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, 1997
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-K 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 6,
1997, was $111,666,431 (7,413,539 shares at $15.0625 per share). It is
assumed for purposes of this calculation that none of the registrant's
officers, directors and 5% stockholders are affiliates.
DOCUMENT INCORPORATED BY REFERENCE
Proxy Statement for the 1997 Annual Meeting of Stockholders. (Part II
and III).
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<PAGE>
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 Washington Department of Financial Institutions, Division of Banks, and
the Federal Deposit Insurance Corporation ("FDIC"). The Bank's deposit
accounts are insured by the FDIC under the Bank Insurance Fund ("BIF").
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 Bank's principal sources of funds for lending and investment
activities are savings deposits, repayment of loans, loan sales and
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.
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. The Bank's main office is located at 1500
Cornwall Avenue, Bellingham, Washington and its telephone number is (360)
733-3050. See "Item 2. Properties."
1
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<PAGE>
Selected Financial Data
- -----------------------
<TABLE>
The following table sets forth certain information concerning the financial position of the Bank at
and for the dates indicated.
March 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total Assets . . . . . . . . . $515,341 $488,968 $457,478 $424,637 $394,168
Loans Outstanding. . . . . . . 399,078 389,651 360,120 340,421 314,540
Cash and Investment
Securities . . . . . . . . . 104,356 87,662 83,782 71,795 68,730
Deposits . . . . . . . . . . . 424,811 402,676 377,703 351,506 328,052
Borrowings . . . . . . . . . . -- -- -- -- --
Stockholders' Equity . . . . . 78,509 79,147 72,685 65,995 59,164
Number of Full Service
Offices. . . . . . . . . . . 12 12 11 9 8
</TABLE>
<TABLE>
Year Ended March 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest Income. . . . . . . . $38,710 $37,082 $33,989 $33,619 $34,202
Interest Expense . . . . . . . (20,832) (20,773) (16,948) (15,227) (16,398)
Net Interest Income. . . . . . 17,878 16,309 17,041 18,392 17,804
Other Income . . . . . . . . . 1,583 1,293 1,220 1,692 1,521
Non-interest Expense . . . . . (7,461) (6,685) (7,149) (7,446) (7,194)
Provision for Loan
Losses . . . . . . . . . . . (200) (110) (132) (368) (409)
Income (Loss) Before ------- ------- ------- ------- -------
Taxes. . . . . . . . . . . . 11,800 10,807 10,980 12,270 11,722
Federal Income Tax . . . . . . 3,997 3,586 3,640 4,262 3,819
SFAS #109. . . . . . . . . . . -- -- -- -- 889
Gain on Sale of
Trust Department. . . . . . . -- -- 181 -- --
------- ------ ------- ------- -------
Net Income . . . . . . . . . . $ 7,803 $7,221 $ 7,521 $ 8,008 $ 7,014
======= ====== ======= ======= =======
</TABLE>
2
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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,
----------------------
1997 1996 1995
---- ---- ----
Return on average assets (net income
divided by average total
assets). . . . . . . . . . . . . . . . . . . . . . 1.55% 1.53% 1.71%
Return on average equity (net income
divided by average equity) . . . . . . . . . . . . 9.90 9.51 10.85
Dividend payout ratio (dividends
declared per share divided
by net income per share) . . . . . . . . . . . . . 62.50 29.09 26.97
Equity to assets ratio (average
equity dividend by average
total assets). . . . . . . . . . . . . . . . . . . 15.70 16.04 15.72
Interest rate spread (difference
between average yield on interest
earning assets and average cost
of interest bearing
liabilities) . . . . . . . . . . . . . . . . . . . 2.98 2.85 3.40
Net yield on earning assets (net
interest income as a percentage
of average interest earning
assets). . . . . . . . . . . . . . . . . . . . . . 3.72 3.61 4.06
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."
