract with
Mr. Evans on March 23, 1993 which provides for an initial term of four years.
In connection with the holding company reorganization, the Corporation became
a party to the employment contract. The agreement renews automatically for an
additional one year term until either of the parties notifies the other in
writing of its intent not to renew the contract. Under the agreement, Mr.
Evans' current annual base compensation is $128,592. In addition, Mr. Evans
is entitled to participate in and to receive all benefits which are applicable
to the Corporation's executive employees. The agreement also provides for
compensation to be paid to Mr. Evans in the event of his disability,
termination without cause or in the event of a change in control of the
Corporation. In the event of a change in control, Mr. Evans would be entitled
to receive an amount equal to 2.99 times the average annual base compensation
received prior to the date of change of control for the most recent five
taxable years. Assuming that a change in control had occurred during fiscal
1996, Mr. Evans would have been entitled to a cash payment equal to
approximately $326,329 based on his current annual compensation.
Deferred Compensation Plan. The Bank has established a deferred
compensation plan for certain of its officers, including Mr. Evans. The plan
provides for additional retirement benefits payable over a 12 to 17 year
period following retirement. In connection with the funding of the Bank's
obligation under the plan, the Bank has
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acquired life insurance policies on the lives of plan participants. At March
31, 1996 and 1995, the cash surrender values of these policies included in
other assets aggregated $1,445,290 and $1,555,442, respectively. Deferred
compensation expense amounted to $32,000, $47,059 and $164,052 in 1996, 1995
and 1994, respectively.
Notwithstanding anything to the contrary set forth in any of the
Corporation's previous filings under the Securities Act of 1933, as amended,
or the Exchange Act that might incorporate future filings, including this
Proxy Statement, in whole or in part, the following Report of the Compensation
Committee and Performance Graph shall not be incorporated by reference into
any such filings.
Report of the Compensation Committee. The Compensation Committee's
duties are to recommend and administer policies that govern executive
compensation for the Corporation and the Bank. The Compensation Committee
evaluates executive performances, compensation policies and salaries. The
Compensation Committee recommends salaries to be paid to each executive
officer. The entire Board of Directors reviews the Compensation Committee's
recommendations as to executive compensation, including the Chief Executive
Officer, and sets these salaries.
The executive compensation policy of the Corporation and the Bank is
designed to establish an appropriate relationship between executive pay and
the Corporation's and the Bank's annual and long-term performance, long-term
growth objectives, and their ability to attract and retain qualified executive
officers. The principles underlying the program are:
* To attract and retain key executives who are vital to the long-term
success of the Corporation and the Bank and are of the highest
caliber;
* To provide levels of compensation competitive with those offered
throughout the financial industry; and
* To motivate executives to enhance long-term stockholder value by
building their ownership in the Corporation.
The Committee also considered a variety of subjective and objective
factors in determining the compensation package for individual executives
including (1) the performance of the Corporation and the Bank as a whole with
an emphasis on annual and long-term performance, (2) the responsibilities
assigned to each executive, and (3) the performance of each executive of
assigned responsibilities as measured by the progress of the Corporation and
the Bank during the year.
Although the Compensation Committee did not establish executive
compensation levels on the basis of whether specific financial goals had been
achieved by the Corporation and the Bank, the Compensation Committee (and the
Board of Directors) considered the overall profitability of the Corporation
and the Bank when making their decisions. The Compensation Committee believes
that management compensation levels, as a whole, appropriately reflect the
application of the Corporation's and Bank's executive compensation policy and
the progress of the Corporation and the Bank.
Compensation Committee
George W. Gust
Robert C. Diehl
Fred R. Miller
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Compensation Committee Interlocks and Insider Participation. No
executive officer of the Corporation or the Bank has served as a member of the
compensation committee of another entity, one of whose executive officers
served on the Compensation Committee. No executive officer of the Corporation
or the Bank has served as a director of another entity, one of whose executive
officers served on the Compensation Committee. No executive officer of the
Corporation or the Bank has served as a member of the compensation committee
of another entity, one of whose executive officers served as a director of the
Corporation or the Bank.
Performance Graph. The following graph compares the cumulative total
shareholder return on the Corporation's Common Stock with the cumulative total
return on the Nasdaq Index and the SNL Western Thrift Index, which encompasses
ten western states. Total return assumes reinvestment of all dividends.
Period Ending
3/28/91 03/31/92 03/31/93 03/31/94 03/31/95 03/31/96
__________________________________________________________
HorizonFinCorp-WA 100.00 123.98 171.43 169.18 155.35 161.05
Nasdaq Total Return 100.00 127.45 146.51 158.15 175.93 238.88
SNL Western Thrift 100.00 95.58 116.41 100.05 108.10 155.22
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COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Corporation's executive
officers and directors, and persons who own more than 10% of any registered
class of the Corporation's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission within
prescribed time periods. Executive officers, directors and greater than 10%
shareholders are required by regulation to furnish the Corporation with copies
of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms it has received
and written representations provided to the Corporation by the above
referenced persons, the Corporation believes that during the fiscal year ended
March 31, 1996 all filing requirements applicable to its reporting officers,
directors and greater than 10% shareholders were properly and timely complied
with, except for two filings made by Executive Vice President Philippe S.L.
Swaab and Vice President Karen A. LePage. Mr. Swaab and Ms. LePage
inadvertently omitted to report their ESOP holdings in their initial Form 3s
filed with the SEC during October 1995. Mr. Swaab and Ms. LePage each
subsequently reported their ESOP holdings on a Form 5, although in an untimely
manner.
TRANSACTIONS WITH MANAGEMENT
Effective with passage of the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989, officers and directors of the Bank are prohibited
from receiving any loan or extension of credit at other than market rates and
terms. The Bank does not extend credit to its directors or officers.
AUDITORS
Moss Adams LLP served as the Corporation's auditors for the fiscal year
ended March 31, 1996. The Board of Directors currently anticipates appointing
Moss Adams LLP to be its auditors for the 1997 fiscal year. A representative
of Moss Adams LLP will be present at the Meeting to respond to questions from
shareholders and will have the opportunity to make a statement if he or she so
desires.
OTHER MATTERS
The Board of Directors is not aware of any business to come before the
Meeting other than those matters described above in this Proxy Statement.
However, if any other matters should properly come before the Meeting, it is
intended that proxies in the accompanying form will be voted in respect
thereof in accordance with the judgment of the person or persons voting the
proxies.
The cost of solicitation of proxies will be borne by the Corporation. In
addition to solicitations by mail, directors, officers, and regular employees
of the Corporation may solicit proxies personally or by telegraph or telephone
at their regular salary or hourly compensation.
The Corporation's 1996 Annual Report to Shareholders has been mailed to
all shareholders of record as of the close of business on June 3, 1996. Any
shareholder who has not received a copy of such annual report may obtain a
copy without charge by writing the Corporation. Such annual report is not to
be treated as part of the proxy solicitation material nor having been
incorporated herein by reference. The Corporation's consolidated financial
statements prepared in conformity with general accepted accounting principles
are included herein as Exhibit 1.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
The Corporation was formed under Washington law on May 22, 1995, and
became the holding company of the Bank, effective October 13, 1995. As a bank
holding company, the Corporation has a number of additional options and
operating advantages. These include, but are not limited to: expanded
business diversification options; flexibility in acquisitions; and the ability
to repurchase its own stock without incurring the adverse tax consequences of
recapturing portions of the Bank's bad debt reserve.
At its March 26, 1996 meeting, the Board of Directors authorized the
repurchase of up to 10% (approximately 655,000 shares) of the Corporation's
outstanding Common Stock over a 24 month period.
The primary business of the Corporation's wholly-owned subsidiary, the
Bank, is to acquire funds in the form of savings deposits and to use the funds
to make loans secured by residential, and to a lesser extent, commercial
properties in the Bank's primary market area. The Bank's operations are
conducted through 12 full-service office facilities, located in Whatcom,
Skagit and Snohomish counties in Northwest Washington.
RESULTS OF OPERATIONS
Total consolidated assets for the Corporation as of fiscal year-end March
31, 1996 were $488,967,604, an increase of 6.88% from the March 31, 1995 level
of $457,478,017. This increase in assets was due primarily to the growth in
loans receivable, which increased 8.20% to $389,650,547 from $360,119,915.
Real estate loans originated for fiscal 1996 were $85,909,880, of which 32%
were refinances compared to fiscal 1995 of $57,262,145 with 15% refinances.
The increase in total real estate loan originations in fiscal 1996 was the
result of lower long term interest rates and an increase in the demand for
refinance mortgages. In addition, consumer lending originations increased
42.82% in fiscal 1996 to $9,745,944 from $6,823,930 in fiscal 1995.
The Bank sold $10,257,604 of real estate loans in fiscal 1996, compared
to $7,194,238 in fiscal 1995. The Bank sells real estate loans during periods
of increased loan volume to improve the Bank's cash flow.
Total liabilities were $409,820,390 at March 31, 1996, an increase of
6.50% from $384,793,257 at March 31, 1995. The increase in liabilities was
due primarily to the growth in savings deposits, which increased 6.61% to
$402,676,437 from $377,703,449.
Shareholder equity in fiscal 1996 increased by $6,462,454 to $79,147,214,
a 8.89% increase from $72,684,760 at fiscal 1995 year end. This is net of the
$.32 per share of cash dividends paid to shareholders during the fiscal year.
The shareholder equity-to-assets ratio was 16.19% at March 31, 1996.
