SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-27062
Horizon Financial Corp.
(Exact name of registrant as specified in its charter)
Chartered by the State of Washington 91-1695422
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1500 Cornwall Avenue, Bellingham, Washington 98225
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (360) 733-3050
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES x NO
Indicate by check mark whether disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
other information statements incorporated by reference in Part III of this
Form 10-KSB or any amendments to this Form 10-K. YES NO X
The aggregate market value of the voting stock held by nonaffiliates of
the registrant, based on the closing sales price of the registrant's Common
Stock as quoted on the Nasdaq Stock Market under the symbol "HRZB" on June 3,
1996, was $87,235,127 (6,591,743 shares at $13.234 per share). It is assumed
for purposes of this calculation that none of the registrant's officers,
directors and 5% stockholders are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for the 1996 Annual Meeting of Stockholders. (Part
II and III).
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PART I
Item 1. Business
(a) General
Horizon Financial Corp. ("Horizon Financial" or the "Corporation") was
incorporated in the State of Washington in 1995 for the purpose of becoming a
bank holding company for Horizon Bank, a savings bank ("Horizon Bank" or the
"Bank"). On July 25, 1995, the stockholders of the Bank approved a plan to
reorganize the Bank into the holding company form of ownership. The
reorganization was completed on October 13, 1995, on which date the Bank
became the wholly-owned subsidiary of the Corporation, and the stockholders of
the Bank became stockholders of the Corporation. Prior to completion of the
reorganization, the Corporation had no material assets or liabilities and
engaged in no business activities. Subsequent to the acquisition of Horizon
Bank, the Corporation has engaged in no significant activity other than
holding the stock of the Bank. Accordingly, the information set forth in this
report, including financial statements and related data, relates primarily to
the Bank.
Horizon Bank was incorporated as a Washington state-chartered mutual
savings bank in 1979 as a successor to Bellingham First Federal Savings and
Loan Association, whose predecessor was originally organized in 1922 as a
state-chartered savings and loan association which converted to a federal
savings and loan association in 1934. The Bank is one of nine stock savings
banks located in the State of Washington which are subject to regulation by
the Department of Financial Institutions of the State of Washington and the
Federal Deposit Insurance Corporation ("FDIC").
On August 12, 1986, the Bank converted from mutual to stock form
through the sale and issuance of 1,599,990 shares of common stock (before
adjustment for subsequent stock splits). Net proceeds from the sale totalled
approximately $16.7 million in new equity capital for the Bank, after
conversion expenses. On March 24, 1987, the Bank declared a three-for-two
stock split of the Bank's common stock, effected in the form of a stock
dividend payable to shareholders of record on April 7, 1987. On December 27,
1988, the Bank declared a 10% stock dividend payable to shareholders of record
on January 10, 1989. On March 23, 1993, the Bank declared a 15% stock
dividend, effected in a form of a stock dividend payable on May 25, 1993, to
shareholders of record on May 4, 1993. This stock dividend increased the
total outstanding shares of the Bank's common stock to 5,801,744. On June 28,
1994, the Bank declared a 10% stock dividend payable on August 25, 1994. This
increased the total outstanding shares of Bank's common stock to 6,476,417, as
of September 30. 1994.
In March 1993, the Bank established a Dividend Reinvestment Plan for
shareholders of record. During the fiscal 1995 year the Bank received
$268,506 in new equity from the Dividend Reinvestment Plan, which increased
the shares outstanding by 20,620 shares. During fiscal 1996, the Bank
received $264,313 in new equity from the Dividend Reinvestment Plan, which
increased the shares outstanding by 21,200 shares.
The business of the Bank consists primarily of attracting savings
deposits from the general public and originating first mortgage loans on
residential properties. The Bank also makes first mortgage loans on
commercial and multi-family residential properties, and, to a limited extent,
loans secured by savings accounts and consumer loans. The Bank also invests
in federal government and agency obligations, corporate notes and bonds,
municipal bonds, common stock, preferred stock, money market instruments and
mortgage-backed obligations.
The principal sources of funds for the Bank's lending and investment
activities are savings deposits, repayment of loans, loan sales and affiliated
Bank borrowings. The Bank's principal sources of income are interest on loans
and loan origination fees, commitment and servicing fees on loans, service
charge income on accounts and interest and dividends on investment securities.
Its principal expenses are interest paid on deposits, borrowings and general
and administrative expenses.
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The Bank's savings and lending operations are conducted through twelve
full-service office facilities located in Whatcom, Skagit and Snohomish
counties in Washington State. On August 12, 1993, the FDIC approved Horizon
Bank's application to open a branch in Burlington, Washington, which opened in
September 1994. On April 26, 1994, the FDIC approved Horizon Bank's
application to open a branch in Edmonds, Washington, which opened in July
1994. On July 14, 1996 the FDIC approved Horizon Bank's application to open a
branch in Millcreek, Washington, which opened in September 1995. The Bank's
main office is located at 1500 Cornwall Avenue, Bellingham, Washington and its
telephone number is (360) 733-3050.
Selected Financial Data
The following table sets forth certain information concerning the
financial position of the Bank at and for the dates indicated.
March 31,
1996 1995 1994 1993 1992
_____ _____ ____ ____ ____
(Dollars in thousands)
Total Assets. . . . . . $488,968 $457,478 $424,637 $394,168 $363,275
Loans Outstanding . . . 389,651 360,120 340,421 314,540 291,051
Cash and Investment
Securities. . . . . . 87,662 83,782 71,795 68,730 61,506
Deposits. . . . . . . . 402,676 377,703 351,506 328,052 303,323
Borrowings. . . . . . . -- -- -- -- --
Stockholders' Equity. . 79,147 72,685 65,995 59,164 53,387
Number of Full Service
Offices . . . . . . . 12 11 9 8 8
Year Ended March 31,
1996 1995 1994 1993 1992
_____ _____ ____ ____ ____
(In thousands)
Interest Income . . . . $37,082 $33,989 $33,619 $34,202 $33,327
Interest Expense. . . . (20,773) (16,948) (15,227) (16,398) (18,784)
Net Interest Income . . 16,309 17,041 18,392 17,804 14,543
Other Income. . . . . . 1,293 1,220 1,692 1,521 1,527
Non-interest Expense. . (6,685) (7,149) (7,446) (7,194) (6,702)
Provision for Loan
Losses. . . . . . . . (110) (132) (368) (409) (877)
Income (Loss) Before
Taxes . . . . . . . . 10,807 10,980 12,270 11,722 8,491
Federal Income Tax. . . 3,586 3,640 4,262 3,819 2,686
SFAS #109 . . . . . . . -- -- -- 889 --
Gain on Sale of
Trust Department . . . -- 181 -- -- --
Net Income. . . . . . . $7,221 $ 7,521 $ 8,008 $ 7,014 $ 5,805
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Key Operating Ratios
The table below sets forth certain performance ratios of the Bank for
the periods indicated. These ratios are calculated based on month end
balances.
At and for the
Year Ended March 31,
1996 1995 1994
____ ____ ____
Return on average assets (net income
divided by average total
assets) . . . . . . . . . . . . . . . . . 1.53% 1.71% 1.96%
Return on average equity (net income
divided by average equity). . . . . . . . 9.51 10.85 12.80
Dividend payout ratio (dividends
declared per share divided
by net income per share). . . . . . . . . 29.09 26.97 23.53
Equity to assets ratio (average
equity dividend by average
total assets) . . . . . . . . . . . . . . 16.04 15.72% 15.29%
Interest rate spread (difference
between average yield on interest
earning assets and average cost
of interest bearing
liabilities). . . . . . . . . . . . . . . 2.85 3.40 4.10
Net yield on earning assets (net
interest income as a percentage
of average interest earning
assets) . . . . . . . . . . . . . . . . . 3.61 4.06 4.71
Yields Earned and Rates Paid
The Bank's pre-tax earnings depend primarily on its net interest
income, the difference between the income it receives on its loan portfolio
and other investments and its cost of money, consisting primarily of interest
paid on savings deposits, and other borrowings. Net interest income is
affected by (i) the difference between rates of interest earned on its
interest-earning assets and rates paid on its interest-bearing liabilities
("interest rate spread") and (ii) the relative amounts of its interest-earning
assets and interest-bearing liabilities. When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income. Thrift institutions have
traditionally used interest rate spreads as a measure of net interest income.
Another indicator of an institution's net interest income is its "net yield on
interest-earning assets" which is net interest income divided by average
interest earning assets.
In an effort to make the yields on its loan portfolio and investments
more interest rate sensitive, the Bank has implemented a number of measures,
which are discussed herein under "-- Lending Activities."
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The following table presents at the date and for the periods indicated, the total dollar amount of
interest income and interest expense, as well as the resulting yields earned and rates paid.
At March 31, Year Ended March 31,
1996 1996 1995 1994
Average Average Inter- Average Average Inter- Average Average Inter- Average
Balance Yield/ Balance est Yield Balance est Yield/ Balance est Yield
Cost Cost Cost Cost
_______________ ________________________ ________________________ ________________________
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-
earning
assets:
Loans
receivable. .$389,651 8.57% $375,018 $32,145 8.57% $352,620 $29,948 8.49% $328,034 $30,210 9.21%
Investment
securities . 57,026 6.24 53,849 3,359 6.24 45,410 2,533 5.58 46,466 2,219 4.77
Mortgage-
backed
securities. . 23,364 6.89 22,895 1,578 6.89 21,630 1,508 6.97 15,614 1,190 7.62
Total
interest-
earning
assets. . . . 470,041 8.21 451,762 37,082 8.21 419,660 33,989 8.10 390,114 33,619 8.62
Interest-
bearing
liabilities:
Deposits. . .402,676 5.36 387,348 20,773 5.36 360,895 16,948 4.70 336,992 15,227 4.52
Total
interest-
bearing
liabilities .402,676 5.36 387,348 20,773 5.36 360,895 16,948 4.70 336,992 15,227 4.52
Net interest
income . . . $16,309 $17,041 $18,392
Interest rate
spread. . . . 2.85% 3.40% 4.10%
Net yield on
interest-
earning
assets . . . . 3.61% 4.06% 4.71%
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities. . 117.63% 116.28% 115.76%
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Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest income and interest
expense for the Bank for the periods indicated. For each category of interest-earning asset and
interest-bearing liability, information is provided on changes attributable to (1) changes in volume (change
in volume multiplied by old rate); (2) changes in rates (change in rate multiplied by old volume); (3)
changes to rate-volume (changes in rate multiplied by the change in volume).
Year Ended March 31,
1996 vs. 1995 1995 vs. 1994 1994 vs. 1993
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
_____________________________ ____________________________ ___________________________
Rate/ Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total Volume Rate Volume Total
______ ____ ______ _____ ______ ____ ______ _____ ______ ____ ______ _____
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Interest
and fees
on loans . $1,898 $281 $ 18 $2,197 $2,277 $(2,362) $(177) $(262) $2,236 $(2,446) $(178) $(388)
Investment
securities
and other
interest-
bearing
securities. . 573 282 41 896 271 334 27 632 276 (439) (33) (196)
Total
interest-
earning
assets. . . .$2,471 $563 $ 59 $3,093 $2,548 $(2,028) $(150) $370 $2,512 $(2,885) $(211) $(584)
Interest expense:
Deposit
accounts. . .$1,252 $2,398 $176 $3,826 $1,071 $ 607 $ 43 $1,721 $1,119 $(2,143) $(148) $(1,172)
Total interest-
bearing
liabilities .$1,252 $2,398 $176 $3,826 $1,071 $ 607 $ 43 $1,721 $1,119 $(2,143) $(148) $(1,172)
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Lending Activities
General. The Bank's loan portfolio totaled $389,650,547 at March 31,
1996, representing approximately 79.69% of its total assets. On that date,
81.15% of total outstanding loans consisted of loans secured by mortgages on
single family residential properties, 3.38% of the loans consisted of loans
secured by two-to-four unit residential properties, 5.16% of total outstanding
loans consisted of loans secured by mortgages on over four unit residential
properties, and 6.49% of total outstanding loans consisted of commercial real
estate loans. The balance of the Bank's outstanding loans at that date
consisted of secured consumer loans and loans secured by savings deposits.
The Bank originates both fixed rate and adjustable rate mortgages
("ARMs") secured by residential, business, and commercial real estate, the
majority of which include building improvements.
In order to have the ability to make the yields on its loan portfolio
and investments more interest rate sensitive, the Bank has implemented a
number of measures. Those measures include: (i) adoption of a policy under
which the Bank generally originates long-term, fixed-rate mortgage loans only
when such loans are written to specifications promulgated by the Federal Home
Loan Mortgage Corporation ("FHLMC") and qualify for sale in the secondary
market, (ii) origination of ARM loans on residential and commercial properties
subject to market conditions, (iii) origination of construction loans secured
by residential and income producing properties at interest rates subject to
periodic adjustment based upon changes in a nationally recognized money market
index and (iv) increased emphasis on originating 10 and 15 year amortizing
mortgage loans. At March 31, 1996, $179,773,652 (or 46.14%) of the Bank's net
mortgage loans receivable were comprised of loans that were other than
long-term fixed-rate mortgage loans (i.e., loans with maturities greater than
15 years, which historically have been the industry's traditional area of
lending activity). This amount consists of $13,992,400 in residential ARM
loans and $13,796,740 in ARM loans secured by commercial and other real
estate with adjustable rates; and $151,984,512 in 15 year or less amortizing
mortgage loans.
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Loan Maturity. The following table sets forth certain information at March 31, 1996 regarding the
dollar amount of loans maturing in the Bank's portfolio based on their contractual terms to maturity.
Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are
reported as due in one year or less. Loan balances do not include undisbursed loan proceeds, unearned
discounts, unearned income and allowance for loan losses.