3
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<TABLE>
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,
---------------- ------------------------------------------------------------------------------
1997 1997 1996 1995
---------------- -------------------------- ------------------------- ------------------------
Aver- Aver- Aver-
age age age
Yield/ Average Yield/ Average Yield/ Average Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- ------- ------- -------- ------ ------- -------- ---- ------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest
-earning
assets:
Loans
receiv-
able . . . $399,078 8.39% $403,056 $33,812 8.39% $375,018 $32,145 8.57% $352,620 $29,948 8.49%
Investment
securities . 42,789 6.27 46,850 2,937 6.27 53,849 3,359 6.24 45,410 2,533 5.58
Mortgage-
backed
securities . . 56,203 6.36 30,834 1,962 6.36 22,895 1,578 6.89 21,630 1,508 6.97
Total -------- ---- -------- ------- ---- -------- ------ ---- -------- ------- ----
interest-
earning
assets . . . 498,070 8.05 480,740 38,711 8.05 451,762 37,082 8.21 419,660 33,989 8.10
Interest-
bearing
liabilities:
Deposits . . 424,811 5.07 410,267 20,832 5.07 386,860 20,773 5.36 361,690 16,948 4.70
Total -------- ---- -------- ------- ---- -------- ------- ---- -------- ------- ----
interest-
bearing
liabilities. 424,811 5.07 410,267 20,832 5.07 386,860 20,773 5.36 361,690 16,948 4.70
-------- -------- ------- -------- ------- -------- -------
Net
interest
income. . . . 17,879 $16,309 $17,041
------- ======= =======
Interest rate
spread . . . . 2.98% 2.85% 3.40%
---- ----- ------
Net yield on
interest
-earning
assets. . . . 3.72% 3.61% 4.06%
---- ====== ======
Ratio of
average
interest-
earning
assets
to average
interest-
bearing
liabili-
ties. . . . . 115.09% 116.63% 116.28%
====== ====== ======
</TABLE>
4
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Rate/Volume Analysis
- --------------------
<TABLE>
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,
-------------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995 1995 vs. 1994
-------------------------------------------------------------------------------------
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. . . . . $2,388 $(671) $(50) $1,667 $1,898 $ 281 $ 18 $2,197 $2,277 $(2,362) $(177) $ (262)
Investment
securities
and other
interest
-bearing
securities . . 71 (108) (1) (38) 573 282 41 896 271 334 27 632
Total
interest-
earning
assets . . . . $2,459 $(779) $(51) $1,629 $2,471 $ 563 $ 59 $3,093 $2,548 $(2,028) $(150) $ 370
====== ===== ==== ====== ====== ====== ==== ====== ====== ======= ===== ======
Interest
expense:
Deposit
accounts . . . $ 835 $(731) $(45) $ 59 $1,252 $2,398 $176 $3,826 $1,071 $ 607 $ 43 $1,721
------ ----- ---- ------ ------ ------ ---- ------ ------ ------- ----- ------
Total
interest
-bearing
liabilities. . $ 835 $(731) $(45) $ 59 $1,252 $2,398 $176 $3,826 $1,071 $ 607 $ 43 $1,721
====== ===== ==== ====== ====== ====== ==== ====== ====== ======= ===== ======
</TABLE>
5
<PAGE>
<PAGE>
Lending Activities
- ------------------
General. The Bank's loan portfolio totaled $399,078,123 at March 31,
1997, representing approximately 77.44% of its total assets. On that date,
81.76% of total outstanding loans consisted of loans secured by mortgages on
single family residential properties, 3.63% of the loans consisted of loans
secured by two-to-four unit residential properties, 4.14% of total outstanding
loans consisted of loans secured by mortgages on over four unit residential
properties, and 6.27% 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.
The Bank has no significant concentration of credit risk other than
that a substantial portion of its loan portfolio is secured by real estate
located in the Bank's primary market area, which the Bank considers to be
Whatcom, Skagit and Shohomish Counties in Washington. This concentration of
credit risk could have a material adverse effect on the Bank's financial
condition and results of operations to the extent there is a material
deterioration in the counties' economic and real estate values.
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 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, 1997, $181,122,756 (or 45.39%) 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 $15,490,484 in residential ARM
loans and $10,332,670 in ARM loans secured by commercial and other real estate
with adjustable rates; and $155,299,602 in 15 year or less amortizing mortgage
loans.