NET INTEREST INCOME
Net interest income in fiscal 1996 was $16,308,807, a 4.30% decrease from
fiscal 1995 of $17,041,315. Total interest income increased in fiscal 1996 to
$37,082,271, a 9.10% increase from fiscal 1995 of $33,989,069.
Interest income on loans in fiscal 1996 was $32,145,266, a 7.34% increase
from $29,948,191 in fiscal 1995. The Bank's weighted average yield on loans
was 8.57% in fiscal 1996, compared to 8.49% in fiscal 1995. While rates were
decreasing for much of fiscal 1996, the increase in refinance activity
contributed to the increase in interest income on loans as the Bank recognizes
the remaining deferred loan fees into income when a mortgage is refinanced or
sold.
Interest and dividends on investments and mortgage-backed securities was
$4,937,005 in fiscal 1996, an increase of 22.18% from $4,040,878 in fiscal
1995. The Bank's weighted average yield on investments increased
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in fiscal 1996 to 6.43% from 6.03% in fiscal 1995. The weighted average yield
on all earning assets increased to 8.21% in fiscal 1996 from 8.10% in fiscal
1995.
Total interest expense in fiscal 1996 was $20,773,464, a 22.57% increase
over fiscal 1995 of $16,947,754. The Bank's cost of savings increased in
fiscal 1996 to 5.36% from 4.70% in fiscal 1995. The primary reason for these
increases was the rapid increase in short term interest rates during late 1994
and early 1995. As a result, the rate paid on the Bank's deposits during
fiscal 1996 was relatively high for much of the year, as it took time for
these deposits to mature and reprice at the lower levels observed later in the
year. The Bank's one year GAP was a negative 34.03% as of March 31, 1996.
This is calculated by taking the difference between the assets and liabilities
which mature or repricing within one year and dividing the result by the total
assets of the Bank.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans decreased in fiscal 1996 to $110,000, a
16.67% decrease from fiscal 1995 of $132,000. These figures include both
specific and general reserves, less the recapture of reserves due to loans
being paid off. As of March 31, 1996, the allowance for loan loss reserves
was $3,236,150. The general and specific reserves as of March 31, 1996
represented .83% of loans receivable, compared to .87% as of March 31, 1995.
While the Bank has been adding to its loan loss reserve over the last
several years, the ratio of loans delinquent, in foreclosure, or real estate
owned to loans receivable has been less than .01% for each of the past five
years. As of March 31, 1996, there were no loans in the Bank's entire
portfolio which were over 90 days delinquent, nor were there any loans in
foreclosure or classified as real estate owned. The consistently low
delinquency and foreclosure rates show a commitment by the Bank to maintain
strong underwriting requirements and the strength and stability of the local
economy. No assurances, however, can be given as to future delinquency levels
or the continued strength and stability of the local economy.
NON-INTEREST INCOME
Non-interest income in fiscal 1996 was $1,292,769, an increase of 6.00%
from fiscal 1995 of $1,219,636. Service fee income was $958,611 in fiscal
1996, a 7.62% decrease from fiscal 1995 of $1,037,715. The service fee income
decline in fiscal 1996 is primarily related to the sale of the Bank's Trust
Department (see "-- Discontinued Operations," below). No trust department
fees were included in service fee income in fiscal 1996, compared to $134,295
in fiscal 1995.
Other non-interest income increased 65.57% in fiscal 1996 to $326,690
from $197,309 in fiscal 1995. The primary factors affecting this increase
include a $41,561 payment received as a death benefit on the Bank's life
insurance policy, along with payments totalling $83,813 received from First
Interstate Bank relating to the sale of the Trust Department (see "--
Discontinued Operations," below).
NON-INTEREST EXPENSE
Non-interest expense in fiscal 1996 decreased to $6,684,507, a 6.50%
decrease from fiscal 1995 of $7,149,431. Compensation and employee benefits
decreased .92% in fiscal 1996 to $3,694,053 from $3,728,481 in fiscal 1995,
despite the addition of employees for the new office in Mill Creek. This
decrease in compensation and employee benefits was primarily due to a
reduction in cash profit sharing paid to employees, which is a function of the
Bank's performance.
Building occupancy expense was $1,075,275 in fiscal 1996, a 5.06%
increase from $1,023,444 in fiscal 1995. The majority of the fiscal 1996
increase was attributed to the opening of the Mill Creek Office in September
1995, along with the full year operations of the relatively new Burlington and
Edmonds Offices, both of which opened during fiscal year 1995. Federal
Deposit Insurance Corporation ("FDIC") insurance premiums in fiscal 1996
<PAGE>
<PAGE>
decreased substantially to $246,686 from $802,862 in fiscal 1995. As a Bank
Insurance Fund ("BIF") insured institution, the premium rate paid by the Bank
for FDIC insurance was reduced to $0.04 per hundred dollars of deposits from
$0.23 during fiscal 1995. Data processing expenses increased 2.78% in fiscal
1996 to $388,947 from $378,425 in fiscal 1995. Advertising expenses increased
6.17% to $322,918 in fiscal 1996 from $304,145 in fiscal 1995. Other
non-interest expenses increased 4.88% in fiscal 1996 to $956,628 from $912,074
in fiscal 1995.
PROVISIONS FOR INCOME TAX
Income tax expense decreased to $3,585,991 in fiscal 1996, from
$3,640,045 in fiscal 1995. The Bank's effective tax rate was approximately
33% in fiscal 1996 and fiscal 1995.
NET INCOME
Annual earnings of $7,221,078 for fiscal 1996 were 3.99% lower than
fiscal 1995 earnings of $7,520,975. Earnings per share for fiscal 1996 were
$1.10 on weighted average shares of 6,553,005, compared to earnings per share
of $1.16 on weighted average shares of 6,487,562 in fiscal 1995. Earnings per
share figures have been restated to reflect a 10% stock dividend paid on
August 25, 1994.
DISCONTINUED OPERATIONS
During fiscal 1995, the Bank signed an agreement with First Interstate
Bank to sell the Trust Department. That decision was part of an ongoing
effort to improve efficiency and to maintain the Bank's focus on its core
business of home lending and deposit gathering. The gain on sale recognized
in fiscal 1995, net of income tax, was $181,500, which raised the Bank's
earnings per share by $.03 for that period. As stated previously, the final
payments received from First Interstate Bank were included as "Other
Non-Interest Income" during fiscal 1996. As of March 31, 1996, all of the
Bank's trust accounts had been closed.
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 March 31, 1996, the Bank had liquid assets
(cash and marketable securities with maturities of one year or less) with a
book value of $30,024,993.
As of March 31, 1996, the total book value of investments and
mortgage-backed securities was $80,389,812 compared to a market value of
$82,879,085, resulting in an unrealized gain of $2,489,273. On March 31,
1995, the book value of investments and mortgage-backed securities was
$77,725,643 compared to market value of $78,133,864, resulting in an
unrealized gain of $408,221. The Bank foresees no factors which would impair
its ability to hold debt securities to maturity.
The Bank's primary sources of funds are cash flow from operations, which
consist primarily of mortgage loan repayments, deposit increases, loan sales,
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 more than 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) making repurchase agreements; 3) accepting additional jumbo and/or public
funds deposits; or 4) accessing the discount window of the Federal Reserve
Bank of San Francisco. The Bank had no borrowings against any kind of credit
as of March 31, 1996.
Stockholders' equity as of March 31, 1996 was $79,147,214 or 16.19% of
assets, which exceeds the 5.0% minimum required by the FDIC in order to be
considered well capitalized. The Bank's total risk-adjusted capital ratio as
of March 31, 1996 was 30.4%, which also exceeds the well capitalized minimum
of 10% required by the FDIC.
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<PAGE>
SHAREHOLDER PROPOSALS
In order to be eligible for inclusion in the proxy solicitation materials
of the Corporation for next year's Annual Meeting of Shareholders, any
shareholder proposal to take action at such meeting must be received at the
Corporation's main office at 1500 Cornwall Avenue, Bellinghm, Washington, no
later than February 21, 1997. Any such proposals shall be subject to the
requirements of the proxy solicitation rules adopted under the Exchange Act.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Richard P. Jacobson
-----------------------
RICHARD P. JACOBSON
SECRETARY
Bellingham, Washington
June 20, 1996
A COPY OF THE ANNUAL REPORT ON FORM 10-K AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION WILL BE FURNISHED WITHOUT CHARGE TO SHAREHOLDERS OF RECORD
AS OF JUNE 3, 1996, UPON WRITTEN REQUEST TO RICHARD P. JACOBSON, SECRETARY,
HORIZON FINANCIAL CORP., 1500 CORNWALL AVENUE, BELLINGHAM, WASHINGTON 98225.
<PAGE>
<PAGE>
HORIZON FINANCIAL CORP.
INDEPENDENT AUDITOR'S REPORT
and
FINANCIAL STATEMENTS
March 31, 1996, 1995 and 1994
<PAGE>
<PAGE>
Horizon Financial Corp.
Table Of Contents
March 31, 1996, 1995 and 1994
Page
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Financial Statements
Statement of Financial Position . . .. . . . . . . . . . . . . . . . . . 2
Statement of Income . . . . . . . . . . . . . . . . . . . . . . 3
Statement of Stockholders' Equity . . . . . . . . . . . . . . . . . 4
Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . . . .6-21
<PAGE>
<PAGE>
Independent Auditor's Report
To the Stockholders and Directors
Horizon Financial Corp.