Due After Due After
Due During 2 Through 5 Through Due Over
the Year Ended 5 Years After 10 Years After 10 Years After
March 31, March 31, March 31, March 31,
1997 1998 1996 1996 1996 Total
_______________ ______ _______ ______ _____
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural. . . . . . . . $15,614 $ 2,429 $13,171 $15,334 $ 4,464 $ 51,012
Real estate construction. . . -- -- -- -- 15,711 15,711
Real estate-mortgage,
installment and other. . . . 13,272 2,147 8,998 22,685 275,826 322,928
Total. . . . . . . . . . $28,886 $4,576 $22,169 $38,019 $296,001 $389,651
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The following table sets forth the dollar amount of all loans due one year after March 31, 1996 which
have fixed interest rates and have floating or adjustable interest rates. Loan balances do not include
undisbursed loan proceeds, unearned discounts, unearned income, and allowance for loan losses.
Fixed
Rates Adjustable Rates Total
_____ ________________ _____
(In thousands)
<S> <C> <C> <C>
Commercial, financial and
agricultural . . . . . . . . . . . . $1,817 $13,797 $15,614
Real estate construction. . . . . . . -- -- --
Real estate-mortgage, installment
and other. . . . . . . . . . . . . . 4,960 8,312 13,272
Total. . . . . . . . . . . . . . $6,777 $22,109 $28,886
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Residential Loans. The primary lending activity of the Bank has been
the granting of conventional loans to enable borrowers to purchase existing
homes or construct new homes. The Bank's real estate loan portfolio also
includes loans on two-to-four family dwellings, multi-family housing (over
four units), and loans made to purchase or refinance improved buildings to be
used for residential housing. At March 31, 1996, approximately 84.53% of the
Bank's total loan portfolio consisted of loans secured by residential real
estate.
The Bank's lending practices generally limit the maximum loan-to-value
ratio on one-to-four family residential mortgage loans to 95% of the appraised
value as determined by an independent appraiser, with the condition that
private mortgage insurance generally be required on any home loans with
loan-to-value ratios in excess of 80% of appraised value. The Bank places
this insurance with carriers approved by FHLMC. The coverage generally limits
the Bank's exposure to 72% of the loan amount. If private mortgage insurance
is required, the borrower pays the premium at loan closing and any recurring
premiums through an escrow reserve account established with the Bank for such
period of time as the Bank requires the insurance coverage to be in force.
Multi-family residential and commercial real estate loans, construction loans
and unimproved real estate loans generally do not exceed 80% of appraised
value.
The Bank presently originates both fixed-rate and ARMs secured by
one-to-four family properties with a loan term not exceeding 30 years. Under
certain conditions, ARM borrowers are allowed to convert beginning on the
first interest rate change date and ending on the fifth interest rate change
date from the date of the loan note. In addition, certain consumer safeguards
are built into the ARM instruments used by the Bank. These safeguards include
limits on annual and lifetime interest rate adjustments. The Bank generally
originates these loans in accordance with guidelines established by the FHLMC.
For the fiscal year ended March 31, 1996, adjustable mortgage loans totalled
$14,057,805 or 14.60% of total originations as compared to $9,660,495 or
14.08% of total originations for the year ended March 31, 1995.
Construction Loans. The Bank also provides construction financing for
single-family dwellings and to a lesser extent makes land acquisition and
development loans on properties intended for residential use. The interest
rate charged by the Bank on these loans varies depending upon the type of
security property and the credit worthiness of the borrower. The origination
fees charged by the Bank on construction loans generally are from one-quarter
to one percentage point higher than fees charged by the Bank for permanent
financing. At March 31, 1996 the Bank had $15,711,393, or 4.03% of total
loans outstanding in construction loans, as compared to $17,132,091, or 4.8%
of total loans at March 31, 1995.
Construction lending is generally considered to involve a higher level
of risk as compared to one- to four-family residential permanent lending
because of the inherent difficulty in estimating both a property's value at
completion of the project and the estimated cost of the project. The nature
of these loans is such that they are generally more difficult to evaluate and
monitor. If the estimate of value proves to be inaccurate, the Bank may be
confronted at, or prior to, the maturity of the loan, with a project whose
value is insufficient to assure full repayment. Loans for the construction of
speculative homes carry more risk because the payoff for the loan is dependent
on the builder's ability to sell the property prior to the time that the
construction loan is due.
Multi-Family, Business and Commercial Loans. These types of loans
constituted $47,307,695 or approximately 12.14% of Horizon Bank's loan
portfolio at March 31, 1996. These loans include fixed rate and adjustable
rate mortgages secured by apartment buildings (i.e., those containing five or
more living units) and business and commercial properties. The Bank generally
requires that such loans have a debt service coverage of 1.25 to 1 with a loan
to value ratio not
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exceeding 80%. Fixed-rate loans generally have a 5 to 10-year loan term, with
payments based upon a 15 to 30-year amortization schedule.
Since 1976, some of the loans originated by the Bank and secured by
income-producing properties have an interest rate which adjusts annually based
upon changes in an index of United States Treasury securities published by the
Board of Governors of the Federal Reserve System ("Federal Reserve"). The
amount of any increase in the interest rate is generally limited to two
percentage points (upward or downward) each adjustment period, with a limit of
six percentage points on the amount which the interest rate can increase or
decrease over the life of the loan.
Multi-family residential and business and commercial real estate
lending is generally considered to involve a higher degree of risk than
permanent residential one- to four-family lending. Such lending typically
involves large loan balances concentrated in a single borrower or groups of
related borrowers. In addition, the payment experience on loans secured by
income-producing properties is typically dependent on the successful operation
of the related real estate project and thus may be subject to a greater extent
to adverse conditions in the real estate market or in the economy generally.
Horizon Bank generally attempts to mitigate the risks associated with
multi-family commercial and residential real estate lending by, among other
things, lending on collateral located in its market area and generally to
individuals who reside in its market.
Consumer Loans. The Bank makes a variety of loans for consumer
purposes. Included among these are home equity loans, loans secured by
personal property, such as automobiles, boats, and other vehicles, loans
secured by a Horizon Bank's Certificate of Deposit, and loans for mobile homes
located in parks.
Horizon Bank began actively marketing consumer loans in fiscal 1982 in
order to provide a wider range of financial services to its customers and to
achieve shorter terms and higher interest rates normally typical of such
loans. At March 31, 1996, the Bank held $15,269,895 of consumer loans.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciating assets such as automobiles, boats and other vehicles. In
such cases, any repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. The
remaining deficiency often does not warrant further substantial collection
efforts against the borrower beyond obtaining a deficiency judgment. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application
of various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount that can be recovered on such loans.
Consumer loans are all secured and are made based on an evaluation of
the borrower's creditworthiness, including income, other indebtedness, and
satisfactory credit history, and the value of the collateral. Designated
managers or Loan Committee members approve consumer loan requests.
Secured loan amounts typically do not exceed 80% of the value of the
collateral, or 80% of the appraised value of the residence in the case of home
equity loans. Horizon Bank maintains a loan loss reserve for consumer loans.
Loan Solicitation and Processing. The primary sources for loan
originations are attributable to deposit customers, current borrowers, walk-in
customers, and referrals from real estate agents and builders. The Bank does
not currently purchase loans from, or otherwise utilize, mortgage brokers in
the origination of loans.
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The Bank accepts completed loan applications from all of its branches.
Processing is performed at the branch level by the branch manager or a
processor working under the direction of the branch manager. Detailed
information is obtained to determine the creditworthiness of the borrower and
the borrower's ability to repay. The more significant items appearing on the
applications and accompanying material are verified through the use of written
credit reports, financial statements, and confirmations. After analysis of
the loan application, supporting documents and the property to be pledged as
loan security, including an appraisal of the property by either a staff
appraiser or an independent fee appraiser, branch managers not having loan
approval authority will forward the application with a written recommendation
to the Bank's Loan Committee. Loan approval requires the signatures of two
members of the Loan Committee. The Loan Committee consists of officers of the
Bank who are appointed by the Bank's Board of Directors. The Bank generally
requires its mortgage notes to be co-signed individually by the principals on
all loans made to entities other than natural persons. Certain lending
personnel have been given limited loan approval authority by the Board of
Directors covering secondary market quality loans not exceeding 80% loan to
value.
Loan assumption requests of adjustable rate loans are handled by the
Bank in a manner similar to new loan requests. FHLMC standards are generally
applied to each request and full credit underwriting is required. For fixed
rate loans, a sale or transfer of the secured property generally results in
the Bank enforcing its due on transfer rights contained in the mortgage
instrument.
Loan Originations, Purchases and Sales. The Bank's current emphasis is
on originating intermediate and long-term fixed rate loans on terms and
conditions which will permit them to be sold in the secondary market, while
originating ARM and 15 and 20 year fixed-rate loans for its own portfolio.
The Bank is a qualified servicer for both Federal Home Loan Mortgage
Corporation ("FHLMC") and the Federal National Mortgage Association, as of
April 1992, and the Bank's general practice is to close its fixed-rate,
one-to-four family residential loans on FHLMC loan documents in order to
facilitate future sales to the mortgage corporation as well as to other
institutional investors. From time to time, depending upon interest rates and
economic conditions, the Bank has sold participation interests in loans in
order to provide additional funds for lending to generate servicing fee income
and to decrease the dollar amount of its intermediate and long-term fixed-rate
loans. The sale of loans in the secondary mortgage market reduces the Bank's
interest rate risk and allows the Bank to continue to make loans during
periods when savings flows decline or funds are otherwise unavailable for
lending purposes. In connection with such sales, the Bank generally retains
the servicing of the loans (i.e., collection of principal and interest
payments), for which it generally receives a fee payable monthly of .25% to
.375% per annum of the unpaid balance of each loan. As of March 31, 1996, the
Bank was servicing loans for others aggregating approximately $57,668,222.
All sales of loan interests by the Bank are made without right of recourse to
the Bank by the buyer of the loan interests in the event of default by the
borrower. In addition to originating loans, Horizon Bank has purchased real
estate loans in the secondary market. The Bank's purchases in the secondary
market depend upon the demand for mortgage credit in the local market area and
the inflow of funds from traditional sources. Loan purchases enable the Bank
to utilize funds more quickly, particularly where sufficient loan demand is
not obtainable locally.
Loan Commitments. Horizon Bank's commitments to make conventional
mortgage loans on existing residential dwellings are made for periods up to 60
days from the date of loan application and are based upon the prevailing
market rate at the time of application. At March 31, 1996, such commitments
amounted to $6,570,804.
Loan Origination and Other Fees. In addition to interest earned on
loans, the Bank receives loan origination fees for originating loans. Loan
origination fees are a percentage of the principal amount of the mortgage loan
which are charged to the borrower at the closing of the loan.
The Bank's loan origination fees are generally 1.5% to 2.50% on
conventional residential mortgages and 2.0% to 2.5% for commercial real estate
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loans. The total amount of deferred loan origination fees and unearned
discounts at March 31, 1996 was $7,559,712. Any unamortized loan fees are
recognized as income at the time the loan is sold or paid off.
Income from loan origination and commitment fees varies with the volume
and type of loans and commitments made and purchased and with competitive
conditions in mortgage markets, which in turn responds to the demand for and
availability of money. The Bank has experienced a decrease in loan fee income
during periods of unusually high interest rates due to the resulting lack of
demand for mortgage loans. The Bank also receives other fees and income from
charges relating to existing loans, which include late charges, and fees
collected in connection with a change in terms or other loan modifications.
These fees and charges have not constituted a material source of income.
Loan Modifications. In January 1992, the Bank started a loan
modification program to assist customers who were considering refinancing
their home loans. For a 2% loan fee the Bank will modify customers' loans
under the program. No new principal is required and only the interest rate
and payment amounts are changed. All other terms and conditions remain the
same. In fiscal 1996, the Bank modified $6,640,084 of real estate loans,
compared to $720,609 in fiscal 1995.
Delinquent Loans, Loans in Foreclosure and Foreclosed Property. Real
estate loans are defined as delinquent when any payment of principal and/or
interest is past due. While generally the Bank is able to work out a
satisfactory repayment schedule with a delinquent borrower, the Bank generally
will undertake foreclosure proceedings if the delinquency is not otherwise
resolved within 90 days. Property acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as "real estate
owned" until such time as it is sold or otherwise disposed of. The Bank's
significant problem loans are as follows:
At March 31, 1996, the Bank did not have any nonaccrual loans,
delinquent loans or restricted loans. Delinquent loans have been consistently
low over the last three fiscal years due to a strong local economy and strong
underwriting. No assurances, however, can be given as to future delinquency
levels and the continued strength of the local economy.
There was no real estate acquired by a default process as of March 31,
1996 and March 31, 1995.
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated.
At March 31,
1996 1995 1994 1993 1992
____ ____ ____ ____ ____
Non-accrual loans . . . $ -- $ -- $ -- $ -- $ --
Loans 90 days or more
delinquent and accruing
interest. . . . . . . . -- 1,545 -- -- 31,000
Restructured loans. . . . -- -- -- -- --
Real estate acquired
through foreclosure. -- -- -- -- --
Total . . . . . . . . $ -- $ 1,545 $ -- $ -- $31,000
As a percentage of net
loans. . . . . . . . . . -- .0004% -- -- .01%
As a percentage of total
assets . . . . . . . . . -- .0003% -- -- .01%
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Reserves for Losses. Prior to fiscal 1991 the Bank operated under a
specific loan loss reserve methodology. The Bank has since switched to a
general loan loss reserve system. This system is more standard within the
banking business and allows the Bank more flexibility in reserving for future
loan loss reserves without having to identify a specific loan. Any
differences between the loss reserve and the amount of loss realized has been
charged or credited to current income. The provision for loan losses is
maintained at a level sufficient to provide for estimated loan losses based on
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 reserve is based upon factors and trends
identified by management at the time financial statements are prepared, but
the ultimate recovery of loans is susceptible to future market factors beyond
the Bank's control, which may result in losses or recoveries differing
significantly from those provided for in the financial statements.
