Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the registrant [x]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[x] Definitive proxy statement
[ ] Definitive additional materials
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Horizon Financial Corp.
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(Name of Registrant as Specified in Its Charter)
Horizon Financial Corp.
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(Name of Person(s) Filing Proxy Statement)
Payment of filing fee (Check the appropriate box):
[x] No fee required.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transactions applies:
N/A
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(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11:
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(4) Proposed maximum aggregate value of transaction:
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11 (a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
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(3) Filing party:
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(4) Date filed:
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June 20, 1997
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
Horizon Financial Corp. to be held at the Best Western Lakeway Inn, 714
Lakeway Drive, Bellingham, Washington, on July 22, 1997 at 2:00 p.m., Pacific
Time.
The attached Notice of Annual Meeting of Shareholders and Proxy Statement
describe the formal business to be transacted at the meeting. During the
meeting, we will also report on the operations of the Corporation. Directors
and officers of the Corporation, as well as a representative of Moss Adams
LLP, will be present to respond to any questions our shareholders may have.
The Corporation's consolidated financial statements, the report of the
independent accountants and management's discussion and analysis of financial
condition and results of operations are included in this proxy statement.
Please sign, date and return the enclosed proxy card. If you attend the
meeting, you may vote in person even if you voted by proxy previously.
Your continued interest and support of the Corporation and Horizon Bank,
a savings bank, are sincerely appreciated.
Sincerely,
/s/ George W. Gust
George W. Gust
Chairman of the Board
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HORIZON FINANCIAL CORP.
1500 Cornwall Avenue
Bellingham, Washington 98225
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held on July 22, 1997
NOTICE IS HEREBY GIVEN THAT the 1997 Annual Meeting of Shareholders (the
"Meeting") of Horizon Financial Corp. ("Corporation") will be held at the Best
Western Lakeway Inn which is located at 714 Lakeway Drive, Bellingham,
Washington on July 22, 1997 at 2:00 p.m., Pacific Time.
A Proxy Card and Proxy Statement for the Meeting are enclosed herewith.
The Meeting is for the purpose of considering and acting upon:
(1) The election of two directors of the Corporation; and
(2) Such other matters as may properly come before the Meeting or any
adjournments thereof.
NOTE: The Board of Directors is not aware of any other business to
come before the Meeting.
Any action may be taken on the foregoing proposal at the Meeting on the
date specified above, or on any date or dates to which, by original or later
adjournment, the Meeting may be adjourned. Shareholders of record at the
close of business on June 6, 1997, are the shareholders entitled to notice of
and to vote at the Meeting and any adjournments thereof.
You are requested to fill in and sign the enclosed form of proxy, which
is solicited by the Board of Directors, and to mail it promptly in the
enclosed envelope. The proxy will not be used if you attend the Meeting and
vote in person.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Richard P. Jacobson
RICHARD P. JACOBSON
SECRETARY
Bellingham, Washington
June 20, 1997
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE YOUR CORPORATION THE
EXPENSE OF FURTHER REQUESTS FOR PROXIES IN ORDER TO INSURE A QUORUM. AN
ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED
IF MAILED IN THE UNITED STATES.
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PROXY STATEMENT
OF
HORIZON FINANCIAL CORP.
1500 Cornwall Avenue
Bellingham, Washington 98225
(360) 733-3050
ANNUAL MEETING OF SHAREHOLDERS
July 22, 1997
- ---------------------------------------------------------------------
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Horizon Financial Corp. ("Corporation"),
the holding company for Horizon Bank, a savings bank ("Bank"), to be used at
the 1997 Annual Meeting of Shareholders of the Corporation ("Meeting") which
will be held at the Best Western Lakeway Inn, 714 Lakeway Drive, Bellingham,
Washington, on Tuesday, July 22, 1997 at 2:00 p.m., Pacific Time. The
accompanying Notice of Annual Meeting of Shareholders and this Proxy Statement
are being first mailed to shareholders on or about June 20, 1997.
REVOCATION OF PROXIES
---------------------
Shareholders who execute proxies retain the right to revoke them at any
time. Unless so revoked, the shares represented by such proxies will be voted
at the Meeting and all adjournments thereof. Proxies may be revoked by
written notice to the Secretary of the Corporation or the filing of a later
proxy prior to a vote being taken on a particular proposal at the Meeting. An
executed proxy will not be voted if a shareholder attends the Meeting and
votes in person. Proxies solicited by the Board of Directors of the
Corporation will be voted in accordance with the directions given therein
provided they are executed. Where no instructions are indicated, executed
proxies will be voted for the nominees for directors set forth below.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
-----------------------------------------------
Shareholders of record as of the close of business on June 6, 1997 are
entitled to one vote for each share of common stock ("Common Stock") of the
Corporation then held. Shareholders are not permitted to cumulate their votes
for the election of directors. As of June 6, 1997, the Corporation had
7,413,539 shares of Common Stock issued and outstanding.
The presence, in person or by proxy, of at least one-third of the total
number of outstanding shares of Common Stock entitled to vote is necessary to
constitute a quorum at the Meeting. The nominees for director who receive a
plurality of the votes cast by the holders of the outstanding Common Stock
entitled to vote at the Meeting will be elected. Votes may be cast for or
withheld from each nominee. Votes that are withheld will have no effect on
the outcome of the election because directors will be elected by a plurality
of votes cast. Broker non-votes will be counted for purposes of determining
the existence of a quorum, but will not be counted for determining the number
of votes cast with respect to the election of directors and, accordingly, will
have no effect on the outcome of the election.
If a shareholder is a participant in the Horizon Bank Employee Stock
Ownership Plan (the "ESOP"), the proxy card represents a voting instruction to
the trustees of the ESOP as to the number of shares in the participant's plan
account. Each participant in the ESOP may direct the trustees as to the
manner in which shares of Common Stock allocated to the participant's plan
account are to be voted.
Persons and groups who beneficially own in excess of five percent of the
Corporation's Common Stock are required to file certain reports with the
Securities and Exchange Commission ("SEC"), and provide a copy to the
Corporation, disclosing such ownership pursuant to the Securities Exchange Act
of 1934, as amended ("Exchange Act"). Based on such reports, management knows
of no person who owned more than five percent of the outstanding shares of
Common Stock at June 6, 1997. The following table sets forth, as of June 6,
1997, information as to the
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shares of the Common Stock beneficially owned by each director of the
Corporation and by all executive officers and directors of the Corporation as
a group.
Number
of Shares Percent
Beneficially of Shares
Name Owned (1)(2)(3) Outstanding
- ---- --------------- -----------
Directors and Named Executive Officer(4)
Robert C. Diehl 32,795 0.44%
Fred R. Miller 72,864 0.98
Maurice (Dennis) Fox 55,863 0.75
George W. Gust 153,351 2.07
Frank G. Uhrig 80,906 1.09
L. M. (Larry) Strengholt 104,510 1.41
Richard R. Haggen 1,161 0.02
V. Lawrence Evans, President and
Chief Executive Officer 169,653 2.29
All Executive Officers and
Directors as a Group
(10 persons) 717,738 9.68
_______________
(1) Includes all shares owned directly by the named individuals or by the
individuals indirectly through a trust or corporation, or by the
individuals' spouses and minor children, except as otherwise noted. The
named individuals effectively exercise sole or shared voting and
investment power over these shares.
(2) Includes shares of Common Stock subject to outstanding stock options
which are exercisable within 60 days after June 6, 1997.
(3) Includes 24,256 shares of Horizon Common Stock held by the Bank's
Employee Stock Ownership Plan ("ESOP").
(4) Under SEC regulations the term "named executive officer(s)" is
defined to include the chief executive officer, regardless of
compensation level, and the four most highly compensated executive
officers, other than the chief executive officer, whose total annual
salary and bonus for the last completed fiscal year exceeded $100,000.
V. Lawrence Evans was the Corporation's only "named executive officer"
during the fiscal year ended March 31, 1997.
PROPOSAL I -- ELECTION OF DIRECTORS
-----------------------------------
The Corporation's Board of Directors consists of eight directors. The
Board is divided into three classes with staggered terms, and each director is
elected for a three-year term. Two directors will be elected at the Meeting
to serve for a three-year period, or until their respective successors have
been duly elected and qualified. The Board of Directors has nominated for
election as directors Robert C. Diehl and Fred R. Miller, both of whom are
current members of the Boards of Directors of the Corporation and the Bank.
It is intended that the proxies solicited by the Board of Directors will
be voted for the election of the above named nominees for the terms specified
in the table below. If any nominee is unable to serve, the shares represented
by all valid proxies will be voted for the election of such substitute as the
Board of Directors may recommend or the Board may reduce the number of
directors to eliminate the vacancy. At this time the Board of Directors knows
of no reason why any nominee might be unavailable to serve.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ALL OF THE NOMINEES NAMED
BELOW FOR DIRECTORS OF THE CORPORATION.
2
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The following table sets forth certain information regarding the nominees
for election at the Meeting and those directors continuing in office after the
Meeting.
Year First Elected Term to
Name Age Trustee or Director Expire
---- --- ------------------- -------
NOMINEES
--------
Robert C. Diehl 58 1976 2000(1)
Fred R. Miller 61 1984 2000(1)
CONTINUING DIRECTORS
--------------------
Maurice (Dennis) Fox 52 1994 1998
George W. Gust 67 1976 1998
Frank G. Uhrig 66 1978 1998
L. M. (Larry) Strengholt 68 1985 1999
Richard R. Haggen 52 1994 1999
V. Lawrence Evans 51 1990 1999
________
(1) Assuming the individual is re-elected.
The principal occupation of each director nominee of the Corporation for
the last five years is set forth below. Unless otherwise stated, each
director resides in the State of Washington.
ROBERT C. DIEHL is the President and General Manager of Diehl Ford, Inc.
FRED R. MILLER is the retired and former owner and President of the
Skagit Bonded Collectors, Inc., Mount Vernon, Washington.
MAURICE (DENNIS) FOX is the former Owner and President of HydroSwirl
Manufacturing Corp.
GEORGE W. GUST joined the Bank in 1975 and has served as the Bank's
Chairman of the Board of Directors since August 1984. Mr. Gust has served as
the Corporation's Chairman of the Board of Directors since October 1995.
FRANK G. UHRIG is the manager and the majority shareholder of Yeager's
Sporting Goods and Marina which sells sporting goods, boats, motors and
general merchandise.
L.M. (LARRY) STRENGHOLT is the President of Strengholt Construction Co.,
Inc., Lynden, Washington, a general building contractor.
RICHARD R. HAGGEN is owner and co-chairman of the Board of Directors of
Haggen, Inc.
V. LAWRENCE EVANS joined the Bank in 1972 and served as the Bank's
Executive Vice President from 1983 to 1990. Mr. Evans has served as President
of the Bank since May 14, 1990 and as Chief Executive Officer since March 26,
1991. Mr. Evans also serves as President and Chief Executive Officer of the
Corporation.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
-------------------------------------------------
The Boards of Directors of the Corporation and the Bank conduct their
business through meetings of the Boards and through their committees. During
fiscal 1997, the Board of Directors of the Corporation held six
3
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meetings. No director of the Corporation attended fewer than 75% of the total
number of meetings of the Board of Directors and committees on which the
director served.
The full Board of Directors of the Corporation acts as a Nominating
Committee for the annual selection of its nominees for election as directors.
The Corporation's Bylaws provide that any nomination to the Board of Directors
(except one proposed by the existing Board of Directors of the Corporation)
must be in writing and delivered or mailed to the Chairman of the Board of
the Corporation at least 20 days prior to the meeting of shareholders called
for the election of directors. The Board of Directors met once during the
1997 fiscal year in its capacity as the Nominating Committee.
The Executive Committee of the Corporation is composed of Directors
Evans, Gust and Miller. This Committee meets at least monthly to advise
management of the Corporation between monthly meetings of the Board of
Directors. The Executive Committee met 12 times during the fiscal year ended
March 31, 1997.