We have audited the accompanying consolidated statement of financial position
of Horizon Financial Corp. (formerly Horizon Bank, A Savings Bank) and its
subsidiary (the "Company") as of March 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for
each of the years ended March 31, 1996, 1995 and 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Horizon
Financial Corp. as of March 31, 1996 and 1995, and the results of its
operations and cash flows for each of the years ended March 31, 1996, 1995 and
1994, in conformity with generally accepted accounting principles.
As described in Note 1 to the financial statements, the Company has adopted
Statement of Financial Accounting Standards No. 114, Accounting by Creditors
for Impairment of a Loan and No. 118, Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures, during fiscal year 1996. Also,
as described in Note 1, the Company adopted Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities, during fiscal year 1995.
Bellingham, Washington
April 24, 1996
<PAGE>
<PAGE>
Horizon Financial Corp.
Consolidated Statement Of Financial Position
March 31, 1996 and 1995
Assets
1996 1995
____________ ____________
Cash and cash equivalents $ 4,844,146 $ 4,946,359
Interest-bearing deposits 8,756,304 11,611,095
Investment securities
Available-for-sale (amortized cost 1996:
$32,190,068; 1995: $28,704,766) 34,623,256 29,823,172
Held-to-maturity (estimated fair value 1996:
$16,157,144; 1995: $14,113,419) 16,080,247 14,004,376
Mortgage-backed securities
Available for sale (amortized cost 1996:
$284,368; 1995: $548,913) 279,473 540,753
Held-to-maturity (estimated fair value 1996:
$23,062,908; 1995: $22,045,425) 23,078,825 22,856,494
Loans receivable 389,650,547 360,119,915
Accrued interest and dividends receivable 3,614,937 3,240,599
Income tax receivable - 1,878,000
Bank premises and equipment, net 6,246,041 6,460,956
Other assets 1,793,828 1,996,298
Total Assets $488,967,604 $457,478,017
Liabilities And Stockholders' Equity
Deposits $402,676,437 $377,703,449
Accounts payable and other liabilities 4,582,712 4,488,140
Advances by borrowers for taxes and insurance 832,442 837,066
Income tax currently payable 66,115 -
Net deferred income tax liabilities 575,000 604,798
Deferred compensation 1,087,684 1,159,804
Total liabilities 409,820,390 384,793,257
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; 6,579,954 and 6,514,652 issued and
outstanding, respectively 6,579,954 6,514,652
Additional paid-in capital 39,415,875 39,036,616
Retained earnings, substantially restricted 31,548,712 26,426,840
Debt related to ESOP - (25,000)
Net unrealized gain on securities classified
as available-for-sale, net of tax 1,602,673 731,652
Total stockholders' equity 79,147,214 72,684,760
Total Liabilities And Stockholders' Equity $488,967,604 $457,478,017
<PAGE>
<PAGE>
Horizon Financial Corp.
Consolidated Statement Of Income
Years Ended March 31, 1996, 1995 and 1994
1996 1995 1994
____________ ____________ ____________
Interest Income
Interest on loans $ 32,145,266 $ 29,948,191 $ 30,209,539
Interest and dividends on
investments and mortgage-
backed securities 4,937,005 4,040,878 3,408,981
Total interest income 37,082,271 33,989,069 33,618,520
Interest Expense
Interest on deposits 20,773,464 16,947,754 15,226,873
Net interest income 16,308,807 17,041,315 18,391,647
Provision For Loan Losses 110,000 132,000 367,802
Net interest income
after provision for
loan losses 16,198,807 16,909,315 18,023,845
Noninterest Income
Service fees 958,611 1,037,715 1,372,077
Other 326,690 197,309 221,291
Net gain (loss) on sales
of investment securities
and loans 7,468 (15,388) 98,712
Total noninterest income 1,292,769 1,219,636 1,692,080
Noninterest Expense
Compensation and employee
benefits 3,694,053 3,728,481 3,909,905
Building occupancy 1,075,275 1,023,444 913,446
Other expenses 956,628 912,074 1,189,639
FDIC Insurance 246,686 802,862 753,861
Data processing 388,947 378,425 383,068
Advertising 322,918 304,145 295,513
Total noninterest expense 6,684,507 7,149,431 7,445,432
Income From Continuing Operations
Before
Provision For Income Tax 10,807,069 10,979,520 12,270,493
Provision For Income Tax
Current 4,062,815 1,399,045 4,832,463
Deferred (476,824) 2,241,000 (570,000)
Total provision for income
tax 3,585,991 3,640,045 4,262,463
Income From Continuing
Operations 7,221,078 7,339,475 8,008,030
Discontinued Operation
Sale of Trust Department,
net of applicable taxes of
$93,500 - 181,500 -
Net Income $ 7,221,078 $ 7,520,975 $ 8,008,030
Earnings Per Share (adjusted for
stock splits and dividends)
Income from continuing
operations $ 1.10 $ 1.13 $ 1.24
Income from discontinued
operation .00 .03 .00
Total Earnings Per Share $ 1.10 $ 1.16 $ 1.24
<PAGE>
<PAGE>
<TABLE>
Horizon Financial Corp.
Consolidated Statement Of Stockholders' Equity
Ended March 31, 1996, 1995 and 1994
Net
Unrealized
Common Stock Additional Gains (Losses) Debt
Number of Paid-In Retained on Securities Related
Shares At Par Capital Earnings Available-For-Sale To ESOP Total
________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31,
1993 $5,804,744 $5,804,744 $31,099,003 $22,389,364 $ - $(128,791) $59,164,320
Repayment of debt
related to
Employee Stock
Ownership Plan - - - - - 75,000 75,000
Cash dividends on
common stock at
$0.32 per share - - - (1,875,093) - - (1,875,093)
Dividend
reinvestment plan 21,951 21,951 328,227 (13,363) - - 336,815
Cash paid for
fractional shares
in connection with
stock dividend (301) (301) (4,148) (5,838) - - (10,287)
Stock options
exercised 48,603 48,603 247,673 - - - 296,276
Net income - - - 8,008,030 - - 8,008,030
Balance, March 31,
1994 5,874,997 5,874,997 31,670,755 28,503,100 - (53,791) 65,995,061
Adjustment to market
value, net of taxes,
for securities
classified as
available-for-sale - - - - 765,724 - 765,724
Repayment of debt
related to Employee
Stock Ownership Plan - - - - - 28,791 28,791
Cash dividends on
common stock at
$0.32 per share - - - (2,031,021) - - (2,031,021)
Dividend reinvestment
plan 20,620 20,620 247,886 - - - 268,506
10% stock dividend 588,579 588,579 6,968,775 (7,557,354) - - -
Cash paid for
fractional shares
in connection with
stock dividend - - - (8,860) - - (8,860)
Stock options
exercised 30,456 30,456 149,200 - - - 179,656
</TABLE>
<PAGE>
<PAGE>
<TABLE>
Net
Unrealized
Common Stock Additional Gains (Losses) Debt
Number of Paid-In Retained on Securities Related
Shares At Par Capital Earnings Available-For-Sale To ESOP Total
________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
Net change in
unrealized gain/loss
on securities classified
as available-for-sale, net
of taxes of $17,552 - - - - (34,072) - (34,072)
Net income - - - 7,520,975 - - 7,520,975
Balance, March 31,
1995 6,514,652 6,514,652 39,036,616 26,426,840 731,652 (25,000) 72,684,760
Repayment of debt
related to Employee
Stock Ownership Plan - - - - - 25,000 25,000
Cash dividends on
common stock at
$0.32 per share - - - (2,099,206) - - (2,099,206)
Dividend reinvestment
plan 21,202 21,202 243,112 - - - 264,314
Stock options
exercised 44,100 44,100 136,147 - - - 180,247
Net change in
unrealized gain/
loss on securities
classified as
available-for-sale,
net of taxes
of $448,708 - - - - 871,021 - 871,021
Net income - - - 7,221,078 - - 7,221,078
Balance, March 31,
1996 $6,579,954 $6,579,954 $39,415,875 $31,548,712 $1,602,673 $ - $79,147,214
</TABLE>
<PAGE>
<PAGE>
Horizon Financial Corp.