The Bank established an allowance for losses for the period ended March
31, 1996 in the amount of $3,236,150 and $3,126,150 for the year ended March
31, 1995. The Bank's loan loss reserve as of March 31, 1996, is approximately
.83% of total loans receivable.
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated.
Year Ended March 31,
1996 1995 1994 1993 1992
_____ ____ ____ ____ ____
Balance at
beginning of
period . . . $3,126,150 $2,994,150 $2,626,348 $2,217,612 $1,340,000
Provision for
loan
losses . . . 110,000 132,000 367,802 408,736 877,612
Balance at end
of period. . $3,236,150 $3,126,150 $2,994,150 $2,626,348 $2,217,612
Ratio of net
charge offs
to average
loans
outstanding
during the
period. . . .03 .04% .11% .13% .31%
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated. See "-- Reserves for
Losses" above for a discussion above regarding the change in fiscal 1992 from
a specific loan loss reserve system to a general loan loss reserve system.
Year Ended March 31,
1996 1995 1994 1993 1992
____ ____ ____ ____ ____
Commercial,
financial and
agricultural . $ 800,000 $ 858,000 $ 858,000 $ 758,000 $ 358,000
Real estate -
construc-
tion . . . . -- -- -- -- --
Real estate -
mortgage. . . 2,436,150 2,268,150 2,136,150 1,868,348 1,859,612
Total
allowance
for loan
losses. . . $3,236,150 $3,126,150 $2,994,150 $2,626,348 $2,217,612
The Bank had no allowances for real estate owned at March 31, 1996,
1995, 1994, 1993 and 1992.
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Investment Activities
Under Washington law, savings banks are permitted to own U.S.
government and government agency obligations, commercial paper, corporate
bonds, mutual fund shares, debt and equity obligations issued by creditworthy
entities, whether traded on public securities exchanges or placed privately
for investment purposes. The Bank holds a diverse portfolio of money market
instruments, United States Treasury obligations, federal agency securities,
common stock, preferred stock and corporate notes.
The FDIC has adopted the Federal Financial Institutions Examination
Council statement of policy on securities activities and accounting
procedures. This new policy requires that institutions establish prudent
policies and strategies for securities activities, identify certain securities
trading practices that are unsuitable for an investment portfolio, recommends
procedures for selection of a securities dealer, and limits investment in high
risk mortgage securities and disproportionately large holdings of long-term
zero coupon bonds.
The policy addresses concerns about speculative or other non-investment
activities in the securities investment portfolios of depository institutions.
Speculative securities activities can impair earnings or capital and, in some
cases, may cause the failure of the institution. The policy establishes a
framework for structuring securities activities and clarifies various
accounting
issues concerning investment accounts versus trading accounts.
The book value of the above investments at March 31, 1996 was
$48,270,315 compared to a market value of $50,780,400. For further
information concerning the Bank's investment securities portfolio, see Note 3
of the Notes to the Consolidated Financial Statements.
The Bank also invests in mortgage-backed securities. At March 31,
1996, such securities had a book value of $23,363,193 and a market value of
$23,342,381.
The following table presents the carrying (book) value of the Bank's
investment securities portfolio and short-term investments. The market value
of the Bank's investment securities portfolio at March 31, 1996, was
approximately $50,780,400. This does not include interest-bearing deposits
and cash equivalents.
At March 31,
1996 1995 1994
____ ____ ____
(In thousands)
Investment securities:
U.S. Government, agency
securities, state and
political subdivisions . . . $39,408 $31,614 $19,413
Asset-backed securities. . . . 23,364 23,405 19,381
Other securities. . . . . . . 8,862 11,095 13,894
Total investments . . . . . 71,634 66,114 52,688
Interest bearing
deposits and cash
equivalents. . . . . . . . . 13,600 16,557 19,107
$85,234 $82,671 $71,795
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<TABLE>
The following table sets forth the scheduled maturities, carrying values, market values and average
yields for the Bank's investment securities at March 31, 1996.
At March 31, 1996
One Year One to Five Five to Ten More than Total Investment
or Less Years Years Ten Years Securities
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
_____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government,
agency
securities,
state and
political
sub-
divisions. . $12,525 5.81% $24,159 6.04% $2,725 8.05% $ -- --% $39,409 $39,502 6.10%
Mortgage-
backed
securities . -- -- 1,705 5.88 1,604 6.76 20,054 6.82 23,363 23,342 6.75
Other . . . . 5,080 4.92 3,782 6.58 -- -- -- -- 8,862 11,279 5.48
Total. . . $17,605 5.48 $29,646 6.10 $4,329 7.56 $20,054 6.82 $71,634 $74,123 6.21
</TABLE>
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<PAGE>
Trust Department
On March 22, 1994, the Board of Directors of the Bank approved a
resolution to close its trust department. On June 30, 1994, the Bank signed
an Acquisition Agreement to sell its book of trust business to First
Interstate Bank. The final customer account was closed in Horizon's trust
department and moved to First Interstate on March 28, 1995. All final
accounting was completed by December 31, 1995.
Savings Activities and Other Sources of Funds
General. Savings accounts and other types of deposits have
traditionally been an important source of the Bank's funds for use in lending
and for other general business purposes. In addition to savings accounts, the
Bank derives funds from loan repayments, loan sales, Federal Reserve
borrowings, and other borrowings and operations. The availability of funds
from loan sales is influenced by general interest rates and other market
conditions. Loan repayments are a relatively stable source of funds while
deposit inflows and outflows vary widely and are influenced by prevailing
interest rates and money market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in deposits or deposit inflows
at less than projected levels and may be used on a longer term basis to
support expanded lending activities.
Deposits. Horizon Bank offers a number of deposit accounts, including
Regular Passbook and Statement Savings Accounts, Checking Accounts, Money
Market with and without Check Access and Certificates of Deposit Accounts with
maturities ranging from seven days up to ten years. Certificates of Deposit
account requirements vary according to minimum principal balances, the time
period the funds must remain on deposit and the interest rate determined for
each term and minimum balance.
The following table sets forth certain information concerning the
deposits at the Bank.
Year Ended March 31,
1996 1995 1994
Weighted Weighted Weighted
Average Average Average Average Average Average
Type Balance Rate Balance Rate Balance Rate
____ _______ ________ _______ _________ _______ ____________
(Dollars in thousands)
Savings $ 29,324 3.46% $ 33,939 3.35% $ 32,235 3.15%
Drafts 24,274 1.93 24,697 2.26 23,699 2.47
Money
Market 44,181 4.48 42,146 3.84 45,279 3.21
Time
Deposits 289,081 6.02 260,908 5.26 235,836 5.19
Total $386,860 5.39% $361,690 4.71% $337,049 4.54%
The following table indicates the amount of the Bank's deposits by time
remaining until maturity as of March 31, 1996 in excess of $100,000.
Certificates
Maturity Period of Deposit
_______________ __________
Three months or less $14,621,365
Three through six months 9,703,615
Six through twelve months 19,067,713
Over twelve months 24,300,237
Total $67,692,930
The Bank has increasingly relied upon deregulated fixed-rate
certificate accounts and other new regulatory authorized types of deposits.
The Bank has a number of different programs designed to attract both
short-term and long-term
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<PAGE>
savings of the general public by providing a wide assortment of accounts and
rates. The program includes traditional passbook accounts; nonnegotiable time
deposits with minimum deposits of $100,000 and terms of 30 days to 10 years
called Jumbo Certificates of Deposit; nonnegotiable, nontransferable time
deposits with minimum deposits of $500 and terms from 30 days to 10 years at
fixed rates; 18-month to 10-year variable rate fixed term certificates;
Individual Retirement Accounts (IRAs); Qualified Retirement Plans; transaction
accounts such as regular checking; MMDAs with and without limited check
access.
The Bank's practice on early withdrawal penalties is applicable only to
time deposits. Management believes that in periods of rising interest rates
this practice will discourage depositors from making premature withdrawals for
the purpose of reinvesting in higher rate time deposits.
The minimum amount required to open a time deposit varies from $500 to
$100,000, depending on the type of time deposit. Pricing of rates on time
deposits with maturities from thirty days to ten years are determined
periodically by the Bank, based upon competitive rates and local market rates,
national money market rates, and yields on assets of the same maturity.
The Bank's MMDA currently has a $1,000 minimum deposit and has a tiered
pricing program, with interest rates that vary by account dollar
balance--$2,000, $10,000, $25,000 and higher. This account has no maturity
requirements, no regulatory interest rate ceiling, and limited check writing
privileges. The interest rate on the account is adjusted by the bank weekly,
based on money market conditions. The Bank currently has a $10,000 minimum
deposit (MMK) money market and has a tiered pricing program, with interest
rates that vary by account dollar balance...$10,000, $25,000, $50,000 and
higher. This account has no maturity requirements, no regulatory interest
rate ceiling, and no check writing privileges. The interest rates on the
account are adjusted by the Bank weekly or as dictated by money market
conditions.
The large variety of deposit accounts offered by the Bank has increased
the Bank's ability to retain deposits and has allowed it to be competitive in
obtaining new funds, although the threat of disintermediation (the flow of
funds away from the Bank into direct investment vehicles, such as government
and corporate securities) still exists. The ability of the Bank to attract
and retain deposits and the Bank's cost of funds have been, and will continue
to be, significantly affected by capital and money market conditions.
Horizon Bank attempts to control the flow of deposits by pricing its
accounts to remain competitive with other financial institutions in its market
area but does not necessarily seek to match the highest rates paid by
competing institutions.
The senior officers of the Bank meet periodically to determine the
interest rates which the Bank will offer to the general public. Such officers
consider the amount of funds needed by the Bank on both a short-term and
long-term basis, the rates being offered by the Bank's competitors,
alternative sources of funds and the projected level of interest rates in the
future.
The Bank's deposits are obtained primarily from residents of Northwest
Washington. Horizon Bank attracts deposits by offering a wide variety of
services and convenient branch locations and service hours. The Bank has not
solicited brokered deposits and has no present intention to attract such
deposits in the future.
For further information concerning the Bank's savings deposits,
reference is made to Note 8 of the Notes to the Consolidated Financial
Statements.
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<PAGE>
Borrowings. Savings deposits and access to a line of credit from the
discount window of the Federal Reserve Bank of San Francisco are available to
the Bank. If additional borrowings are needed, the Bank may do repurchase
agreements, term fed funds, or additional public funds deposits. The Bank has
no borrowings against any kind of credit as of March 31, 1996. Horizon Bank
has had no borrowings for the last five fiscal years.
Competition
The Bank faces substantial competition in its market area in
originating loans and attracting deposits. Competition in originating loans
is primarily from other thrift institutions, commercial banks, mortgage
companies, credit unions and consumer finance companies. The Bank competes
for loan originations primarily through interest rates and loan fees it
charges and through the efficiency and quality of services it provides
borrowers. Competition is affected by, among other things, the general
availability of lendable funds, general and local economic conditions and
current interest rate levels.
In attracting deposits, the Bank competes primarily with other thrift
institutions, commercial banks and credit unions. The Bank competes for
customer deposits principally on the basis of convenience and quality of its
banking services and the investment opportunities that satisfy the
requirements of investors with respect to rate of return, liquidity, risk and
other factors. The primary factors in competing for deposits are interest
rates and the convenience of office locations. In light of the recent
deregulation of interest rate controls on deposits, the Bank anticipates that
it will face increasing competition for deposits from commercial banks, other
thrift institutions and non-regulated financial intermediaries.
Personnel
At March 31, 1996, Horizon Bank employed 101 full-time and 24 part-time
employees. Horizon Bank employees are not represented by any collective
bargaining agreement. Management of Horizon Bank considers its relations with
its employees to be good.
REGULATION AND SUPERVISION
The Bank
General. As a state-chartered, federally insured bank, Horizon Bank is
subject to extensive federal and state regulation. Lending activities and
other investments must comply with various statutory and regulatory
requirements, including prescribed minimum capital standards. Horizon Bank is
regularly examined by the FDIC and the Department of Financial Institutions of
the State of Washington and files periodic reports concerning the Bank's
activities and financial condition with its regulators. The Bank's
relationship with depositors and borrowers also is regulated to a great extent
by both federal and state law, especially in such matters as the ownership of
savings accounts and the form and content of mortgage documents. The law and
regulations of the State of Washington pertaining to banks and other
corporations apply to the Bank. Among other things, those laws and
regulations govern the Bank's investments and borrowings, loans, payment of
interest and dividends, and establishment and relocation of branch offices.
Deposit Insurance. Deposit accounts at the Bank are insured up to
applicable limits by the FDIC under the Bank Insurance Fund ("BIF"). As an
insurer, the FDIC issues regulations, conducts examinations, requires the
filing of reports and generally supervises and regulates the operations of
state- chartered banks that are not members of the Federal Reserve System.
FDIC approval is required prior to any merger or consolidation involving
state, nonmember banks, or the establishment or relocation of an office
facility
<PAGE>
<PAGE>
thereof. FDIC supervision and regulation is intended primarily for the
protection of depositors and the FDIC insurance funds.
Pursuant to provisions in the Federal Deposit Insurance Act ("FDI Act"),
all BIF-insured banks must pay semiannual insurance assessments. The Bank's
assessments for the year ended March 31, 1996, equalled $246,686.