The Audit Committee of the Corporation is composed of Directors Diehl,
Haggen and Uhrig. The Audit Committee is responsible for examining and
evaluating the activities of the Corporation and reporting its findings to the
Board. This examination determines the reliability of information produced on
behalf of the Corporation and the effectiveness of internal practices and
procedures and the efficiency of operations. The Audit Committee also assists
the Board in the selection of independent accountants. The Audit Committee
met five times during the fiscal year ended March 31, 1997.
The Compensation and Retirement Committee is composed of Directors Diehl,
Gust and Miller. This Committee makes recommendations to the Board of
Directors concerning corporation compensation packages and retirement plans.
The Compensation and Retirement Committee met once during the fiscal year
ended March 31, 1997.
DIRECTORS' COMPENSATION
-----------------------
Each director of the Corporation is also a director of the Bank.
Directors of the Corporation received no additional compensation for
attendance at any meeting of the Corporation's Board of Directors or
committees thereof during the fiscal year ended March 31, 1997. Members of
the Bank's Board of Directors receive an annual retainer of $7,500 and $250
for attendance at each Board meeting. The Chairman of the Board receives an
additional $400 for attendance at each Board meeting. Directors also receive
$175 for each committee meeting attended held on the day of a regular meeting
or a special board meeting held by telephone conference call, and $175 for
attendance at a special board meeting or a committee meeting held on a day
other than the day of a regular board meeting. Members of the Executive
Committee receive $375 for each monthly meeting attended. Employees of the
Bank who are also directors do not receive compensation for their attendance
at any board committee meetings.
EXECUTIVE COMPENSATION
----------------------
Summary Compensation Table. The following table sets forth the
compensation received by the named executive officer for each of the three
fiscal years ended March 31, 1997. All compensation is paid by the Bank.
Long-Term
Compensation
Annual Compensation Awards
------------------------------- ------
Other
Annual All
Compen- Other
Name and sation Options Compen-
Position Year Salary($) Bonus($) ($)(1) (#) sation($)
- -------- ---- --------- -------- ------- ------ -------
V. Lawrence Evans 1997 $162,000 $24,611 -- -- $18,775(2)
President and Chief 1996 128,592 25,973 -- 15,000 11,726
Executive Officer 1995 125,000 46,483 -- 5,000 12,048
(footnotes on following page)
4
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- --------------
(1) Does not include perquisites which did not exceed the lesser of $50,000
or 10% of salary and bonus.
(2) Includes contributions to the Bank's ESOP of $7,173 and to the Bank's
Retirement Savings and Investment Plan ("401(k) Plan") of $9,720.
Option Exercise/Value Table. The following information with respect to
options exercised during the fiscal year ended March 31, 1997, and remaining
unexercised at the end of the fiscal year, is presented for the named
executive officer.
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options Options
Shares at Fiscal at Fiscal
Acquired Year End(#) Year End($)
On Value ---------------- ----------------
Exer- Real- Exer- Unexer- Exer- Unexer-
Name cise(#) ized($) cisable cisable cisable cisable
- ---- ------- ------- ------ ------- -------- -------
V. Lawrence -- -- 62,630 10,000 $409,071 $34,400
Evans
Employment Agreements. The Bank entered into an employment contract with
Mr. Evans on March 23, 1993 which provides for an initial term of four years.
In connection with the holding company reorganization, the Corporation became
a party to the employment contract. The agreement renews automatically for an
additional one year term until either of the parties notifies the other in
writing of its intent not to renew the contract. Under the agreement, Mr.
Evans' current annual base compensation is $162,000. In addition, Mr. Evans
is entitled to participate in and to receive all benefits which are applicable
to the Corporation's executive employees. The agreement also provides for
compensation to be paid to Mr. Evans in the event of his disability,
termination without cause or in the event of a change in control of the
Corporation. In the event of a change in control (as defined in the
agreement), Mr. Evans would be entitled to receive an amount equal to 2.99
times the average annual base compensation received prior to the date of
change of control for the most recent five taxable years. Assuming that a
change in control had occurred during fiscal 1997, Mr. Evans would have been
entitled to a cash payment equal to approximately $374,163 based on his
current annual compensation.
Deferred Compensation Plan. The Bank has established a deferred
compensation plan for certain of its officers, including Mr. Evans. The plan
provides for additional retirement benefits payable over a 12 to 17 year
period following retirement. In connection with the funding of the Bank's
obligation under the plan, the Bank has acquired life insurance policies on
the lives of plan participants. Deferred compensation expense for Mr. Evans
amounted to $127,630, $32,000 and $47,059 in 1997, 1996 and 1995,
respectively.
Notwithstanding anything to the contrary set forth in any of the
Corporation's previous filings under the Securities Act of 1933, as amended,
or the Exchange Act that might incorporate future filings, including this
Proxy Statement, in whole or in part, the following Report of the Compensation
Committee and Performance Graph shall not be incorporated by reference into
any such filings.
Report of the Compensation Committee. The Compensation Committee's
duties are to recommend and administer policies that govern executive
compensation for the Corporation and the Bank. The Compensation Committee
evaluates executive performances, compensation policies and salaries. The
Compensation Committee recommends salaries to be paid to each executive
officer. The entire Board of Directors reviews the Compensation Committee's
recommendations as to executive compensation, including the Chief Executive
Officer, and sets these salaries.
The executive compensation policy of the Corporation and the Bank is
designed to establish an appropriate relationship between executive pay and
the Corporation's and the Bank's annual and long-term performance, long-
5
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<PAGE>
term growth objectives, and their ability to attract and retain qualified
executive officers. The principles underlying the program are:
To attract and retain key executives who are vital to the long-term
success of the Corporation and the Bank and are of the highest caliber;
To provide levels of compensation competitive with those offered
throughout the financial industry; and
To motivate executives to enhance long-term stockholder value by building
their ownership in the Corporation.
The Committee also considered a variety of subjective and objective
factors in determining the compensation package for individual executives
including (1) the performance of the Corporation and the Bank as a whole with
an emphasis on annual and long-term performance, (2) the responsibilities
assigned to each executive, and (3) the performance of each executive of
assigned responsibilities as measured by the progress of the Corporation and
the Bank during the year.
Another factor the Compensation Committee (and the Board of Directors)
considered when making their decisions was the overall profitability of the
Corporation and Bank, rather than establishing compensation levels on the
basis of whether specific financial goals had been achieved by the Corporation
and the Bank. The Compensation Committee believes that management
compensation levels, as a whole, appropriately reflect the application of the
Corporation's and Bank's executive compensation policy and the progress of the
Corporation and the Bank.
Compensation Committee
George W. Gust
Robert C. Diehl
Fred R. Miller
Compensation Committee Interlocks and Insider Participation. The
Compensation Committee of the Board of Directors consists of George W. Gust,
Robert C. Diehl and Fred R. Miller. During fiscal 1997, there were no
compensation committee interlocks between the Corporation and any other
entity.
Performance Graph. The following graph compares the cumulative total
shareholder return on the Corporation's Common Stock with the cumulative total
return on the Nasdaq Index and the SNL Western Thrift Index, which encompasses
ten western states. Total return assumes reinvestment of all dividends.
6
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Period Ending
-----------------------------------------------
Index 3/31/92 3/31/93 3/31/94 3/31/95 3/31/96 3/31/97
- ---------------------------------------------------------------------
Horizon Financial $100.00 $138.27 $176.46 $125.30 $129.90 $177.31
Corp.
Nasdaq - Total U.S. 100.00 114.96 124.09 138.04 187.43 208.49
SNL Thrifts (Western) 100.00 121.68 102.79 112.71 163.84 234.39
Index
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Corporation's executive
officers and directors, and persons who own more than 10% of any registered
class of the Corporation's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission within
prescribed time periods. Executive officers, directors and greater than 10%
shareholders are required by regulation to furnish the Corporation with copies
of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms it has received
and written representations provided to the Corporation by the above
referenced persons, the Corporation believes that during the fiscal year ended
March 31, 1997 all filing requirements applicable to its reporting officers,
directors and greater than 10% shareholders were properly and timely complied
with, except for one report on Form 4, a Statement of Change in Beneficial
Ownership of Securities, for Director Robert C. Diehl. Mr. Diehl filed a
report for a sale of stock on February 6, 1997 that should have been filed by
January 10, 1997.
7
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TRANSACTIONS WITH MANAGEMENT
----------------------------
Effective with passage of the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989, officers and directors of the Bank are prohibited
from receiving any loan or extension of credit at other than market rates and
terms. The Bank does not extend credit to its directors or officers.
AUDITORS
--------
Moss Adams LLP served as the Corporation's auditors for the fiscal year
ended March 31, 1997. The Board of Directors currently anticipates appointing
Moss Adams LLP to be its auditors for the 1998 fiscal year. A representative
of Moss Adams LLP will be present at the Meeting to respond to questions from
shareholders and will have the opportunity to make a statement if he or she so
desires.
OTHER MATTERS
-------------
The Board of Directors is not aware of any business to come before the
Meeting other than those matters described above in this Proxy Statement.
However, if any other matters should properly come before the Meeting, it is
intended that proxies in the accompanying form will be voted in respect
thereof in accordance with the judgment of the person or persons voting the
proxies.
The cost of solicitation of proxies will be borne by the Corporation. In
addition to solicitations by mail, directors, officers, and regular employees
of the Corporation may solicit proxies personally or by telegraph or telephone
at their regular salary or hourly compensation.
The Corporation's 1997 Annual Report to Shareholders has been mailed to
all shareholders of record as of the close of business on June 6, 1997. Any
shareholder who has not received a copy of such annual report may obtain a
copy without charge by writing the Corporation. Such annual report is not to
be treated as part of the proxy solicitation material nor having been
incorporated herein by reference. The Corporation's consolidated financial
statements prepared in conformity with general accepted accounting principles
are included herein as Exhibit 1.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
General
- -------
The Corporation was formed under Washington law on May 22, 1995, and
became the holding company of the Bank, effective October 13, 1995. As a bank
holding company, the Corporation has a number of additional options and
operating advantages over the Bank. These include, but are not limited to:
expanded business diversification options; flexibility in acquisitions; and
the ability to repurchase its own stock without incurring the adverse tax
consequences of recapturing portions of the Bank's bad debt reserve.
The Bank was organized in 1922 as a Washington state chartered mutual
savings and loan association and converted to a federal mutual savings and
loan association in 1934. In 1979, the Bank converted to a Washington state
chartered mutual savings bank, the deposits of which are insured by the
Federal Deposit Insurance Corporation ("FDIC"). On August 12, 1986, the Bank
then converted to a state chartered stock savings bank. The primary business
of the Bank is to acquire funds in the form of savings deposits and to use the
funds to make loans secured by residential and commercial properties in the
Bank's primary market area. The Bank's operations are conducted through
twelve full-service office facilities, located in Whatcom, Skagit and
Snohomish counties in Northwest Washington.
At its March 26, 1996 meeting, the Board of Directors authorized the
repurchase of up to 10% (approximately 655,000 shares) of the Corporation's
outstanding Common Stock over a 24 month period.
8
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<PAGE>
During the fiscal year ended March 31, 1997, the Corporation repurchased
216,600 shares of its Common Stock. Also, the Corporation paid a special cash
dividend of $0.35 per share in the third quarter of its fiscal year, in
addition to the quarterly dividends paid throughout the year.
Results of Operations
- ---------------------
Total consolidated assets for the Corporation as of fiscal year-end
March 31, 1997 were $515,341,339, an increase of 5.39% from the March 31, 1996
level of $488,967,604. This increase in assets was due in part to the growth
in loans receivable, which increased 2.42% to $399,078,123 from $389,650,547.
Real estate loans originated for fiscal 1997 were $100,579,512, of which 31%
were refinances, compared to fiscal 1996 of $85,909,880 with 32% refinances.
The increase in total real estate loan originations in fiscal 1997 was the
result of lower long term interest rates and continued strong demand for
refinance mortgages. In addition, consumer lending originations held steady
in fiscal 1997, with total originations of $9,606,372 from $9,745,944 in
fiscal 1996.