Consolidated Statement Of Cash Flows
Years Ended March 31, 1996, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
1996 1995 1994
____________ ____________ _____________
Cash Flows From Operating Activities
Net income $ 7,221,078 $ 7,520,975 $ 8,008,030
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 441,623 543,397 404,475
Amortization and
deferrals, net 16,729 (356,973) 1,600,700
Provision for loan
losses 110,000 132,000 367,802
Provision for
deferred income tax (476,824) 2,241,000 (570,000)
Loss on retirement of Bank premises
and equipment - - 10,153
Changes in assets and liabilities
Interest and dividends
receivable (374,338) (382,874) 254,980
Interest payable 147,879 6,598 (32,437)
Federal income tax
(receivable) payable 1,944,115 (283,755) (84,115)
Other assets 202,470 (1,947,118) (34,873)
Other liabilities (180,051) (373,777) 300,406
Net cash flows from
operating activities 9,052,681 7,099,473 10,225,121
Cash Flows From Investing Activities
Change in interest-
bearing deposits, net 2,854,791 2,110,875 3,050,300
Purchases of investment
securities -
available-for-sale (17,526,522) (20,348,306) (24,169,082)
Proceeds from sales and
maturities of investment
securities -
available-for-sale 16,324,963 8,374,223 25,820,344
Purchases of investment
securities -
held-to-maturity (12,989,293) (2,186,198) -
Proceeds from maturities
of investment securities
- held-to-maturity 8,629,679 4,757,916 -
Purchases of mortgage-
backed securities -
held-to-maturity (2,787,555) (7,007,397) -
Purchases of mortgage-
backed securities -
available-for-sale - (7,865) (12,982,340)
Proceeds from maturities
of mortgage-backed
securities - held-to
-maturity 2,565,224 2,501,502 -
Proceeds from maturities
of mortgage-backed
securities -
available-for-sale 264,545 489,654 6,318,341
Proceeds from sales of
loans 10,257,604 7,194,238 28,626,069
Principal payments on
loans 56,451,474 41,985,042 91,618,518
Originations and
purchases of loans (96,291,439) (68,624,451) (148,018,688)
Purchases of bank premises
and equipment (226,708) (1,383,457) (1,587,700)
Net cash flows from
investing activities (32,473,237) (32,144,224) (31,324,238)
Cash Flows From Financing Activities Change in
checking and savings
accounts, net 4,770,671 (10,492,418) 11,347,853
Proceeds from issuance
of time deposits 146,567,614 138,645,541 118,533,946
Payments for maturing
time deposits (126,365,297) (101,955,465) (106,427,585)
Common stock issued, net 444,561 439,302 622,804
Cash dividends paid (2,099,206) (2,031,021) (1,875,093)
Net cash flows from
financing activities 23,318,343 24,605,939 22,201,925
Net Change In Cash And Cash
Equivalents (102,213) (438,812) 1,102,808
Cash And Cash Equivalents,
beginning of year 4,946,359 5,385,171 4,282,363
Cash And Cash Equivalents,
end of year $ 4,844,146 $ 4,946,359 $ 5,385,171
Supplemental Disclosures Of Cash Flow Information
Cash paid during the year
for interest $ 20,625,585 $ 16,941,156 $ 15,259,310
Cash paid during the year
for income tax $ 2,118,000 $ 3,655,000 $ 4,916,578
Noncash Investing And Financing Transactions
Mortgage loans securitized
and exchanged for FHLMC
participation
certificates $ - $ 7,002,363 $ 11,993,436
<PAGE>
<PAGE>
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Operations - Horizon Financial Corp. (the "Company"), through
its wholly-owned subsidiary, Horizon Bank (the "Bank"), provides a full range
of mortgage lending services to borrowers and a full range of customer
services to depositors through twelve branches located in Whatcom, Skagit and
Snohomish Counties of Washington State. The Bank is an FDIC insured,
state-chartered stock savings bank.
(b) Financial Statement Presentation and Use of Estimates - The financial
statements have been prepared in accordance with generally accepted accounting
principles and reporting practices applicable to the banking industry. In
preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of revenues and expenses for
the period and assets and liabilities as of the balance sheet date. Actual
results could differ from estimated amounts.
(c) Reorganization - Pursuant to an agreement and plan of reorganization
occurring during fiscal year 1996, Horizon Bank's common stockholders became
stockholders of Horizon Financial Corp., and Horizon Financial Corp. became
the sole shareholder of Horizon Bank.
(d) Principles of Consolidation - As of March 31, 1996, and for the year then
ended, the consolidated financial statements include the accounts of Horizon
Financial Corp. and its wholly-owned subsidiary, Horizon Bank. Westward
Financial Services, Inc. is a wholly-owned subsidiary of Horizon Bank, whose
accounts are also included in the consolidation. All material intercompany
balances and transactions have been eliminated. Horizon Financial Corp. was
formed during 1996. As of March 31, 1995 and 1994, and for the years then
ended, the financial statements include the accounts of Horizon Bank and its
wholly-owned subsidiary Westward Financial Services, Inc.
(e) Cash and Cash Equivalents - Cash and cash equivalents consist of cash on
hand and noninterest-bearing amounts due from banks.
(f) Investments in Interest-Bearing Deposits - Investments in
interest-bearing deposits consist principally of federal funds sold to a major
Seattle-area bank, repurchase agreements and short-term certificates of
deposit with western Washington financial institutions.
(g) Investments and Mortgage-Backed Securities - The Company adopted SFAS
115, Accounting for Certain Investments in Debt and Equity Securities, as of
April 1, 1995. This statement establishes standards of financial accounting
and reporting for investments in equity and debt securities, and requires
classification of securities into one of three categories: (1) held-to-
maturity, (2) available-for-sale, or (3) trading. Investment securities are
categorized as held-to-maturity when the Bank has the positive intent and
ability to hold those securities to maturity. Securities which are held-to-
maturity are stated at cost, adjusted for amortization of premiums, and
accretion of discounts which are recognized as adjustments to interest income.
Investment securities categorized as available-for-sale are generally held for
investment purposes (to maturity), although unanticipated future events may
result in the sale of some securities. Available-for-sale securities are
recorded at fair value, with the net unrealized gain or loss included as a
separate component of stockholders' equity net of the related tax effect.
Realized gains or losses on dispositions are based on the net proceeds and the
adjusted carrying amount of securities sold, using the specific identification
method.
The Company did not have any investment securities categorized as trading
securities at March 31, 1996 or March 31, 1995.
(h) Loans Receivable - Generally, loans receivable are held for investment.
Such loans are stated at the principal amount outstanding, net of any
adjustments including discounts on loans purchased and deferred loan
origination fees.
These adjustments are amortized over the remaining life of the loans. Loans
are considered "held-for-sale" when management intends to sell such loans or
exchange them for participation certificates. Loans held-for-sale are carried
at the lower of cost or market value. There were no loans considered
held-for-sale at each respective year end.
<PAGE>
<PAGE>
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICATN ACCOUNTING POLICIES
(Continued)
Loan origination fees, net of certain direct loan origination costs, are
deferred and recognized as an adjustment of the yield on the related loans,
using the interest method.
(i) Impaired Loans and Related Income - A loan is considered impaired when
management determines that it is probable that all contractual amounts of
principal and interest will not be paid as scheduled in the loan agreement.
These loans include nonaccruing loans past due 90 days or more, loans
restructured in the current year, and other loans that management considers to
be impaired.
When a loan is placed on nonaccrual status, all interest previously accrued,
but not collected, is reversed and charged against interest income. Income on
nonaccrual loans is then recognized only when the loan is brought current, or
when, in the opinion of management, the borrower has demonstrated the ability
to resume payments of principal and interest. Interest income on restructured
loans is recognized pursuant to the terms of new loan agreements. Interest
income on other impaired loans is monitored and based upon the terms of the
underlying loan agreement. However, the recorded net investment in impaired
loans, including accrued interest, is limited to the present value of the
expected cash flows of the impaired loan, or the observable fair market value
of the loan, or the fair value of the loan's collateral.
(j) Provision for Loan Losses - Management estimates the provision for loan
losses by evaluating known and inherent risks in the loan portfolio. These
factors include changes in the size and composition of the loan portfolio,
actual loan loss experience, current and anticipated 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 allowance is based upon
factors and trends identified by future market factors beyond the Company's
control, which may result in losses or recoveries differing significantly from
those provided for in the financial statements.
(k) Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation. Major renewals or betterments are capitalized and
depreciated over their estimated useful lives. Depreciation is computed on the
straight-line method over the estimated useful lives of thirty-five years for
buildings and four to ten years for equipment.
(l) Real Estate Owned - Real estate acquired through foreclosure is recorded
at the lower of cost (unpaid loan balance plus foreclosure expenses) less any
reserve, or estimated market value. At March 31, 1996 and 1995, the Company
did not own any real estate acquired through foreclosure.
(m) Trust Department - Assets held by the Bank's Trust Department in a
fiduciary or agency capacity are not included in the consolidated financial
statements as such items are not assets of the Bank. There were no assets
under management by the Trust Department at March 31, 1996 or 1995. Total
assets under management by the Trust Department had an aggregate market value
of approximately $14,700,000 at March 31, 1994. Management discontinued the
Trust Department during fiscal year 1995.
(n) Income Taxes - The Company reports income and expenses using the accrual
method of accounting and files a consolidated tax return which includes its
subsidiary. The Company accounts for income taxes on the liability method. The
liability method recognizes the amount of tax payable at the date of the
financial statements as a result of all events that have been recognized in
the financial statements, as measured by the provisions of currently enacted
tax law and rates.
(o) Earnings Per Share - Earnings per share are based on the weighted average
number of shares of common stock outstanding during each reporting period.
Earnings per share have been restated to reflect stock splits and stock
dividends (see Note 11). Earnings per share for the fiscal years ended March
31, 1996, 1995 and 1994 are based on the equivalent weighted average number of
shares outstanding of $6,553,005, 6,487,562 and 6,435,423, respectively.
Outstanding options to purchase common stock of the Company are not considered
dilutive for purposes of computing the weighted average number of shares
outstanding.
<PAGE>
<PAGE>
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
(p) New Accounting Standards - The Financial Accounting Standards Board
issued Statement of Financial Standards (SFAS) No. 114, Accounting by
Creditors for Impairment of a Loan and No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures, effective for the
Bank in fiscal year 1996. These statements specify how allowances for credit
losses related to impaired loans should be determined and establishes the
allowable methods for income recognition. Adoption of the new standards did
not have a material effect on the Company's financial position or results of
operations.
(q) Reclassifications - Certain reclassifications have been made to prior
years' amounts to conform to the current year presentation. These
reclassifications have no significant effect on the Bank's previously reported
financial position or results of operations.