6
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<PAGE>
<TABLE>
Loan Maturity. The following table sets forth certain information at March 31, 1997 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,
--------------- ------------- -------------- --------------
1998 1999 1997 1997 1997 Total
---- ---- ---- ---- ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural . . . . . . $12,878 $1,906 $13,561 $12,920 $ 6,222 $ 47,487
Real estate construction . -- -- -- -- 18,808 18,808
Real estate-mortgage,
installment and other . . 12,306 3,429 14,835 34,415 267,798 332,783
------- ------ ------- ------- -------- --------
Total . . . . . . . . $25,184 $5,335 $28,396 $47,335 $292,828 $399,078
======= ====== ======= ======= ======== ========
</TABLE>
<TABLE>
The following table sets forth the dollar amount of all loans due one year after March 31, 1997 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)
<C> <S> <S> <S>
Commercial, financial and
agricultural. . . . . . . $2,545 $10,333 $12,878
Real estate construction . -- -- --
Real estate-mortgage,
installment and other . . 3,934 8,372 12,306
------ ------- -------
Total . . . . . . . . $6,479 $18,705 $25,184
====== ======= =======
</TABLE>
7
<PAGE>
<PAGE>
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, 1997, approximately 85.39% 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 the appraised value. The Bank places
this insurance with carriers approved by the 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, 1997, adjustable mortgage loans totalled
$11,446,235 or 10.39% of total originations as compared to $14,057,805 or
14.60% of total originations for the year ended March 31, 1996.
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 creditworthiness 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, 1997 the Bank had $18,808,232, or 4.71% of total
loans outstanding in construction loans, as compared to $15,711,393, or 4.03%
of total loans at March 31, 1996. At March 31, 1997, $5,624,436 or 1.41% of
the construction loan portfolio consisted of "speculative" construction loans
(i.e., loans on dwellings for which there is not an underlying contract for
sales).
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 $40,379,050 or approximately 10.12% of Horizon Bank's loan
portfolio at March 31, 1997. 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
8
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<PAGE>
loans have a debt service coverage of 1.20 to 1 with a loan-to-value ratio not
exceeding 80%. Fixed-rate loans generally have a five to 10-year loan term,
with payments based upon a 15 to 30-year amortization schedule.
At March 31, 1997, $12,026,110 of loans 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, home equity lines of
credit, 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 actively markets consumer loans 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,
1997, the Bank held $17,219,233 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 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.
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
9
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<PAGE>
currently purchase loans from, or otherwise utilize, mortgage brokers in the
origination of loans.
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 10, 15 and 20 year fixed-rate loans for its own portfolio.
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.
The Bank is a qualified servicer for both FHLMC and the Federal
National Mortgage Association. 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, 1997, the
Bank was servicing loans for others aggregating approximately $83,742,111.
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 May 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage
Servicing Rights," which is effective for years beginning after December 15,
10
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<PAGE>
1995. This statement requires mortgage servicers to recognize servicing
rights on loans as separate assets, no matter how acquired. When the Bank
sells loans and retains the servicing rights it will be required to allocate
the total cost of the loans between servicing rights and loans based on their
relative fair values if their values can be estimated. SFAS No. 122 was
effective for and was adopted by the Bank beginning April 1996. SFAS No. 122
will not be applied retroactively. Management does not believe the adoption
of this statement will have a material impact on the Bank's financial
condition or results of operations.
Loan Commitments. Horizon Bank issues commitments to originate
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, 1997, such
commitments amounted to $2,523,820.
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 0% to 2.50% on
conventional residential mortgages and 2.0% to 2.5% for commercial real estate
loans. The total amount of deferred loan origination fees and unearned
discounts at March 31, 1997 was $6,835,376. 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. The Bank offers 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 1997, the
Bank modified $1,116,175 of real estate loans, compared to $6,640,084 in
fiscal 1996.
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. At March 31,
1997, the Bank had one loan over 90 days delinquent with a balance of $38,918.
Management does not anticipate incurring material losses from this loan
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.
11
PAGE
<PAGE>
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated.