The Bank sold $5,038,461 of real estate loans in fiscal 1997, compared to
$10,257,604 in fiscal 1996. The Bank sells real estate loans during periods
of increased loan volume to improve the Bank's cash flow. In addition to
these cash sales, the Bank securitized $28,123,822 in long term, fixed rate
mortgages during the year. This securitization shifted loans from loans
receivable into the investment portfolio, which enhanced the Bank's liquidity
position.
Total liabilities were $436,832,325 at March 31, 1997, an increase of
6.59% from $409,820,390 at March 31, 1996. The increase in liabilities was
due primarily to the growth in savings deposits, which increased 5.50% to
$424,811,286 from $402,676,437.
Shareholder equity in fiscal 1997 decreased by $638,200 to $78,509,014
from $79,147,214 at fiscal 1996 year end. This is net of the $0.40 per share
of regular cash dividends, the $0.35 per share special cash dividend, and the
repurchase of 216,600 shares of the Corporation's Common Stock. These actions
were taken in an effort to enhance the return to shareholder's in the current
year and future years. The Bank remains strong in terms of its capital
position, with a shareholder equity-to-assets ratio of 15.23% at March 31,
1997.
Net Interest Income
- -------------------
Net interest income in fiscal 1997 was $17,878,339, a 9.62% increase from
fiscal 1996 of $16,308,806. Total interest income increased in fiscal 1997 to
$38,710,639, a 4.39% increase from fiscal 1996 of $37,082,271.
Interest income on loans in fiscal 1997 was $33,812,005, a 5.19% increase
from $32,145,266 in fiscal 1996. The Bank's weighted average yield on loans
was 8.39% in fiscal 1997, compared to 8.57% in fiscal 1996. Therefore, the
increase in interest income from loans was due primarily to the overall growth
in loans receivable.
Interest and dividends on investments and mortgage-backed securities was
$4,898,634 in fiscal 1997, down slightly from $4,937,005 in fiscal 1996. The
Bank's weighted average yield on investments decreased in fiscal 1997 to 6.31%
from 6.43% in fiscal 1996. The weighted average yield on all earning assets
decreased to 8.05% in fiscal 1997 from 8.21% in fiscal 1996. Therefore, the
improvement in the Bank's total interest income is primarily attributable to
the overall growth in its interest-earning assets.
Total interest expense in fiscal 1997 increased slightly to $20,832,300,
a .28% increase over fiscal 1996 of $20,773,465. However, this small increase
occurred while the Bank's deposit base increased by 5.50%. As a result, the
Bank's cost of savings decreased in fiscal 1997 to 5.07% from 5.36% in fiscal
1996. The primary reason for this decline was the generally lower level of
interest rates during the year, as compared to the rates being paid on the
Bank's accounts that were maturing. This overall reduction in the Bank's cost
of funds was a significant factor in the improved net interest income for the
year.
9
<PAGE>
<PAGE>
The Bank's one year GAP was (34.72)% as of March 31, 1997. This is
calculated by taking the difference between the assets and liabilities which
mature or reprice within one year and dividing the result by the total assets
of the Bank. The Bank's performance in fiscal 1997 was enhanced by the
generally low level of interest rates.
Provision for Losses on Loans
- -----------------------------
The provision for losses on loans increased in fiscal 1997 to $200,400
from $110,000 during fiscal 1996. These figures include both specific and
general reserves. As of March 31, 1997, the allowance for loan loss reserves
was $3,236,150. The general and specific reserves as of March 31, 1997
represent .85% of loans receivable, compared to .83% as of March 31, 1996.
This is considered by the Bank's management to be an adequate level of
reserves at this time.
While the Bank has considered it to be a prudent practice to add to its
loan loss reserve over the last several years, the ratio of loans delinquent,
in foreclosure, or real estate owned to loans receivable has been less than
.01% for each of the past five years. As of March 31, 1997, there was one
loan in the Bank's portfolio which was over 90 days delinquent, with a balance
of $38,918. This consistently low delinquency rate shows a commitment by the
Bank to maintain strong underwriting requirements and the strength and
stability of the local economy.
Non-Interest Income
- -------------------
Non-interest income in fiscal 1997 was $1,583,063, an increase of 22.46%
from fiscal 1996 of $1,292,768. Service fee income was $1,037,308 in fiscal
1997, an 8.21% increase from fiscal 1996 of $958,610. The primary reason for
the increase in total non-interest income was an increase in the net gain on
the sale of investment securities, which increased to $268,915 in fiscal 1997,
as compared to $7,468 in fiscal 1996. This was due primarily to the sale of
common stocks from the Bank's investment portfolio during the year, which is
not necessarily indicative of future performance in this area.
Other non-interest income decreased 15.26% in fiscal 1997 to $276,840
from $326,690 in fiscal 1996. One of the primary factors affecting this
difference was the recognition of $83,813 received from First Interstate Bank
in fiscal 1996, which reflected the final accounting of the sale of the Bank's
trust department. No trust fees were recognized as income in fiscal 1997.
Non-Interest Expense
- --------------------
Non-interest expense in fiscal 1997 increased to $7,460,889, an 11.61%
increase from fiscal 1996 of $6,684,507. Compensation and employee benefits
increased 12.75% in fiscal 1997 to $4,164,945 from $3,694,053 in fiscal 1996.
This increase was due primarily to the one-time recognition of $277,525 in
expenses relating to the Bank's retirement program. Without this item,
compensation and employee benefits would have increased 5.23% from the
previous year.
Building occupancy expense was $1,120,585 in fiscal 1997, a 4.21%
increase from $1,075,275 in fiscal 1996. FDIC insurance expenses in fiscal
1997 decreased to $14,297 from $246,686 in fiscal 1996 due to a significant
reduction in premiums as compared to the comparable period one year prior.
Data processing expenses increased 6.32% in fiscal 1997 to $413,512 from
$388,947 in fiscal 1996, due primarily to the overall growth of the Bank.
Advertising expenses increased 7.87% to $348,342 in fiscal 1997 from $322,918
in fiscal 1996. Other non-interest expenses increased 46.26% in fiscal 1997
to $1,399,208 from $956,628 in fiscal 1996. This increase in other expenses
was due to a number of factors, including the recognition of expenses relating
to the Bank reaching $500 million in assets, which results in additional
compliance expenses, a Local Improvement District assessment affecting one of
the Bank's offices, and expenses relating to the development of new products
during the year. These new products include a home equity line of credit (now
available), a debit card program (also available now), and a soon to be
available telephone banking system.
10
<PAGE>
<PAGE>
Provisions for Income Tax
- -------------------------
Income tax expense increased to $3,996,693 in fiscal 1997, from
$3,585,991 in fiscal 1996. The Bank's effective tax rate was approximately
33% in fiscal 1997 and fiscal 1996.
Net Income
- ----------
Annual earnings of $7,803,420 for fiscal 1997 represent an 8.06% increase
from fiscal 1996 earnings of $7,221,078. Earnings per share for fiscal 1997
were $1.20 on weighted average shares of 6,503,188, compared to earnings per
share of $1.10 on weighted average shares of 6,553,005 in fiscal 1996.
Discontinued Operations
- -----------------------
During fiscal 1995, the Bank signed an agreement with First Interstate
Bank to sell its Trust Department. That decision is part of an ongoing effort
to improve efficiency and to maintain the Bank's focus on its core business of
home lending and deposit gathering. While no trust fees were received in
fiscal 1997, the final payments received from First Interstate Bank are
included as "Other Non-Interest Income" in fiscal 1996. As of March 31, 1996,
all of the Bank's trust accounts had been closed.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Bank maintains liquid assets in the form of cash and short-term
investments to provide a source to fund loans, savings withdrawals, and other
short-term cash requirements. At March 31, 1997, the Bank had liquid assets
(cash and marketable securities with maturities of one year or less) with a
book value of $27,814,179.
As of March 31, 1997, the total book value of investments and
mortgage-backed securities was $98,991,955 compared to a market value of
$99,719,336, resulting in an unrealized gain of $727,381. On March 31, 1996,
the book value of investments and mortgage-backed securities was $80,389,812
compared to market value of $82,879,085, resulting in an unrealized gain of
$2,489,273. The Bank foresees no factors which would impair its ability to
hold debt securities to maturity.
The Bank's primary sources of funds are cash flow from operations, which
consist primarily of mortgage loan repayments, deposit increases, loan sales,
and cash received from the maturity or sale of investment securities. The
Bank's liquidity fluctuates with the supply of funds and management believes
that the current level of liquidity is more than adequate at this time. If
additional liquidity is needed, the Bank's options include, but are not
necessarily limited to: 1) selling additional loans in the secondary market;
2) making repurchase agreements; 3) accepting additional jumbo and/or public
funds deposits; or 4) accessing the discount window of the Federal Reserve
Bank of San Francisco. The Bank had no borrowings against any kind of credit
as of March 31, 1997.
Stockholders' equity as of March 31, 1997 was $78,509,014, or 15.23% of
assets, which exceeds the 5.0% minimum required by the FDIC in order to be
considered well capitalized. The Bank's total risk-adjusted capital ratio as
of March 31, 1997 was 30.4%, which also exceeds the well capitalized minimum
of 10% required by the FDIC.
11
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<PAGE>
SHAREHOLDER PROPOSALS
---------------------
In order to be eligible for inclusion in the proxy solicitation
materials of the Corporation for next year's Annual Meeting of Shareholders,
any shareholder proposal to take action at such meeting must be received at
the Corporation's main office at 1500 Cornwall Avenue, Bellingham, Washington,
no later than February 20, 1998. Any such proposals shall be subject to the
requirements of the proxy solicitation rules adopted under the Exchange Act.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Richard P. Jacobson
RICHARD P. JACOBSON
SECRETARY
Bellingham, Washington
June 20, 1997
A COPY OF THE ANNUAL REPORT ON FORM 10-K AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION WILL BE FURNISHED WITHOUT CHARGE TO SHAREHOLDERS OF RECORD
AS OF JUNE 6, 1997, UPON WRITTEN REQUEST TO RICHARD P. JACOBSON, SECRETARY,
HORIZON FINANCIAL CORP., 1500 CORNWALL AVENUE, BELLINGHAM, WASHINGTON 98225.
12
<PAGE>
<PAGE>
HORIZON FINANCIAL CORP.
INDEPENDENT AUDITOR'S REPORT
AND
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
<PAGE>
<PAGE>
HORIZON FINANCIAL CORP.
TABLE OF CONTENTS
March 31, 1997, 1996 and 1995
PAGE
INDEPENDENT AUDITOR'S REPORT.................................................1
CONSOLIDATED FINANCIAL STATEMENTS
Statement of Financial Position...........................................2
Statement of Income.......................................................3
Statement of Stockholders' Equity.........................................4
Statement of Cash Flows...................................................5
Notes to Financial Statements..........................................6-25
<PAGE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Directors
Horizon Financial Corp.
We have audited the accompanying consolidated statement of financial position of
Horizon Financial Corp. and its subsidiary as of March 31, 1997 and 1996, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the years ended March 31, 1997, 1996 and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Horizon Financial
Corp. as of March 31, 1997 and 1996, and the results of its operations and cash
flows for each of the years ended March 31, 1997, 1996 and 1995, in conformity
with generally accepted accounting principles.