NOTE 2 - INTEREST BEARING DEPOSITS
Interest bearing deposits consisted of the following at March 31, 1996 and
1995: 1996 1995
--------- ---------
Federal funds sold $ 8,100,000 $ 9,150,000
Certificates of deposit 526,311 570,631
Repurchase agreement 129,993 1,890,464
$ 8,756,304 $11,611,095
The Company has purchased securities under an agreement to resell
substantially identical securities with a major Seattle-area bank. The amounts
advanced under this agreement represent short-term loans and are reflected as
interest-bearing deposits in the consolidated statement of financial position.
The securities underlying the agreements are comprised of shares of a mutual
fund, which trades primarily in U.S. government securities.
The underlying investments, which mature within 90 days, are maintained by a
third party custodian in an investment pool that is comprised of securities
which have been purchased by a variety of institutions under similar
agreements to resell. The Company's transactions have been executed under a
written custodial agreement that explicitly recognizes the Company's interest
in their portion of the total investment pool.
Securities purchased under this agreement to resell averaged $393,957 and
$1,197,773 monthly during 1996 and 1995, respectively. The maximum amount
outstanding during any month in 1996 and 1995 amounted to $3,030,724 and
$4,032,146, respectively.
NOTE 3 - INVESTMENT SECURITIES
The Company's investment policy requires that the Company purchase only
high-grade investment securities. Purchases of debt instruments are generally
restricted to those rated A or better by a nationally recognized statistical
rating organization.
The amortized cost and estimated market values of investments, together with
unrealized gains and losses, are as follows as of March 31, 1996 and 1995,
respectively:
<PAGE>
<PAGE>
NOTE 3 - INVESTMENT SECURITIES (Continued)
1996
________________________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ----------
AVAILABLE-FOR-SALE SECURITIES
State and political subdivisions and U.S.
government agency
securities $31,061,762 $ 183,878 $ (76,307) $31,169,333
Marketable equity
securities 623,833 2,324,465 - 2,948,298
Corporate debt
securities 504,473 1,152 - 505,625
Total available-for-
sale securities 32,190,068 2,509,495 (76,307) 34,623,256
HELD-TO-MATURITY SECURITIES
State and political subdivisions and U.S.
government agency
securities 8,346,489 16,888 (31,134) 8,332,243
Corporate debt
securities 7,733,758 101,603 (10,460) 7,824,901
Total held-to-maturity
securities 16,080,247 118,491 (41,594) 16,157,144
Total investment
securities $48,270,315 $ 2,627,986 $ (117,901) $50,780,400
1995
________________________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ----------
AVAILABLE-FOR-SALE SECURITIES
State and political subdivisions and
U.S. government
agency securities $27,821,273 $ 36,434 $ (472,341) $27,385,366
Marketable equity
securities 883,493 1,559,313 (5,000) 2,437,806
Total available-for-
sale securities 28,704,766 1,595,747 (477,341) 29,823,172
HELD-TO-MATURITY SECURITIES
State and political subdivisions and
U.S. government
agency securities 3,793,155 136,974 (703) 3,929,426
Corporate debt
securities 10,211,221 85,961 (113,189) 10,183,993
Total held-to-maturity
securities 14,004,376 222,935 (113,892) 14,113,419
Total investment
securities $42,709,142 $ 1,818,682 $ (591,233) $43,936,591
The amortized cost and estimated fair value of investment securities at March
31, 1996 by contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
1996
_____________________________________________________
Available-For-Sale Held-To-Maturity
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- ---------- ---------- ---------
State and political subdivisions and
U.S. government agencies
One year $10,622,273 $10,630,147 $ 1,902,925 $1,905,836
Two to five years 17,714,715 17,720,756 6,443,564 6,426,407
Six to ten years 2,724,774 2,818,430 - -
31,061,762 31,169,333 8,346,489 8,332,243
Corporate debt securities
One year 504,473 505,625 3,951,376 3,950,995
Two to five years - - 3,782,382 3,873,906
Marketable equity securities
One year 623,833 2,948,298 - -
Total investment
securities $32,190,068 $34,623,256 $16,080,247 $16,157,144
<PAGE>
<PAGE>
NOTE 3 - INVESTMENT SECURITIES (Continued)
Proceeds from sales of investments and gross realized gains and losses on
investment sales were as follows for the
year ended March 31:
1996 1995 1994
------- ------- -------
Proceeds from sales and
maturities of investments $ 25,389,243 $ 15,623,296 $ 25,820,344
Gross gains realized on
sales of investments $ 4,577 $ 14,360 $ 95,890
Gross losses realized on
sales of investments $ - $ 28,446 $ 233
Information about concentrations of investments in particular industries for
marketable equity securities and corporate debt securities at March 31 consist
of the following:
1996 1995
__________________ __________________
Market Market
Cost Value Cost Value
_____ ______ _____ ______
Marketable equity securities
Automobile $ - $ - $ 500,000 $ 495,000
Banking 543,543 981,445 293,543 593,800
FHLMC common stock 24,230 1,577,125 24,230 1,119,250
Other 56,060 389,728 65,720 229,756
$ 623,833 $ 2,948,298 $ 883,493 $ 2,437,806
Corporate debt securities
Banking $ - $ - $ 499,342 $ 580,625
Brokerage companies 1,846,986 1,847,679 2,498,155 2,469,218
Finance companies 4,965,604 5,060,972 2,715,325 2,675,788
Private utilities 1,026,469 1,025,000 1,287,610 1,282,350
Telephone companies 399,172 396,875 501,621 502,500
Other - - 2,709,168 2,673,512
$ 8,238,231 $ 8,330,526 $10,211,221 $10,183,993
At March 31, 1996 and 1995, U.S. government agency and corporate debt
securities of $1,500,000 and $2,500,000, respectively were pledged as
collateral for deposits of state and local government agencies and deposits
for trust accounts in excess of $100,000, as required by Washington State Law.
NOTE 4 - MORTGAGE-BACKED SECURITIES
Mortgage-backed securities at March 31 consist of the following:
1996
_____________________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Available-for-sale
securities $ 284,368 $ 149 $ (5,044) $ 279,473
Held-to-maturity
securities 23,078,825 345,258 (361,175) 23,062,908
Total mortgage-
backed securities $23,363,193 $ 345,407 $ (366,219) $23,342,381
<PAGE>
<PAGE>
NOTE 4 - MORTGAGE-BACKED SECURITIES (Continued)
1995
______________________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- --------
Available-for-sale
securities $ 548,913 $ 6,582 $ (14,742) $ 540,753
Held-to-maturity
securities 22,856,494 197,379 (1,008,448) 22,045,425
Total mortgage-
backed securities $23,405,407 $ 203,961 $(1,023,190) $22,586,178
The amortized cost and estimated fair value of mortgage-backed securities at
March 31, 1996 by contractual maturity are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right
to prepay obligations with or without prepayment penalties.
1996
__________________________________________________
Available-For-Sale Held-To-Maturity
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- ----------- --------- ----------
Mortgage-Backed Securities
Two to five years $ 241,681 $ 236,637 $ 1,463,563 $1,439,861
Six to ten years - - 1,604,075 1,608,841
After ten years 42,687 42,836 20,011,187 20,014,206
Total mortgage-
backed securities $ 284,368 $ 279,473 $23,078,825 $23,062,908
All of the above mortgage-backed securities are rated AAA by a nationally
recognized statistical rating organization.
NOTE 5 - LOANS RECEIVABLE
Loans receivable (collateralized principally by properties in the Whatcom,
Skagit and Snohomish Counties of Washington State) at March 31 consist of the
following:
1996 1995
------ ------
First mortgage loans
Conventional $ 428,994,680 $ 396,428,785
Construction - conventional 15,711,393 17,132,091
FHA 18,712 37,414
VA - 10,639
Real estate contracts 5,778 152,625
Less participating interests
sold (57,668,222) (52,994,119)
Participation loan interests 3,779,339 5,156,781
Home equity loans 10,654,690 9,144,186
Loans on savings deposits 743,967 687,368
Consumer loans 3,789,247 1,241,985
Other loans 81,991 102,776
----------- -----------
406,111,575 377,100,531
Less:
Undisbursed loan proceeds (5,665,166) (6,311,483)
Unearned discounts (112,721) (231,015)
Deferred loan fees (7,446,991) (7,311,968)
Allowance for loan losses (3,236,150) (3,126,150)
----------- -----------
$389,650,547 $360,119,915
<PAGE>
<PAGE>
NOTE 5 - LOANS RECEIVABLE (Continued)
The Company originates both adjustable and fixed interest rate loans.
Adjustable rate loans typically contain annual rate increase caps (2%) and
loan lifetime rate increase caps (6 to 8%). At March 31, 1996, the Company had
adjustable and fixed rate loans as follows:
Fixed Rate Adjustable Rate
Term to Maturity Book Value Term to Maturity Book Value
________________ __________ ________________ __________
Less than one year $ 5,384,743 Less than one year $ -
One to two years 3,158,794 One to two years -
Two to five years 15,229,955 Two to five years 246,823
Five to ten years 48,735,247 Five to ten years 841,052
Over ten years 305,850,085 Over ten years 26,664,876
Total commitments to originate mortgage loans, substantially all of which are
not at committed rates, amounted to $6,570,804 and $1,848,050 at March 31,
1996 and 1995, respectively.
Real estate loans serviced for others are $57,668,222 and $52,994,119,
respectively, as of March 31, 1996 and 1995.
Impaired loans on a nonaccrual basis or restructured, and the related
interest, were not material at March 31, 1996 and 1995.