Effective September 30, 1995, the FDIC lowered assessment rates from
$.23 to $.31 per $100 of insured deposits to rates of $.04 to $.31 per $100 of
insured deposits, depending on the health of the bank, as a result of the
recapitalization of the BIF. On November 15, 1995, the FDIC voted to drop its
premiums for most banks to the statutory minimum of $2,000 per annum,
effective January 1996. Other banks will be charged risk-based premiums up to
$.27 per $100 of deposits. As a well capitalized bank, Horizon Bank qualifies
for the minimum statutory assessment.
Any insured bank which does not operate in accordance with or conform to
FDIC regulations, policies and directives may be sanctioned for
non-compliance. For example, proceedings may be instituted against any
insured bank or any director, officer, or employee of such bank who engages in
unsafe and unsound practices, including the violation of applicable laws and
regulations. The FDIC has the authority to terminate deposit insurance
pursuant to procedures established for that purpose.
Capital Requirements. Pursuant to FDIC regulations, a bank's qualifying
total capital base consists of two types of capital elements: "Core capital"
(Tier 1) and "supplementary capital" (Tier 2). To qualify as an element of
Tier 1 or Tier 2 capital, a capital instrument should not contain or be
subject to any conditions, covenants, terms restrictions, or provisions that
are inconsistent with safe and sound banking practices. The Bank must
maintain a ratio of Tier 1 capital to total assets of not less than 4 percent,
as discussed below. At March 31, 1996, Horizon Bank had a ratio of Tier 1
capital to total assets of 16.19%.
These capital requirements are designated as the minimum acceptable
standards for banks whose overall financial condition is fundamentally sound,
which are well-managed and have no material or significant financial
weaknesses. The FDIC capital regulations state that, where the FDIC
determines that the financial history or condition, managerial resources
and/or the future earnings prospects of a bank are not adequate, or where a
bank has sizable off-balance sheet or funding risks, significant risks from
concentrations of credit or nontraditional activities, excessive interest risk
rate exposure, or a significant volume of assets classified substandard,
doubtful or loss or otherwise criticized, the FDIC may determine that the
minimum adequate amount of capital for that bank is greater than the minimum
standards established by regulation.
Core (Tier 1) capital is defined as the sum of core capital elements of
common stockholders' equity (which includes common stock and related surplus,
undivided profits, disclosed capital reserves that represent a segregation of
undivided profits, and foreign currency translation adjustments, less net
unrealized holding losses on available-for-sale equity securities with readily
determinable fair values), noncumulative perpetual preferred stock including
any related surplus, and minority interests in the equity capital accounts of
consolidated subsidiaries, minus all intangible assets other than mortgage
servicing rights and purchased credit card relationships and minus any
disallowed deferred tax assets.
Supplementary (Tier 2) capital includes allowances for loan and lease
losses, up to a maximum of 1.25 percent of risk-weighted assets, cumulative
perpetual preferred stock, long-term preferred stock (original maturity of at
least 20 years) and any related surplus; perpetual preferred stock (and any
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<PAGE>
related surplus) where the dividend is reset periodically based, in whole or
part, on the bank's current credit standing, regardless of whether the
dividends are cumulative or noncumulative; hybrid capital instruments,
including mandatory convertible debt securities; and term subordinated debt
and intermediated-term preferred stock (original average maturity of five
years or more) and any related surplus. Supplementary capital does not
include revaluation reserves or hidden reserve that represent unrealized
appreciation on assets such as bank premises and equity securities.
Minimum Leverage Capital Requirement. Under the FDIC's capital
regulations the most highly-rated institutions are required to meet a "Tier 1"
leverage capital ratio of at least three percent of total assets. Tier 1 (or
"core capital") consists of common equity stock minus all intangible assets
other than limited amounts of purchased mortgage servicing rights. All other
banks must have a Tier 1 leverage ratio of at least 100 to 200 basis points
above the three percent minimum. The FDIC's capital regulations also
establish a minimum leverage ratio of not less than four percent for banks
that are not highly rated or are anticipating or experiencing significant
growth. Based on the definitions contained in the FDIC's capital regulations,
as of March 31, 1996, Horizon had Tier 1 capital of 16.19%.
The FDIC's capital regulation also requires higher capital levels for
banks which exhibit more than a moderate degree of risk or exhibit other
characteristics which necessitate that higher than minimum levels of capital
be maintained. The FDIC's capital regulations further provide that any
insured bank with a Tier 1 capital to total assets ratio of less than two
percent is considered to be operating in an unsafe and unsound condition
pursuant to Section 8(a) of the FDI Act unless the insured bank enters into a
written agreement, to which the FDIC is a party, to correct its capital
deficiency. Insured banks operating with Tier 1 capital levels below two
percent (and which have not entered into a written agreement) are subject to
an insurance removal action. Insured banks operating with lower than the
prescribed minimum capital levels, generally will not receive approval of
applications submitted to the FDIC. Also, inadequately capitalized state
nonmember banks will be subject to such administrative action as the FDIC
deems necessary.
A state nonmember bank that is below the minimum leverage requirement
will be deemed to be engaging in an "unsafe or unsound practice" that could
result in an FDIC enforcement action unless the bank complies with a capital
plan approved by the FDIC.
Risk Based Capital. In March 1989 the FDIC adopted a "Statement of
Policy on Risk-Based Capital" to supplement its existing capital regulations.
The Federal Reserve and the Office of the Comptroller of the Currency also
have adopted very similar risk-based capital rules. The Statement of Policy
consists of: a definition of capital for risk-based capital purposes, a
system for calculating risk-weighted assets by assigning assets and
off-balance sheet items to broad risk categories, and a schedule specifying a
phase-in period for achieving a minimum supervisory ratio of
capital-to-risk-weighted assets. According to the Statement of Policy, a
bank's risk-based capital is calculated
by dividing its qualifying total capital base by its risk-weighted assets. A
bank's qualifying total capital base consists of "core capital" (or "Tier 1"
capital) and "supplemental capital" (or "Tier 2" capital). The Statement of
Policy specifies the components of each category. On March 31, 1996, Horizon
Bank's risk-based capital ratio was 30.38 percent.
Federal Reserve System. In 1980, Congress enacted legislation which
imposed Federal Reserve Board reserve requirements (under "Regulation D") on
all depository institutions, that maintain transaction accounts or
non-personal time deposits. These reserves may be in the form of cash or
non-interest bearing deposits with the regional Federal Reserve Bank. NOW
accounts and other types of accounts that permit payments or transfers to
third parties fall within the
<PAGE>
<PAGE>
definition of transaction accounts and are subject to Regulation D reserve
requirements, as are any non-personal time deposits at a bank. Under
Regulation D, a bank must establish reserves equal to 0% of the first $4.3
million of net transaction accounts, 3% of the next $47.7 million, and 10%
plus $1.56 million of the remainder. The reserve requirement on non-personal
time deposits with original maturities of less than 1.5 years is 0%. As of
March 31, 1996, the Bank's deposit with the Federal Reserve Bank and vault
cash exceeded the Bank's reserve requirements.
Prompt Corrective Action. Federal statutes establish a supervisory
framework based on five capital categories: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. An institution's category depends upon where its capital
levels are in relation to relevant capital measure, which include a risk-based
capital measure, a leverage ratio capital measure, and certain other factors.
The federal banking agencies have adopted regulations that implement this
statutory framework. Under these regulations, an institution is treated as
well capitalized if its ratio of total capital to risk-weighted assets is 10%
or more, its ratio of core capital to risk-weighted assets is 6% or more, its
ratio of core capital to adjusted total assets is 5% or more, and it is not
subject to any federal supervisory order or directive to meet a specific
capital level. In order to be adequately capitalized, an institution must
have a total risk-based capital ratio of not less than 8%, a Tier 1 risk-based
capital ratio of not less than 4%, and a leverage ratio of not less than 4%.
Any institution which is neither well capitalized nor adequately capitalized
will be considered undercapitalized.
Undercapitalized institutions are subject to certain prompt corrective
action requirements, regulatory controls and restrictions which become more
extensive as an institution becomes more severely undercapitalized. Failure
by the Bank to comply with applicable capital requirements would, if
unremedied, result in restrictions on its activities and lead to enforcement
actions, including, but not limited to, the issuance of a capital directive to
ensure the maintenance of required capital levels. Banking regulators will
take prompt corrective action with respect to depository institutions that do
not meet minimum capital requirements. Additionally, approval of any
regulatory application filed for their review may be dependent on compliance
with capital requirements.
The Corporation
General. The Corporation, as the sole shareholder of the Bank, is a
bank holding company and has registered as such with the Federal Reserve.
Bank holding companies are subject to comprehensive regulation by the Federal
Reserve under the Bank Holding Company Act, as amended (the "BHCA"), and the
regulations of the Federal Reserve. As a bank holding company, the
Corporation is required to file with the Federal Reserve annual reports and
such additional information as the Federal Reserve may require and will be
subject to regular examinations by the Federal Reserve. The Federal Reserve
also has extensive enforcement authority over bank holding companies,
including, among other things, the ability to assess civil money penalties to
issue cease and desist or removal orders and to require that a holding company
divest subsidiaries (including its bank subsidiaries). In general,
enforcement actions may be initiated for violations of law and regulations and
unsafe or unsound practices.
Under the BHCA, a bank holding company must obtain Federal Reserve
approval before: (1) acquiring, directly or indirectly, ownership or control
of any voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(3) merging or consolidating with another bank holding company.
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<PAGE>
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by Federal Reserve regulation or
order, have been identified as activities closely related to the business of
banking or managing or controlling banks. The list of activities permitted by
the Federal Reserve includes, among other things, operating a savings
institution, mortgage company, finance company, credit card company or
factoring company, performing certain data processing operations; providing
certain investment and financial advice; underwriting and acting as an
insurance agent for certain types of credit-related insurance; leasing
property on a full-payout, non-operating basis; selling money orders,
travelers' checks and United States Savings Bonds; real estate and personal
property appraising; providing tax planning and preparation services; and,
subject to certain limitations, providing securities brokerage services for
customers. The Corporation has no present plans to engage in any of these
activities.
Dividends. The Federal Reserve has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the
Federal Reserve's view that a bank holding company should pay cash dividends
only to the extent that the company's net income for the past year is
sufficient to cover both the cash dividends and a rate of earning retention
that is consistent with the company's capital needs, asset quality and overall
financial condition. The Federal Reserve also indicated that it would be
inappropriate for a company experiencing serious financial problems to borrow
funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the Federal Reserve pursuant to the FDIC Improvement
Act, the Federal Reserve may prohibit a bank holding company from paying any
dividends if the holding company's bank subsidiary is classified as
"undercapitalized."
Bank holding companies, except for certain "well-capitalized" bank
holding companies, are required to give the Federal Reserve prior written
notice of any purchase or redemption of its outstanding equity securities if
the gross consideration for the purchase or redemption, when combined with the
net consideration paid for all such purchases or redemptions during the
preceding 12 months, is equal to 10% or more of their consolidated net worth.
The Federal Reserve may disapprove such a purchase or redemption of it
determines that the proposal would constitute an unsafe or unsound practice or
would violate any law, regulation, Federal Reserve order, or any condition
imposed by, or written agreement with, the Federal Reserve.
Capital Requirements. The Federal Reserve has established capital
requirements for bank holding companies that generally parallel the capital
requirements for national banks under the Office of the Comptroller of the
Currency's regulations. Under the Federal Reserve Board's capital guidelines,
the Corporation's levels of consolidated regulatory capital exceed the Federal
Reserve's minimum requirements, as follows:
Amount Percent
(Dollars in Thousands)
Tier 1 Capital $79,147 16.19%
Minimum Tier 1 (leverage) requirement 19,558 4.00
Excess $59,589 12.19%
Risk-based capital $80,204 30.38%
Minimum risk-based capital requiremen 21,116 8.00
Excess $59,088 22.38%
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TAXATION
Federal Taxation
General. The Corporation and the Bank report their income on a fiscal
year basis using the accrual method of accounting and will be subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Corporation. The Bank has not been audited by
the IRS during the past five years. Reference is made to Note 9 of the Notes
to the Consolidated Financial Statements contained in the Proxy Statement for
additional information concerning the income taxes payable by the Bank.
Tax Bad Debt Reserves. Savings institutions such as the Bank which
meet certain definitional tests primarily relating to their assets and the
nature of their business ("qualifying thrifts") are permitted to establish a
reserve for bad debts and to make annual additions thereto, which additions
may, within specified formula limits, be deducted in arriving at their taxable
income. The Bank's deduction with respect to "qualifying loans," which are
generally loans secured by certain interests in real property, may be computed
using an amount based on the Bank's actual loss experience, or a percentage
equal to 8% of the Bank's taxable income, computed with certain modifications
and reduced by the amount of any permitted additions to the nonqualifying
reserve. The Bank's deduction with respect to non-qualifying loans must be
computed under the experience method which essentially allows a deduction
based on the Bank's actual loss experience over a period of several years.
Each year the Bank selects the most favorable way to calculate the deduction
attributable to an addition to the tax bad debt reserve.
The Bank presently satisfies the qualifying thrift definitional tests.
If the Bank failed to satisfy such tests in any taxable year, it would be
unable to make additions to its bad debt reserve. Instead, the Bank would be
required to deduct bad debts as they occur and would additionally be required
to recapture its bad debt reserve deductions ratably over a multi-year period.
Among other things, the qualifying thrift definitional tests require the Bank
to hold at least 60% of its assets as "qualifying assets." Qualifying assets
generally include cash, obligations of the United States or any agency or
instrumentality thereof, certain obligations of a state or political
subdivision thereof, loans secured by interests in improved residential real
property or by savings accounts, student loans and property used by the Bank
in the conduct of its banking business. The Bank's ratio of qualifying assets
to total assets exceeded 60% through March 31, 1996. Although there can be no
assurance that the Bank will continue to satisfy the 60% test, management
believes that this level of qualifying assets can be maintained by the Bank.