At March 31,
---------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Non-accrual loans. . . $ -- $ -- $ -- $ -- $ --
Loans 90 days or more
delinquent and
accruing interest . . 38,918 -- 1,545 -- --
Restructured loans . . -- -- -- -- --
Real estate acquired
through foreclosure . -- -- -- -- --
------- ----- ------ ------- ------
Total. . . . . . . . $38,918 $ -- $1,545 $ -- $ --
======= ===== ====== ======= ======
As a percentage of net
loans . . . . . . . . .010% -- .0004% -- --
As a percentage of
total assets. . . . . .008% -- .0003% -- --
Reserves for Losses. The Bank operates under a general loan loss
reserve system. Any differences between the loss reserve and the amount of
loss realized is 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 year ended March
31, 1997 in the amount of $3,406,150 and $3,236,150 for the year ended March
31, 1996. The Bank's loan loss reserve as of March 31, 1997, is approximately
.85% 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,
------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Balance at
beginning
of period. . . $3,236,150 $3,126,150 $2,994,150 $2,626,348 $2,217,612
Provision
for loan
losses . . . 200,400 110,000 132,000 367,802 408,736
Adjustment to
reserves . . (30,400) -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at end
of period . . $3,406,150 $3,236,150 $3,126,150 $2,994,150 $2,626,348
========== ========== ========== ========== ==========
Ratio of net
charge offs to
average loans
outstanding
during the
period . . . . .05% .03% .04% .11% .13%
12
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<PAGE>
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,
---------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Commercial,
financial
and
agricultural. . $ 800,000 $ 800,000 $ 858,000 $ 858,000 $ 758,000
Real estate
- construc-
tion. . . . . -- -- -- -- --
Real estate
- mortgage. . 2,606,150 2,436,150 2,268,150 2,136,150 1,868,348
---------- ---------- ---------- ---------- ----------
Total
allowance
for loan
losses . . . $3,406,150 $3,236,150 $3,126,150 $2,994,150 $2,626,348
========== ========== ========== ========== ==========
The Bank had no allowances for real estate acquired through foreclosure
at March 31, 1997, 1996, 1995, 1994 and 1993.
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 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, 1997 was
$32,390,741 compared to a market value of $34,670,775. 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,
1997, such securities had a book value of $56,202,898 and a market value of
$54,650,245.
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<PAGE>
<PAGE>
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, 1997, was
approximately $89,321,020. This does not include interest-bearing deposits
and cash equivalents.
At March 31,
------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Investment securities:
U.S. Government, agency
securities, state and
political subdivisions. . $ 26,914 $39,408 $31,614
Asset-backed securities . . 56,203 23,364 23,405
Other securities . . . . . 5,477 8,862 11,095
-------- ------- -------
Total investments. . . . 88,594 71,634 66,114
Interest bearing
deposits and cash
equivalents . . . . . . . 14,815 13,600 16,557
-------- ------- -------
$103,409 $85,234 $82,671
======== ======= =======
14
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<PAGE>
<TABLE>
The following table sets forth the scheduled maturities, carrying values, market values and average
yields for the Bank's investment securities at March 31, 1997.
At March 31, 1997
-----------------------------------------------------------------------------
Total
One Year One to Five Five to Ten More than Investment
or Less Years Years Ten Years Securities
------------ ------------ ------------ ------------ ---------------------
Carry- Aver- Carry- Aver- Carry- Aver- Carry- Aver- Carry- Aver-
ing age ing age ing age ing age ing Market age
Value Yield Value Yield Value Yield Value Yield Value Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government,
agency securities,
state and political
subdivisions. . . . .$ 8,242 5.85% $16,259 6.12% $2,413 7.97% $ -- --% $26,914 $26,885 6.21%
Mortgage-backed
securities. . . . . . -- -- 5,939 6.38 3,203 6.47 47,061 6.80 56,203 54,650 6.74
Other. . . . . . . . . 3,407 4.49 1,492 8.01 578 6.50 -- -- 5,477 7,786 5.32
------- ---- ------- ---- ------ ---- ------- ---- ------- ------- ----
Total . . . . . . .$11,649 5.30% $23,690 6.31% $6,194 7.03% $47,061 6.80% $88,594 $89,321 6.46%
======= ==== ======= ==== ====== ==== ======= ==== ======= ======= ====
</TABLE>
15
<PAGE>
<PAGE>
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 several 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 thirty days up to 10 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,
----------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Type Balance Rat Balance Rate Balance Rate
- ---- ------- --------- ------- -------- -------- --------
(Dollars in thousands)
Savings $ 30,164 3.45% $ 29,324 3.46% $ 33,939 3.35%
Drafts 25,482 1.68 24,274 1.93 24,697 2.26
Money Market 52,334 4.15 44,181 4.48 42,146 3.84
Time
Deposits 302,287 5.72 289,081 6.02 260,908 5.26
-------- ---- --------- ---- --------- ----
Total $410,267 5.10% $ 386,860 5.39% $ 361,690 4.71%
======== ==== ========= ==== ========= ====
The following table indicates the amount of the Bank's deposits by time
remaining until maturity as of March 31, 1997 in excess of $100,000.
Certificates
Maturity Period of Deposit
--------------- ------------
Three months or less $12,170,025
Three through six months 12,497,119
Six through twelve months 17,902,142
Over twelve months 29,849,668
-----------
Total $72,418,954
===========
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 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.