The allowance for loan losses at March 31 and changes during the year are as
follows:
1996 1995 1994
_____ _____ _____
Balance, beginning of year $ 3,126,150 $ 2,994,150 $ 626,348
Provision for loan losses 110,000 132,000 367,802
Balance, end of year $ 3,236,150 $ 3,126,150 $ 2,994,150
NOTE 6 - ACCRUED INTEREST AND DIVIDENDS RECEIVABLE
Accrued interest and dividends receivable at March 31 is summarized as
follows:
1996 1995
______ _____
Investment securities $ 878,507 $ 622,430
Mortgage-backed securities 155,197 144,090
Loans receivable 2,572,159 2,460,456
Dividends on marketable equity securities 9,074 13,623
$ 3,614,937 $ 3,240,599
NOTE 7 - PREMISES AND EQUIPMENT
Premises and equipment at March 31 consisted of:
1996 1995
______ ______
Buildings $ 5,296,552 $ 5,296,552
Equipment 3,437,809 3,288,238
--------- ---------
8,734,361 8,584,790
Accumulated depreciation (3,997,087) (3,632,601)
--------- ---------
4,737,274 4,952,189
Land 1,508,767 1,508,767
--------- ---------
$ 6,246,041 $ 6,460,956
<PAGE>
<PAGE>
NOTE 8 - DEPOSITS
A comparative summary of deposits at March 31 follows (the contractual or
weighted average interest rates are
indicated in parentheses):
1996 1995
______ ______
Demand deposits
Savings (3.46%, 3.35%) $ 29,451,298 $ 30,525,888
Checking (1.93%, 2.26%) 21,654,768 22,566,188
Checking (noninterest-bearing) 3,205,029 2,251,388
Money market (3.93%, 3.38%) 16,006,524 15,555,087
Ultimate Money Market (4.77%, 4.18%) 31,325,489 25,973,885
101,643,108 96,872,436
Time certificates of deposit
Less than 6.00% 195,291,015 137,904,704
6.00% to 7.99% 100,976,129 134,769,887
8.00% to 9.99% 4,766,185 6,957,103
10.00% to 11.99% - 1,199,319
301,033,329 280,831,013
Total deposits $ 402,676,437 $ 377,703,449
Time deposit accounts of $100,000 or more amount to $67,692,930 and
$59,026,699 at March 31, 1996 and 1995, respectively.
Time certificate of deposit maturities at March 31 are as follows:
1996
----
Variable Fixed
Rate Rate Total 1995
--------- ----------- ----------- -----------
Within one year $ 7,924,695 $201,036,849 $208,961,544 $205,967,750
One to two years 4,582,465 29,755,962 34,338,427 37,695,190
Two to three years 1,531,245 8,951,727 10,482,972 7,209,451
Three to four years 607,074 2,014,028 2,621,102 4,642,619
Four to five years 75,522 2,962,483 3,038,005 1,358,679
Over five years 14,235,997 27,355,281 41,591,278 23,957,324
---------- ----------- ----------- -----------
$28,956,998 $272,076,330 $301,033,328 $280,831,013
The terms of variable rate Cds allow customers to make additional deposits to
existing Cds at any time.
The weighted average nominal interest rate on all deposits at March 31, 1996
and 1995 is 5.39 percent and 4.71 percent, respectively.
Interest expense on deposits for the years ended March 31 is summarized as
follows:
1996 1995 1994
____ _____ ____
Money market $ 1,979,018 $ 1,619,161 $1,452,256
Checking 468,000 559,312 586,241
Savings 1,013,374 1,135,501 1,014,985
Certificates of deposit 17,313,072 13,633,780 12,173,391
---------- ---------- ----------
$20,773,464 $16,947,754 $15,226,873
NOTE 9 - INOCME TAX
Deferred income tax results from temporary differences in the recognition of
income and expense for tax and financial statement purposes. The source of
these differences and the related tax effects for the years ended March 31 are
as follows:
<PAGE>
<PAGE>
NOTE 9 - INCOME TAX (Continued)
1996 1995 1994
_____ ____ ____
Deferred loan fees $ (758,129) $ 1,964,518 $ (785,756)
Loan loss and general reserves 232,638 260,542 232,723
Deferred compensation 24,521 3,183 (35,076)
Other, net 24,146 12,757 18,109
-------- --------- --------
$ (476,824) $ 2,241,000 $ (570,000)
The nature and components of the Company's net deferred tax assets
(liabilities), established at an estimated tax rate of 34 percent, are as
follows at March 31:
1996 1995
____ ____
Deferred Tax Assets
Deferred loan fees in excess of amounts
deferred for tax purposes $ 1,176,407 $ 418,000
Deferred compensation agreements 370,000 394,000
Financial reporting accrued expenses
not recognized for tax purposes 290,000 324,000
Total deferred assets 1,836,407 1,136,000
Deferred Tax Liabilities
Tax based loan loss deductions not
recognized for financial reporting (1,430,000) (1,230,000)
Tax effect of unrealized gains on
available-for-sale securities (825,620) (378,594)
Other deferred tax liabilities (155,787) (132,204)
Total deferred liabilities (2,411,407) (1,740,798)
Net deferred tax assets (liabilities) $ (575,000) $ (604,798)
The Company believes, based upon the available evidence, that all deferred
assets will be realized in the normal course of operations. Accordingly, these
assets have not been reduced by a valuation allowance.
A reconciliation of the Company's income tax provision to the statutory
federal income tax rate for the years ended March 31 is as follows:
1996 1995 1994
------ ------ ------
Provision for income tax at the
statutory rate of 34 percent $ 3,674,403 $ 3,733,037 $ 4,171,968
Increase (decrease) in tax
resulting from Dividends received
deduction (21,057) (21,719) (25,639)
Other, net (67,355) (71,273) 116,134
Income tax provision $ 3,585,991 $ 3,640,045 $ 4,262,463
The Company is allowed a bad debt deduction of 8 percent of taxable income,
subject to certain limitations. The cumulative tax-basis bad debt deduction as
of March 31, 1996 and 1995 was approximately $14,325,000 and $13,650,000,
respectively. If any portion of this amount is subsequently used for purposes
other than to absorb loan losses, that portion will be subject to federal
income tax at the then prevailing tax rate.
NOTE 10 - BENEFIT PLANS
(a) Defined Benefit Retirement Plan - The Company has a noncontributory
defined benefit retirement plan which covers all full-time employees with one
year of continuous service who were also eligible to participate as of
December 31, 1992. Effective January 1, 1993, the Company curtailed the
enrollment of new participants to the plan due to factors described in Note
12. No additional contributions will be made to the plan. Concurrent with the
curtailment, the plan fiscal year end was changed to December 31.
Contributions to the plan are based upon the Projected Unit Credit actuarial
funding method.
A new 401(k) plan (see Note 10e) has been established by the Company as an
alternative to this defined benefit plan.
<PAGE>
<PAGE>
NOTE 10 - BENEFIT PLANS (Continued)
The plan's funded status as of December 31, 1996, 1995 and 1994 was as
follows:
December 31
1996 1995 1994
_____ _____ _____
Accumulated benefit obligation
Vested $ 2,148,381 $ 2,060,144 $ 1,827,573
Nonvested 50,753 67,169 88,641
$ 2,199,134 $ 2,127,313 $ 1,916,214
Projected benefit obligation $ 2,883,175 $ 2,756,105 $ 2,463,796
Fair value of plan assets (2,041,493) (1,818,103) (1,784,709)
Projected benefit obligation
over (under) plan assets 841,682 938,002 679,087
Unrecognized prior service cost 130,166 143,531 156,896
Unrecognized net gain (loss) (559,491) (660,917) (629,936)
Unrecognized net transition asset 107,864 126,355 144,846
Accrued pension cost $ 520,221 $ 546,971 $ 350,893
Net annual pension cost includes the following components for the plan year
ended December 31:
December 31
1996 1995 1994
_____ _____ _____
Service costs - benefits
earned during the period $ 158,895 $ 154,300 $ 109,320
Interest cost on projected
benefit obligation 162,797 146,203 122,426
Actual return on plan assets (70,400) (62,061) (125,555)
Net amortization and deferrals (38,684) (42,364) (38,072)
Net pension cost $ 212,608 $ 196,078 $ 68,119
The weighted average assumptions used were as follows:
1996 1995 1994
_____ _____ _____
Discount rate 6% 6% 6%
Rate of increase in compensation
levels 5% 5% 5%
Expected long-term rate of return
on plan assets 6% 6% 6%
(b) Deferred Compensation Plan - The Company has entered into deferred
compensation agreements with certain of its officers. The agreements provide
for additional retirement benefits payable over a ten to fifteen year period
following retirement. In connection with these agreements, the Company has
acquired life insurance policies on the individual officers covered by the
deferred compensation agreements. At March 31, 1996 and 1995, the cash
surrender values of these policies included in other assets aggregated
$1,445,290 and $1,555,442, respectively.
Deferred compensation expense amounted to $32,000, $47,059 and $164,052 in
1996, 1995 and 1994, respectively.
(c) Profit Sharing Arrangement - The Company has a profit sharing arrangement
with employees meeting certain service requirements. Payments made to
employees pursuant to the arrangement are based upon earnings, growth in
deposits and attainment of certain corporate objectives. Costs of the
arrangement were $437,370, $600,294 and $879,412 for 1996, 1995 and 1994,
respectively.
(d) Employee Stock Ownership Plan - All employees of the Company who have
completed a minimum number of years of service with the Company are eligible
to participate in the Company's employee stock option plan ("ESOP").