/s/MOSS ADAMS LLP
-----------------
Bellingham, Washington
April 22, 1997
1
<PAGE>
<PAGE>
HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
March 31, 1997 and 1996
ASSETS 1997 1996
----------- -----------
Cash and cash equivalents $ 4,416,862 $ 4,844,146
Interest-bearing deposits 10,398,316 8,756,304
Investment securities
Available-for-sale (amortized cost 1997: 26,238,895 34,623,256
$24,008,966; 1996: $32,190,068)
Held-to-maturity (estimated fair value 1997: 8,381,775 16,080,247
$8,431,880; 1996: $16,157,144)
Mortgage-backed securities
Available for sale (amortized cost 1997: 35,229,087 279,473
$36,512,300; 1996: $284,368)
Held-to-maturity (estimated fair value 1997: 19,690,598 23,078,825
$19,421,158; 1996: $23,062,908)
Loans receivable 399,078,123 389,650,547
Accrued interest and dividends receivable 3,545,380 3,614,937
Income tax receivable 297,192 -
Bank premises and equipment, net 6,130,683 6,246,043
Other assets 1,934,428 1,793,826
----------- -----------
TOTAL ASSETS $515,341,339 $488,967,604
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $424,811,286 $402,676,437
Accounts payable and other liabilities 8,935,825 4,582,712
Advances by borrowers for taxes and insurance 898,950 832,442
Income tax currently payable - 66,115
Net deferred income tax liabilities 896,264 575,000
Deferred compensation 1,290,000 1,087,684
----------- -----------
Total liabilities 436,832,325 409,820,390
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Serial preferred stock, $1 par value, 10,000,000
shares authorized; none issued or outstanding - -
Common stock, $1 par value, 30,000,000 shares
authorized; 6,650,340 and 6,579,954 issued
and outstanding, respectively 6,650,340 6,579,954
Additional paid-in capital 40,063,678 39,415,875
Retained earnings 34,518,794 31,548,712
Debt related to ESOP (450,000) -
Net unrealized gain on securities classified as 624,833 1,602,673
available-for-sale, net of tax
Treasury stock, 216,600 shares, at cost (2,898,631) -
---------- ---------
Total stockholders' equity 78,509,014 79,147,214
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $515,341,339 $488,967,604
=========== ===========
See accompanying notes to these financial statements.
2
<PAGE>
<PAGE>
HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
Years Ended March 31, 1997, 1996 and 1995
1997 1996 1995
-------- -------- --------
INTEREST INCOME
Interest on loans $33,812,005 $32,145,266 $29,948,191
Interest and dividends on investments and 4,898,634 4,937,005 4,040,878
mortgage-backed securities -------- -------- --------
Total interest income 38,710,639 37,082,271 33,989,069
INTEREST EXPENSE
Interest on deposits 20,832,300 20,773,465 16,947,754
-------- -------- --------
Net interest income 17,878,339 16,308,806 17,041,315
PROVISION FOR LOAN LOSSES 200,400 110,000 132,000
Net interest income after provision for -------- -------- --------
loan losses 17,677,939 16,198,806 16,909,315
-------- -------- --------
NONINTEREST INCOME
Service fees 1,037,308 958,610 1,037,715
Other 276,840 326,690 197,309
Net gain (loss) on sales of investment
securities and loans 268,915 7,468 (15,388)
-------- -------- --------
Total noninterest income 1,583,063 1,292,768 1,219,636
-------- -------- --------
NONINTEREST EXPENSE
Compensation and employee benefits 4,164,945 3,694,053 3,728,481
Building occupancy 1,120,585 1,075,275 1,023,444
Other expenses 1,399,208 956,628 912,074
FDIC insurance 14,297 246,686 802,862
Data processing 413,512 388,946 378,425
Advertising 348,342 322,917 304,145
-------- -------- --------
Total noninterest expense 7,460,889 6,684,505 7,149,431
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAX 11,800,113 10,807,069 10,979,520
-------- -------- --------
PROVISION FOR INCOME TAX
Current 3,171,693 4,062,815 1,399,045
Deferred 825,000 (476,824) 2,241,000
-------- -------- --------
Total provision for income tax 3,996,693 3,585,991 3,640,045
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS 7,803,420 7,221,078 7,339,475
DISCONTINUED OPERATION
Sale of Trust Department, net of applicable
taxes of $93,500 - - 181,500
---------- ---------- ----------
NET INCOME $7,803,420 $7,221,078 $7,520,975
========== ========== ==========
EARNINGS PER SHARE (adjusted for stock splits
and dividends)
Income from continuing operations $ 1.20 $ 1.10 $ 1.13
Income from discontinued operation - - 0.03
---------- ---------- ----------
$ 1.20 $ 1.10 $ 1.16
========== ========== ==========
See accompanying notes to these financial statements.
3
PAGE
<PAGE>
<TABLE>
HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years Ended March 31, 1997, 1996 and 1995
Net Unrealized
Gains (Losses)
Common Stock Additional Debt on Securities Treasury
Number of Paid-In Retained Related Available- Stock
Shares At Par Capital Earnings To ESOP For-Sale at Cost Total
------ -------- ------- -------- ------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1994 5,874,997 $5,874,997 $31,670,755 $28,503,100 $(53,791) $ - $ - $65,995,061
Adjustment to market value,
net of taxes, for securities
classified as available-for-sale - - - - - 765,724 - 765,724
Repayment of debt related to
Employee Stock Ownership Plan - - - - 28,791 - - 28,791
Cash dividends on common stock at
$0.32 per share - - - (2,031,021) - - - (2,031,021)
Dividend reinvestment plan 20,620 20,620 247,886 - - - - 268,506
10% stock dividend 588,579 588,579 6,968,775 (7,557,354) - - - -
Cash paid for fractional shares
in connection with stock dividend - - - (8,860) - - - (8,860)
Stock options exercised 30,456 30,456 149,200 - - - - 179,656
Net change in unrealized gain/loss
on securities classified as
available-for-sale, net of
taxes of $17,552 - - - - - (34,072) - (34,072)
Net income - - - 7,520,975 - - - 7,520,975
------ -------- ------- -------- ------- -------- ------- ----------
BALANCE, March 31, 1995 6,514,652 6,514,652 39,036,616 26,426,840 (25,000) 731,652 - 72,684,760
Repayment of debt related to
Employee Stock Ownership Plan - - - - 25,000 - - 25,000
Cash dividends on common stock
at $0.32 per share - - - (2,099,206) - - - (2,099,206)
Dividend reinvestment plan 21,202 21,202 243,112 - - - - 264,314
Stock options exercised 44,100 44,100 136,147 - - - - 180,247
Net change in unrealized gain/loss
on securities classified as
available-for-sale, net of
taxes of $448,708 - - - - - 871,021 - 871,021
Net income - - - 7,221,078 - - - 7,221,078
------ -------- ------- -------- ------- -------- ------- ----------
BALANCE, March 31, 1996 6,579,954 6,579,954 39,415,875 31,548,712 - 1,602,673 - 79,147,214
Employee Stock Ownership Plan
debt guarantee - - - - (500,000) - - (500,000)
Repayment of ESOP related debt - - - - 50,000 - - 50,000
Cash dividends on common stock
at $0.75 per share - - - (4,833,338) - - - (4,833,338)
Dividend reinvestment plan 23,743 23,743 304,498 - - - - 328,241
Stock options exercised 46,643 46,643 343,305 - - - - 389,948
Net change in unrealized gain/loss
on securities classified
as available-for-sale, net
of taxes of $503,736 - - - - - (977,840) - (977,840)
Treasury stock purchased - - - - - - (2,898,631) (2,898,631)
Net income - - - 7,803,420 - - - 7,803,420
------ -------- ------- -------- ------- -------- ------- ----------
BALANCE, March 31, 1997 6,650,340 $6,650,340 $40,063,678 $34,518,794 $(450,000) $624,833 $(2,898,631)$78,509,014
========= ========= ========== ========== ======= ======= ========= ==========
See accompanying notes to these financial statements.
4
</TABLE>
<PAGE>
<PAGE>
HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended March 31, 1997, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES -------- -------- --------
Net income $7,803,420 $7,221,078 $7,520,975
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 443,827 441,623 543,397
Amortization and deferrals, net (724,355) 16,729 (356,973)
Provision for loan losses 200,400 110,000 132,000
Provision for deferred income tax 825,000 (476,824) 2,241,000
Changes in assets and liabilities:
Interest and dividends receivable 69,557 (374,338) (382,874)
Interest payable (55,520) 147,879 6,598
Federal income tax (receivable) payable (363,307) 1,944,115 (283,755)
Other assets (140,600) 202,470 (1,947,118)
Other liabilities 4,677,457 (180,051) (373,777)
-------- -------- --------
Net cash flows from operating activities 12,735,879 9,052,681 7,099,473
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Change in interest-bearing deposits, net (1,642,012) 2,854,791 2,110,875
Purchases of investment securities -
available-for-sale (8,626,426)(17,526,522)(20,348,306)
Proceeds from sales and maturities of
investment securities-available-for-sale 16,807,528 16,324,963 8,374,223
Purchases of investment securities-
held-to-maturity - (12,989,293) (2,186,198)
Proceeds from maturities of investment
securities - held-to-maturity 7,698,472 8,629,679 4,757,916
Purchases of mortgage-backed securities-
held-to-maturity - (2,787,555) (7,007,397)
Purchases of mortgage-backed securities-
available-for-sale (8,816,864) - (7,865)
Proceeds from maturities of mortgage-backed
securities - held-to-maturity 3,388,227 2,565,224 2,501,502
Proceeds from maturities of mortgage-backed
securities - available-for-sale 712,754 264,545 489,654
Proceeds from sales of loans 5,038,460 10,257,604 7,194,238
Principal payments on loans 66,132,069 56,451,474 41,985,042
Originations and purchases of loans (108,647,972)(96,291,439)(68,624,451)
Purchases of bank premises and equipment (328,469) (226,708) (1,383,457)
-------- -------- --------
Net cash flows from investing activities (28,284,233)(32,473,237)(32,144,224)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in checking and savings accounts,net 13,055,711 4,770,671 (10,492,418)
Proceeds from issuance of time deposits 154,013,669 146,567,614 138,645,541
Payments for maturing time deposits (144,934,530)(126,365,297)(101,955,465)
Common stock issued, net 718,189 444,561 439,302
Cash dividends paid (4,833,338) (2,099,206) (2,031,021)
Treasury stock purchased (2,898,631) - -
-------- -------- --------
Net cash flows from financing activities 15,121,070 23,318,343 24,605,939
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (427,284) (102,213) (438,812)
CASH AND CASH EQUIVALENTS, beginning of year 4,844,146 4,946,359 5,385,171
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $4,416,862 $4,844,146 $4,946,359
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $20,887,820 $20,625,585 $16,941,156
========= ========= =========
Cash paid during the year for income tax $ 3,535,000 $ 2,118,000 $ 3,655,000
========= ========= =========
NONCASH INVESTING AND FINANCING TRANSACTIONS
Mortgage loans securitized and exchanged for
FHLMC participation certificates $28,123,822$ - $ 7,002,363
========= ========= =========
5
<PAGE>
<PAGE>
HORIZON FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Operations - Horizon Financial Corp. (the "Company"), through its
wholly-owned subsidiary, Horizon Bank (the "Bank"), provides a full range of
mortgage lending services to borrowers and a full range of customer services to
depositors through twelve branches located in Whatcom, Skagit and Snohomish
Counties of Washington State. The Bank is an FDIC insured, state-chartered stock
savings bank.
(b) Financial Statement Presentation and Use of Estimates - The financial
statements have been prepared in accordance with generally accepted accounting
principles and reporting practices applicable to the banking industry. In
preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of revenues and expenses for the
period and assets and liabilities as of the balance sheet date. Actual results
could differ from estimated amounts.
(c) Reorganization - Pursuant to an agreement and plan of reorganization
occurring during fiscal year 1996, Horizon Bank's common stockholders became
stockholders of Horizon Financial Corp., and Horizon Financial Corp.
became the sole shareholder of Horizon Bank.
(d) Principles of Consolidation - As of March 31, 1997 and 1996, and for the
years then ended, the consolidated financial statements include the accounts of
Horizon Financial Corp. and its wholly-owned subsidiary, Horizon Bank. Westward
Financial Services, Inc. is a wholly-owned subsidiary of Horizon Bank, whose
accounts are also included in the consolidation. All material intercompany
balances and transactions have been eliminated. Horizon Financial Corp. was
formed during 1996. For the year ended March 31, 1995, the financial statements
include the accounts of Horizon Bank and its wholly-owned subsidiary Westward
Financial Services, Inc.
(e) Cash and Cash Equivalents - Cash and cash equivalents consist of cash on
hand and noninterest-bearing amounts due from banks.