The amount of the addition to the reserve for losses on qualifying real
property loans under the percentage of taxable income method cannot exceed the
amount necessary to increase the balance of the reserve for losses on
qualifying real property loans at the close of the taxable year to 6% of the
balance of the qualifying real property loans outstanding. Also, if the
qualifying thrift uses the percentage of taxable income method, then the
qualifying thrift's aggregate addition to its reserve for losses on qualifying
real property loans cannot, when added to the addition to the reserve for
losses on nonqualifying loans, exceed the amount by which: (i) 12% of the
amount that the total deposits or withdrawable accounts of depositors of the
qualifying thrift at the close of the taxable year exceeds (ii) the sum of the
qualifying thrift's surplus, undivided profits and reserves at the beginning
of such year. As of March 31, 1996, this overall limitation would not have
restricted the Bank's deduction for additions
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to its bad debt reserve. At March 31, 1996, the Bank's total bad debt reserve
for tax purposes was approximately $14.3 million.
Distributions. To the extent that the Bank makes "nondividend
distributions" to the Corporation that are considered as made: (i) from the
reserve for losses on qualifying real property loans, to the extent the
reserve for such losses exceeds the amount that would have been allowed under
the experience method; or (ii) from the supplemental reserve for losses on
loans ("Excess Distributions"), then an amount based on the amount distributed
will be included in the Bank's taxable income. Nondividend distributions
include distributions in excess of the Bank's current and accumulated earnings
and profits, distributions in redemption of stock, and distributions in
partial or complete liquidation. However, dividends paid out of the Bank's
current or accumulated earnings and profits, as calculated for federal income
tax purposes, will not be considered to result in a distribution from the
Bank's bad debt reserve. Thus, any dividends to the Corporation that would
reduce amounts appropriated to the Bank's bad debt reserve and deducted for
federal income tax purposes would create a tax liability for the Bank. The
amount of additional taxable income attributable to an Excess Distribution is
an amount that, when reduced by the tax attributable to the income, is equal
to the amount of the distribution. Thus, if, after the Conversion, the Bank
makes a "nondividend distribution," then approximately one and one-half times
the amount so used would be includable in gross income for federal income tax
purposes, assuming a 35% corporate income tax rate (exclusive of state and
local taxes). See "Regulation" and "Dividend Policy" for limits on the
payments of dividends by the Bank. The Bank does not intend to pay dividends
that would result in a recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Internal Revenue Code (the
"Code") imposes a tax on alternative minimum taxable income ("AMTI") at a rate
of 20%. The excess of the tax bad debt reserve deduction using the percentage
of taxable income method over the deduction that would have been allowable
under the experience method is treated as a preference item for purposes of
computing the AMTI. In addition, only 90% of AMTI can be offset by net
operating loss carryovers. AMTI is increased by an amount equal to 75% of the
amount by which the Bank's adjusted current earnings exceeds its AMTI
(determined without regard to this preference and prior to reduction for net
operating losses). For taxable years beginning after December 31, 1986, and
before January 1, 1996, an environmental tax of .12% of the excess of AMTI
(with certain modification) over $2.0 million is imposed on the Corporation,
including the Bank, whether or not an Alternative Minimum Tax ("AMT") is paid.
Dividends-Received Deduction and Other Matters. The Corporation may
exclude from its income 100% of dividends received from the Bank as a member
of the same affiliated group of corporations. The corporate
dividends-received deduction is generally 70% in the case of dividends
received from unaffiliated corporations with which the Corporation and the
Bank will not file a consolidated tax return, except that if the Corporation
or the Bank owns more than 20% of the stock of a corporation distributing a
dividend, then 80% of any dividends received may be deducted.
Washington Taxation
The Bank is subject to a business and occupation tax which is imposed
under Washington law at the rate of 1.60% of gross receipts; however, interest
received on loans secured by mortgages or deeds of trust on residential
properties is not subject to such tax.
Reference is made to Note 9 of the Notes to the Consolidated Financial
Statements for additional information concerning the income taxes payable by
the Bank.
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Item 2. Properties
The following table sets forth the location of the Bank's offices, as
well as certain information relating to these offices.
Total Net Book
Year Cost of Value as of Square Leased/
Opened Assets March 31, 1996 Feet Owned
Bellingham Main Office . . . 1971 $3,154,273 $961,114 19,179 Owned
1500 Cornwall Avenue
Bellingham, WA 98225
Bellingham/Meridian. . . . . 1987 1,058,767 804,226 4,650 Owned
4110 Meridian
Bellingham, WA 98226
Ferndale Office. . . . . . . 1976 769,216 415,734 3,692 Owned
Third and Main
Ferndale, WA 98248
Lynden Office. . . . . . . . 1981 705,966 464,557 3,702 Owned
Third and Grover
Lynden, WA 98264
Blaine Office. . . . . . . . 1976 806,695 602,845 3,610 Owned
Fourth & "H" Streets
Blaine, WA 98230
Mount Vernon Office. . . . . 1976 480,899 249,973 3,275 Owned
1503 Riverside Dr.
Mount Vernon, WA 98273
Anacortes Office . . . . . . 1987 1,071,816 926,418 1,500 Owned
1218 Commercial Avenue
Anacortes, WA 98221
Snohomish Office . . . . . . 1987 387,878 213,507 1,388 Owned
620 2nd Street
Snohomish, WA 98290
Everett Office . . . . . . . 1991 112,689 56,361 1,972 Leased
909 S.E. Everett Mall Way
#E-500
Everett, WA 98208
Burlington Office. . . . . . 1994 1,407,978 1,328,685 3,980 Owned
1020 S. Burlington Blvd
Burlington, WA 98232
Edmonds Office . . . . . . . 1994 137,205 89,710 1,597 Leased
315 Fifth Avenue South
Suite A&B
Edmonds, WA 98020
Mill Creek Office. . . . . . 1995 149,746 132,911 1,945 Leased
13416 Bothell Everett Hwy.
Suite 201
Mill Creek, WA 98012
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Item 3. Legal Proceedings
The Bank is not engaged in any legal proceedings of a material nature
at the present time. From time to time it is a party to legal proceedings
wherein it enforces its security interest in loans made by it.
Item 4. Submission of Matters to a Vote of Security-Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Corporation's common stock is traded on the Nasdaq Stock Market
under the symbol "HRZB." The common stock began trading on the Nasdaq Stock
Market at the time of the Bank's conversion to stock form in August 1986.
The following table presents the high and low closing bid prices from
the Nasdaq Stock Market, and cash dividends per share paid, for the last two
fiscal years. These prices represent quotations by dealers and do not
necessarily represent actual transactions, and do not include retail markups,
markdowns or commissions. The Corporation has approximately 5,150 beneficial
stockholders at March 31, 1996.
1996 Fiscal Year
Quarter HIGH LOW DIVIDENDS PER SHARE
4th $14.00 $11.75 $.08
3rd 13.75 12.25 .08
2nd 13.25 11.50 .08
1st 12.00 11.25 .08
1995 Fiscal Year
Quarter HIGH LOW DIVIDENDS PER SHARE
4th $12.50 $10.75 $.08
3rd 14.00 10.50 .08
2nd 14.50 12.63 .08
1st 13.41 12.50 .073
Item 6. Selected Financial Data
The information contained in "Item 1 - Business - Selected Financial
Data" in this Form 10-K is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The information required by this item is incorporated herein by
reference to the section captioned "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Proxy Statement.
Item 8. Financial Statements and Supplementary Data
The financial statements contained in the Proxy Statement which are
listed under Item 14 herein, are incorporated herein by reference.
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Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the section captioned "Proposal I --
Election of Directors" and "Compliance with Section 16(a) of the Exchange Act"
in the Registrant's Proxy Statement.
The executive officers of the Corporation and the Bank are as follows:
Name Age Position
George W. Gust 66 Chairman of the Board of the
Corporation and the Bank
V. Lawrence Evans 49 Chief Executive Officer
and President of the
Corporation and the Bank
Philippe S. L. Swaab 42 Executive Vice President of the
Bank
Richard P. Jacobson 33 Vice President and Secretary of
the Corporation and the Bank
Judy E. Boxx 54 Vice President of the Bank
Jeffrey H. Jansen 38 Vice President of the Bank
Karen A. LePage 55 Vice President of the Corporation
and the Bank
Karla C. Lewis 49 Vice President of the Bank
Merwyn G. Murk 57 Vice President of the Bank
Donald A. Wolf 47 Vice President of the Bank
The following is a description of the principal occupation and
employment of the executive officers of the Corporation and the Bank during at
least the past five years:
GEORGE W. GUST joined the Bank in 1975 and has also served as the
Chairman of the Board of Directors of the Bank since August 1984. Effective
May 14, 1990, Mr. Gust resigned as President.
V. LAWRENCE EVANS joined the Bank in 1972 and served as the Bank's
Executive Vice President/Finance from 1983 to May 14, 1990 at which time, Mr.
Evans was appointed President of the Bank. On March 26, 1991, Mr. Evans was
appointed Chief Executive Officer of the Bank.
PHILIPPE S. L. SWAAB joined Horizon Bank in December 1990 as Executive
Vice President and Corporate Secretary. In December 1994 he was appointed
Executive Vice President and Chief Lending Officer.
RICHARD P. JACOBSON worked for Horizon Bank from 1985 to 1992. From
April 1992 to May 1994, he worked as a real estate appraiser for a local
appraisal
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company. He re-joined the Bank in May of 1994 and was appointed Vice
President/Finance and Corporate Secretary in December 1994.
JUDY E. BOXX joined Horizon Bank in 1984. She has worked in the Loan
Servicing/Collection Department since 1986. She was appointed Vice President
and Manager of the Loan Servicing Department in December of 1994.
JEFFREY H. JANSEN joined Horizon Bank in 1985 as the manager of the
Bank's Lynden Office. He was appointed Vice President in December of 1994.
KAREN A. LEPAGE has been employed by the Bank since 1958. In December
1985, she was promoted to Vice President. She has been manager of the
Accounting Department since 1977.
KARLA C. LEWIS joined Horizon Bank in 1973. From 1983 to December
1994, she was the Manager of the Loan Servicing Department. She was appointed
Vice President in June 1987 and is currently the Bank's Senior Loan
Underwriter.
MERWYN G. MURK joined the Bank in 1969 and has been manager of the
Savings Department since 1972. He was appointed Vice President in October
1977.
DONALD A. WOLF joined Horizon Bank in 1973. He has been the Bank's
Operations manager since October 1984. Mr. Wolf was appointed Vice President
in June 1987.
Item 11. Executive Compensation
Information regarding management compensation and transactions with
management and others is incorporated by reference to the section captioned
"Proposal I - Election of Directors" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to
the section captioned "Voting Securities and Principal Holders Thereof" of the
Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to
the section captioned "Voting Securities and Principal Holders Thereof" of the
Proxy Statement.
(c) Changes in Control
The Corporation is not aware of any arrangements, including any pledge
by any person of securities of the Corporation, the operation of which may at
a subsequent date result in a change in control of the Corporation.
Item 13. Certain Relationships and Related Transactions
The information contained under the sections captioned "Voting
Securities and Principal Holders Thereof" in the Proxy Statement is
incorporated herein by reference.
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) (1) Financial Statements
Accountants' Report on Financial Statements
Consolidated Statement of Financial
Position, March 31, 1996 and 1995
Consolidated Statement of Income for the years ended
March 31, 1996, 1995 and 1994
Consolidated Statement of Stockholders' Equity
for the years ended March 31, 1996, 1995 and 1994
Consolidated Statement of Cash Flows for the years
ended March 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(2) All required financial statement schedules are included in the Notes
to Consolidated Financial Statements.
(b) None.
(c) Exhibits
(3.1) Articles of Incorporation of Horizon Financial, Corp.
(incorporated by reference to Exhibit 3.1 to the
Registrant's Current Report on Form 8-K dated October
13, 1995)
(3.2) Bylaws of Horizon Financial Corp. (incorporated by
reference to Exhibit 3.2 to the Registrant's Current
Report on Form 8-K dated October 13, 1995)
(10.1) Amended and Restated Employment Agreement with V.
Lawrence Evans
(10.2) Deferred Compensation Plan
(10.3) 1986 Stock Option and Incentive Plan (incorporated by
reference to Exhibit 99.1 to the Registrant's
Registration Statement on Form S-8 (File No. 33-99780))
(10.4) 1995 Stock Option Plan (incorporated by reference to
Exhibit 99.2 to the Registrant's Registration Statement
on Form S-8 (File No. 33-99780))
(21) Subsidiaries of the Registrant
(23) Consent of Auditors
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the bank has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
HORIZON FINANCIAL CORP.
Date: June 25, 1996 By: /s/ George W. Gust
___________________________
George W. Gust, Chairman of
the Board
(Duly Authorized
Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ V. Lawrence Evans By: /s/ Fred R. Miller
_____________________ ____________________
V. Lawrence Evans Fred R. Miller
Principal Financial Director
Officer, Director and
President
Date: June 25, 1996 Date: June 25, 1996
By: /s/ Karen A. LePage By: /s/ L. M. Strengholt
_____________________ ____________________
Karen A. LePage L. M. Strengholt
Principal Accounting Director
Officer
Date: June 25, 1996 Date: June 25, 1996
By: /s/ Robert C. Diehl By: /s/ Frank G. Uhrig
_____________________ _____________________
Robert C. Diehl Frank G. Uhrig
Director Director
Date: June 25, 1996 Date: June 25, 1996
By: /s/ George W. Gust By: /s/ Maurice D. Fox
_____________________ _____________________
George W. Gust Maurice D. Fox
Director Director
Date: June 25, 1996 Date: June 25, 1996
By: /s/ Richard D. Haggen
______________________
Richard D. Haggen
Director
Date: June 25, 1996
<PAGE>
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EXHIBIT 10.1
Employment Agreement with V. Lawrence Evans
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AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED AGREEMENT ("Agreement") originally entered into
on the 23rd day of March, 1993 and amended and restated on July 25, 1995, by
and between Horizon Bank, a savings bank (the "Bank"), Horizon Financial Corp.