16
<PAGE>
<PAGE>
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 _ of the Notes to the Consolidated Financial
Statements.
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, 1997. Horizon Bank
has had no borrowings for the last five fiscal years.
17
<PAGE>
<PAGE>
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, 1997, Horizon Bank employed 112 full-time and 18 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 Washington Department of Financial
Institutions, Division of Banks, 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 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 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, 1997, equalled $14,297.
18
<PAGE>
<PAGE>
As a result of the BIF having reached its designated reserve ratio,
effective January 1, 1996, the FDIC substantially reduced deposit insurance
premiums for well-capitalized, well-managed financial institutions that are
members of the BIF. Under the new assessment schedule, rates were reduced to
arrange of 0 to 27 basis points, with approximately 92% of BIF members paying
the statutory minimum annual assessment rate of $2,000. As a well capitalized
bank, the Bank qualified for the minimum statutory assessment during fiscal
1997.
On September 30, 1996, the Deposit Insurance Fund Act was enacted to
assist depository institutions insured by the Savings Association Insurance
Fund ("SAIF") in meeting its designated reserve ratio. Pursuant to the Act,
the FDIC imposed an assessment on FDIC-insured financial institutions
beginning January 1, 1997, for the purpose of paying interest on the
obligations issued by the Financing Corporation in the 1980's to help fund the
thrift industry cleanup. BIF-assessable deposits will be charged an
assessment at a rate of approximately 0.013% until the earlier of December 31,
1999, or the date upon which the last savings association ceases to exist,
after which time the assessment will be the same for all insured deposits.
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, 1997, Horizon Bank had a ratio of Tier 1
capital to total assets of 15.20%.
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.
19
<PAGE>
<PAGE>
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
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, 1997, Horizon had Tier 1 capital of 15.20%.
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. The FDIC has 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 substantially 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, 1997, Horizon Bank's risk-based
capital ratio was 30.43 percent.
Federal Reserve System. The Federal Reserve Board requires (under
"Regulation D") that all depository institutions, including savings banks,
20
<PAGE>
<PAGE>
maintain reserves on 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
definition of transaction accounts and are subject to Regulation D reserve
requirements, as are any non-personal time deposits at a savings bank. Under
Regulation D, a bank must establish reserves equal to 0% of the first $4.4
million of net transaction accounts, 3% of the next $44.9 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, 1997, 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
21
<PAGE>
<PAGE>
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.
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.
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:
22
<PAGE>
<PAGE>
Amount Percent
------ -------
(Dollars in Thousands)
Tier 1 Capital $78,384 15.60%
Minimum Tier 1 (leverage) requirement 20,086 4.00
------- -----
Excess 58,298 11.60%
======= =====
Risk-based capital $80,951 30.43%
Minimum risk-based capital requirement 21,279 8.00
------- -----
Excess $59,672 22.43%
======= =====
TAXATION
Federal Taxation
- ----------------
General. The Corporation and the Bank report their consolidated 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. Reference is made to Note 10
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. For taxable years beginning prior to January 1,
1996, savings institutions such as the Bank which met certain definitional
tests primarily relating to their assets and the nature of their business
("qualifying thrifts") were permitted to establish a reserve for bad debts and
to make annual additions thereto, which additions may, within specified
formula limits, have been 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 have been computed using an
amount based on the Bank's actual loss experience, or a percentage equal to 8
percent 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 nonqualifying loans was 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 selected the most favorable way to calculate the deduction attributable
to an addition to the tax bad debt reserve.
Recently enacted legislation repealed the reserve method of accounting
for bad debt reserves for tax years beginning after December 31, 1995. As
result, savings associations will no longer be able to calculate their
deduction for bad debts using the percentage-of-taxable-income method.
Instead, savings associations will be required to compute their deduction
based on specific charge-offs during the taxable year or, if the savings
association or its controlled group had assets of less than $500 million,
based on actual loss experience over a period of years. This legislation also
requires savings associations to recapture into income over a six-year period
their post-1987 additions to their bad debt tax reserves, thereby generating
additional tax liability. At March 31, 1997, the Bank's post-1987 reserves
totalled approximately $5,782,000. The recapture may be suspended for up to
two years if, during those years, the institution satisfies a residential loan
requirement. The Bank anticipates that it will meet the residential loan
requirement for the taxable year ending March 31, 1998.