(f) Investments in Interest-Bearing Deposits - Investments in interest-bearing
deposits consist principally of federal funds sold to a major Seattle-area bank,
repurchase agreements and short-term certificates of deposit with western
Washington financial institutions.
(g) Investments and Mortgage-Backed Securities - The Company classifies its
securities into one of three categories: (1) held-to-maturity, (2) available-
for-sale, or (3) trading. Investment securities are categorized as held-
to-maturity when the Bank has the positive intent and ability to hold those
securities to maturity. Securities which are held-to-maturity are stated at
cost, adjusted for amortization of premiums, and accretion of discounts which
are recognized as adjustments to interest income.
Investment securities categorized as available-for-sale are generally held
for investment purposes (to maturity), although unanticipated future events may
result in the sale of some securities. Available-for-sale securities are
recorded at fair value, with the net unrealized gain or loss included as a
separate component of stockholders' equity net of the related tax effect.
Realized gains or losses on dispositions are based on the net proceeds and the
adjusted carrying amount of securities sold, using the specific identification
method.
The Company did not have any investment securities categorized as trading
securities at March 31, 1997 or March 31, 1996.
(h) Loans Held for Sale - Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value in
the aggregate. Net unrealized losses are recognized through a valuation
allowance by charges to income.
6
<PAGE>
<PAGE>
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
(i) Loans Receivable - Loans receivable that management has the intent and
ability to hold for the foreseeable future or until maturity or pay-off are
reported at their outstanding principal adjusted for any charge-offs, the
allowance for loan losses, and any deferred fees or costs on originated loans
and unamortized premiums or discounts on purchased loans.
Loan origination fees, net of certain direct loan origination costs, are
deferred and recognized as an adjustment of the yield on the related loans,
using the interest method.
(j) Impaired Loans and Related Income - A loan is considered impaired when
management determines that it is probable that all contractual amounts of
principal and interest will not be paid as scheduled in the loan agreement.
These loans include nonaccruing loans past due 90 days or more, loans
restructured in the current year, and other loans that management considers to
be impaired.
When a loan is placed on nonaccrual status, all interest previously
accrued, but not collected, is reversed and charged against interest income.
Income on nonaccrual loans is then recognized only when the loan is brought
current, or when, in the opinion of management, the borrower has demonstrated
the ability to resume payments of principal and interest. Interest income on
restructured loans is recognized pursuant to the terms of new loan agreements.
Interest income on other impaired loans is monitored and based upon the terms of
the underlying loan agreement. However, the recorded net investment in impaired
loans, including accrued interest, is limited to the present value of the
expected cash flows of the impaired loan, or the observable fair market value of
the loan, or the fair value of the loan's collateral.
(k) Mortgage Servicing Rights - During fiscal year 1997, the Company began to
recognize the fair value of its retained mortgage servicing rights on loans sold
or securitized. This change was required by the provisions of Statement of
Financial Standards No. 122 Accounting for Mortgage Servicing Rights and
subsequently by Statement of Financial Accounting Standards No. 125 Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. Pursuant to these requirements, the Company allocates its total
cost in mortgage loans between mortgage servicing rights and loans, based upon
their relative fair values. Fair values are generally obtained through quoted
market prices. The allocation of cost is made when the loan is originated if the
Company has a definitive plan to sell or securitize the loan at that time, or,
at the date of sale or securitization if a definitive plan did not exist at the
date of origination. The Company generally retains mortgage servicing rights
when loans are sold, and evaluates for impairment the costs allocated to these
rights on a periodic basis. To account for possible impairment, the Company has
established a valuation allowance to measure impairment of its mortgage
servicing rights. Impairment is measured based upon the characteristics of the
individual loans, including note rate, term, underlying collateral, current
market conditions and estimates of net servicing income. The Company accounts
for its recorded value, and possible impairment of mortgage servicing rights, on
a loan-by-loan basis.
The cost allocated to mortgage servicing rights is amortized in proportion to,
and over the period of, estimated net servicing income.
(l) Provision for Loan Losses - Management estimates the provision for loan
losses by evaluating known and inherent risks in the loan portfolio. These
factors include changes in the size and composition of the loan portfolio,
actual loan loss experience, current and anticipated economic conditions,
detailed analysis of individual loans for which full collectibility may not be
assured, and determination of the existence and realizable value of the
collateral and guarantees securing the loans. The allowance is based upon
factors and trends identified by future market factors beyond the Company's
control, which may result in losses or recoveries differing significantly from
those provided for in the financial statements.
7
<PAGE>
<PAGE>
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
(m) Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation. Major renewals or betterments are capitalized and
depreciated over their estimated useful lives. Depreciation is computed on the
straight-line method over the estimated useful lives of thirty-five years for
buildings and four to ten years for equipment.
(n) Real Estate Owned - Real estate acquired through foreclosure is recorded at
the lower of cost (unpaid loan balance plus foreclosure expenses) less any
reserve, or estimated market value. At March 31, 1997 and 1996, the Company did
not own any real estate acquired through foreclosure.
(o) Income Taxes - The Company reports income and expenses using the accrual
method of accounting and files a consolidated tax return which includes its
subsidiary. Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes. Deferred taxes result from temporary
differences in the recognition of certain income and expense amounts between the
Bank's financial statements and its tax returns.
(p) Earnings Per Share - Earnings per share are based on the weighted average
number of shares of common stock outstanding during each reporting period.
Earnings per share have been restated to reflect stock splits and stock
dividends (see Note 12). Earnings per share for the fiscal years ended March 31,
1997, 1996 and 1995 are based on the equivalent weighted average number of
shares outstanding of 6,503,188, 6,553,005 and 6,487,562, respectively.
Outstanding options to purchase common stock of the Company are not considered
dilutive for purposes of computing the weighted average number of shares
outstanding.
(q) Financial Instruments - All financial instruments held or issued by the Bank
are held or issued for purposes other than trading. In the ordinary course of
business, the Bank enters into off-balance-sheet financial instruments
consisting of commitments to extend credit. These commitments are recorded in
the financial statements when they are funded.
(r) Advertising Costs - The Company expenses advertising costs as they are
incurred.
(s) Stock Options - The Company recognizes the financial effects of stock
options in accordance with Accounting Principles Board Opinion No. 25 Accounting
for Stock Issued to Employees (APB 25). Generally, stock options are issued at a
price equal to the fair value of the Company's stock as of the grant date. Under
APB 25, options issued in this manner do not result in the recognition of
employee compensation in the Company's financial statements. Disclosures
required by Statement of Financial Accounting Standard No. 123 Accounting for
Stock-Based Compensation are provided in Note 12.
(t) Reclassifications - Certain reclassifications have been made to prior years'
amounts to conform to the current year presentation. These reclassifications
have no significant effect on the Bank's previously reported financial position
or results of operations.
8
<PAGE>
<PAGE>
NOTE 2 - INTEREST-BEARING DEPOSITS
Interest bearing deposits consisted of the following at March 31, 1997 and 1996:
1997 1996
--------- ---------
Federal funds sold $9,325,000 $ 8,100,000
Certificates of deposit 548,316 526,311
Repurchase agreement 525,000 129,993
---------- ----------
$10,398,316 $ 8,756,304
========== ==========
The Company has purchased securities under an agreement to resell substantially
identical securities with a major Seattle-area bank. The amounts advanced under
this agreement represent short-term loans and are reflected as interest-bearing
deposits in the consolidated statement of financial position. The securities
underlying the agreements are comprised of shares of a mutual fund, which trades
primarily in U.S. government securities.
The underlying investments, which mature within 90 days, are maintained by a
third party custodian in an investment pool that is comprised of securities
which have been purchased by a variety of institutions under similar agreements
to resell. The Company's transactions have been executed under a written
custodial agreement that explicitly recognizes the Company's interest in their
portion of the total investment pool.
Securities purchased under this agreement to resell averaged $56,543 and
$393,957 monthly during 1997 and 1996, respectively. The maximum amount
outstanding during any month in 1997 and 1996 amounted to $1,753,711 and
$3,030,724, respectively.
NOTE 3 - INVESTMENT SECURITIES
The Company's investment policy requires that the Company purchase only
high-grade investment securities. Purchases of debt instruments are generally
restricted to those rated A or better by a nationally recognized statistical
rating organization.
The amortized cost and estimated market values of investments, together with
unrealized gains and losses, are as follows as of March 31, 1997 and 1996,
respectively:
1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
AVAILABLE-FOR-SALE SECURITIES --------- ---------- ---------- ---------
State and political subdivisions
and U.S. government agency
securities $21,943,561 $ 88,452 $ (99,483)$21,932,530
Marketable equity securities 494,580 2,245,161 - 2,739,741
Corporate debt securities 1,570,825 42 (4,243) 1,566,624
--------- ---------- ---------- ---------
Total available-for-sale 24,008,966 2,333,655 (103,726) 26,238,895
securities ========== ========== ========== ==========
HELD-TO-MATURITY SECURITIES
State and political subdivisions and
U.S. government agency securities 4,970,193 3,261 (21,450) 4,952,004
Corporate debt securities 3,411,582 71,564 (3,270) 3,479,876
--------- ---------- ---------- ---------
Total held-to-maturity securities 8,381,775 74,825 (24,720) 8,431,880
--------- ---------- ---------- ---------
Total investment securities $32,390,741 $ 2,408,480 $ (128,446)$34,670,775
========== ========== ========== ==========
9
<PAGE>
<PAGE>
NOTE 3 - INVESTMENT SECURITIES (Continued)
1996
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
AVAILABLE-FOR-SALE SECURITIES --------- ---------- ---------- ---------
State and political subdivisions
and U.S. government agency
securities $31,061,762 $ 183,878 $ (76,307)$31,169,333
Marketable equity securities 623,833 2,324,465 - 2,948,298
Corporate debt securities 504,473 1,152 - 505,625
Total available-for-sale --------- ---------- ---------- ---------
securities 32,190,068 2,509,495 (76,307) 34,623,256
HELD-TO-MATURITY SECURITIES
State and political subdivisions
and U.S. government agency
securities 8,346,489 16,888 (31,134) 8,332,243
Corporate debt securities 7,733,758 101,603 (10,460) 7,824,901
--------- ---------- ---------- ---------
Total held-to-maturity securities 16,080,247 118,491 (41,594) 16,157,144
--------- ---------- ---------- ---------
Total investment securities $48,270,315 $2,627,986 $ (117,901)$50,780,400
========== ========== ========== ==========
The amortized cost and estimated fair value of investment securities at March
31, 1997 by contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
1997
Available-For-Sale Held-To-Maturity
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
State and political subdivisions
and U.S. government agencies
One year $ 5,743,283 $ 5,740,388 $2,498,419 $ 2,497,866
Two to five years 13,786,879 13,733,982 2,471,774 2,454,138
Six to ten years 2,413,399 2,458,160 - -
--------- ---------- --------- ----------
21,943,561 21,932,530 4,970,193 4,952,004
--------- ---------- --------- ----------
Corporate debt securities
One year - - 2,912,006 2,910,500
Two to five years 992,680 988,437 499,576 569,376
Five to ten years 578,144 578,187 - -
--------- ---------- --------- ----------
1,570,824 1,566,624 3,411,582 3,479,876
--------- ---------- --------- ----------
Marketable equity securities
One year 494,581 2,739,741 - -
--------- ---------- --------- ----------
Total investment securities $24,008,966 $26,238,895 $8,381,775 $ 8,431,880
========== ========== ========= ==========
10
<PAGE>
<PAGE>
NOTE 3 - INVESTMENT SECURITIES (Continued)
Proceeds from sales of investments and gross realized gains and losses on
investment sales were as follows for the year ended March 31:
1997 1996 1995
----------- ---------- -----------
Proceeds from sales of investments $ 374,175 $ 89,624 $ 4,270,568
=========== ========== ===========
Gross gains realized on sales of investments $ 303,072 $ 4,577 $ 14,360
=========== ========== ===========
Gross losses realized on sales of investments $ 2,969 $ - $ 28,446
=========== ========== ===========
Information about concentrations of investments in particular industries for
marketable equity securities and corporate debt securities at March 31 consist
of the following:
1997 1996
Market Market
Cost Value Cost Value
------ ------ ------ ------
Marketable equity securities
Banking $427,562 $ 973,869 $543,543 $ 981,445
FHLMC common stock 20,955 1,308,000 24,230 1,577,125
Other 46,064 457,872 56,060 389,728
------ ------ ------ ------
$ 494,581 $ 2,739,741 $ 623,833 $ 2,948,298
======= ========== ========= ==========
Corporate debt securities
Brokerage companies $3,573,808 $ 3,637,874 $1,846,986 $ 1,847,679
Finance companies 1,008,823 1,009,375 4,965,604 5,060,972
Private utilities 399,775 399,251 1,026,469 1,025,000
Telephone companies - - 399,172 396,875
----------- ----------- ---------- -----------
$ 4,982,406 $ 5,046,500 $8,238,231 $ 8,330,526
=========== =========== ========== ===========
At March 31, 1997 and 1996, U.S. government agency and corporate debt securities
of $1,000,000 and $1,500,000, respectively were pledged as collateral for
deposits of state and local government agencies and deposits for trust accounts
in excess of $100,000, as required by Washington State Law.