(the "Company") and V. Lawrence Evans (hereinafter referred to as the
"Executive").
WHEREAS, the Company has been organized to serve as the holding company
for the Bank and for other purposes;
WHEREAS, the Executive has heretofore been employed by the Bank as
President and is experienced in all phases of the business of the Bank;
WHEREAS, the Executive is serving in a similar capacity with the Company;
WHEREAS, the Bank and the Company wishes to assure itself of the services
of Executive for the period provided in this Agreement, and Executive is
willing to serve in the employ of the Bank on a full-time basis for said
period;
WHEREAS, the Board of Directors of the Bank has determined that the best
interests of the Bank and the Company would be served by providing the
Executive with protection and special benefits following any change of control
of the Bank or the Company; and
WHEREAS, the Board of Directors has determined to approve said Employment
Agreement and authorize the execution thereof by and on behalf of the Bank and
the Company;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereby agree as follows:
1. Employment. The Bank agrees to continue Executive in its employ,
and Executive agrees to remain in the employ of the Bank, for the period
stated in paragraph 3 hereof and upon the other terms and conditions herein
provided.
2. Position and Responsibilities. The Bank employs Executive and
Executive agrees to serve as President of the Bank for the term and on the
conditions hereinafter set forth. Executive agrees to perform such services
not inconsistent with his position as shall from time to time be assigned to
him by the Bank's Board of Directors. Executive also agrees to serve, if
elected, as an officer and director of the Company or any subsidiary or
affiliate of the Company.
3. Term and Duties.
(a) Term of Employment. The period of Executive's employment under
this agreement commenced on March 23, 1993 for a period of forty-eight (48)
full calendar months and any extensions thereafter. The parties agree that
said forty-eight month period of employment shall automatically be extended
for an additional twelve full calendar months without further action by the
parties on March 23 of each year during the term of the Agreement, unless
either party shall have served written notice upon the other prior to March 23
of any year during the term of the Agreement of its intention that this
Agreement shall terminate at the end of any forty-eight month period which
constitutes the current term of the Agreement.
Notwithstanding the foregoing provisions of this Section 3(a), if a
Change in Control (as hereinafter defined) occurs on or within three (3) years
before the expiration of the Executive's term of employment under this
Agreement, the term shall automatically be extended to a period of three (3)
years from the date
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of the Change in Control, and, as so extended, the term shall expire on the
third anniversary of the Change of Control.
(b) Duties. During the period of his employment hereunder and
except for illnesses, reasonable vacation periods, and reasonable leaves of
absence, Executive shall devote his business time, attention, skill, and
efforts to the faithful performance of his duties hereunder; provided,
however, that with the approval of the Board of Directors of the Bank, from
time to time, Executive may serve, or continue to serve, on the boards of
directors of, and hold any other offices or positions in, companies or
organizations, which, in such Board's judgment, will not present any material
conflict of interest with the Bank or any of its subsidiaries or affiliates or
divisions, or unfavorably affect the performance of Executive's duties
pursuant to this Agreement, or will not violate any applicable statute or
regulation.
4. Compensation and Reimbursement of Expenses.
(a) Compensation. The Bank agrees to pay the Executive during the
term of this Agreement a salary at the rate of $128,592 per annum ("Base
Salary"); provided, that the rate of such salary shall be reviewed by the
Board of Directors of the Bank not less often than annually. Such rate of
salary, or increased rate of salary, as the case may be (each increase of
which shall then become the "Base Salary"), shall be increased per annum at
least in an amount equal to the Seattle-Tacoma area cost of living index as
stated on July 31st of each year, or from time to time in such additional
amount as the Board in its discretion may decide. Such salary shall be
payable in accordance with the customary payroll practices of the Bank, but in
no event less frequently than monthly, and any bonus/profit sharing shall be
payable in the manner specified by such committee or such Board of Directors
at the time any such bonus/profit sharing is awarded.
(b) Discretionary Bonuses. The Executive shall be entitled to
participate in an equitable manner with all other key management personnel of
the Bank in discretionary bonuses/profit sharing authorized and declared by
the Board of Directors of the Bank to its key management employees. No other
compensation provided for in this Agreement shall be deemed a substitute for
the Employee's right to participate in such discretionary bonuses/profit
sharing when and as declared by the Board of Directors. Any such bonus/profit
sharing shall take into account the Bank's current financial condition,
operations and the Board of Directors evaluation of the performance of the
Executive.
(c) Reimbursement of Expenses. The Bank shall pay or reimburse
Executive for all reasonable travel and other expenses incurred by Executive
in the performance of his obligations under this Agreement. The Bank further
agrees to provide the Executive with the use of an automobile commensurate
with his position during his period of employment and to reimburse the
Executive for all initiation fees and dues associated with membership in
professional, social, civic and service clubs which the Executive joins or has
joined and which membership, in whole or part, furthers the interests of or
promotes the interest of the Bank or assists the Executive in business
relationships on behalf of the Bank, and which has been approved by the Board
of Directors.
5. Participation in Benefit Plans. Except as otherwise provided in
this Agreement, the payments provided in paragraphs 4, 7, and 8 hereof are in
addition to any benefits to which Executive may be, or may become, entitled
under any group hospitalization, health, dental care, or sick leave plan, life
or other insurance or death benefit plan, travel or accident insurance, or
executive contingent compensation plan, including, without limitation, capital
accumulation and termination pay programs, restricted or stock purchase plan,
stock option plan, retirement income, qualified pension plan, supplemental
pension plan (excess benefit plan), deferred compensation plan or other
present or future group employee benefit plan or program of the Bank for which
executives are or
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shall become eligible, and Executive shall be eligible to receive during the
period of his employment under this Agreement, and during any subsequent
period for which he shall be entitled to receive payments from the Bank under
paragraph 7 or paragraph 8, all benefits and emoluments for which executives
are eligible under every such plan or program to the extent permissible under
the general terms and provisions of such plans or programs and in accordance
with the provisions thereof.
The Bank shall continue to fund, through any subsequent period for which
the Executive shall be entitled to receive payments from the Bank under
paragraph 7 or paragraph 8, the Executive's participation in the Bank's
benefit plans and retirement plans as enumerated above, at such time and in
such amounts as would otherwise be payable. Such funding shall be at levels
sufficient to provide the Executive with benefits substantially similar to
those which the Executive would have been entitled to receive had the
Executive been credited under such plan with full services hereunder for such
subsequent period for which he shall be entitled to receive payments from the
Bank under paragraph 7 or 8, hereunder.
Executive shall also have the option of continuing to receive such
benefits as are provided under this Agreement if, following termination of
this Agreement, but after agreement with the Bank for Executive to continue to
serve the Bank as a consultant or in another capacity on a part-time basis,
Executive shall pay to Bank the costs of the Bank continuing his participation
in each benefit plan.
6. Vacation and Sick Leave. At such reasonable times as the Board of
Directors shall in its discretion permit, Executive shall be entitled, without
loss of pay, to absent himself voluntarily from the performance of his
employment under this Agreement, all such voluntary absences to count as
vacation time; provided that:
(a) Executive shall be entitled to an annual vacation in accordance
with the policies as periodically established by the Board of Directors for
senior management officials of the Bank, which shall in no event be less than
20 business days per annum.
(b) The timing of vacations shall be scheduled in a reasonable
manner by the Board of Directors. Executive shall not be entitled to receive
any additional compensation from the Bank on account of his failure to take a
vacation; nor shall he be entitled to accumulate unused vacation from one
fiscal year to the next except to the extent authorized by the Board of
Directors for senior management officials of the Bank.
(c) In addition to the aforesaid paid vacations, Executive shall be
entitled, without loss of pay, to absent himself voluntarily from the
performance of his employment with the Bank for such additional periods of
time and for such valid and legitimate reasons as the Board of Directors in
its discretion may determine. Further, the Board of Directors shall be
entitled to grant to Executive a leave or leaves of absence with or without
pay at such time or times and upon such terms and conditions as the Board in
its discretion may determine.
(d) In addition, Executive shall be entitled to an annual sick
leave as established by the Board of Directors for senior management officials
of the Bank. In the event any sick leave time shall not have been used during
any year, such leave shall accrue to subsequent years only to the extent
authorized by the Board of Directors. Upon termination of his employment,
Executive shall not be entitled to receive any additional compensation from
the Bank for unused sick leave.
7. Benefits Payable Upon Disability.
(a) Primary Disability Benefits. In the event of the Disability
(as hereinafter defined) of Executive, the Bank shall continue to pay
Executive the
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monthly compensation provided in paragraph 4 hereof during the period of his
disability provided, however, that in the event Executive is disabled for a
continuous period exceeding three (3) calendar months, the Bank may, at its
selection, terminate the Agreement, in which event Executive shall be entitled
to receive the benefits described in paragraph 7(b).
As used in this Agreement, the term "disability" shall mean the
substantial inability of Executive to perform his duties under this Agreement
as determined by an independent physician selected with the approval of the
Bank and Executive.
(b) Secondary Disability Benefits. In addition to the payments the
Executive shall be entitled to receive under any long term disability coverage
maintained by the Bank for the Executive, the Bank shall pay to the Executive
a monthly disability benefit equal to ten (10) percent of his monthly earnings
at the time he became disabled. Payment of such disability benefit shall
commence on the last day of the month following the month for which the final
payment under paragraph 7(a) was made and cease with the earlier of (i) the
payment for the month in which the Executive dies or (ii) the payment for the
month preceding the month in which occurs Executive's normal retirement date
under the Bank' tax-qualified retirement plan(s).
(c) Services During Disability. During the period Executive is
entitled to receive payments under paragraphs 7(a) and (b), the Executive
shall, to the extent that he is physically and mentally able to do so, furnish
information and assistance to the Bank, and, in addition, upon reasonable
request in writing on behalf of the Board of Directors, or an executive
officer designated by such Board, from time to time, make himself available to
the Bank to undertake reasonable assignments consistent with the dignity,
importance, and scope of his prior position and his physical and mental
health. During such period of service, Executive shall be responsible and
report to, and be subject to the supervision of, the Board of Directors of the
Bank or an executive officer designated by the Board, as to the method and
manner in which he shall perform such assignments, subject always to the
provisions of this paragraph 7(c), and shall keep such Board, or such
executive officer, appropriately informed of his progress in each such
assignment.
8. Payments to Executive Upon Termination of Employment.
(a) Event of Termination. Upon the occurrence of an Event of
Termination (as hereinafter defined) during the period of Executive's
employment under this Agreement, the provisions of this paragraph 8 shall
apply. As used in this Agreement, an "Event of Termination" shall mean the
termination by the Bank of Executive's employment here under for any reason
other than "cause" or retirement at or after the normal retirement age under a
tax-qualified retirement plan maintained by the Bank or termination pursuant
to Paragraph 7(a). A termination for "cause" shall include termination
because of the Executive's personal dishonesty, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform
stated duties, willful violation of any law, rule or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order, or
material breach or any provision of this Agreement. In the event of
termination for cause the Executive shall have no right to receive
compensation or other benefits for any period after such termination.
(b) Event of Termination Without Change of Control. Upon the
occurrence of an Event of Termination other than after a Change of Control (as
hereinafter defined), the Bank shall pay to the Executive monthly, or in the
event of his subsequent death, to his designated beneficiary or beneficiaries,
or to his estate, as the case may be, as severance pay or liquidated damages,
or both, during the period below described a sum equal to the highest monthly
rate of salary paid to the Executive at any time under this Agreement. Such
payments shall commence on the last day of the month following the date of
said event of
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termination and shall continue until the date this Agreement would have
expired but for said occurrence, with such occurrence being viewed as a
determination by the Bank not to extend the Agreement as provided for in
paragraph 3 of this Agreement. In the event this Agreement is terminated by
the Executive, the compensation and benefits will be terminated upon the
effective date of the employment termination or as may otherwise be determined
by the Board of Directors.
(c) Event of Termination After Change of Control. If, after a
"Change of Control" (as hereinafter defined) of the Bank or the Company, the
Bank or the Company shall terminate the employment of the Executive during the
period of employment under this Agreement for any reason other than "cause,"
as defined in paragraph 8(a), retirement at or after the normal retirement age
under a tax-qualified retirement plan maintained by the Bank or a termination
pursuant to paragraph 7(a), or otherwise change the present capacity or
circumstances in which the Executive is employed as set forth in paragraph 2
of this Agreement or cause a reduction in the Executive's responsibilities or
authority or compensation or other benefits provided under this Agreement
without the Executive's written consent (all of the above constituting an
"Event of Termination"), then the Bank shall pay to the Executive and provide
the Executive, or to his beneficiaries, dependents and estate, as the case may
be, with the following:
(i) The Bank shall promptly pay to the Executive a sum equal
to the total amount of the present value of 2.99 times the average annual
compensation payable by the Bank and includable by the Executive in gross
income for the most recent five taxable years ending before the date on which
the ownership or control of the Bank changed or the portion of this period
during which the Executive was an employee of the Bank.