Participants receive distributions from the ESOP only in the event of
retirement, disability or termination of employment. The primary purpose of
the ESOP is to acquire shares of the Company's common stock on behalf of ESOP
participants.
<PAGE>
<PAGE>
NOTE 10 - BENEFIT PLANS (Continued)
The Company loaned the ESOP $509,485 in 1986 to purchase original issue common
stock at the initial offering price. The loan is to be repaid over a period of
ten years, with annual payments including interest due on March 31. The
interest rate is equivalent to the one-year advance rate for the Federal Home
Loan Bank of Seattle and is adjusted each year. The Company makes annual
contributions to the ESOP equal to the ESOP's debt service less dividends
received by the ESOP. Dividends on allocated ESOP shares are recorded as a
reduction of retained earnings; dividends on unallocated ESOP shares are
recorded as a reduction of debt and accrued interest. In 1996, 1995 and 1994
the Company contributed $26,737, $43,593 and $80,640, respectively, including
interest, to the ESOP which is included in compensation expense. The loan was
paid off in full during the year ended March 31, 1996; the loan balance at
March 31, 1995 amounted to $25,000.
(e) 401(k) Plan - Effective January 1, 1993, the Company adopted a defined
contribution 401(k) retirement and savings plan (the "Plan") covering
substantially all employees. The Company contributes 3 percent of
participating employee's eligible salary to the Plan and a discretionary
amount determined annually by the Board of Directors. Total contributions to
the Plan amounted to $297,087, $120,036 and $120,778 for the years ended March
31, 1996, 1995 and 1994, respectively.
NOTE 11 - STOCKHOLDERS' EQUITY
(a) The Board of Directors declared a 10 percent stock dividend on June 28,
1994 to stockholders of record on August 8, 1994. This dividend added 588,579
shares of common stock to outstanding shares.
The average number of shares outstanding and all per share data has been
restated to reflect the stock dividends and stock split.
(b) Capital Adequacy -The Bank is subject to various regulatory capital
requirements administered by the Federal Deposit Insurance Corporation and the
Federal Reserve Board. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines on the
regulatory framework for prompt corrective action, the Bank must meet specific
capital adequacy guidelines that involve quantitative measures of the Banks
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital classification is also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures have been established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of Tier I capital (as defined in the regulations) to total
average assets; and minimum ratios of Tier I and total risk based capital to
risk-weighted assets. Under the regulatory framework for prompt corrective
action, the Bank must maintain minimum Tier I leverage, Tier I risk-based, and
total risk based ratios to be categorized as well as capitalized. These ratios
are set forth in the table below.
To be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
March 31, 1996
Tier I (to
average assets) $79,147 16.2% $19,558 4.0% $24,448 5.0%
Tier I capital
(to risk-weighted
assets) 77,838 29.5 10,558 4.0 15,838 6.0
Total risk based
capital (to risk-
weighted assets) 80,204 30.4 21,116 8.0 26,396 10.0
March 31, 1995
Tier I (to average
assets) $ 72,685 15.9% $ 18,299 4.0% $ 22,874 5.0%
Tier I capital
(to risk-weighted
assets) 72,503 28.3 10,264 4.0 15,396 6.0
Total risk based
capital (to risk-
weighted assets) 74,701 29.1 20,528 8.0 25,660 10.0
<PAGE>
<PAGE>
NOTE 11 - STOCKHOLDERS' EQUITY (Continued)
As of March 31, 1996, the most recent notification from the Bank's regulator
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events since that
notification that management believes have changed the institution's category.
(c) Dividends - Washington State Law limits certain cash dividends within ten
years of a conversion. The Bank may not, without prior approval of the State
Supervisor of Banking, declare or pay cash dividends on its capital stock in
an amount in excess of one-half of the greater of its net income for the
current fiscal year or the average of its net income for the current fiscal
year and not more than two of the immediately preceding fiscal years.
(d) Restricted Retained Earnings - The Bank converted to a state-chartered
stock savings bank in August 1986. Washington State Law requires that
preconversion retained earnings be restricted for the protection of
preconversion depositors. Restricted retained earnings at the date of
conversion were $14,900,000.
(e) Stock Option and Incentive Plan - The Company may award options for a
maximum of 612,256 shares, as restated, of authorized common stock to certain
officers and key employees under the 1987 Stock Option and Incentive Plan
("Incentive Plan"). The Incentive Plan is intended to provide for the granting
of both incentive stock options and nonincentive stock options. Options are
granted at the then fair market value and vest at 20 percent to 35 percent per
year. Options are exercisable from one to five years from date of grant,
subject to certain limitations.
At March 31, 1996, options granted under the Incentive Plan are as follows:
Price per Share Options
----------------- ---------
Balance, March 31, 1993 321,376
Granted $ 12.84 to $ 14.54 12,855
Exercised $ 2.87 to $ 9.49 (54,585)
Terminated/Forfeited $ 8.03 to $ 9.49 (952)
Balance, March 31, 1994 278,694
Granted $ 11.63 to $ 12.84 8,408
Exercised $ 2.87 to $ 14.54 (31,313)
Terminated/Forfeited $ 2.87 to $ 14.54 (9,383)
Balance, March 31, 1995 246,406
Exercised $ 2.87 to $ 14.54 (67,736)
Terminated/Forfeited $ 2.87 to $ 14.54 (4,416)
Balance, March 31, 1996 174,254
All shares and prices per share have been restated to reflect the effects of
stock dividends and splits through the date of this financial statement.
The number of options exercisable amounted to 159,286 at March 31, 1996.
(f) Stock Option Plan - During the year ended March 31, 1996, the Company
established an incentive stock option plan (the 1995 Plan) authorizing the
grant of up to 360,000 shares of common stock to certain officers and key
employees of the Bank. Options are granted at no less than fair market value
and may or may not vest immediately upon issuance based on the terms
established by the Board of Directors. Options are generally exercisable
within three to five years from the date of grant and expire after ten years.
At March 31, 1996, options granted under the 1995 Plan are as follows:
Price per Share Options
---------------- ---------
Balance, March 31, 1995
Granted $ 12.23 to $ 12.56 161,200
Exercised -
Terminated/Forfeited $ 12.23 to $ 12.56 (3,700)
Balance, March 31, 1996 157,500
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NOTE 11 - STOCKHOLDERS' EQUITY (Continued)
(g) Holding Company Loans - Under federal regulations, the Bank is limited,
unless previously approved, as to the amount it may loan to the holding
company and any one affiliate to 10 percent of its capital stock and surplus,
and the total of loans to the holding company and affiliates must not exceed
20 percent of capital and surplus. Further, all such loans must be fully
collateralized.
(h) Dividend Reinvestment Plan - As a service to its stockholders of record,
the Bank offers a Dividend Reinvestment and Stock Purchase Plan ("Reinvestment
Plan"). Under the terms of the Reinvestment Plan, dividends and optional cash
payments may be reinvested toward the purchase of additional shares of stock.
No brokerage commission or fees are charged to acquire shares through the
Reinvestment Plan.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
(a) Employment Agreement - The Company has entered into a four year
employment agreement with the Company's president at an amount approximating
his current level of compensation. In the event of specified terminations of
the president's employment following a change in control of the Company (as
defined), the agreement provides the president with severance payments of up
to three times his annual compensation plus continuation of certain benefits.
(b) Contingency Reserve - The Company has a contingency reserve of $353,000
recorded to reflect the estimated impairment of value related to pension plan
assets invested with Mutual Benefit Life Insurance Company. The Company plans
to honor its pension commitments and, after reviewing all of the available
information, has reserved 17 percent of the plan's asset values to reflect
this commitment.
(c) Long-Term Lease Commitments - The Company has entered into lease
agreements for three branch offices located in Snohomish County, Washington.
Future noncancelable lease payments under these agreements are as follows for
the years ending March 31:
1997 $ 87,936
1998 87,936
1999 85,020
2000 60,370
2001 78,000
-------
$ 399,262
NOTE 13 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has implemented Statement of Financial Accounting Standards (SFAS)
No. 107, Disclosure About Fair Value of Financial Instruments. The following
methods and assumptions were used to estimate the fair value of the following
classes of financial instruments:
Cash Equivalents and Federal Funds Sold - Due to the relatively short period
of time between the origination of these instruments and their expected
realization, the carrying amount is estimated to approximate market value.
Investment and Mortgage-Backed Securities, and Loans Held-for-Sale - For
securities and loans held-for-sale, fair values are based on quoted market
prices or dealer quotes, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
Loan Receivables - For certain homogeneous categories of loans, such as those
written to Federal Home Loan Mortgage Corporation ("FHLMC") standards, fair
value is estimated using the quoted market prices for securities backed by
similar loans, adjusted for differences in loan characteristics.
<PAGE>
<PAGE>
NOTE 13 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Deposit Liabilities and Federal Funds Purchased - The fair value of demand
deposits, savings accounts, certain money market deposits, and federal funds
purchased, is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated by discounting
the estimated future cash flows using the rates currently offered for deposits
with similar remaining maturities.
Off-Balance-Sheet Instruments - The Company's off-balance-sheet instruments
include unfunded commitments to extend credit. The fair value of these
instruments is not considered practicable to estimate because of the lack of
quoted market price and the inability to estimate fair value without incurring
excessive costs.