NOTE 4 - MORTGAGE-BACKED SECURITIES
Mortgage-backed securities at March 31 consist of the following:
1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
Available-for-sale securities $36,512,300 $ 7,542$(1,290,755)$35,229,087
Held-to-maturity securities 19,690,598 253,046 (522,486) 19,421,158
--------- ---------- ---------- ---------
Total mortgage-backed securities $56,202,898 $ 260,588 $(1,813,241$54,650,245
========== ========== ========== ==========
1996
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
Available-for-sale securities $ 284,368 $ 149 $ (5,044) $ 279,473
Held-to-maturity securities 23,078,825 345,258 (361,175) 23,062,908
Total mortgage-backed --------- ---------- ---------- ---------
securities $23,363,193 $ 345,407 $(366,219)$23,342,381
========== ========== ========== ==========
11
<PAGE>
<PAGE>
NOTE 4 - MORTGAGE-BACKED SECURITIES (Continued)
The amortized cost and estimated fair value of mortgage-backed securities at
March 31, 1997 by contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties.
1997
Available-For-Sale Held-To-Maturity
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- ---------- --------- ---------
Mortgage-Backed Securities
Two to five years $ 3,568,173 $ 3,525,027 $2,370,736 $2,288,483
Six to ten years 2,744,537 2,735,208 458,490 486,970
After ten years 30,199,590 28,968,852 16,861,372 16,645,705
--------- ---------- --------- ---------
Total mortgage-backed securities $36,512,300 $35,229,087 $19,690,598 19,421,158
========== ========== ========== ==========
All of the above mortgage-backed securities are rated AAA by a nationally
recognized statistical rating organization.
NOTE 5 - LOANS RECEIVABLE
Loans receivable (collateralized principally by properties in the Whatcom,
Skagit and Snohomish Counties of Washington State) at March 31 consist of the
following:
1997 1996
-------- --------
First mortgage loans
Conventional $462,416,787 $428,847,082
Construction - conventional 18,808,232 15,711,393
FHA 15,565 18,712
VA 8,132 8,579
Real estate contracts 137,466 144,797
Less participating interests sold (83,742,111) (57,668,222)
Participation loan interests 2,559,423 3,779,339
Home equity loans 12,296,636 10,654,690
Home equity LOC 252,834 -
Loans on savings deposits 896,824 743,967
Consumer loans 3,220,759 3,789,247
Other loans 102,180 81,991
-------- --------
416,972,727 406,111,575
Less:
Undisbursed loan proceeds (7,653,078) (5,665,166)
Unearned discounts (39,204) (112,721)
Deferred loan fees (6,796,172) (7,446,991)
Allowance for loan losses (3,406,150) (3,236,150)
----------- ----------
$399,078,123 $389,650,547
=========== ===========
12
<PAGE>
<PAGE>
NOTE 5 - LOANS RECEIVABLE (Continued)
The Company originates both adjustable and fixed interest rate loans. Adjustable
rate loans typically contain annual rate increase caps (2%) and loan lifetime
rate increase caps (6 to 8%). At March 31, 1997, the Company had adjustable and
fixed rate loans as follows:
Fixed Rate Adjustable Rate
Term to Maturity Book Value Term to Maturity Book Value
---------------- ---------- ---------------- ----------
Less than one year $ 820,535 Less than one year $ -
One to two years 4,518,577 One to two years -
Two to five years 13,166,576 Two to five years 145,598
Five to ten years 56,465,527 Five to ten years 739,542
Over ten years 316,209,612 Over ten years 24,906,760
Real estate loans serviced for others are $83,742,111 and $57,668,222,
respectively, as of March 31, 1997 and 1996.
Impaired loans on a nonaccrual basis or restructured, and the related interest,
were not material at March 31, 1997 and 1996.
The allowance for loan losses at March 31 and changes during the year are as
follows:
1997 1996 1995
----------- ---------- -----------
Balance, beginning of year $ 3,236,150 $3,126,150 $ 2,994,150
Provision for loan losses 200,400 110,000 132,000
Adjustment to reserves (30,400) - -
----------- ---------- -----------
Balance, end of year $ 3,406,150 $3,236,150 $ 3,126,150
=========== ========== ===========
NOTE 6 - MORTGAGE SERVICING RIGHTS
Loan costs allocated to mortgage servicing rights were as follows as of March
31, 1997:
1997
Beginning balance $ -
Additions for new loans 337,131
Amortization (1,030)
----------
Ending balance 336,101
Valuation allowance for impairment
mortgage servicing rights (179,743)
----------
Mortgage servicing rights, net $ 156,358
==========
Changes in the valuation allowance for impairment of mortgage servicing was as
follows:
Beginning balance $ -
Additions (180,307)
Credited to income 564
----------
Ending balance $ (179,743)
==========
13
<PAGE>
<PAGE>
NOTE 7 - ACCRUED INTEREST AND DIVIDENDS RECEIVABLE
Accrued interest and dividends receivable at March 31 is summarized as follows:
1997 1996
---------- -----------
Investment securities $ 614,563 $ 878,507
Mortgage-backed securities 318,792 155,197
Loans receivable 2,598,621 2,572,159
Dividends on marketable equity securities 13,404 9,074
---------- -----------
$3,545,380 $ 3,614,937
========== ===========
NOTE 8 - PREMISES AND EQUIPMENT
Premises and equipment at March 31 consisted of:
1997 1996
Buildings $5,296,552 $ 5,296,552
Equipment 3,741,511 3,437,809
---------- ----------
9,038,063 8,734,361
Accumulated depreciation (4,416,148) (3,997,086)
---------- ----------
4,621,915 4,737,275
Land 1,508,768 1,508,768
---------- ----------
$6,130,683 $ 6,246,043
========== ==========
NOTE 9 - DEPOSITS
A comparative summary of deposits at March 31 follows (the contractual or
weighted average interest rates are indicated in parentheses):
1997 1996
Demand deposits
Savings (3.45%, 3.46%) $31,800,323 $29,451,298
Checking (1.68%, 1.93%) 24,294,988 21,654,768
Checking (noninterest-bearing) 3,472,171 3,205,029
Money market (3.51%, 3.98%) 15,926,449 16,006,524
Ultimate Money Market (4.42%, 4.77%) 39,204,888 31,325,489
---------- ----------
114,698,819 101,643,108
---------- ----------
Time certificates of deposit
Less than 6.00% 265,045,389 195,291,015
6.00% to 7.99% 40,996,844 100,976,129
8.00% to 9.99% 4,070,234 4,766,185
---------- ----------
310,112,467 301,033,329
---------- ----------
Total deposits $424,811,286$402,676,437
=========== ===========
Time deposit accounts of $100,000 or more amount to $72,418,954 and $67,692,930
at March 31, 1997 and 1996, respectively.
14
<PAGE>
<PAGE>
NOTE 9 - DEPOSITS (Continued)
Time certificate of deposit maturities at March 31 are as follows:
1997
Variable Fixed
Rate Rate Total 1996
-------- --------- ----------- ------------
Within one year $ 6,396,280 $199,132,513 $205,528,793 $208,961,544
One to two years 3,912,898 42,463,837 46,376,735 34,338,427
Two to three years 952,482 8,605,426 9,557,908 10,482,972
Three to four years 158,219 3,611,019 3,769,238 2,621,102
Four to five years 201,615 4,729,745 4,931,360 3,038,005
Over five years 14,136,314 25,812,119 39,948,433 41,591,278
-------- --------- ----------- ------------
$25,757,808 $284,354,659 $310,112,467 $301,033,328
========== =========== =========== ===========
The terms of variable rate CDs allow customers to make additional deposits to
existing CDs at any time.
The weighted average nominal interest rate on all deposits at March 31,
1997 and 1996 is 5.10 percent and 5.39 percent, respectively.
Interest expense on deposits for the years ended March 31 is summarized as
follows:
1997 1996 1995
----------- ---------- -----------
Money market $ 2,169,938 $1,979,018 $ 1,619,161
Checking 427,690 468,000 559,312
Savings 1,039,920 1,013,374 1,135,501
Certificates of deposit 17,194,752 17,313,072 13,633,780
----------- ---------- -----------
$20,832,300 $20,773,464 $16,947,754
=========== =========== ===========
NOTE 10 - INCOME TAX
Deferred income tax results from temporary differences in the recognition of
income and expense for tax and financial statement purposes. The source of these
differences and the related tax effects for the years ended March 31 are as
follows:
1997 1996 1995
----------- ---------- -----------
Deferred loan fees $ (897,980) $(758,129) $1,964,518
Loan loss and general reserves 53,984 232,638 260,542
Deferred compensation 70,187 24,521 3,183
Other, net (51,191) 24,146 12,757
----------- ---------- -----------
$ (825,000) $(476,824) $2,241,000
=========== ========== ===========
15
<PAGE>
<PAGE>
NOTE 10 - INCOME TAX (Continued)
The nature and components of the Company's net deferred tax assets
(liabilities), established at an estimated tax rate of 34 percent, are as
follows at March 31:
1997 1996
-------- --------
Deferred Tax Assets
Deferred loan fees in excess of amounts deferred
for tax purposes $ 280,000 $1,176,407
Deferred compensation agreements 440,000 370,000
Financial reporting accrued expenses not recognized
for tax purposes 275,000 290,000
-------- --------
Total deferred assets 995,000 1,836,407
-------- ---------
Deferred Tax Liabilities
Tax based loan loss deductions not recognized
for financial reporting (1,375,000) (1,430,000)
Tax effect of unrealized gains on
available-for-sale securities (321,883) (825,620)
Other deferred tax liabilities (194,381) (155,787)
---------- ----------
Total deferred liabilities (1,891,264) (2,411,407)
---------- ----------
Net deferred tax assets (liabilities) $ (896,264) $ (575,000)
========== ==========
The Company believes, based upon the available evidence, that all deferred
assets will be realized in the normal course of operations. Accordingly, these
assets have not been reduced by a valuation allowance.
A reconciliation of the Company's income tax provision to the statutory federal
income tax rate for the years ended March 31 is as follows:
1997 1996 1995
----------- ---------- ----------
Provision for income tax at the statutory
rate of 34 percent $ 4,012,038 $3,674,403 $3,733,037
Increase (decrease) in tax resulting from:
Dividends received deduction (17,891) (21,057) (21,719)
Other, net 2,546 (67,355) (71,273)
----------- --------- ----------
Income tax provision $ 3,996,693 $3,585,991 $ 3,640,045
=========== ========= ==========
For fiscal years 1996 and 1995, the Company was allowed a bad debt deduction of
8 percent of taxable income, subject to certain limitations. During 1997 a tax
law change eliminated this tax deduction, and, in addition, requires the Company
to recapture and pay taxes on these deductions taken after fiscal year ended
March 31, 1988. The Company has previously recorded deferred tax liabilities to
account for this obligation. Therefore, the Company believes retroactive effects
of this law change will not be significant. The cumulative tax-basis bad debt
deduction as of March 31, 1997 and 1996 was approximately $13,650,000. If any
portion of this amount is subsequently used for purposes other than to absorb
loan losses, that portion will be subject to federal income tax at the then
prevailing tax rate.