Under prior law, if the Bank failed to satisfy the qualifying thrift
definitional 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
23
<PAGE>
<PAGE>
as they occur and would additionally be required to recapture its bad debt
reserve deductions ratably over a multi-year period. At March 31, 1997, the
Bank's total bad debt reserve for tax purposes was approximately $13,650,000.
Among other things, the qualifying thrift definitional tests required the Bank
to hold at least 60 percent 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. Under current law, a savings
association will not be required to recapture its pre-1988 bad debt reserves
if it ceases to meet the qualifying thrift definitional tests.
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.
24
<PAGE>
<PAGE>
Audits. The Bank has not been audited by the IRS during the past five
years.
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. The Bank's business and occupation
tax returns were audited in November 1995.
Item 2. Properties
- -------------------
The following table sets forth the location of the Bank's offices, as
well as certain information relating to these offices.
Net Book
Year Value as of Square Leased/
Opened March 31, 1997 Feet Owned
------ -------------- ---- ------
Bellingham Main Office. . . 1971 $1,062,558 19,179 Owned
1500 Cornwall Avenue
Bellingham, WA 98225
Bellingham/Meridian . . . . 1987 782,808 4,650 Owned
4110 Meridian
Bellingham, WA 98226
Ferndale Office . . . . . . 1976 391,349 3,692 Owned
Third and Main
Ferndale, WA 98248
Lynden Office . . . . . . . 1981 457,796 3,702 Owned
Third and Grover
Lynden, WA 98264
Blaine Office . . . . . . . 1976 587,631 3,610 Owned
Fourth & "H" Streets
Blaine, WA 98230
Mount Vernon Office . . . . 1976 240,040 3,275 Owned
1503 Riverside Dr.
Mount Vernon, WA 98273
Anacortes Office. . . . . . 1987 893,906 3,650 Owned
1218 Commercial Avenue
Anacortes, WA 98221
Snohomish Office. . . . . . 1987 193,768 1,388 Owned
620 2nd Street
Snohomish, WA 98290
Everett Office. . . . . . . 1991 49,390 1,972 Leased
909 S.E. Everett Mall Way
#E-500
Everett, WA 98208
(table continued on following page)
25
<PAGE>
<PAGE>
Net Book
Year Value as of Square Leased/
Opened March 31, 1997 Feet Owned
------ -------------- ---- ------
Burlington Office . . . . . 1994 1,283,591 3,980 Owned
1020 S. Burlington Blvd
Burlington, WA 98232
Edmonds Office. . . . . . . 1994 $ 74,150 1,597 Leased
315 Fifth Avenue South
Suite A&B
Edmonds, WA 98020
Mill Creek Office . . . . . 1995 113,696 1,945 Leased
13416 Bothell Everett Hwy. . . . .
Suite 201
Mill Creek, WA 98012
At March 31, 1997, the aggregate book value of the Corporation's
premises and equipment was $6,130,683.
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 5,000 beneficial
stockholders at March 31, 1997.
1997 Fiscal Year
Quarter HIGH LOW DIVIDENDS PER SHARE
------- ---- --- -------------------
4th $16.75 $13.25 $.10
3rd 14.00 12.25 .45
2nd 14.00 12.50 .10
1st 13.25 11.75 .10
26
<PAGE>
<PAGE>
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
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.
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 67 Chairman of the Board of the
Corporation and the Bank
V. Lawrence Evans 50 Chief Executive Officer
and President of the
Corporation and the Bank
Richard P. Jacobson 34 Vice President and Secretary of
the Corporation and the Bank
Judy E. Boxx 55 Vice President of the Bank
Jeffrey H. Jansen 39 Vice President of the Bank
Karen A. LePage 56 Vice President of the Corporation
and the Bank
(table continued on following page)
27
<PAGE>
<PAGE>
Name Age Position
- ----- --- --------
Karla C. Lewis 50 Vice President of the Bank
Merwyn G. Murk 58 Vice President of the Bank
Donald A. Wolf 48 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.
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 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 Chief Lending Officer.
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.