(ii) During the period of sixty months following the Event of
Termination as defined in Section 8(c), the Executive shall be entitled to
receive payments from the Bank under paragraph 7 or paragraph 8 hereunder, the
Executive, his dependents, beneficiaries and estate shall continue to be
covered under all employee benefit plans of the Bank, including without
limitation the Bank's bonus/profit sharing plan, tax-qualified retirement
plan(s), deferred compensation plan, life insurance and health insurance as if
the Executive was still employed during such period under this Agreement. In
addition, following an Event of Termination as defined in Section 8(c), the
Executive shall have the option to purchase the automobile provided by the
Bank for his use at its then current book value.
As part of the obligation of the Bank under Section 8(c)(ii)
hereof to fund the Executive's participation in employee benefit plans after
the Event of Termination or through the expiration of the term of this
Agreement, the Bank shall continue to fund the insurance or other arrangements
for the indemnification, defense or hold-harmless of officers or directors of
the Bank which are then in effect for the benefit of the Executive with
respect to all of his acts and omissions while an officer or directors as
fully and completely as if such termination had not occurred, and until the
final expiration or running of all periods of limitations against action which
may be applicable to such acts or omissions. The Bank shall fully fund or pay
its obligation under this Subsection 8(c)(ii) on the date of the Event of
Termination or at the earliest date thereafter which is practicable.
(iii) If and to the extent that benefits or service credit for
benefits provided by paragraph 8(c)(ii) shall not be payable or provided under
any such plans to the Executive, his dependents, beneficiaries and estate, by
reason of his no longer being an employee of the Bank as a result of
termination of employment, the Bank shall itself pay or provide for payment of
such benefits and service credit for benefits to the Executive, his
dependents, beneficiaries and estate. Any such payment relating to retirement
shall commence
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on a date selected by the Executive which must be a date on which payments
under the Bank's tax-qualified retirement plan(s), deferred compensation plan
or successor plan may commence.
(iv) If the Executive elects to have benefits commence prior
to the normal retirement age under the tax-qualified retirement plan, deferred
compensation plan or any successor plan maintained by the Bank and thereby
incurs an actuarial reduction in his monthly benefits under such plan, the
Bank shall itself pay or provide for payment to the Executive of the
difference between the amount that would have been paid if the benefits
commenced at normal retirement age and the actuarially reduced amount paid
upon the early commencement of benefits.
(v) Notwithstanding the preceding subparagraphs of this
paragraph 8(c), in the event that the aggregate payments or benefits to be
made or afforded to the Executive under this Section would be deemed to
include an "excess parachute payment" under Section 280G of the Code, such
payments or benefits shall be payable or provided to the Executive in equal
monthly installments over the minimum period necessary to reduce the present
value of such payments or benefits to an amount which is one dollar ($1.00)
less than three (3) times the Executive's "base amount" under Section
280G(b)(3) of the Code.
(vi) The Executive shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other
employment or otherwise nor shall any amounts received from other employment
or otherwise by the Executive offset in any manner the obligations of the Bank
hereunder.
(d) Change of Control. Paragraph 8(c) shall become operative upon
the occurrence of a Change of Control of the Bank. A "Change of Control"
shall be deemed to have occurred, if:
(i) Any person becomes the beneficial owner, directly or
indirectly, of 25% or more of the outstanding shares of any class of voting
stock issued by the Bank or the Company.
(ii) Any person becomes the beneficial owner, directly or
indirectly, of 10% or more, but less than 25%, of the outstanding shares of
any class of voting stock issued by the Bank or the Company, if the Board of
Directors of the Bank or the Company, or the Federal Deposit Insurance
Corporation ("FDIC") or other appropriate regulatory authority, has made a
determination that such beneficial ownership constitutes or will constitute
control of the Bank or the Company;
(iii) Any person (other than the persons named as proxies
solicited on behalf of the Board of Directors of the Bank or the Company)
holds revocable or irrevocable proxies as to the election or removal of two or
more directors of the Bank, for 25% or more of the total number of voting
shares of the Bank;
(iv) Any person has commenced a tender or exchange offer, or
entered into an agreement or received an option, to acquire beneficial
ownership of 10% or more of the total number of voting shares of the Bank or
the Company, whether or not the required approval or non-objection for such
acquisition has been received from the FDIC, or other appropriate regulatory
authority, if the Bank's or the Company's Board of Directors has made a
determination that such action constitutes or will constitute a Change in
Control; or
(vi) During any period of 24 consecutive months, individuals
who at the beginning of such period constitute the Bank's or the Company's
Board of Directors cease for any reason to constitute at least a majority of
the Board, unless the election of each director who was not a
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director at the beginning of such period has been approved in advance by
directors representing at least two-thirds of the directors then in office who
were directors at the beginning of the period.
A person shall be deemed a beneficial owner as that term is
used in Rule 13d-3 under the Securities Exchange Act of 1934, as amended.
Upon a Change of Control of the Bank or the Company, these special termination
provisions of paragraph 8(c) shall become operative immediately.
(e) Power of the Board of Directors to terminate the Executive.
The Board of Directors of the Bank may terminate the Executive at any time; in
the event of such termination the provisions of this paragraph 8 shall fully
apply.
9. Source of Payments. All payments provided in this Agreement shall
be timely paid in cash or check from the general funds of the Bank. The
Company, however, guarantees all payments and the provision of all amounts and
benefits due hereunder to Executive and, if such payments or benefits are not
timely paid or provided by the Bank, such amounts and benefits shall be paid
or provided by the Company.
10. Confidential Information. Executive shall not, to the detriment of
the Bank, knowingly disclose or reveal to any authorized person any
confidential information relating to the Bank, its subsidiaries or affiliates,
or to any of the businesses operated by them, and Executive confirms that such
information constitutes the exclusive property of the Bank.
11. Federal Income Tax Withholding. The Bank may withhold from any
benefits payable under this Agreement all federal, state, city or other taxes
as shall be required pursuant to any law or governmental regulation or ruling.
12. Effect on Prior Agreements. This Agreement contains the entire
understanding between the parties hereto and supersedes any prior employment
agreement between the Bank or any predecessor of the Bank and Executive.
13. General Provisions.
(a) Nonassignability. Neither this Agreement nor any right or
interest hereunder shall be assignable by Executive, his beneficiaries, or
legal representatives without the Bank's prior written consent; provided,
however, that nothing in this paragraph 13(a) shall preclude (i) Executive
from designating a beneficiary to receive any benefits payable hereunder upon
his death, or (ii) the Executors, administrators, or other legal
representatives of Executive or his estate from assigning any rights hereunder
to the person or persons entitled thereto.
(b) No Attachment. Except as required by law, no right to receive
payments under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or
to execution, attachment, levy, or similar process of assignment by operation
of law, and any attempt, voluntary or involuntary, to effect any such action
shall be null, void and of no effect.
(c) Binding Agreement. This Agreement shall be binding upon, and
inure to the benefit of, Executive, the Bank and their respective permitted
successors and assigns. The Bank and the Company shall require any successor
or assignee, whether direct or indirect, by purchase, merger, consolidation or
otherwise, to all or substantially all the business or assets of the Bank or
the Company, expressly and unconditionally to assume and agree to perform the
Bank's or the Company's obligations under this Agreement, in the same manner
and to the same extent that the Bank or the Company would be required to
perform if no such succession or assignment had taken place.
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(d) Expenses to Enforce Agreement. The Bank shall pay all legal
fees and expenses which the Executive may incur as a result of the Bank's
contesting the validity or enforceability of this Agreement and the Executive
shall be entitled to receive interest thereon for the period of any delay in
payment from the date such payment was due at the rate determined by adding
200 basis points to the six month Treasury Bill rate.
14. Modification and Waiver.
(a) Amendment of Agreement. This Agreement may not be modified or
amended except by an instrument in writing signed by the parties hereto.
(b) Waiver. No term or condition of this Agreement shall be deemed
to have been waived, nor shall there be an estoppel against the enforcement of
any provision of this Agreement, except by written instrument of the party
charged with such waiver or estoppel. No such written waiver shall be deemed
a continuing waiver unless specifically stated therein, and each waiver shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than the specifically waived.
15. Severability. If, for any reason, any provision of this Agreement
is held invalid, such invalidity shall not affect any other provision of this
Agreement not held so invalid, and each such other provision shall to the full
extent consistent with law continue in full force and effect. If any
provision of this Agreement shall be held invalid in part, such invalidity
shall in no way affect the rest of such provision, together with all other
provisions of this Agreement, shall to the full extent consistent with law
continue in full force and effect. If this Agreement is held invalid or
cannot be enforced, then to the full extent permitted by law any prior
agreement between the Bank (or any predecessor thereof) and Executive shall be
deemed reinstated as if this Agreement has not been executed.
16. Headings. The headings of paragraphs herein are included solely for
conveniene of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
17. Governing Law. This Agreement has been executed and delivered in
the state of Washington, and its validity, interpretation, performance, and
enforcement shall be governed by the laws of said state, except to the extent
federal law is governing.
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IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement
to be executed and its seal to be affixed hereunto by officers thereunto duly
authorized, and Executive has signed this Agreement, all as of the day and
year first above written.
ATTEST: HORIZON BANK, A SAVINGS BANK
/s/Richard P. Jacobson /s/George W. Gust
__________________________ By: ___________________________
Richard P. Jacobson George W. Gust
ATTEST: HORIZON FINANCIAL CORP.
/s/Richard P. Jacobson /s/George W. Gust
__________________________ By: ___________________________
Richard P. Jacobson George W. Gust
WITNESS:
/s/V. Lawrence Evans
________________________________
V. Lawrence Evans
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EXHIBIT 10.2
Deferred Compensation Agreement
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HORIZON BANK
(A Savings Bank)
EXECUTIVE INCOME PARTICIPATION PLAN
PAGE
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TABLE OF CONTENTS
Page
SECTION 1 Definitions. . . . . . . . . . . . . . . . . . 1
1.1 Administrator . . . . . . . . . . . . . . . . . . 1
1.2 Beneficiary . . . . . . . . . . . . . . . . . . . 1
1.3 Committee . . . . . . . . . . . . . . . . . . . . 1
1.4 Company . . . . . . . . . . . . . . . . . . . . . 1
1.5 ERISA . . . . . . . . . . . . . . . . . . . . . . 1
1.6 Normal Retirement Age . . . . . . . . . . . . . . 1
1.7 Participant . . . . . . . . . . . . . . . . . . . 1
1.8 Plan. . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2 Eligibility and Participation. . . . . . . . . 2
SECTION 3 Supplemental Retirement and Death Benefits . . 2
3.1 Supplemental Retirement Benefits. . . . . . . . . 2
3.2 Death Benefits. . . . . . . . . . . . . . . . . . 2
SECTION 4 General Provisions . . . . . . . . . . . . . . 3
4.1 Right to Amend or Terminate . . . . . . . . . . . 3
4.2 No Right of Employment. . . . . . . . . . . . . . 3
4.3 Plan Funding. . . . . . . . . . . . . . . . . . . 3
4.4 Unsecured Benefits. . . . . . . . . . . . . . . . 3
4.5 Reporting . . . . . . . . . . . . . . . . . . . . 3
4.6 Trust Agreement . . . . . . . . . . . . . . . . . 3
4.7 Administration. . . . . . . . . . . . . . . . . . 4
4.8 No Assignment . . . . . . . . . . . . . . . . . . 4
4.9 Binding Effect. . . . . . . . . . . . . . . . . . 4
4.10 Governing Law . . . . . . . . . . . . . . . . . . 5
SECTION 5 Duties Upon Insolvency . . . . . . . . . . . . 5
5.1 Duty to Inform. . . . . . . . . . . . . . . . . . 5
5.2 Actions Required. . . . . . . . . . . . . . . . . 5
5.3 Insolvency. . . . . . . . . . . . . . . . . . . . 5
SECTION 6 Claims Procedure . . . . . . . . . . . . . . . 5
6.01 Appeal Procedure for Denial of Benefits . . . . . 5
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HORIZON BANK
(A Savings Bank)
EXECUTIVE INCOME PARTICIPATION PLAN
The purpose of this Executive Income Participation Plan (the "Plan")
is to award individuals for their continues commitment to Horizon Bank, and to
provide an income continuation supplemental retirement benefit to eligible
Participants and their Beneficiary. It is intended that this Plan will aid in
retaining and attracting individuals of exceptional ability by providing them
with the benefits provided hereunder.
This restated Plan is effective as of January 1, 1990.
SECTION 1
Definitions
1.1 Administrator shall mean Horizon Bank.
1.2 Beneficiary shall mean the spouse of the Participant. If the
Participant is unmarried, or if the spouse predeceases the Participant, death
benefits will be payable to the estate of the spouse or the Participant,
whichever is last to die.
1.3 Committee shall mean the individuals as may from time to time
be appointed by Horizon Bank to Administer the Plan in accordance with Section
4.7 hereof.
1.4 Company shall mean Horizon Bank or any successor entity. The
Company may delegate authority necessary to administer the Plan to any person
or committee.
1.5 ERISA shall mean the Employee Retirement Income Security Act
of 1974, as amended, and any regulations issued pursuant thereto.
1.6 Normal Retirement Age shall mean the Participant's 65th
birthday.
1.7 Participant shall mean such individuals as may be selected by
the Company from time to time, and whose names shall be listed on Exhibit "A"
to this Plan.
1.8 Plan shall mean this Executive Income Participation Plan.
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SECTION 2
Eligibility and Participation
As restated, only the individuals selected by the Company and whose
names appear on Exhibit A of this Plan shall be eligible to participate under
this Plan. The Company may, in its sole discretion, select other eligible
Participants from among a select group of the Company's management or highly
compensated employees within the meaning of Sections 201, 301 and 401 of
ERISA. All such additional Participants, if any, shall be listed on an
amendment to Exhibit A of this Plan.