The carrying amounts and estimated fair values of the Bank's financial
instruments at March 31, 1996 and 1995 are as follows:
1996 1995
________________________ _________________________
Carrying Carrying
Amount Fair Value Amount Fair Value
________ __________ ________ __________
Financial Assets
Cash and cash
equivalents $ 4,844,146 $ 4,844,146 $ 4,946,359 $ 4,946,359
Investment securities 50,703,503 50,780,400 43,827,548 43,936,591
Mortgage-backed
securities 23,258,298 23,342,381 23,397,247 22,586,178
Interest-bearing
deposits 8,756,304 8,756,304 11,611,095 11,611,095
Loans 389,650,547 383,285,007 360,119,915 349,090,737
Accrued interest and
dividends receivable 3,614,937 3,614,937 3,240,599 3,240,599
Financial Liabilities
Demand and savings
deposits 101,643,108 101,643,108 96,872,436 96,872,436
Time deposits 301,033,329 304,362,022 280,831,013 279,451,586
Accounts payable
and accrued
liabilities 4,277,395 4,277,395 4,330,703 4,330,703
Accrued interest
payable 305,317 305,317 157,437 157,437
<PAGE>
<PAGE>
NOTE 14 - PARENT COMPANY (ONLY) FINANCIAL INFORMATION
Condensed balance sheet at March 31, 1996:
In Thousands
____________
Cash $ 166
Investment in bank 78,940
Other assets 567
$ 79,673
Other liabilities $ 526
Stockholders' equity 79,147
$ 79,673
Condensed statement of income for the year ended March 31, 1996:
In Thousands
____________
Income
Cash dividends from Bank subsidiary $ 1,160
Expenses
Compensation 42
Other 74
Total expenses 116
Income before equity in undistributed income of
subsidiary and benefit equivalent to income taxes 1,044
Benefit equivalent to income taxes 39
Income before equity in undistributed income of subsidiary 1,083
Equity in undistributed income of subsidiary 6,138
Net income $ 7,221
<PAGE>
<PAGE>
NOTE 14 - PARENT COMPANY (ONLY) FINANCIAL INFORMATION (Continued)
Condensed statement of cash flows for the year ended March 31, 1996:
In Thousands
_____________
Cash Flows From Operating Activities
Net income $ 7,221
Adjustments to reconcile net income to net cash
flow from operating activities
Equity in undistributed income of subsidiary (6,138)
Other operating activities (80)
Net cash flows from operating activities 1,003
Cash Flows From Financing Activities
Sale of common stock 213
Dividends paid (1,050)
Net cash flows from financing activities (837)
Net Change In Cash 166
Cash, beginning of year -
Cash, end of year $ 166
NOTE 15 - SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
Year Ended March 31, 1996
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Interest income $ 9,014,590 $ 9,227,444 $ 9,357,995 $ 9,482,242
Interest expense (5,014,548) (5,236,169) (5,345,005) (5,177,742)
Net interest income 4,000,042 3,991,275 4,012,990 4,304,500
Provision for loan losses (15,000) (15,000) (15,000) (65,000)
Other income 336,913 336,968 314,984 303,904
Other expenses (1,797,136) (1,541,133) (1,671,781) (1,674,457)
Income from continuing operations
before income tax 2,524,819 2,772,110 2,641,193 2,868,947
Federal income tax (826,250) (911,404) (885,935) (962,402)
Net income $ 1,698,569 $ 1,860,706 $ 1,755,258 $ 1,906,545
Earnings per share (adjusted for stock
splits and dividends) $ .26 $ .28 $ .27 $ .29
Year Ended March 31, 1995
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Interest income $ 8,242,461 $ 8,399,115 $ 8,567,400 $ 8,780,093
Interest expense (3,841,342) (4,069,359) (4,306,844) (4,730,209)
Net interest income 4,401,119 4,329,756 4,260,556 4,049,884
Provision for loan
losses (33,000) (33,000) (33,000) (33,000)
Other income 361,483 322,211 293,836 242,106
Other expenses (1,799,024) (1,871,016) (1,733,918) (1,745,473)
Income from continuing
operations before
income tax 2,930,578 2,747,951 2,787,474 2,513,517
Federal income tax (970,526) (908,187) (923,848) (837,484)
Income from continuing
operations 1,960,052 1,839,764 1,863,626 1,676,033
Discontinued operation
(sale of Trust Department), net of
taxes of $ 93,500 181,500 - -
Net income $ 2,141,552 $ 1,839,764 $ 1,863,626 $ 1,676,033
Earnings per share
(adjusted for stock
splits and dividends) $ .33 $ .28 $ .29 $ .26
NOTE 16 - NEW ACCOUNTING PRONOUNCEMENTS
FASB issued Statement of Financial Accounting Standards No. 121, Accounting
For The Impairment Of Long-Lived Assets and Assets To Be Disposed Of. This
standard addresses accounting for the impairment of long-lived assets, certain
identifiable intangibles and goodwill. The Company does not expect this
standard to have an impact on its financial reporting. This standard will
become effective for the Company in fiscal year 1997.
<PAGE>
<PAGE>
NOTE 16 - NEW ACCOUNTING PRONOUNCEMENTS (Continued)
In May 1995, FASB issued Statement of Financial Accounting Standards No. 122,
Accounting For Mortgage Servicing Rights. This standard requires separate
recognition of mortgage servicing rights obtained in connection with the
origination of loans. The standard may only be applied prospectively and will
be effective for the Company beginning in fiscal year 1997. The Company is
studying the requirements of this standard and believes that its application
will not have significant effects on its financial reporting.
In October 1995, FASB issued Statement of Financial Accounting Standard No.
123, Accounting For Stock-Based Compensation. This standard establishes
financial accounting and reporting standards for stock-based employee
compensation plans, such as stock purchase or stock option plans. The
requirements of this standard are effective for transactions entered into
during fiscal year 1997. The Company believes that this standard's application
will not have significant effects on its financial reporting.
NOTE 17 - SUBSEQUENT EVENTS
Subsequent to year end, the Company's Employee Stock Ownership Plan ("ESOP")
began to purchase up to $500,000 worth of the Company's common stock for the
benefit of participants in the ESOP plan. Additionally, the Company announced
a plan to repurchase up to 657,000 shares, or approximately 10% of the
Company's outstanding common stock. The repurchase program is expected to be
completed within 24 months.
PAGE
<PAGE>
REVOCABLE PROXY
HORIZON FINANCIAL CORP.
ANNUAL MEETING OF SHAREHOLDERS
July 23, 1996
The undersigned hereby appoints the Executive/Proxy Committee of the
Board of Directors of Horizon Financial Corp. ("Corporation") with full powers
of substitution to act as attorneys and proxies for the undersigned, to vote
all shares of Common Stock of the Corporation which the undersigned is
entitled to vote at the Annual Meeting of Shareholders ("Meeting"), to be held
at the Best Western Lakeway Inn, 714 Lakeway Drive, Bellingham, Washington, on
Tuesday, July 23, 1996, at 2:00 p.m., Pacific Time, and at any and all
adjournments thereof, as follows:
VOTE
FOR WITHHELD
I. The election as directors of the nominees listed below [ ] [ ]
(except as marked to the contrary below).
Robert C. Diehl (One-year term)
Fred R. Miller (One-year term)
Maurice (Dennis) Fox (Two-year term)
George W. Gust (Two-year term)
Frank G. Uhrig (Two-year term)
L. M. (Larry) Strengholt (Three-year term)
Richard R. Haggen (Three-year term)
V. Lawrence Evans (Three-year term)
INSTRUCTIONS: To withhold your vote for any individual
nominees, write the nominee's name on the line below.
____________________________________________________
The Board of Directors recommends a vote "FOR" the listed proposition.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED,
THIS PROXY WILL BE VOTED FOR THE PROPOSITION STATED. IF ANY OTHER BUSINESS IS
PRESENTED AT SUCH MEETING, THIS PROXY WILL BE VOTED BY THE BOARD OF DIRECTORS
IN ITS BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO
OTHER BUSINESS TO BE PRESENTED AT THE MEETING. THIS PROXY ALSO CONFERS
DISCRETIONARY AUTHORITY ON THE BOARD OF DIRECTORS TO VOTE WITH RESPECT TO
APPROVAL OF THE MINUTES OF THE PRIOR MEETING OF SHAREHOLDERS, THE ELECTION OF
ANY PERSON AS DIRECTOR WHERE THE NOMINEE IS UNABLE TO SERVE OR FOR GOOD CAUSE
WILL NOT SERVE, AND MATTERS INCIDENT TO THE CONDUCT OF THE 1996 ANNUAL
MEETING.
<PAGE>
<PAGE>
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
Should the undersigned be present and elect to vote at the Meeting or at
any adjournment thereof and after notification to the Secretary of the
Corporation at the Meeting of the shareholder's decision to terminate this
proxy, then the power of said attorneys and proxies shall be deemed terminated
and of no further force and effect.
The undersigned acknowledges receipt from the Corporation, prior to the
execution of this proxy, of Notice of the Annual Meeting, a proxy statement
for the Annual Meeting and an Annual Report to Shareholders.
Dated: , 1996
_______________________________ _____________________________
PRINT NAME OF SHAREHOLDER PRINT NAME OF SHAREHOLDER
_______________________________ _____________________________
SIGNATURE OF SHAREHOLDER SIGNATURE OF SHAREHOLDER
Please sign exactly as your name appears on the enclosed card. When signing
as attorney, executor, administrator, trustee or guardian, please give your
full title. If shares are held jointly, each holder should sign.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.
<PAGE>
<PAGE>