28
<PAGE>
<PAGE>
(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.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
- -----------------------------------------------------------------
(a) (1) Financial Statements
--------------------
Independent Auditor's Report*
Consolidated Statement of Financial
Position, March 31, 1997 and 1996*
Consolidated Statement of Income for the years ended
March 31, 1997, 1996 and 1995*
Consolidated Statement of Stockholders' Equity
for the years ended March 31, 1997, 1996 and 1995*
Consolidated Statement of Cash Flows for the years
ended March 31, 1997, 1996 and 1995*
Notes to Consolidated Financial Statements*
__________________
* Contained in the Corporation's Annual Meeting Proxy Statement
filed with the Securities and Exchange Commission on June 20, 1997 and
incorporated herein by reference. All schedules have been omitted as
the required information is either inapplicable or contained in the
Consolidated Financial Statements or related Notes contained in the
Annual Meeting Proxy Statement.
(2) All required financial statement schedules are included in the Notes
to Consolidated Financial Statements.
(b) The Corporation did not file any Current Reports on Form 8-K during the
quarter ended March 31, 1997.
29
<PAGE>
<PAGE>
(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 (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year
ended March 31, 1996)
(10.2) Deferred Compensation Plan (incorporated by reference to
the Registrant's Annual Report on Form 10-K for the year
ended March 31, 1996)
(10.3) 1986 Stock Option and Incentive Plan (incorporated by
reference to Exhibit 99.1 to the Registrant's
Registration Statement on Form S-8 (File No. 33-99780))
(10.4) 1995 Stock Option Plan (incorporated by reference to
Exhibit 99.2 to the Registrant's Registration Statement
on Form S-8 (File No. 33-99780))
(21) Subsidiaries of the Registrant
(23) Consent of Auditors
(27) Financial Data Schedule
30
<PAGE>
<PAGE>
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 27, 1997 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
Director Director
Principal Financial
Officer, Chief Executive
Officer and President
Date: June 27, 1997 Date: June 27, 1997
By: /s/Karen A. LePage By: /s/ L. M. Strengholt
-------------------------- -----------------------
Karen A. LePage L. M. Strengholt
Principal Accounting Director
Officer
Date: June 27, 1997 Date: June 27, 1997
By: /s/ Robert C. Diehl By: /s/ Frank G. Uhrig
-------------------------- -----------------------
Robert C. Diehl Frank G. Uhrig
Director Director
Date: June 27, 1997 Date: June 27, 1997
By: /s/ George W. Gust By: /s/ Maurice D. Fox
-------------------------- -----------------------
George W. Gust Maurice D. Fox
Director and Chairman of Director
the Board
Date: June 27, 1997 Date: June 27, 1997
By: /s/ Richard D. Haggen
--------------------------
Richard D. Haggen
Director
Date: June 27, 1997
<PAGE>
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 Consolidated Financial Statements
contained in the Annual Meeting Proxy Statement filed with the SEC on
June 20, 1997 and incorporated herein by reference.
(b) Wholly-owned subsidiary of Horizon Bank, a savings bank.
<PAGE>
<PAGE>
Exhibit 23
Consent of Auditors
<PAGE>
<PAGE>
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 22, 1997 appearing in the Annual Meeting Proxy Statement of
Horizon Financial Corp., dated June 20, 1997, which is incorporated by
reference in Horizon Financial Corp.'s Annual Report on Form 10-K for the year
ended March 31, 1997.
/s/MOSS ADAMS LLP
MOSS ADAMS LLP
Bellingham, Washington
June 25, 1997
<PAGE>
<PAGE>
Exhibit 27
Financial Data Schedule
PAGE
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 4416862
<INT-BEARING-DEPOSITS> 10398316
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 61467982
<INVESTMENTS-CARRYING> 28072373
<INVESTMENTS-MARKET> 27853038
<LOANS> 399078123
<ALLOWANCE> 3406150
<TOTAL-ASSETS> 515341339
<DEPOSITS> 424811286
<SHORT-TERM> 0
<LIABILITIES-OTHER> 12021039
<LONG-TERM> 0
0
0
<COMMON> 6650340
<OTHER-SE> 71858674
<TOTAL-LIABILITIES-AND-EQUITY> 515341339
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<EXPENSE-OTHER> 7460889
<INCOME-PRETAX> 11800113
<INCOME-PRE-EXTRAORDINARY> 7803420
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7803420
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.20
<YIELD-ACTUAL> 8.05
<LOANS-NON> 0
<LOANS-PAST> 38918
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3236150
<CHARGE-OFFS> 0
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<ALLOWANCE-CLOSE> 3406150
<ALLOWANCE-DOMESTIC> 839750
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2566400
</TABLE>