NOTE 11 - BENEFIT PLANS
(a) Defined Benefit Retirement Plan - The Company has a noncontributory defined
benefit retirement plan which covers all full-time employees with one year of
continuous service who were also eligible to participate as of December 31,
1992. Effective January 1, 1993, the Company curtailed the enrollment of new
participants to the plan. Concurrent with the curtailment, the plan fiscal year
end was changed to December 31. Contributions to the plan are based upon the
Projected Unit Credit actuarial funding method.
16
<PAGE>
<PAGE>
NOTE 11 - BENEFIT PLANS (Continued)
A new 401(k) plan (see Note 11e) has been established by the Company as an
alternative to this defined benefit plan.
The plan's funded status as of December 31, 1997, 1996 and 1995 was as follows:
December 31
---------------------------------
1997 1996 1995
----------- ---------- ----------
Accumulated benefit obligation
Vested $ 2,330,443 $2,148,381 $2,060,144
Nonvested 51,541 50,753 67,169
---------------------------------
$ 2,381,984 $2,199,134 $2,127,313
=========== ========== ==========
Projected benefit obligation $ 3,081,040 $2,883,175 $2,756,105
Fair value of plan assets (2,340,028)(2,041,493)(1,818,103)
Projected benefit obligation over
(under) plan assets 741,012 841,682 938,002
Unrecognized prior service cost 116,801 130,166 143,531
Unrecognized net gain (loss) (493,996) (559,491) (660,917)
Unrecognized net transition asset 89,373 107,864 126,355
---------------------------------
Accrued pension cost $ 453,190 $ 520,221 $ 546,971
=================================
Net annual pension cost includes the following components for the plan year
ended December 31:
December 31
----------------------------------
1997 1996 1995
----------- ---------- -----------
Service costs-benefits earned during the $ 128,641 $ 158,895 $ 154,300
period
Interest cost on projected 170,244 162,797 146,203
benefit obligation
Actual return on plan assets (162,872) (70,400) (62,061)
Net amortization and deferrals 31,460 (38,684) (42,364)
----------- ---------- -----------
Net pension cost $ 167,473 $ 212,608 $ 196,078
==================================
The weighted average assumptions used were as follows:
1997 1996 1995
-------- -------- --------
Discount rate 6 % 6 % 6 %
Rate of increase in compensation levels 5 % 5 % 5 %
Expected long-term rate of return on plan assets 6 % 6 % 6 %
(b) Deferred Compensation Plan - The Company has entered into deferred
compensation agreements with certain of its officers. The agreements provide for
additional retirement benefits payable over a twelve to seventeen year period
following retirement. In connection with these agreements, the Company has
acquired life insurance policies on the individual officers covered by the
deferred compensation agreements. At March 31, 1997 and 1996, the cash surrender
values of these policies included in other assets aggregated $1,551,342 and
$1,445,290, respectively.
Deferred compensation expense amounted to $293,521, $32,000 and $47,059 in
1997, 1996 and 1995, respectively.
17
<PAGE>
<PAGE>
NOTE 11 - BENEFIT PLANS (Continued)
(c) Profit Sharing Arrangement - The Company has a profit sharing arrangement
with employees meeting certain service requirements. Payments made to employees
pursuant to the arrangement are based upon earnings, growth in deposits and
attainment of certain corporate objectives. Costs of the arrangement were
$412,829, $437,370 and $600,294 for 1997, 1996 and 1995, respectively.
(d) Employee Stock Ownership Plan - All employees of the Company who have
completed a minimum number of years of service with the Company are eligible to
participate in the Company's employee stock option plan ("ESOP"). Participants
receive distributions from the ESOP only in the event of retirement, disability
or termination of employment. The primary purpose of the ESOP is to acquire
shares of the Company's common stock on behalf of ESOP participants.
The Company loaned the ESOP $509,485 in 1986 to purchase original issue
common stock at the initial offering price. The loan required annual payments
over ten years, including interest due on March 31. This loan was paid in full
during the year ended March 31, 1996.
In April 1996, the Company issued a new loan to the ESOP in the amount of
$500,000, to purchase shares of common stock in the open market. The loan is to
be repaid over a period of ten years, with annual payments including interest
due on March 31. For the year ending March 31, 1997, the Company contributed
$82,442 including interest, to the ESOP which is included in compensation
expense. The outstanding balance of the loan at March 31, 1997 is $450,000.
(e) 401(k) Plan - Effective January 1, 1993, the Company adopted a defined
contribution 401(k) retirement and savings plan (the "Plan") covering
substantially all employees. The Company contributes 3 percent of participating
employee's eligible salary to the Plan and a discretionary amount determined
annually by the Board of Directors. Total contributions to the Plan amounted to
$118,577, $119,737 and $120,036 for the years ended March 31, 1997, 1996 and
1995, respectively.
NOTE 12 - STOCKHOLDERS' EQUITY
(a) Capital Requirements - The Corporation and Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory -
and possibly additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the Corporation's financial
statements. Under capital adequacy guidelines on the regulatory framework for
prompt corrective action, the Corporation must meet specific capital adequacy
guidelines that involve quantitative measures of each entity's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. Capital classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require maintenance of minimum amounts and ratios (set forth in the table below)
of total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets, and of Tier 1 capital to average assets. Management believes, as of
March 31, 1997, that each entity meets all capital adequacy requirements to
which they are subject.
As of February 24, 1997, the most recent notification from the Bank's
regulator categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category.
18
PAGE
<PAGE>
<TABLE>
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
------ ------- ------ ------- ------ -------
As of March 31, 1997
Total Capital
(to Risk Weighted Assets)
<S> <C> <C> <C> <C> <C> <C>
Consolidated $ 80,951 30.4% $ 21,279 >8.0% $ 26,599 >10%
- -
Horizon Bank $ 80,875 30.4% $ 21,277 >8.0% $ 26,596 >10%
- -
Tier I Capital
(to Risk Weighted Assets)
Consolidated $ 78,384 29.5% $ 10,640 >4.0% $ 15,960 >6%
- -
Horizon Bank $ 78,309 29.4% $ 10,638 >4.0% $ 15,958 >6%
- -
Tier I Capital
(to Average Assets)
Consolidated $ 78,384 15.6% $ 20,086 >4.0% $ 25,108 >5%
- -
Horizon Bank $ 78,309 15.6% $ 20,085 >4.0% $ 25,106 >5%
- -
</TABLE>
<TABLE>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
------ ------- ------ ------- ------ -------
As of March 31, 1996
Total Capital
(to Risk Weighted Assets)
<S> <C> <C> <C> <C> <C> <C>
Consolidated $ 80,411 30.5% $ 21,120 >8.0% $ 26,400 >10%
- -
Horizon Bank $ 80,204 30.4% $ 21,116 >8.0% $ 26,396 >10%
- -
Tier I Capital
(to Risk Weighted Assets)
Consolidated $ 78,045 29.6% $ 10,560 >4.0% $ 15,840 >6%
- -
Horizon Bank $ 77,838 29.5% $ 10,558 >4.0% $ 15,838 >6%
- -
Tier I Capital
(to Average Assets)
Consolidated $ 78,045 16.5% $ 18,929 >4.0% $ 23,661 >5%
- -
Horizon Bank $ 77,838 16.5% $ 18,928 >4.0% $ 23,660 >5%
- -
</TABLE>
(b) Holding Company Loans - Under federal regulations, the Bank is limited,
unless previously approved, as to the amount it may loan to the holding company
and any one affiliate to 10 percent of its capital stock and surplus, and the
total of loans to the holding company and affiliates must not exceed 20 percent
of capital and surplus. Further, all such loans must be fully collateralized.
(c) Dividend Reinvestment Plan - As a service to its stockholders of record, the
Bank offers a Dividend Reinvestment and Stock Purchase Plan ("Reinvestment
Plan"). Under the terms of the Reinvestment Plan, dividends and optional cash
payments may be reinvested toward the purchase of additional shares of stock. No
brokerage commission or fees are charged to acquire shares through the
Reinvestment Plan.
(d) Stock Repurchase Plans - During the year ended March 31, 1997, the Company
announced a plan to repurchase up to 657,000 shares, or approximately 10% of the
Company's outstanding common stock. The repurchase program is expected to be
completed within 24 months. As of March 31, 1997, the Company has repurchased
216,600 shares for a total adjusted basis of $2,898,631.
19
<PAGE>
<PAGE>
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
(e) Stock Option and Incentive Plans - The Company may award options for a
maximum of 612,256, as restated, of authorized common stock to certain officers
and key employees under the 1987 Stock Option and Incentive Plan. The 1987
Incentive Plan is intended to provide for the granting of both incentive and
nonincentive stock options. Options are granted at the then fair market value
and vest at 20 to 35 percent per year. Options are excersizable from one to five
years from date of grant, subject to certain limitations, and expire after 10
years.
The Company may award options for a maximum of 360,000 as restated, of
authorized common stock to certain officers and key employees under the 1995
Stock Option and Incentive Plan. Options are granted at no less than fair market
value and may or may not vest immediately upon issuance based on the terms
established by the Board of Directors. Options are generally exercisable within
three to five years from date of grant and expire after 10 years.
Pro forma information regarding net income and earnings per share is required by
Statement of Financial Accounting Standards No. 123 Accounting for Stock-Based
Compensation. The pro forma information recognizes, as compensation, the value
of stock options granted using an option valuation model known as the Black
Scholes model. Pro forma earnings per share amounts also reflect an adjustment
for an assumed purchase of treasury stock from proceeds deemed obtained from the
issuance of stock options. The fair value for options issued in 1996 is
estimated at $578,890. The fair value of options issued in 1997 is estimated at
$12,401. The following assumptions were used to estimate the fair value of the
options:
1997 1996
-------- --------
Risk-free interest rate 6.71 % 6.73 %
Dividend yield rate 5.263% 2.535%
Price volatility .2227 .2192
Weighted average expected life of options 4.07 yr 4.34 yr
Management believes that the assumptions used in the option pricing model are
highly subjective and represent only one estimate of possible value, as there is
no active market for the options granted. The fair value of the options granted
in 1996 and 1997 will be allocated to pro forma earnings over the vesting period
of the options. Accordingly, until the provisions for SFAS 123 are recognized
for all years for which options have been granted, pro forma earnings will
likely reflect an increasing amount of compensation expense resulting from the
stock options.
Pro forma disclosures:
1997 1996
-------- --------
Net income as reported $7,803,420 $7,221,078
Additional compensation for fair value of
stock options $ 147,823 $ 144,723
Pro forma net income $7,655,597 $7,076,355
Pro forma earnings per share $ 1.19 $ 1.09
20
<PAGE>
<PAGE>
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
Shares of Common Stock Weighted Average of
Available for Under Exercise Price of
Option/Award Plan Shares Under Plan
------------ -------- -----------------
BALANCE, March 31, 1994 409 278,694
Authorized - -
Granted (8,408) 8,408 11.63 to 12.84
Exercised - (31,313) 2.87 to 14.54
Lapsed 9,383 (9,383) 2.87 to 14.54
------------ --------
BALANCE, March 31, 1995 1,384 246,406
Authorized 360,000 -
Granted (161,200) 161,200 12.23 to 12.56
Exercised - (67,736) 2.87 to 14.54
Lapsed 9,618 (9,618) 2.87 to 14.54
------------ --------
BALANCE, March 31, 1996 209,802 330,252
Authorized - -
Granted (5,000) 5,000 13.4375
Exercised - (46,249) 2.87 to 14.5455
Lapsed 17,002 (17,002) 2.87 to 14.5455
Expired (7,869) -
------------ --------
BALANCE, March 31, 1997 213,935 272,001
============ ========
Options Outstanding Options Exercisable
Weighted
Average Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ----------- -------- ----------- --------
1 to 5 639 .67 years $ 3.43 639 $ 3.43
5 to 10 113,316 4.21 years 8.86 109,363 8.83
10 to 15 158,046 8.42 years 12.65 48,506 12.81
At March 31, 1997, 485,936 shares of common stock were reserved for issuance
pursuant to stock plans, options and conversions of preferred stock.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
(a) Employment Agreement - The Company has entered into a four year employment
agreement with the Company's president at an amount approximating his current
level of compensation. In the event of specified terminations of the president's
employment following a change in control of the Company (as defined), the
agreement provides the president with severance payments of up to three times
his annual compensation plus continuation of certain benefits.