SECTION 3
Supplemental Retirement and Death Benefits
3.1 Supplemental Retirement Benefits. If the Participant remains
in the employ of the Company until age 64, then upon attaining Normal
Retirement Age, an income continuation supplemental retirement benefit will be
payable to the Participant under the terms of this Plan, equal to the benefit
established by the Company and set forth opposite the name of the participant
on Exhibit A attached hereto. Provided that the Participant remains in the
employ of the Company until age 64, all benefits will be fully vested in the
Participant and his Beneficiary. Supplemental Retirement Benefits will be
payable to the Participant in one hundred twenty (120) monthly installments
beginning on or about the 1st day of calendar month coincident with or next
following the Participant's attainment Normal Retirement Age. If the
Participant should die during the ten (10) year income continuation period,
benefits shall continue to be paid for the duration of the income continuation
period to the Participant's Beneficiary.
3.2 Death Benefits. If the Participant should die while in the
employ of the Company prior to attaining Normal Retirement Age, the
Participant's Beneficiary shall be entitled to receive the designated benefit
in one hundred twenty (120) monthly installments beginning on or about the 1st
day of calendar
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month following the Participant's death. No other survivor benefits will be
payable pursuant to the terms of this Plan.
SECTION 4
General Provisions
4.1 Right to Amend or Terminate. The Company may, in its sole
discretion, terminate, suspend or amend this Plan at any time, in whole or in
part. However, no amendment or suspension of the Plan will affect a
Participant's or Beneficiary's rights to benefits accrued to the date of
amendment, and no amendment shall accelerate benefits to a Participant to the
detriment of the Company's creditors.
4.2 No Right of Employment. Nothing contained herein will confer
upon any Participant the right to be retained in the service of the Company,
nor will it interfere with the right of the Company to discharge or otherwise
deal with any Participant without regard to the existence of this Plan.
4.3 Plan Funding. Supplemental retirement benefits may be paid
either from a trust fund established by the Company or from the general or
segregated assets of the Company. All trust fund assets as well as non-trust
fund assets shall at all times remain subject to the claims of the general
creditors of the Company.
4.4 Unsecured Benefit. The unpaid balance of any account
maintained pursuant to this Plan or trust is an unsecured, general obligation
of the Company. No Participant has ownership rights with respect to any asset
of the Company or any trust fund by reason of his participation in this Plan
or any trust that may be established hereunder.
4.5 Reporting. The Company is not required to render any report
or accounting to any Participant until benefits under this Plan are actually
paid.
4.6 Trust Agreement. If the Company elects to establish a trust
fund for the payment of income continuation supplemental retirement benefits,
the trustee shall receive and hold all contributions to the trust fund made by
the Company
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pursuant to the Plan and shall hold, invest, reinvest, and distribute such
fund in accordance with the terms and provisions of this Plan and the trust
agreement. The Company or the Committee may engage the services of qualified,
independent investment mangers for the purpose of providing some or all of the
investment management for this Plan. The Company or the Committee may modify
any trust agreement from time to time to accomplish the purposes of this Plan
and may, with approval, remove any trustee and select a successor trustee. No
amendment to the Plan, however, will bind a trustee without its consent.
4.7 Administration. The Company shall designate a committee to
administer, construe and interpret this Plan. Initially, the Committee shall
be comprised of certain designated directors of the Company. The Committee
shall perform administrative duties as required herein, and shall serve for
such terms as the Company may designate or until a successor has been
appointed or until removed by the Company. No Committee member shall vote on
a matter that relates solely to his entitlement to benefits hereunder.
The construction and interpretation by the Committee of any provision
of this Plan shall be final, conclusive and binding upon all parties,
including the Company and its employees. The Committee has the sole
discretion to decide all issues under this Plan and any trust that may be
established hereunder. Any decision by the Committee that is not an abuse of
discretion or arbitrary and capricious, shall be upheld by a court of law.
The Committee may adopt rules and regulations to assist it in the
administration of the Plan. No member of the Committee shall be liable for
any act performed or determination made, unless attributable to willful
misconduct or lack of good faith. The Company shall hold the Committee and
its members harmless and indemnify them from liability unless such liability
stems from willful misconduct or lack of good faith. All expenses of
administration of the Plan shall be borne by the Company and no part thereof
shall be payable by any Participant in this Plan.
4.8 No Assignment. Except as provided below, no rights hereunder
are assignable in whole or in part, either by voluntary or involuntary act or
by operation of law. Rights hereunder are not subject to anticipation,
alienation,
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sale, transfer, assignment, pledge or encumbrance. Such rights are not
subject to the debts, contracts, liabilities, engagements or torts of the
Participant or his Beneficiary. Notwithstanding the above, the Participant's
and Beneficiary's rights hereunder may be assigned to a trust created under
the Participant's last will and testament or similar dispositive instrument.
In addition, current payments, but not future payments, may be assigned as
they become payable hereunder.
4.9 Binding Effect. This Agreement is binding upon the parties
hereto, and their respective heirs, executors, administrators, successor and
assigns. This Agreement shall bind the Company, and any successor thereto
whether as a result of merger, sale of stock, sale of substantially all the
assets, or otherwise.
4.10 Governing Law. This Agreement shall be governed by the laws
of the State of Washington except as may be preempted or superseded by federal
law. Venue shall be in Whatcom County, State of Washington.
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SECTION 5
Duties Upon Insolvency
5.1 Duty to Inform. The Board of Directors and/or the Chief
Executive Officer of the Company shall suspend all benefit payments in the
event of the Company's bankruptcy or insolvency, and shall have the duty to
inform the trustee (if a trust is established) of the Company's bankruptcy or
insolvency.
5.2 Actions Required By Trustee. When informed of the Company's
insolvency or bankruptcy by the Board of Directors and/or the Chief Executive
Officer, the trustee and the Company shall suspend payments to any Participant
or Beneficiary pursuant to this Plan and shall hold assets for the benefit of
the Company's general creditors. Furthermore, if the trustee receives other
written allegations from any other source (with proper written documentation
supporting the same) of the Company's insolvency, the trustee shall suspend
all such payments and hold the trust assets for the benefit of the Company's
general
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creditors, and must determine within thirty (30) days whether the Company is
in fact insolvent. If the trustee determines that the Company is not
insolvent, the Trustee will resume payments, including any benefits previously
suspended. In all cases where the trustee has actual knowledge of, or has
made a determination of the Company's insolvency, the trustee shall deliver
trust assets to satisfy claims of the Company's general creditors as directed
by a court of competent jurisdiction.
5.3 Insolvency. Insolvency shall mean the complete inability of
the Company to meet its obligations to the Company's creditors in due course.
SECTION 6
Claims Procedure
6.1 Appeal Procedure for Denial of Benefits. The Plan
Administrator shall provide adequate notice in writing to any Participant or
to any Beneficiary ("Claimant") whose claim for benefits under the Plan the
Committee has denied. The Plan Administrator's notice to the Claimant shall
set forth:
(a) The specific reason for the denial;
(b) Specific references to pertinent Plan provisions on
which the Advisory Committee based its denial;
(c) A description of any additional material and
information needed for the Claimant to perfect his claim and an explanation of
why the material or information is needed; and
(d) That any appeal the Claimant wishes to make of the
adverse determination must be in writing to the Committee within 75 days after
receipt of the Plan Administrator's notice of denial of benefits. The Plan
Administrator's notice must further advise the Claimant that his failure to
appeal the action to the Committee in writing within the 75 day period will
render the Committee's determination final, binding and conclusive.
If the Claimant should appeal to the Committee, he, or his duly
authorized representative, may submit, in writing, whatever issues and
comments he, or his duly authorized representative, feels are pertinent. The
Claimant, or his duly authorized representative, may review pertinent Plan
documents. The Committee
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shall re-examine all facts related to the appeal and make a final
determination, in its sole and absolute discretion, as to whether the denial
of benefits is justified under the circumstances. The Committee shall advise
the Claimant of its decision within 60 days of the Claimant's written request
for review, unless special circumstances (such as a hearing) would make the
rendering of a decision within the 60 day limit unfeasible. In no event shall
the Committee render a decision respecting a denial of a claim for benefits
later than 120 days after its receipt of a request for review.
The Plan Administrator's notice of denial of benefits shall identify
the name of each member of the Committee and the name and address of the
Committee member to whom the Claimant may forward his appeal.
IN WITNESS WHEREOF, the Company has caused this restated Plan to be
executed and to be effective as of January 1, 1990.
HORIZON BANK, a Savings Bank
By: /s/ V. Lawrence Evans
_______________________
V. Lawrence Evans
Its: President
ATTEST:
/s/ George W. Gust
_______________________
George W. Gust
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AMENDMENT TO THE
HORIZON BANK (A Savings Bank)
EXECUTIVE INCOME PARTICIPATION PLAN
Pursuant to Section 4.1 of the Executive Income Participation Plan,
as amended and restated effective January 1, 1990, Horizon Bank has reserved
the right to amend the Plan at any time, provided that, no amendment will
affect benefits that have been accrued to the date of the amendment, and
provided that such amendment does not accelerate the payment of benefits to
any Participant or Beneficiary. Accordingly, Horizon Bank, by action of its
Board of Directors amends the Plan as follows:
I.
DEFINITIONS
Section 1.6 of the Plan is amended as follows:
1.6 Normal Retirement Age shall mean the
Participant's 62nd birthday. Prior to this amendment, a
Participant's Normal Retirement Age was defined as the
Participant's 65th birthday.
The Plan is amended to add the following definition under New Section
1.9:
1.9 Change of Control shall mean (a) the
acquisition, in any manner, of twenty-five percent (25%) or
more of the outstanding common stock of Horizon Bank by any one
or more persons or entities acting in concert, (b) the merger
of Horizon Bank into any corporation, where after such merger
twenty-five percent (25%) or more of the outstanding stock of
the corporation is owned by shareholders other than
shareholders of Horizon Bank common stock immediately prior to
the merger, or (c) the replacement of current directors or the
election of new directors constituting a majority of the Board
of Directors where such replacement or election has not been
supported by the current Board of Directors.
II.
SUPPLEMENTAL RETIREMENT AND DEATH BENEFITS
Section 3.1 and 3.2 of the Plan are amended as follows:
3.1 Supplemental Retirement Benefits. If the
Participant remains in the employ of the Company until age 61,
then upon attaining Normal Retirement Age, an income
continuation supplemental retirement benefit will be payable to
the Participant under the terms of this Plan, equal to the
benefit established by the Company as set forth opposite the
name of the Participant on Exhibit A attached hereto. Provided
that the Participant remains in the employ of the Company until
age 61, all benefits will be fully vested in the Participant
and his Beneficiary. Supplemental Retirement Benefits will be
payable to the Participant under the installment schedule set
forth opposite the Participant's name on Exhibit A, with
payments beginning on or about the first day of the calendar
month coincident with or next following the Participant's
attainment of Normal Retirement Age. If the Participant should
die during the income continuation period set
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forth on Exhibit A, benefits shall continue to be paid for the
duration of the income continuation period to the Participant's
Beneficiary.
3.2 Death Benefits. If the Participant should
die while in the employ of the Company prior to attaining
Normal Retirement Age, the Participant's Beneficiary shall be
entitled to receive the designated benefit in monthly
installments beginning on or about the first day of the
calendar month following the Participant's death, and payable
for the income continuation period set forth opposite the
Participant's name on Exhibit A. No other survivor benefits
will be payable pursuant to the terms of this Plan.
III.
TRUST AGREEMENT
Section 4.6 of the Plan is amended as follows:
4.6 Trust Agreement. In the event of a Change
in Control, the Company shall establish an irrevocable grantor
trust for the payment of income continuation supplemental
retirement benefits. In the event of a Change in Control or if
for any other reason the Company elects to establish a trust
fund for the payment of benefits, the trust agreement shall
comply with the model Rabbi trust provisions of Rev. Proc.
92-64, and the trustee shall receive and hold all contributions
to the trust fund made by the Company pursuant to the Plan and
shall hold, invest, reinvest, and distribute such funds in
accordance with the terms and provisions of this Plan and the
trust agreement. The Company or the Committee may engage the
services of qualified, independent investment managers for the
purpose of providing some or all of the investment management
for this Plan. The Company or the Committee may modify any
trust agreement from time to time to accomplish the purposes of
this Plan, provided such modifications comply with the model
language of the Revenue Procedure, and may, with approval,
remove any trustee and select a successor trustee. No
amendment to the Plan, however, will bind a trustee without its
consent.
Except as expressly modified herein, the terms of the Executive
Income Participation Plan as amended and restated effective January 1, 1990,
are hereby ratified, confirmed and approved.
This Amendment shall be effective the 27th day of October, 1992.
HORIZON BANK, A Savings Bank
By: /s/ V. Lawrence Evans
_______________________
V. Lawrence Evans
Its: President
_______________________
ATTEST:
/s/ George W. Gust
_______________________
George W. Gust
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Exhibit 21
Subsidiaries of the Registrant
Parent
Horizon Financial Corp.
Jurisdiction
Percentage or State of
Subsidiaries (a) of Ownership Incorporation
Horizon Bank, a savings bank 100% Washington
Westward Financial
Services, Inc. (b) 100% Washington
(a) The operation of the Corporation's wholly owned subsidiaries are
included in the Corporation's Financial Statements contained in the Annual
Report attached hereto as Exhibit 13.
(b) Wholly-owned subsidiary of Horizon Bank, a savings bank.
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Exhibit 23
Consent of Auditors
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-99780) of Horizon Financial Corp. of our report
dated April 24, 1996 appearing in the Annual Meeting Proxy Statement of
Horizon Financial Corp., dated June 20, 1996, which is incorporated by
reference in Horizon Financial Corp.'s Annual Report on Form 10-K for the year
ended March 31, 1996.
MOSS ADAMS LLP
Bellingham, Washington
June 28, 1996
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