(b) Contingency Reserve - The Company has a contingency reserve of $302,997
recorded to reflect the estimated impairment of value related to pension plan
assets invested with Mutual Benefit Life Insurance Company. The Company plans to
honor its pension commitments and, after reviewing all of the available
information, has reserved approximately 13 percent of the plan's asset values to
reflect this commitment.
21
<PAGE>
<PAGE>
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
(c) Long-Term Lease Commitments - The Company has entered into lease agreements
for three branch offices located in Snohomish County, Washington. Future
noncancelable lease payments under these agreements are as follows for the years
ending March 31:
1998 $ 87,936
1999 85,020
2000 60,370
2001 18,000
-------
$ 251,326
=======
NOTE 14 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Bank's business activity is with customers located within Whatcom,
Skagit and Snohomish Counties. Investments in state and municipal securities
involve governmental entities within the state of Washington. The Bank
originates commercial, real estate and consumer loans. Generally, loans are
secured by deposit accounts, personal property or real estate. Rights to
collateral vary and are legally documented to the extent practicable. Although
the Bank has a diversified loan portfolio, local economic conditions may affect
borrowers' ability to meet the stated repayment terms.
NOTE 15 - FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance-sheet risk (loan
commitments) in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates. Loan
commitments involve, to varying degrees, elements of credit and interest-rate
risk in excess of the amount recognized in the balance sheet. The contract
amounts of those commitments reflect the extent of the Bank's exposure to credit
loss from these commitments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Loan commitments are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. The Bank's experience has been that substantially all loan commitments
are drawn upon by customers. Collateral held usually includes single family
residential property and income producing commercial properties.
The Bank has not incurred any losses on its commitments in 1997 or 1996. Loan
commitments outstanding were $2,523,820 in 1997 and $6,578,804 in 1996.
22
<PAGE>
<PAGE>
NOTE 16 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
the following classes of financial instruments:
CASH EQUIVALENTS AND FEDERAL FUNDS SOLD - Due to the relatively short period of
time between the origination of these instruments and their expected
realization, the carrying amount is estimated to approximate market value.
INVESTMENT AND MORTGAGE-BACKED SECURITIES, AND LOANS HELD-FOR-SALE - For
securities and loans held-for-sale, fair values are based on quoted market
prices or dealer quotes, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
LOAN RECEIVABLES - For certain homogeneous categories of loans, such as those
written to Federal Home Loan Mortgage Corporation ("FHLMC") standards, fair
value is estimated using the quoted market prices for securities backed by
similar loans, adjusted for differences in loan characteristics. For variable
rate loans that reprice frequently and with no significant change in credit
risk, fair values are based on carrying values.
DEPOSIT LIABILITIES AND FEDERAL FUNDS PURCHASED - The fair value of demand
deposits, savings accounts, certain money market deposits, and federal funds
purchased, is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated by discounting the
estimated future cash flows using the rates currently offered for deposits with
similar remaining maturities.
OFF-BALANCE-SHEET INSTRUMENTS - The Company's off-balance-sheet instruments
include unfunded commitments to extend credit. The fair value of these
instruments is not considered practicable to estimate because of the lack of
quoted market price and the inability to estimate fair value without incurring
excessive costs.
The carrying amounts and estimated fair values of the Bank's financial
instruments at March 31, 1997 and 1996 are
as follows:
1997 1996
----------------------- ----------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
FINANCIAL ASSETS ------- ---------- ------- ----------
Cash and cash equivalents $ 4,416,862 $ 4,416,862 $4,844,146 $ 4,844,146
Investment securities 34,620,670 34,670,775 50,703,503 50,780,400
Mortgage-backed securities 54,919,685 54,650,245 23,258,298 23,342,381
Interest-bearing deposits 10,398,316 10,398,316 8,756,304 8,756,304
Loans 399,078,123 389,241,544 389,650,547 383,285,007
Accrued interest and 3,545,380 3,545,380 3,614,937 3,614,937
dividends receivable
FINANCIAL LIABILITIES
Demand and savings deposits 114,698,819 114,698,819 101,643,108 101,643,108
Time deposits 310,112,467 311,259,095 301,033,329 304,362,022
Accounts payable and accrued 8,686,028 8,686,028 4,277,395 4,277,395
liabilities
Accrued interest payable 249,797 249,797 305,317 305,317
23
<PAGE>
<PAGE>
NOTE 17 - PARENT COMPANY (ONLY) FINANCIAL INFORMATION
In Thousands
1997 1996
----------------------
Condensed balance sheet at March 31, 1997:
Cash $ 386 $ 166
Investment in bank 78,434 78,940
Other assets 332 567
----------------------
$ 79,152 $ 79,673
======================
Other liabilities $ 643 $ 526
Stockholders' equity 78,509 79,147
----------------------
$ 79,152 $ 79,673
======================
Condensed statement of income for the year ended March 31, 1997:
In Thousands
1997 1996
----------------------
Income
Cash dividends from Bank subsidiary $ 7,128 $ 1,160
----------------------
Expenses
Compensation 89 42
Other 241 74
----------------------
Total expenses 330 116
----------------------
Income before equity in undistributed income
of subsidiary and benefit equivalent to income taxes 6,798 1,044
Benefit equivalent to income taxes 84 39
----------------------
Income before equity in undistributed income of subsidiary 6,882 1,083
Equity in undistributed income of subsidiary 921 6,138
----------------------
Net income $ 7,803 $ 7,221
======================
In Thousands
1997 1996
Cash flows from operating activities
Net income $ 7,803 $ 7,221
Adjustments to reconcile net income to net
cash flow from operating activities:
Equity in undistributed income of subsidiary (921) (6,138)
Other operating activities 352 (80)
-----------------------
Net cash flows from operating activities 7,234 1,003
-----------------------
Cash flows from financing activities
Sale of common stock 718 213
Dividends paid (4,833) (1,050)
Repurchase of common stock (2,899) -
-----------------------
Net cash flows from financing activities (7,014) (837)
-----------------------
Net change in cash 220 166
Cash, beginning of year 166 -
-----------------------
Cash, end of year $ 386 $ 166
=======================
24
<PAGE>
<PAGE>
NOTE 18 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Year Ended March 31, 1997
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Interest income $ 9,509,539 $ 9,596,672 $ 9,878,619 $ 9,725,809
Interest expense (5,125,258) (5,193,467) (5,267,939) (5,245,636)
----------- ----------- ----------- -----------
Net interest income 4,384,281 4,403,205 4,610,680 4,480,173
Provision for loan losses (60,000) (50,000) (60,400) (30,000)
Other income 310,430 599,038 355,013 318,582
Other expenses (1,790,346) (2,152,266) (1,820,079) (1,698,198)
----------- ----------- ----------- -----------
Income from continuing
operations before income tax 2,844,365 2,799,977 3,085,214 3,070,557
Federal income tax (962,206) (947,978) (1,042,909) (1,043,600)
----------- ----------- ----------- -----------
Net income $ 1,882,159 $ 1,851,999 $ 2,042,305 $ 2,026,957
=========== =========== =========== ===========
Earnings per share (adjusted for
stock splits and dividends) $ .29 $ .28 $ .32 $ .31
===== ===== ===== =====
Year Ended March 31, 1996
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Interest income $ 9,014,590 $ 9,227,444 $ 9,357,995 $ 9,482,242
Interest expense (5,014,548) (5,236,169) (5,345,005) (5,177,742)
----------- ----------- ----------- -----------
Net interest income 4,000,042 3,991,275 4,012,990 4,304,500
Provision for loan losses (15,000) (15,000) (15,000) (65,000)
Other income 336,913 336,968 314,984 303,904
Other expenses (1,797,136) (1,541,133) (1,671,781) (1,674,457)
----------- ----------- ----------- -----------
Income from continuing 2,524,819 2,772,110 2,641,193 2,868,947
operations before income tax
Federal income tax (826,250) (911,404) (885,935) (962,402)
----------- ----------- ----------- -----------
Net income $ 1,698,569 $ 1,860,706 $ 1,755,258 $ 1,906,545
=========== =========== =========== ===========
Earnings per share (adjusted for
stock splits and dividends) $ .26 $ .28 $ .27 $ .29
===== ===== ===== =====
NOTE 19 - NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued SFAS No. 127, Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125 in December 1996.
The standard becomes effective January 1, 1998. Management believes the
provisions of SFAS No. 127 will not have a material effect on its financial
condition or reported results of operation.
25
<PAGE>
<PAGE>
REVOCABLE PROXY
HORIZON FINANCIAL CORP.
ANNUAL MEETING OF SHAREHOLDERS
July 22, 1997
The undersigned hereby appoints the Executive/Proxy Committee of the Board
of Directors of Horizon Financial Corp. ("Corporation") with full powers of
substitution to act as attorneys and proxies for the undersigned, to vote all
shares of Common Stock of the Corporation which the undersigned is entitled to
vote at the Annual Meeting of Shareholders ("Meeting"), to be held at the Best
Western Lakeway Inn, 714 Lakeway Drive, Bellingham, Washington, on Tuesday, July
22, 1997, at 2:00 p.m., Pacific Time, and at any and all adjournments thereof,
as follows:
VOTE
FOR WITHHELD
I. The election as directors of the
nominees listed below [ ] [ ]
(except as marked to the
contrary below).
Robert C. Diehl
Fred R. Miller
INSTRUCTIONS: To withhold your vote for any individual
nominees, write the nominee's name on the line below.
----------------------------------------
The Board of Directors recommends a vote "FOR" the listed proposition.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR THE PROPOSITION STATED. IF ANY OTHER BUSINESS IS
PRESENTED AT SUCH MEETING, THIS PROXY WILL BE VOTED BY THE BOARD OF DIRECTORS IN
ITS BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO
OTHER BUSINESS TO BE PRESENTED AT THE MEETING. THIS PROXY ALSO CONFERS
DISCRETIONARY AUTHORITY ON THE BOARD OF DIRECTORS TO VOTE WITH RESPECT TO
APPROVAL OF THE MINUTES OF THE PRIOR MEETING OF SHAREHOLDERS, THE ELECTION OF
ANY PERSON AS DIRECTOR WHERE THE NOMINEE IS UNABLE TO SERVE OR FOR GOOD CAUSE
WILL NOT SERVE, AND MATTERS INCIDENT TO THE CONDUCT OF THE 1997 ANNUAL MEETING.
<PAGE>
<PAGE>
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
Should the undersigned be present and elect to vote at the Meeting or at
any adjournment thereof and after notification to the Secretary of the
Corporation at the Meeting of the shareholder's decision to terminate this
proxy, then the power of said attorneys and proxies shall be deemed terminated
and of no further force and effect.
The undersigned acknowledges receipt from the Corporation, prior to the
execution of this proxy, of Notice of the Annual Meeting, a proxy statement for
the Annual Meeting and an Annual Report to Shareholders.
Dated:_________________, 1997
- ----------------------------- -------------------------
PRINT NAME OF SHAREHOLDER PRINT NAME OF SHAREHOLDER
- ----------------------------- -------------------------
SIGNATURE OF SHAREHOLDER SIGNATURE OF SHAREHOLDER
Please sign exactly as your name appears on the enclosed card. When signing as
attorney, executor, administrator, trustee or guardian, please give your full
title. If shares are held jointly, each holder should sign.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.
<PAGE>
